November 19, 2018
External Growth Strategies to Build Your Business
Last week, we discussed internal growth strategies; today we’ll examine external options.
Inorganic growth is all about increasing productivity or market share through the use of knowledge and experience not internally developed within your company. Instead, this knowledgeable typically comes through consultants, mergers and acquisition, strategic alliances, joint ventures and partnerships.
Consulting firms can provide a number of services to assist an organization, either through advice on cutting costs to increase your net profit and shareholder value, or they can identify growth areas in the market and assess the risks of each option through independent research. They can also advise on change management and provide training for your executives and middle management on how to communicate change within your organization. Because they can look at your company without the legacy, sunk costs, and emotion leaders and employees may deal with, consultants can make recommendations that may be hard for those in the business to execute due to how those ideas will affect the human capital of the organization.
Mergers and Acquisitions
Mergers and Acquisition (M&A) offers a distinct set of advantages to increase your competitive advantage. They include:
- Business Expansion: M&A is a fast way to enter new markets with established companies that already have the client base and trust in their region or country. Not having to incorporate, not managing the legal issues of market entry can be very appealing. Localization is already embedded within the firm itself.
- Consolidation: M&A can bring together two or more competitors that will immediately increase market share, increase efficiency by reducing surplus capacity, increase production throughput, and increase bargaining power with vendors and suppliers.
- Adding New Capabilities: Watch the tech incubators and keep updating your knowledge of what’s new in your industry. You don’t want to be caught sleeping when Airbnb or Uber shows up to disrupt your industry. Instead of creating new technology from scratch, invest in a small startup with promising technology that you can exclusively incorporate within your own firm. You can also use this tactic to eliminate threats to your business. A telecom company had created Computer Telephony Integration (CTI) software that enabled small and medium sized businesses to create a single inbox where voicemail, email and faxes could be stored. It enabled anyone to read their emails, listen to .WAV recordings of their voice mails and see the faxes from anywhere they had access to their email. You could also call in and listen to your voicemails, have text-to-speech speak your emails, and use Optical Character Recognition (OCR) technology to read your faxes to you. It was an amazing product that was also very affordable. As the company was gearing up for a major marketing push, Nokia moved in and bought the company for $56 million, put the technology in a box and put it in a closet, never to be seen again. Nokia had been developing a similar product and this product was clearly a threat to them. When they purchased the company, they also got the employees who were clearly capable of integrating their technical knowledge and experience into products being built within Nokia.
- Financial Assistance: You may want to put your company on the market if you’re struggling. You may not be able to achieve the profit margins you need in order to sustain your business, but your products or services are solid, your reputation in the market is good and you have a devoted customer base. A larger firm may be able to overlook your financial distress, enabling you to save on interest payments by using the stronger company’s assets to pay off your debt and improve your cash flow. Private equity and investment firms may also be interested in investing in you if you have a solid plan for how you will use those funds to deal with your debt and grow your organization.
- Taxes: Depending on where you are located, your tax load may be higher than your competition cutting into your net profits. Acquiring a company in a different state or country may enable you to benefit by transferring your profits or tax losses due to more favorable tax structures, subject to any legal restrictions.
- Asset Stripping: Some companies have assets that are worth more than the company as a whole or employees within the firm that have the technical expertise and capabilities that you need to fulfill your growth strategies. You can purchase the firm and sell off or unbundle business units that can significantly reduce your total cost to purchase the company.
Strategic Alliances, Joint Ventures and Partnerships
While M&As bring together organizations through complete changes in ownership, individual companies can join forces to pursue a common growth strategy without sharing ownership in each other’s companies. There are two main types of alliances:
- Equity Alliances: The most common form of an equity alliance is a joint venture, where two companies remain independent and incorporate a new firm that is jointly owned by the two companies. When an alliance is formed with multiple partners, they are typically called consortium alliances.
- Non-Equity Alliances: Non-equity alliances are typically based on contracts. The most common form of non-equity alliances is franchising where one company gives another company the right to sell the first company’s products or services in a particular location in return for a fee or royalty. Licensing is another type of non-equity alliance which allows another company to use your intellectual property, such as your brand or patents, in return for a fee. Long term subtracting agreements also fall under this category, particularly prevalent in the manufacturing sector’s supply chain.
Alliances, joint ventures and partnerships are a far less risky, less complex and inexpensive option compared to mergers and acquisitions. With either, however, you may still want to involve a management consulting firm to assist you in making these decisions and hopefully keep you from making a very expensive mistake.