An astute CEO can often augment organic growth with acquisitions, but a majority of acquisitions fail to deliver expected returns. CEO Carol Koffinke of Beacon Associates says that “60 to 80 percent of all mergers and acquisitions fail to meet their merger goals.” Why do they fail?
Much has been written about acquiring companies’ failure to realize the value they envisioned for their acquisitions and the why’s: a lack of proper due diligence, cultural mismatch, lack of integration planning, unforeseen market factors, etc. However, of all the possible reasons for failure, M&A experts put the lack of a clear vision at the top of the list.
Source: “Creating and Executing a Winning M&A Strategy,” Merrill Data Site and The M&A Advisor, October 2013
While a clear vision can accelerate execution of any growth strategy, successful M&A demands a level of clarity most companies fail to achieve. Why do companies launch into an acquisition without sufficient vision and planning? Here are the most common reasons we’ve encountered in working with top executives:
- Some CEOs don’t naturally think strategically. A CEO who’s risen through the operational ranks can end up with a “make stuff, sell stuff” philosophy and a view that strategy is merely a set of slides for board and investors, while in fact, a clear strategy drives revenue and profitability.
- A CEO can be overwhelmed by the daily pressure of running the business. Periodically answering the question “are you working on or in your business?” can prevent the urgency of daily concerns that distract from the CEO’s paramount responsibility – increasing shareholder value.
- Pressure to make quarterly goals can diffuse and erode the shared view of a company’s purpose. A process called business entropy (e.g., repeatedly accepting non-core business) can eventually dilute the strength of a company’s brand and slow its ability to generate new business.
How can a CEO be more intentional about growing the company through acquisition?
- Find a way to set aside time to think and discuss new directions. In this new social media world, it’s easy to develop a chronic short attention span. Focused thought is required to create breakout strategies.
- Take an honest look to make sure you’re not hanging onto more than you should. How to cross the second chasm, i.e. growing a company from small to big, is described in Doug Tatum’s insightful book, No Man’s Land. Pick up a copy and read it this weekend. (If you think you don’t have time, you need to read it.)
- Discuss growth challenges with objective trusted advisors. Use CEO peers at Vistage and experienced consultants as soundingboards to call out any “elephants in the room.” They will help you establish the clear vision needed to drive your acquisition initiatives.
Two momentous tipping points threaten most businesses during their lifetime. The first is an external threat that challenges startups, and the second is an internal threat that challenges established, growing businesses. Failing to address either one adequately can result in disaster.
In 1991, Geoff Moore introduced a powerful concept in Crossing the Chasm that became a key concept in the universal business vocabulary. He observed a startup company must leap from (a) an early market dominated by early adopters who seek new solutions to (b) the mainstream market where buyers are more conservative but sustainable financial returns are available. To survive, an emerging company must cross this chasm to secure a beachhead in the mainstream market.
The second chasm is described in Doug Tatum’s 2007 book called No Man’s Land. While less publicized and not as universally understood, this second chasm is no less real and just as inevitable. It’s encountered during “the adolescent stage in which an established but rapidly growing firm is too big to be small, but too small to be big.”
Crossing the second chasm does not call for securing a second beachhead. Instead, the challenge is personal: the CEO must modify the way the business operates without losing the uniqueness that created its initial successes. Tatum identified four “M word” dangers confronting the CEO of a company negotiating this second chasm: misalignment, management, model, and money.
Misalignment of the company with its market requires clarifying the purpose and uniqueness of the company, then focusing all its resources on activities that leverage its best strengths. To paraphrase Tatum, avoiding the hard work of clarifying and systematizing the core business has killed many companies after they make it well past the startup phase. Understanding the strategic positioning of the company (e.g., primary audience and target customers, primary benefits delivered, competitors, and unique differentiators), then aligning everyone in the company with this shared vision is vital to survival.
Outgrowing its management team is the second danger of an established company attempting to grow. Small companies are highly dependent upon the talents of the founder and CEO, but a growing company inevitably exceeds the bandwidth of its CEO and early management. Getting to the next level requires that the CEO relinquish his/her tight control over every aspect of the business in favor of bringing in established managers in key areas. The CEO’s challenge is to retain direct responsibility for key areas, where he/she is most talented, while delegating the other areas to managers who have already developed critical systems and processes before at larger companies.
Outgrowing the model is the third challenge faced by companies crossing the second chasm. The financial model of most young companies depends upon high performance of cheap labor. The CEO works for little or nothing while dedicated employees work crazy hours too for lower-than-industry-standard pay, but this doesn’t scale. As the company outgrows its management, a new financial model accommodating competitive pay, more intense competition, and maintenance of profitability must be quickly developed.
The fourth challenge is money. Entrepreneurs are often surprised that, when the growth they crave starts to happen, cash becomes more scarce rather than more abundant. They are even more surprised by the difficulty they find in getting the financial backing needed to finance more growth. What looks like good news to the CEO looks like significant risk to investors. “The key to raising money is reducing the real and perceived risk of the company” and the key to reducing risk includes taking the previously described three steps.
If you’re a CEO of a growing company and you missed No Man’s Land when it came out, reading it will provide a clearer picture of your business and the challenges you face in growing it.