Okay, the economy has picked up and your organization has capital to deploy for better returns. Strategically, what do you do? Do you try to grow organically or through acquisition?
Both offer sunny skies and trapdoors to deep, dark places, so it’s critical that you choose your steps wisely!
Let’s look at organic growth, first. Take a look at this simple model below:
Currently, your organization is in the green box. You know your customer and you know your products—that’s why you are so profitable! As you look to grow organically, move in one of two directions (in the direction of the blue boxes.) You either know what your customers want or you know where to find new customers for your existing products. Moving to the yellow box represents the least chance for success. It explains why McDonald's is not building farm machinery!
So, let’s evaluate the box to the right that includes “do not know the products.” Should you go this route? What are your customers telling you? Is there a void for a product? Are you collecting market intelligence, meaning does someone already offer one or more of your products? Are you listening for both the positives and negatives? Do you have a market research area, a product development department, project management, testing, and a rollout strategy? If not, you might consider the next option, moving up to the box that includes “do not know the customers.”
Most importantly, when you're trying to achieve organic growth, be realistic about offering new products because you will develop products or services that fail, and that can be expensive. Is that acceptable to you? The upside, however, is that when a product or service takes off, it more than covers the cost of the products that failed. For example, look at all the successful products 3M has developed. They have no doubt had failures along the way, but the model works if you're willing to take chances!
Growth through expansion
Expanding your products and services to more customers is easier to do than building new products. This can be achieved by expanding your marketing and sales reach to a new territory, state, or country. Strategically, build a plan for expansion. Create awareness in those expansion areas with marketing campaigns, advertising, attention-getting splashes, and support for your additional team with customer testimonials, and even personal visits to the new market with existing clients! And, don’t forget to announce that expansion within your existing areas; it creates a buzz that is repeated at national meetings and conferences that further supports your plan.
Expansion can also come from putting your products and services into different industries with similar needs. For example, Aramark and Canteen are food service giants that provide meals in a variety of industries. The similar need is food for employees!
Look for a trusted organization that can help you transition into a new market. Remember the Product Life Cycle? These are the folks on the far left side of the slope. For their help in getting the door open for your company’s product(s), reward them with extras, price breaks, etc.
Growth through acquisition
Now, let’s take a look at growth by acquisition. Your goal is to deploy capital for a better return on your investment. Acquiring another organization should play into the model we described above. Strategically, it should either increase the number of products and services available to your existing customers or expand your existing products to new customers.
Yes, acquiring another organization for more market share to reduce the competition is also strategy to offer your products to more customers. Then, it becomes simple math: which is the least expensive way of getting those customers—organic growth or acquisition growth?
Related reading: How to Successfully Navigate a Merger or Acquisition
Before acquiring a competitor, you should conduct careful analysis to your product lifecycle. Is there life in your products to cover the cost of the acquisition? What if a start-up in the next state comes out with a better product that kills your sales momentum? Suddenly, you acquisition looks like a bad decision.
For an acquisition to take place, two things must occur:
The organization with capital that wants to perform the acquisition must be in a position where they have no choice but to acquire due to lack of product development. The company has lacked the leadership to keep its market research and product development departments moving forward. In other words, they have no vision and no alternative.
One of the CEOs has to get the power and the other has to get the “golden parachute.” If those two CEOs are not taken care of, the acquisition has little chance of success because at least one of the CEOs will be fighting the acquisition. Parachutes in the service industry are provided as long as the CEO is “warrantied.” A warranty means the CEO has to stay with the organization long enough for the relationships to transition to the new company, and then the completion of the sales price is calculated based on how much organization was retained.
During its days of growth, Conseco Insurance Company acquired 42 other insurers. While the company ultimately failed, it did perform acquisitions better than anyone I had ever seen. They did not struggle with keeping the other company’s name, logo, etc. When the deal was done, it was done, and though it was painful, it was short-lived. Their acquisitions were designed for completion within three months.
So, how will you choose to spend your money? Organically or by acquisition? Whatever you choose, step carefully!