What do a small, family-owned café, a medium-sized independent social care provider, and a multinational, private equity-backed conglomerate have in common? They all share the same goal: growth. Despite this collective obsession, the vast majority of growth strategies fail.
Hardly any companies achieve sustainable growth over the course of a decade, so we want to examine why. We’re going to explore the minefields of M&A and organic growth and discuss key motivational factors that underpin poor growth strategies, leading to calamitous consequences.
Why Most Growth Strategies Fail
Reactivity, Not Proactivity
Though it’s unfortunate, many failed growth strategies share one common feature: they aren’t proactively building from a position of strength; they’re desperately reacting to weakness. Perhaps growth has stalled or a product launch has seriously backfired, to the point where the business is desperately clambering for any method of diversification to build positive momentum by any means necessary.
It’s easy to see why this reflex kicks in. If profits from the core business are appearing to fizzle out, one could argue that change is needed to adapt to an ever-changing market. But that misses the point. The core business isn’t just a line on a graph that endlessly ascends. No, it’s the differentiating factor for any given business and drives customers to choose your product or service over another. If a company launches a new growth strategy in a fit of panic, then resources will be spread even more thinly while any remaining advantage over the competition will diminish.
To the point, businesses that grow from their strengths rather than away from them tend to sustain growth longer. Look at the way in which Disney doubled down on its own intellectual property across film, television, theme parks and merchandise to expand upon its own existing capabilities, for example.
Sustainable growth starts with consolidating your company’s strengths before understanding the unique aspects of your business that make it successful in the first place. Your growth strategy should amplify these strengths, not run away from them.
M&A Mistakes
The effect is almost immediate. Suddenly, a business has access to new customers, exceptional talent, and innovative technology. There is no doubt that mergers and acquisitions are an outstanding tool for accelerating growth; however, they also carry significant risk.
Success rates are shockingly low. According to a Harvard publication, 70% – 90% of mergers and acquisitions fail to increase shareholder value. Leadership losses, cultural clashes, and integration issues are all inevitable challenges for many M&A hopefuls looking to buck the trend. After months or even years of back-patting over the undeniable ‘synergy’ between companies and the projected revenue after the ‘M’ or ‘A’, a deal seems inevitable.
The unshakeable truth about M&A is that, if the business doesn’t fit the buyer’s long-term strategy, and (even worse) there isn’t a practical post-acquisition integration playbook, the growth gained is borrowed, not earned. A short-term boost, followed by a long-term limbo in which synergy is opposed by integration lags and internal political squabbles, leaving a newly ‘bolstered’ business which is actually weaker than the sum of its parts.
If the shoe’s on the other foot and a business is looking to sell, they should be wary of predatory equity houses that purchase companies with the intent of offloading the debt from the purchase onto them. The most notorious example is Toys “R” Us’ bankruptcy at the hands of Bain Capital, KKR, and Vornado Realty Trust. $5 billion of the $7.5 billion buyout was thrust onto the much-loved brand, along with $400 million in annual interest payments, which led to its unfortunate demise.
The more compatible the businesses, the better. If the parties involved operate in the same space, then their respective teams will integrate more easily and the buyer company’s organisational knowledge will align with their new colleagues, systems, and assets.
Organic Obstacles
Every company aspires to grow organically. Doing so signifies operational mastery, market expansion, and commercial security. On top of that, it is generally more sustainable. But in practice, it’s incredibly challenging – especially for a small business with fewer resources and less capital, where organic growth poses much greater risks.
Suppose a brick-and-mortar business operating at a small scale wants to grow organically. In that case, they must mobilise a larger proportion of company resources, which might already be in short supply. Compare this to a more scalable business model, for instance, an online clothing retailer like Closure London, where inherent structural advantages, e.g., lower overhead costs, easier access to the global market, and 24/7 operations, position the business to build on its current offering and grow organically.
But when mistakes are made in organic growth, the consequences can be catastrophic. The insatiable appetite of a growing company can sometimes outpace its ability to digest what it’s already eaten. When the pace is too fast, it can pile massive pressure on your workforce and systems and stretch resources to breaking point as the business outgrows its operational capacity.
On the other hand, when organic growth is too slow, it can delay the project’s return on investment, leading to frustration, negative cultural buzz, and poor decision-making if expectations are not set. In addition, businesses that rely on organic growth can fall behind competitors that utilise M&A in fast-moving markets, leading to a decline in market share.
When done right, you’ll see a snowballing effect: a company increases its operational scale, logistics, and systems to efficiently serve more and more customers at lower cost, across more regions or internationally, all while increasing loyalty among existing customers and finding new ways to innovate.
Long-Term Sustainable Growth is Possible
The evidence is clear: growing a business at any given scale is difficult. Mergers and acquisitions and organic growth each have their respective Achilles’ heels, but that shouldn’t detract from the enormous range of boosts and benefits they can offer businesses. Successful companies that experience consistent, sustainable long-term growth capitalise on their best assets, refining the business model and building on their strengths before deciding they can take on the world.
Written by Damian Woods