Acquisition and Strategic Planning - 1

Strategic Planning for Growth

According to Boston Consulting Group, of all the factors contributing to the fundamental value of a business, by far the most important is profitable growth. They estimate that it is responsible for between two-thirds and three-fourths of a company's TSR over the long term.

To support companies in planning for profitable growth, BCG helps companies determine the precise role that growth should play in their corporate strategies, identify the most promising growth opportunities, and set the appropriate balance between organic growth and growth by acquisition.

http://www.bcg.com/impact_expertise/practice_area.jsp?practice=38




What actually is (successful) growth?


What is growth? We can measure corporate growth with statistics about

· Revenue

· Profits

· Number of staff

· Number of subsidiaries.



There are several strategic options, how organizations can grow:

· Internal growth (e.g. entry in new markets, launch of new products)

· Mergers and acquisitions

· Joint ventures

· Leveraging (licensing, development of a network of franchise partners).





Successful growth fulfils the following criteria:

A growing organization should always generate value. Successful growth can be measured by the criteria of sustainability, profitability and shareholder value generation.



· Growth does not necessary generate shareholder value.

· Successful corporate growth needs focus on and leadership in some core businesses.

· Success of failure in growth is not a matter of industry or size of the organization. It is, however, a matter of managerial decisions.



That sounds simple, but it is not. According to a study of Bain & Company, only a one out of seven organization manages to grow successfully.



Barriers to Growth

Barriers to successful corporate growth are complex. The main reason is a lack of a growth strategy – or failure to implement one. A poll from ADL and Fortune revealed that only about 25% of all respondents finally realized their intended strategies.

This allows two conclusions:

· Parts of the management have deficits, which prevent realization of the strategy. These deficits may base in communication or the inability to translate the overall vision and strategy into smaller steps and projects for particular divisions.

· In some companies, the whole planning process is little more than rubbish, since they fail to analyze their environment correctly and hence to develop appropriate projections and scenarios.



Moreover, there may be barriers to growth on operational levels:

· Lack of financial means or insufficient access to outside capital

· Lack of qualified staff / expertise

· Lack of preparation to take risks

· Lack of willingness and ability to change (“we always did it that way”)

· The “this is not invented here”-syndrome – the lack of willingness to take on external knowledge





Preconditions for Growth

The most important thing an organization should have is a strong core business. Such a core business has the following characteristics:

· It is a unique, profitable combination of strategic assets (e.g. equipment, intellectual property rights), skills and abilities (e.g. expert knowledge of workforce), products/services, and relations to external environment.

· It distinguishes the organization from its competitors.

· It enables the organization to serve a particular market segment with a perceived value added.

· It may be a single line of business or a combination of several divisions.

· It is the long-lasting major source of growth and value generation.

· It does not necessary contribute the largest proportion of revenues, but it does contribute the largest proportion of profits (A-product)



These characteristics of a core business reveal which further preconditions are needed in order to achieve growth:

· Development and implementation of a (growth)strategy

· Sound financial basis

· Ownership or development of two to three profitable core businesses

· Market leadership with these core businesses (even if it is in a narrow niche market)

· Management focus on these core businesses

· Continuous monitoring of external environment, early realization of and reactions to changes in the market

· Avoidance of unnecessary diversification into unknown businesses



The last point needs some explanation. Diversification into new businesses is not wrong in itself. Changes in the external environment may force the organization to explore new products in new markets. Management should however avoid looking for better prospects in unknown territory (here: business) only because they are not successful in their traditional fields.



The general message for corporate growth is:

Start with the exploitation of your existing competitive advantages.

http://www.themanager.org/Strategy/ManagingGrowthII.htm