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Views and Experiences: Growth by Innovation or M&A?

October 25, 2009

John Furrier kicked-off an interesting conversational thread on twitter: Grow through innovation or M&A interesting discussion going on here; re: Cisco vs Juniper – two different visions on growth. Jake Kaldenbaugh, Susie Wee joined me in the discussion. I have summarized my thinking and position on M&A vs Innovation driven growth strategy. My argument is that success in Innovation and M&A driven strategies combined with optimal use of financial engineering is the best guarantee of thriving in good times and bad times. Companies decided to choose only innovation or M&A or financial engineering tend to destroy its value as opposed to creating value. Welcome your comments and wisdom to shape my thinking and practice.

Growth

Growth is a worthy goal. Not very long ago, earnings just more than the cost of the capital was the mantra to measure the growth of the companies. Many companies worked hard to make their assets sweat. But, changing times and changing market conditions drove investor’s thirst for ever higher returns. Then came the next generation technology companies and changed the market expectations. Now, same investors no longer happy with earnings at cost of capital. They are demanding unattainable growth targets. It is practically impossible to meet the rising expectations of shareholders unless companies innovate to create the wealth – that too in a way competition can’t follow you quickly. You can’t buy the innovation “off-the-shelf” through M&As.

In the continuing quest for business growth, many companies are turning to three compelling sources of growth: Financial Engineering, Innovation and Integration (M&A). Growth through applying financial engineering practices by getting rid of bad companies, “toxic assets”, share buy backs, returning cash to shareholders, and downsizing only lasts for short term and are used for instant cure for slow growth syndrome. Where Innovation is not only about developing new generations of products, services, channels, and customer experience but also conceiving new business processes and models. M&A or Integration enables them increase capacity, improve performance, lower cost structure, and discover new business opportunities.

Susie Wee (@susiewee) wrote,

Organic growth reqs commitment to productization/M&A reqs commitment 2 integration. Each has a place & needs to be “done well”

Growth is no substitute for radical innovation. But “durable growth” is a derivative of radical innovation. Focusing on growth rather than on the challenge of innovation is more likely to destroy wealth. Don’t mistake financial engineering for radical innovation. At the end there will not be any more wealth to unlock. You don’t need leaders to unlock the wealth – instead you need leaders who has fire-in-the-belly to create lightening rods of radical innovation. Innovation and integration, together, allow an enterprise to acquire more customers and deliver more goods and services to market. My argument is that success in all three is the best guarantee of thriving in good times and bad times. If companies choose to go with either one of these strategies and stagnation can doom a business. Successful execution of either of these strategies is not an easy task. It needs discipline and senior management commitment. It strongly depends on companies’ ability to collaborate across organizational boundaries.

Companies that can grow their top-line by giving away value at close to zero profit are spinning their wheels without much of progress. How long they can survive?

Innovation Driven Strategy

Unless companies institutionalize the innovation activism, they are unlikely to meet the challenges: Reinvent itself and re-inventing its industry. Apple is such a great example of an innovation driven company. How many acquisitions Apple made recently? I guess close to none. Is apple creating wealth or unlocking wealth? Apple created huge wealth through radical innovation. My assessment is that Apple was able to re-imagine its deepest sense of what Apple is, what it does, and how it competes. That made them very unique company in the Valley. Customers love their products. They don’t even mind piercing their bodies with tattoos of Apple’s logo. What is driving such a stellar performance of Apple? I bet it is constant, restless, and relentless innovation with new products their customers love without damaging their price position and the brand.

Susie Wee (@susiewee) wrote,

@Furrier @Jakewk @sureddy Driving innovation to product in a company is an art. Requires strategy, opportunity, timing, and luck.

@sureddy Actually I prefer the word “fortune” over “luck”. You can have some impact on your fortune.How important?Very… @Furrier @Jakewk

@sureddy Moving innov to market in BigCo requires many functions-mktg,r&d,GTM,supply chain,ops-to execute in concert. @Furrier @Jakewk

@sureddy Fortune/Luck is when the innovation matches needs/strategic directions in multiple functions at the same time. @Furrier @Jakewk

Many companies fail to create the future not because they fail to predict it but because they fail to imagine it. Companies stuck more often with their heritage and failed to distinguish between the heritage and destiny. As Jake Kaldenbaugh pointed out, in many companies the premium placed on being right is so high that there is virtually no room for imagination or looking for the unconventional wisdom. These days strategies of many companies looks alike or hardly any difference. Outsourcing was another powerful force for the strategy convergence. As companies outsourced more and more made their strategic differentiation narrower and narrower. They are focused for short term and compromising their long term vision.

Jake Kaldenbaugh tweeted his interesting view on Innovation Strategy:

@sureddy @susiewee @furrier Organic is still a funky art in cos. Have hard time doing both product & GTM development.

@sureddy @furrier Successful internal R&D growth strats tend to run in cycles for cos which tells me they may be based on leader ie S. Jobs

@sureddy @furrier @susiewee I think corp incentive systems interfere w/ internal innovation. Y so much reliance on VC & M&A in SV.

Without a radical innovation, companies are devoting a mountain of resources to molehill of differentiation. Unless companies become more adept at innovation, more imaginative minds will capture tomorrow’s wealth. We see this all the time. Companies started in garages tend to break the records of all time. What is driving these small companies to achieve such an outstanding performance or results? Their ability to de-construct and re-construct their business models at the speed of light. When its most effective, radical innovation makes their competition irrelevant. It isn’t about competitive strategy. It is not positioning against competition. But making competition irrelevant. If it is not different, it is not strategic any more.

Cisco and M&A Driven Strategy

Companies like Cisco realized that much of the innovation that will shape the future of their industry is occurring outside of their organization. Cisco viewed hundreds of startups that created every year as potential sources of innovation to be exploited. They adopted totally different strategy. They co-opted the insurgents. They are innovators in one sense realizing that the ultimate value of their acquisitions is not the integration of technology or products but unlocking the huge wealth in the contribution it makes to Cisco’s entrepreneurial energy. In my view, Cisco enabled different level of Innovation through a perfect blend of serendipity, genius, invest commitment, and sheer execution focus. I tend argue that Cisco legitimized, fostered, celebrated, and rewarded the nonlinear innovation. I may be wrong. But, my strong sense is that they created an ecosystem where virtuous mice(startups with great ideas) and wealthy elephant(Cisco with ton of money and passion to harvest these startup ideas) lived happily ever after!

@Jakewk Cisco’s competitive strategy is at odd with engineering and product strategy has been for years – they fill holes not advance tec

Cisco has worked to make acquisitions a routine process, as route as the product development. Kind of open their eyes and ears to look for new innovations part of their strategy. This strategy worked well for Cisco for reasonable amount of time.

Jake Kaldenbaugh replied to Cisco’s M&A vs Innovation strategy:

@Furrier Re: Cisco filling holes v. adv tech: Sometimes systemic integration can be innovation IMHO.

Does this strategy work for long run? Is it sustainable? In my view, I think they also reached the point of inflection. For every strategy there is a decay unless it is constantly refined and reinforced. And I am sure Cisco started to experience this too. It is rather very difficult to scale this strategy for ever. The complexity of trying to manage these different business units soon will overwhelm the advantage of integration. Though M&A helps eliminating the competition vs making their competition irrelevant. Companies that focus on this strategy, soon end up with an unsustainable or strategy decay. What do they do next? Then they go and spin-off or de-mergers or break them into small companies. Or get rid of the bad apples. All these would lead to the circus of financial engineering to unlock the shareholder wealth. Never forget that good companies gone bad are simply companies that for too long denied the strategy decay or trying to over reach their growth without any strategic differentiation.

Conclusion

Don’t mistake financial engineering for radical innovation. At the end there will not be any more wealth to unlock. Companies need radical innovation to create more wealth. Successful innovation needs discipline of innovation, senior management commitment, and depends on companies’ ability to collaborate across organizational boundaries. Innovation and integration, together, allow an enterprise to acquire more customers and deliver more goods and services to market more rapidly making competition irrelevant. My argument is that success in both combined with optimal use of financial engineering is the best guarantee of thriving in good times and bad times. Companies decided to choose only innovation or M&A or financial engineering tend to destroy its value as opposed to creating value.

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