All companies have a growth objective and keep striving to achieve it. At the same time they undergo a typical maturity life-cycle that tends to plateau and decline at some point in their journey.
To combat this phenomenon businesses regularly establish new goals to drive continuity in their growth.
In this article we will discuss seven areas where a synergistic approach offers companies a great pathway to leapfrog to their goals. We will delve into each of these areas and contrast the organic and inorganic methods of achieving them.
Launch a new product
One way to combat a declining business or generate new sources of revenue is by introducing new products or capabilities in existing ones. This is a very widely used strategy in nearly all industries and is referred to as innovation s-curve:
Some example are:
- Next generation products
- Complementary or adjacent products
- Add-on capabilities or support services
The process starts with concept and planning. Market analysis, marketing plan, development, resources and timelines are some areas that must be considered. The organic approach normally takes a long time and has a high degree of variability and uncertainty as the team needs to make assumptions and learn while executing.
The longer the product life cycle, the larger the opportunity cost and higher the risk of counter moves by the competitors. Dealing with the associated delays, costs and risks is normally emotionally charged for the executives.
Some companies augment their new product growth strategy with an inorganic approach.
This approach will:
- Significantly shorten the cycle to deliver the new product to market
- Eliminate the implementation challenges and risks
- Gives quick access to a proven product and market
- Eliminates vulnerability to market uncertainties and fluctuations
- Has a lower cost over time, despite a larger initial investments
Procter & Gamble and SugarCRM are perfect examples of companies that pursued this strategy and used it as a repeatable formula to grow through new product lines.
IBM is another example in the software space. Between 2010 and 2013, IBM acquired 43 companies. By pushing the products of these companies through IBM’s global sales force, IBM was able to substantially increase its revenue using the acquired companies.
The so-called Bolt-on and Tuck-in acquisitions are also common approaches for large organizations to continue their growth at a much faster rate and lower cost than from-the-scratch implementation.
Expand geographical reach
Geographic expansion is another common way to grow the customer base and generate additional revenue from existing products in a new target region. Many factors such as regulations, taxation, culture and others must be considered when deciding to grow in a new region. Expansion speed in the new region is essential to beat competition and gain a larger market share.
Inorganic options, such as acquisition or strategic partnership, offer the fastest way to accomplish such a goal. Some of the advantages are:
- Quick access to talent pool and team formation
- Logistic and operational establishment
- Overcome employees law, taxation and compliance hurdles
- Get quick access to an established channel and customer base
- Gain opportunity to cross-sell across the two geographies
Walmart has successfully deployed this strategy to become a global powerhouse. In some cases they used acquisitions (e.g. Woolco for entering into Canada) and in other cases Joint ventures (such as Cifra for entering Mexico). The company, which opened its first international store in 1991, had more than 130,000 employees working in 729 facilities outside the United States by July 1999.
Enter a new Industry
Selling existing products into a new industry is a creative option to counter market saturation or as a new source of revenue. While the upsides can be very lucrative, this is a challenging endeavor for most companies.
Here are some of the challenges and steps that must be carried out:
- Analyze the industry, the needs, and existing solutions
- Study and understand the competitive market and players
- Define business model and go to market strategy
- Establish capabilities, resources, training needed to penetrate that market
Entering a new industry organically is very complex and has many associated risks. Moreover, it is a very lengthy and costly process. Partnering with or acquiring another company in the target industry can be a quick way to get access to expertise, talent and product and remove many unknowns or assumptions. Some of the obvious advantages are:
- Immediate access to a proven industry and market recognition
- Access to SMEs and strong management in the domain
- Overcome industry specific customization and users’ expectations
Amazon is a perfect example which started in the online marketplace for books and eventually got into several other industries. One of these is how Amazon got into the food retail industry through the acquisition of Whole Foods. Think about what it would have taken Amazon to enter the food retail industry organically.
Reduce Customer Acquisition Costs
For most companies Customer Acquisition Cost (CAC) is one of the major expenses.
Access to new sales channels and other ways to reduce CAC not only impacts the company’s bottomline, but also serves as a competitive advantage.
Companies deploy different tactics to achieve this, such as:
- Improve SEO ranking and organic traffic
- Automate and optimize marketing channels
- Expand sales and distribution channels
- Improve sales funnel and conversion rate
Organic approaches often work but in some cases may be too slow, have limitations or require additional resources. Instead, companies can use partnership or acquisitions to quickly tap into lower cost means of customer acquisitions. This can be accomplished through:
- Quick access to established growth hacking and marketing expertise
- Cheaper access to target market via adjacent sales or affiliate channels
- Access to influencers network
- Conversion opportunity in existing funnel drop offs
- Strong sales teams with a proven track record
- Product or service bundling opportunities
- Monetization of brand strength
Zoom acquisition of Five9 is an example of using a synergistic relationship to reduce customer acquisition cost. The synergy between Five9 Contact Center as a Service (“CCaaS”) solution with Zoom’s broad communications platform created an effective cross-sell opportunity.
Curo’s acquisition of Heights Finance is another example of using a similar strategy to reduce the marketing and customer acquisition cost while expanding the addressable market.
Compete with IP and Technology
To gain competitive advantage, take leadership positions or create barriers to entry in a market, companies need to innovate and establish intellectual property.
That is accomplished through learning and aligning the organization to gradually develop the subject matter expertise, and establish industry connections, trade secrets, patents, technology or solutions. These will allow a company to be recognized and respected as a leader in an industry and benefit from its economic power. Acquisition of a company that has built the expertise and IP can be a quick way to get access to and start to create value from it.
Oftentimes combination of buyer’s internal IP and technology and those of the target can create synergy effects that are by no means achievable organically due to the protection rights by the target company.
Take for example Tesla’s acquisition of SolarCity to enter the photovoltaics market. Solar installation business was merged with Tesla’s battery energy storage products in a fairly short time which would have otherwise taken years to develop organically.
Hire the right talent fast
Getting access to talent is a very lengthy and costly process. The challenge drastically increases as the number of openings grow, especially if the new hires are to form a new team or business unit.
Careful planning to hire talent and positioning them so they can effectively work together is required to build a strong team.
Any company that has gone through building a new team attests to the amount of time and effort it takes to get the benefit from such investments. In some cases, hiring can become a bottleneck and impact their speed and growth. Acquiring a small company with matching talents and low enterprise value can be a great alternative to quickly solve an otherwise long running problem. Some benefits of so called “acqui-hire” are:
- Provides immediate access to a pool of resources with related domain knowledge
- Established compensation and benefit packages and opportunity to negotiate or adjust
- History of collaboration and teamwork
- Track record and quality proof of results
Robinhood acquisition of Binc is a very good example of acqui-hire. We discussed this acquisition in a previous article.
Compliance, rules, certificates and licenses often get in the way of go-to-market. These requirements often take a long time to overcome and could significantly delay or limit growth. Take for example FDA approval or AICPA SOC compliance which take about one year to get approval. Similarly state, federal, international laws or supplier acceptance processes could introduce complexity and additional time.
Through acquisition, a company can obtain required compliance in a rather short time. This approach can be very efficient, especially in the cases where the waiting or approval process takes a long time.
For example, Nuvei acquisition of Simplex, a payment solution provider, provided Nuvel an Electronic Money Institution (EMI) license to offer International Bank accounts to end users and corporations, and offers future banking and card issuing capabilities. Applying for such a license involves a process that could take six months to a year under normal conditions and could take longer under unusual conditions.
An acquisition can contribute to one or more of the strategies above. Multiple small acquisitions, the so called serial acquisitions, can provide all the resources and capabilities that a company requires to create value and growth. Smaller and frequent acquisitions are often easy to manage and yield significant jumps in market share. Needless to say, they are less regulated than their bigger and public counterparts.