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Up Up Again!
Did you know that according to a recent Harvard Business Review report, the failure report for mergers and acquisitions (M&A) sits between 70 and 90 percent?
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A strategy team at a large Indian conglomerate, comprising of MBA graduates is looking to develop a five year growth strategy for their parent company. They are looking for a good starting point to structure and guide their thought process.
Given the volatile economic environment over the last few quarters, the single biggest agenda in most corporate boardrooms is to drive financial growth. While everybody thinks and realizes that drawing up the growth strategy is important, in reality, it is a little tricky to complete this exercise. Such an exercise needs to be structured and exhaustive comprising of quantitative and qualitative inputs. This article looks at a starting template of the list of questions to be answered to accomplish this exercise.
Are you playing in the right game?
Any growth strategy exercise begins in understanding the details of the industry the incumbent is operating in. There are many frameworks to support in this exercise with Porter's five forces being the most common starting point. Following questions are essential,
- What is the size of the industry?
- What are the key growth drivers / expected growth rate of the industry?
- Who are the key competitors and what is their competitive intensity?
- What is the expected impact of regulation and government legislation?
- What is the magnitude of digital disruption the industry is exposed to?
- What are the other related industries (that use similar raw material or distribution chains) that can be explored?
Where to play?
Once the game (aka industry) has been identified, it is important to understand the positions the players (aka focus pockets of growth) will occupy. Following questions will help answer the main question on where to play,
- Which channels should be focused on due to size / future growth potential?
- Which regions should be focused on due to size / future growth potential?
- Which product should be focused on due to size / future growth potential?
- Which customer segments should be focused on due to size / future growth potential?
- Which price points should be focused on due to size / future growth potential?
Golden question - build, borrow or buy?
The most important question is often the mode of growth that the incumbent should pursue. INSEAD professor Laurence Capron in her book "Build, Borrow or Buy" has identified determining mode of growth as a major driver of success in devising a growth strategy. Deciding on the mode of growth is a function of the following questions,
- What is the level of control the incumbent wants to keep on the growth strategy initiatives?
- Does the incumbent have the in-house capability to execute the growth strategy initiatives?
- What is the level of financial investment the incumbent is ready to make to pursue growth?
'Build' or growing in-house capability is pursued when the incumbent has the capability internally. It is generally used to build a greater reach for an existing product in an existing segment. It involves complete control of the execution.
'Borrow' or growing via partnerships (e.g. contracting, outsourcing) is pursued when the incumbent has a clearly defined scope or outcome statement without the threat of the partner becoming a potential competitor. It is typically used for leveraging an existing product, distribution in a new market. In such a setup, control is shared while financial investment is not very high.
'Buy' or pursuing the inorganic route, often touted as the most risky alternative, is seen as a last resort to drive growth. It is often used to build market share or enter a completely new setup. Control and scale are seen as primary drivers while these marriages often end up with divorce (e.g. failure rates of M&As are often higher than 50%). The financial investment in such a proposition is often the largest among the various routes.
In terms of strategy, a combination of 'build and borrow' is often tried first and 'buy' is seen as a mode of last resort.
Are you planning to pursue mindless growth!
Numerous companies, new age and traditional, are falling prey to the trap of pursuing mindless growth at the cost of sacrificing eventual profits. While growth leads to scale which can lead to profitability, an expansion strategy that compromises on profits is never advisable. Following questions should be carefully answered,
" Is the return on capital employed from growth initiatives higher than the cost of capital?
" Is the cost of acquisition and servicing equal to the potential lifetime profit from the consumer?
" What are the key financials (Net Present Value, Internal Rate of Return, Payback period) of the incremental initiatives over 3, 5 and 10 years?
In conclusion, growth is the magical potion being hunted for in most corporate boardrooms. The exercise to devise a growth strategy needs to be thorough and structured. And sometimes, it is okay to continue status quo rather than pursue value destroying growth activities!
Did you know?
- Did you know that devising a growth strategy exercise typically takes between 2 - 4 months?
- Did you know that most business conglomerates refresh their growth strategies every year as part of their annual planning exercise?
- Did you know that according to a recent Harvard Business Review report, the failure report for mergers and acquisitions (M&A) sits between 70 and 90 percent?
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.