– Thoughts on Strategy and Management

External growth strategy

A couple of days ago I received a question concerning an external growth strategy. The core of that question had three different parts. When might this strategy route be appropriate?  What are the conditions for an organization to consider this route and what forms of strategies are applicable once the organization settles to take this direction?

Before I start I would like to mention that there is no general answer to those questions. A growth strategy – not matter whether internal or external growth – should help your organization to protect (and to sustain) its existing advantages or to develop new advantages (competencies, resources in its widest sense etc.). However there are some interesting indicators and attributes that should be taken into account when entering an external growth strategy. I would like to explain only two of them; furthermore I will discuss some issues in brief that you and your organization have to have in mind.

1 – “Cheap” availability of external assets
A situation of major economic changes can offer a lot of opportunities for external growth. Such a situation might include that important economic assets (shares, land, legal rights etc.) are available for a very low price. Think on the situation in Russia at the beginning of the 1990’s: At the beginning of this decade shares of former communist enterprises were distributed to the people; often this people had very different needs (instead of being a shareholder), so that their major objective was to sell their shares. They could not assess both value and potential of these shares; hence they sold them for a very low price. It was a huge market opportunity for people with some capital to acquire large stakes in enterprises.
The same concept can be applied to any other type of asset…of course these assets should have a strategic potential (or at least a financial potential) for your own organization.

2 – Acquisition of external knowledge, capabilities, resources, market access, brand
Another aspect for external growth can be summarized as follows “Another organization has got some items that you would like to have for your own organization….but you don’t have them and it would take to much time to achieve them for yourself”. Imagine your organization is an engine maker. You discover that another company has developed a very good technology to increase the life time of engines. This technology is protected by patents. You have several options: a) Your organization increases its own research and development activities to develop a similar technology (because the patent licence is to expensive or not on sale). b) Your organization buys the patent licence; but you have to have in mind that you licence fees might support your competitor. C) You discover that the other company has some other assets, too (good engineers etc…and this staff would fit very well to your organization). So what is the conclusion? You acquire the other company.

Sounds crazy, right. An example from practice: A Swiss Recruiting firm acquired a German recruiting firm in 2006. There were some major reasons: Acquisition of market access, achieving a new level of economies of scale and acquisition of management capacity. Yes, the Swiss firm was keen on having the German directors in their Swiss headquarter and the directors of the German firm became directors in the firm, which had acquired their former enterprise. That is a very good example for an external growth strategy.

What else to consider?
There is a large number of issues that your organization has to consider when starting an external growth strategy. Hence I can just highlight some of them and address them briefly in form of questions:

  • Organizational fitness. Is the management capacity of your organization able to run a larger, even different organization? I have seen senior managers who have been brilliant managers within their stable environment, but failed (or at least came in trouble) when they had to manage another or just different organization.
  • Financial health. Is your organization sound financed and able to refinance acquisition or external resources? What impact will the acquisition have on your future cash flow? Is your relationship stable to your major refinancing partners?
  • Is your organization able to integrate external assets? Do you have an experience within the field of bringing different organizations together? Do you someone in your management team who has these competencies?
  • Strategic consequences. What do you major shareholders think about your ideas (You are quite lucky, when it is your company and you are the major shareholder…). Do you have an exit strategy or fall back-strategy, if your external growth activities fail? Does your growth strategies represent a wake-up call for other competitors (Remember Netscape in the mid 90’s, when they announced to hit Microsoft, what actually was a wake up call for Redmond, too.)?

In order to develop an appropriate strategy I would recommend a holistic approach. This approach should contain these four steps:

  • Diagnosis (your situation, external data and information, new ideas)
  • Objective development
  • Analysis (organisation, your systems, strategic consequences)
  • Decision

I hope that these ideas and questions might help your organization a little bit.

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