Innovation or Acquisition

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As leaders of an organization, one is always confronted with the need to constantly find avenues of growth to keep their share holders happy. If you are leading one such organization, you are also constantly grappling with the question about where could the next level of growth come from.

Do you have innovative products or services in your portfolio which can lead you to the next level of growth? If you are like most of your counter-parts, you usually find out that your innovation pipeline doesn’t look very lucrative when it comes to high growth products or services. Then you start looking at probable acquisitions (usually strategic) that you could make to be able to grow fast enough.

Acquisitions:

Now, there is enough evidence in the world that most acquisitions do not work. Examples are abundant of failed acquisitions. Also, acquisitions cause a lot of disruption in terms of integration with your products, services and employees. Also, the talent that you acquire with the acquisition, mostly leaves the company at the first opportunity. So, you are left with a product/service that you could maybe exploit for a bit of growth and with all the people who did not add very much value in creating the product or service itself. You again find yourself at a junction where you again face the same question – where can i find more growth? What acquisitions can i make?

Add to this, the cost of acquisition, the model is a self-sustaining loop and also takes you away from the probability that you will ever be able to find the next block-buster product or service in-house.

So, the question is how do you get out of this trap and continue to grow:

Innovation:

Long term profitable growth can only be possible if your team is able to identify the possible growth areas and are able to design products and services to exploit the same.

This however is easier said than done. In order to enable this, you must be willing to invest in your innovation engine. There are two types of investment that we can talk about here.

– Monetary investment: I am always surprised to see companies spend millions and billions of dollars on acquisitions and at the same time make it so difficult to fund some of their innovation projects by a few 100 thousands or a few millions. Unless you make it easier to find funding for innovation projects you shall never be able to get block-buster products or services.

– Emotional investment: You find that a leader is heavily involved in all the discussions around an acquisition. However, the same leaders do not spend even half that time in supporting the innovation projects running in their organisations. The lack of their public support also has a big impact on the success of their innovation engine.

There is enough being said about innovation and how to run an innovation program or create a culture of innovation. Most of these advise is common-sense but as they say, common sense does not necessarily translate to common practice.

This does not mean that acquisitions are always bad. If you acquire for the right reasons and the right thing, acquisitions can add a lot of value. Some reasons where acquisition makes more sense could be:

– Acquire IP or product lines which when combined with your current portfolio (current and pipeline) can provide you competitive advantage in the market.
– Acquire a business if it is a good investment opportunity in your market. Do not try and integrate it with your existing business. The integration is mostly a wasted effort and mostly does not lead to improving the overall business.
– Never acquire for the talent or the business process of culture of the organizations. Culture and business processes cant be transferred from one to the other and the talent usually leaves at the first opportunity.

So, building a good innovation engine which consistently produces breakthrough products resulting in high growth is simple and effective, but not easy.

Acquiring companies is easier but not simple or effective.

What do you chose to do? Innovate or acquire?

Do let me know your thoughts by commenting below or tweet them to me at @rmukeshgupta.

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