It’s all about growth!
Without growth, companies become less competitive as their cost increase and they face the need to invest in human or technology resources to prepare the future. And for technology companies, this even a matter of survival.
Company growth is made of two distinct kinds of growth: internal growth and external growth.
Internal growth consists of generating more revenue out of the existing product portfolio. It demonstrates the ability of your company to grow by itself and the efficiency of your sales strategy and execution to be predictable and repeatable.
On the other hand, external growth is necessary when your existing market has reached maturity and there is a need to extend to adjacent markets. And this need gets stronger in ever changing economy such as the software market where it is extremely complex for tech vendors to keep up with all technology disruptions.
Large companies have difficulties to innovate
The larger companies get, the more difficult it is for them to innovate. Innovation is a state of mind that requires a lot of ingredients: entrepreneur mindset, thinking outside the box, disruptive market vision, strong technical expertise, good money to spend, personal commitment life-style. Innovation doesn’t rime with processes nor immediate performance and reporting.
As every rule has their exceptions, I’ve always been impressed by the capacity of Google to keep innovating despite their size. I think there are two main reasons that: first, they generate plenty of cash with Adwords – above $45 billion a year – and that gives them plenty of money to spend in innovation. Then, innovation teams are made of extremely talented people – Google Map was invented by a small team initially. Last, every employee is encouraged to spend time imagining new projects outside of his daily mission and working with other colleagues with a large freedom of action.
But this is an exception, for most of the companies, innovating is very hard – impossible I would say – and keeping a pace of +30% yearly growth becomes more and more difficult as the products get older.
The BCG Growth-Share matrix
The BCG Matrix illustrates the need for “Cash Cows” to finance the future “Stars”. Those “Cash Cows” are meant to disappear with their market at some point and the raising “Stars” will become the future “Cash Cows” to finance innovation.
Mergers and acquisitions to the rescue
As innovation is almost impossible in large companies, the external growth strategy consists in acquiring smaller companies that are still agile and have proven initial success. The best scenario would be to buy “Stars” but they are usually much too expensive and this limits the potential targets to the “Question Marks”. The objective then is to optimize the chance to turn those “Questions Marks” into “Stars”.
Which company to buy?
Before starting a formal approach leading to negotiations, there is a preparation work to be made on the product marketing side:
- Which are the adjacent target markets we want to address?
- Who are the companies visible in this area – in the analyst reports for example?
- What is the brand awareness of those companies?
- Whom do they sell to, who are the buyers?
- What is their distribution model?
- What is their pricing model?
Then, the marketing mix of every candidate company needs to be properly analyzed to optimize the chance to succeed in a future integration:
- Product: will the target products be combined with your existing products or should they be sold separately?
- Place: can you leverage the different distribution channels to cross-sell efficiently ?
- Pricing: is the pricing similar to your existing pricing models
- Promotion: is the marketing funnel similar to yours and addresses the same targets or is it a fully different promotion model?
Depending on the results of this analysis, you will find companies that make more sense to engage with than others.
How to turn an acquisition into a success?
Making an acquisition succeed is extremely hard. Actually, many fail leading to millions of dollars in loss & profits.
I think there are three major challenges when acquiring a new company:
- the people integration: the acquired company has a specific culture that is most probably radically different to yours, people have their working habits and processes. Everything can get confused during integration and this often leads to many people leaving.
- the sales enablement: how to train your existing sales teams on the new products? Which pricing strategy? Which influence on the bonus plan? Are the buyers the same or do sales teams need to sell to other buyers they are not used to talk to?
- the technology: technology challenges are often under-estimated but they can be hard to overcome, especially if the products are meant to be integrated together.
It seems important to me that large companies establish formal written processes explaining the different steps to integrate a new company successfully. Those processes should be drilled down into every department and monitored very closely at every acquisition.
Companies who have an efficient process in place to acquire and integrate new companies successfully will compensate largely their lack of internal innovation and keep growing significantly.