M&A the Smart Way

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A Bain study of 1,700 acquisitions found that companies doing more than three relatively small deals per year achieved 25% higher returns than companies doing fewer, but larger, acquisitions.

M&A the Smart WayGrowing a business is normally a complex, experimental, and somewhat chaotic process. Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects.

According to a study done by KPMG[1], only about 25% of companies who try to expand into new markets are successful. However, there are a few companies that have developed successful formulas for organic growth expansion. Some of those companies have an 80% success rate. So, what are those successful companies doing right?

It appears that the key to successful expansion is able to develop a repeatable process. For example, some companies develop a paradigm for geographical expansion. They study the demographics, competition and local economic trends to identify a target profile for locating new business expansion projects. Over the years, franchisers have become experts in defining new franchise market opportunities. Other companies expand using their business model.

Dell, for example, has repeatedly adapted its direct-to-customer model to new customer segments and new product categories. Others such as Nike, expanded into adjacent customer segments, introduce new products, developed new distribution channels, and then moved into adjacent geographic markets.

Two Characteristics

According to the KPMG survey, companies who were successful in expanding into adjacent market segments have two things in common:

  1. They were extraordinarily disciplined, applying rigorous screens before they made an adjacency move.
  2. In almost all cases, they developed their repeatable formulas by studying their customers and their customers’ economics very, very carefully.

Leadership from the Top

“Typically, these formulas are applied by CEOs who approach growth strategy with a strong sense of discipline and restraint. Many of them have well-defined rules about which opportunities,” the report states. It goes on to mention that key is to never place the core business in jeopardy and reduce new variables to a minimum.

A repeatable model allows managers to refine skills and systematize processes that are developed mostly through guesswork the first time. A Bain study of 1,700 acquirers found that companies doing more than three relatively small deals per year achieved 25% higher returns than companies doing fewer, but larger, acquisitions.

Factors that facilitate success for repeatable expansion processes

  1. Reduced complexity. Keep it simple and try to limit variables that are not familiar.
  2. Speed. When a company has mastered a repeatable formula for adjacency moves, it can successfully start—and finish—a number of moves faster than a competitor would.
  3. Strategic Clarity. While it sounds similar to reducing complexity, strategic clarity refers to making sure that key stakeholders fully understand the strategy, process, and expected results.
  4. Practice makes for confidence. As companies get better at rapid adjacency expansion, opportunities proliferate. Along with the confidence to follow customers aggressively into new adjacencies, companies need to develop the confidence to say no when the organization is stretched.
  5. Know the customer. The more attuned a company is to its customers’ preferences the more readily it can spot untapped opportunities.
  6. Segment customers: With pragmatic customer segments that illuminate how customer behavior leads to purchasing decisions, customer segmentation becomes a seedbed of repeatable adjacency moves.

In summary, expanding your company into adjacent market segments requires an intimate understanding of customers, how they make their purchasing decisions and what trends are they following or developing. The study further makes it clear that keeping expansion simple and limiting new variables will allow a company to do multiple smaller excursions into adjacent opportunities. With that experience comes a disciplined process that promotes speed, confidence and opens up more opportunities.

[1] https://hbr.org/2003/12/growth-outside-the-core

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