As leaders of an organization, one is always confronted with the need to constantly find avenues of growth to keep their share holders happy. If you are leading one such organization, you are also constantly grappling with the question about where could the next level of growth come from.
Do you have innovative products or services in your portfolio which can lead you to the next level of growth? If you are like most of your counter-parts, you usually find out that your innovation pipeline doesn’t look very lucrative when it comes to high growth products or services. Then you start looking at probable acquisitions (usually strategic) that you could make to be able to grow fast enough.
Acquisitions:
Now, there is enough evidence in the world that most acquisitions do not work. Examples are abundant of failed acquisitions. Also, acquisitions cause a lot of disruption in terms of integration with your products, services and employees. Also, the talent that you acquire with the acquisition, mostly leaves the company at the first opportunity. So, you are left with a product/service that you could maybe exploit for a bit of growth and with all the people who did not add very much value in creating the product or service itself. You again find yourself at a junction where you again face the same question – where can i find more growth? What acquisitions can i make?
Add to this, the cost of acquisition, the model is a self-sustaining loop and also takes you away from the probability that you will ever be able to find the next block-buster product or service in-house.
So, the question is how do you get out of this trap and continue to grow:
Innovation:
Long term profitable growth can only be possible if your team is able to identify the possible growth areas and are able to design products and services to exploit the same.
This however is easier said than done. In order to enable this, you must be willing to invest in your innovation engine. There are two types of investment that we can talk about here.
– Monetary investment: I am always surprised to see companies spend millions and billions of dollars on acquisitions and at the same time make it so difficult to fund some of their innovation projects by a few 100 thousands or a few millions. Unless you make it easier to find funding for innovation projects you shall never be able to get block-buster products or services.
– Emotional investment: You find that a leader is heavily involved in all the discussions around an acquisition. However, the same leaders do not spend even half that time in supporting the innovation projects running in their organisations. The lack of their public support also has a big impact on the success of their innovation engine.
There is enough being said about innovation and how to run an innovation program or create a culture of innovation. Most of these advise is common-sense but as they say, common sense does not necessarily translate to common practice.
This does not mean that acquisitions are always bad. If you acquire for the right reasons and the right thing, acquisitions can add a lot of value. Some reasons where acquisition makes more sense could be:
– Acquire IP or product lines which when combined with your current portfolio (current and pipeline) can provide you competitive advantage in the market.
– Acquire a business if it is a good investment opportunity in your market. Do not try and integrate it with your existing business. The integration is mostly a wasted effort and mostly does not lead to improving the overall business.
– Never acquire for the talent or the business process of culture of the organizations. Culture and business processes cant be transferred from one to the other and the talent usually leaves at the first opportunity.
So, building a good innovation engine which consistently produces breakthrough products resulting in high growth is simple and effective, but not easy.
Acquiring companies is easier but not simple or effective.
What do you chose to do? Innovate or acquire?
Do let me know your thoughts by commenting below or tweet them to me at @rmukeshgupta.
3 thoughts on “Innovation or Acquisition”
Hi Mukesh,
A very interesting topic and a very interesting point of view, which I partially empathise with, but I do have many issues with this story as well, and I hope you don’t mind me sharing them with you, for the sake of a good discussion!
1. My overall comment is that you are making quite a gross oversimplification and sweeping generalisation of a complex topic. For example, you don’t even make a distinction between small and large acquisitions, and I would expect small ones to be more successful than large ones.
2. Where is the evidence and/or examples for all your bold statements? It’s all just based on your experience, but we don’t even know what your experience is based on!
3. “If you are like most of your counter-parts, you usually find out that your innovation pipeline doesn’t look very lucrative when it comes to high growth products or services.” Huh? I’m sure there are plenty of companies with high growth products and services, otherwise there wouldn’t be any high growth products and services ;o)
4. “Now, there is enough evidence in the world that most acquisitions do not work.” Where is it then (as I said in point 1)? I’m not expert in M&A, but I’m sure there’s also plenty of “evidence” (which is usually subjective anyway) that most acquisitions do work. It may sometimes even be hard to judge the success of an acquisition, which leads to some people calling it a success and others a failure. Besides, even if an acquisition is widely considered not to have worked, I think you should probably separate the idea of the acquisition (do these companies have a good fit together?) and the way the acquisition was executed (which often leaves a lot to be desired, because people try to cut corners and save time and money).
5. You raise an interesting point about the level of monetary and emotional investment management puts into in-house innovation, compared to acquisitions, but, again, where is your evidence and/or examples?
Having said that, I have a hunch that you may be right about this, and I would suggest that it has something to do with speed. I don’t have the research to hand, but i have seen research that the average tenure of C-level execs is going down, which means they have less and less time to satisfy the impatient, short-term shareholders, make an impact and leave their mark on a company, before they move on to the next one (voluntarily or not so voluntarily ;o). That means they are under pressure to do big things as quickly as possibly, and what could be bigger and quicker than making some bold acquisition? Compare that to starting some big in-house innovation project, where you might never see the fruits of your labour, except for in the newspaper. Do you think that could have something to do with it?
6. After giving all acquisitions a pretty thorough bashing, you suddenly say “This does not mean that acquisitions are always bad.” which seems to be a contradition.
7. You then go on to describe 2 types of good acquisitions…
“- Acquire IP or product lines which when combined with your current portfolio (current and pipeline) can provide you competitive advantage in the market.
– Acquire a business if it is a good investment opportunity in your market. Do not try and integrate it with your existing business. The integration is mostly a wasted effort and mostly does not lead to improving the overall business.”
… which also seem to contradict each other. It’s okay if they are different types of acquisitions, but for the 2nd one, you write “Do not try and integrate it with your existing business. The integration is mostly a wasted effort and mostly does not lead to improving the overall business.” and this certainly doesn’t apply to the 1st one, where integration (or “combination” to use your word) is essential.
8. Then, you write “Never acquire for the talent or the business process of culture of the organizations. Culture and business processes cant be transferred from one to the other and the talent usually leaves at the first opportunity.” and, again, this is a sweeping generalisation. Just because it’s hard to retain talent and knowhow, that doesn’t mean it is impossible and you should “never” attempt it. This could be a lot easier with small acquisitions than large ones, for example, and it often has more to do with how the acquisition is executed than anything else.
9. “So, building a good innovation engine which consistently produces breakthrough products resulting in high growth is simple and effective, but not easy. Acquiring companies is easier but not simple or effective. What do you chose to do? Innovate or acquire?” I don’t really understand this statement, and I believe that it’s not an either-or question. Most companies would do well to do a combination of both.
Look foward to you response!
Hi Maarten
Thanks for taking time and sharing your thoughts. That really is the idea – to have conversations that have the potential to shape our opinions.
Firstly, I should apologize for being lazy and not sharing the articles, papers which could have supported my claims in the first place. Let me try and correct that by sharing some research that forms the base for some of my arguments:
1. There are many articles and research papers which have pegged the failure rates of mergers and acquisitions between 50 & 90%. You can find a few such papers below:
– http://goo.gl/zfAiz
– http://goo.gl/sDcax
– http://goo.gl/fWix9
– http://www.businessinsider.com/why-acquisitions-fail-2012-10
Results from these studies indicate that the failure rate of acquisitions remain in the same range irrespective of the size of the merger/acquisition.
2. One of the reasons for the popularity of M&A despite the low success rate is also the fact that corporate leaders are hard stretched to find growth and do not much options internally. I have to admit that this is only an opinion that I hold and can’t substantiate with research papers. However, I can think of a lot of companies which have their first run-away success products built within their organization and then struggle to come-up with the next set of blockbuster innovations in-house. That is also a reason for the phenomenal valuations for companies which are able to do so (Apple, Google, P&G, Facebook, etc)
3. I agree with you when you say that the CEO’s under the constant pressure to deliver in short terms is taking a toll on long term innovation programs.
4. I do not want to create an impression that acquisitions are all bad. Even if 50% of them fail, there is the other 50% that do add value to the shareholders. In my opinion (I do not have a proof for this), the one’s that succeed are those which fulfill the conditions that i have mentioned in my post.
5. I agree with you that I have made a sweeping generalization about the talent and also agree that how an acquisition is executed has a big impact on the talent leaving or staying. However, you also need to know that good people who go out and work in a small organization work there for a specific reason and I believe that the reason more often is about the freedom that they get to do the kind of work that they want to do and that they are making a difference. The moment they find themselves in a corporate environment, these very things change for the worse and hence, they want to go out and do their next gig.,. This is not just the way I feel but a lot of others think the same as well. Some thoughts on this @ http://www.zdnet.com/post-acquisition-exec-departures-inevitable-7000000180/.
6. Building innovation capabilities in-house is not simple because, this requires consistent investments for the long run (difficult for the reasons you have stated in your comment as well). Acquisitions are easier to do, makes the senior leadership look good, but has a success rate which is low as well. This is also much costlier. Acquisitions do provide speed (to enter a new market or to capture market share). I agree that organizations need to get better at doing both. However, one of them will usually be more preferred than the other (my opinion and experience). Also, the skillset and expertise required to do either is so different that trying to manage both requires astute management and consistent focus on the long term.
There are a few organizations that have handled both well. One example that comes to mind is amazon.com. They have been able to acquire organizations, successfully remain invested and have had a long list of innovations that their teams have delivered on.
I can only hope that there are more companies which are able to reproduce their success.
I have tried to respond to your queries as much as I could. I know that this is a topic which can be argued both ways and both sides could be right. However, as with any other topic in life, it is never a question of “EITHER”, “OR” but about “AND”.
Hi Mukesh,
Unfortunately, I don’t have time to read all the articles you’ve provided (!), but you’ve clearly given the matter a lot of thought and you make some very good points. I think, at the end of the day, we are probably “on the same wavelength” in most areas, as it’s simply not a black-
and-white topic.
I’m still not sure about your “simple, but not easy” theme, which seems to be the overarching theme of your blog, because, to me, “simple” and “easy” are pretty much synonymous. Do you mean that people often say things that sound very simple, but are far from simple in reality? In that case, I fully agree, but I would formulate it differently, and I don’t know how!
But forgive my complaining. I think you’r doing a great job with this blog, so keep up the good work!
-Maarten
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