Originally published in HBR by Mark Bonchek, David Kidder, and Anne Berkowitch
M&A is central to many companies’ growth strategies. But you can’t grow by acquisition alone. Companies with more organic growth generate higher shareholder returns than those relying on acquisitions alone. But organic growth remains elusive. It’s been easier to go from big to bigger through M&A than new to big through entrepreneurship.
That failure is not due to a lack of trying. Companies dedicate vast amounts of time, money, and effort to organic growth. The problem is that many companies have the wrong “operating system” for organic growth.
For most companies, both M&A and organic growth are managed like rocket launches. An enormous amount of planning goes into anticipating every possible scenario and removing every possible risk. Once launched, the opportunity is micro-managed to ensure that everything goes according to plan.
This might have worked in the past when markets moved incrementally. But in a global business environment that is changing exponentially, the market moves too quickly. Too much is simply unpredictable. The solution is to shift the mindset from “rocket launch” to “laboratory”. You need to be constantly experimenting, adapting, and learning — rather than analyzing, planning, and optimizing.
In our work with dozens of large companies on growth and transformation strategies, we’ve found a set of principles and practices that create an operating system for growth. The system draws on the most successful model of value creation in the last century — the ecosystem of Silicon Valley, adapted for application by large organizations. The key elements are (1) startups with fully dedicated cofounders, (2) a growth board of investors, and (3) an agile team focused on capturing learnings, building capabilities, and clearing roadblocks.
There are three key shifts that established companies need to make in order to adopt this operating system and embark on the journey of organic growth:
Quest Like a Founder (Not a Manager)
The first step is to find a founder’s quest. This means finding a problem that is worth solving, that inspires you, and for which you can create an unfair advantage. What makes this a quest is that there is likely no product currently on the market or no existing demand from consumers. As a result, market research will show a small Total Addressable Market (TAM). But successful founders instead focus on the Total Addressable Problem (TAP). Instead of looking at how much market share they can get for products that already exist, they look at how much market they can create by solving problems that already exist.
As an example, a consumer packaged goods company was concerned that millennials weren’t buying as much of one product as their parents did. They were losing share — not to other brands selling the same component, but to other people and providers delivering an integrated solution, such as on-demand apps or mom-and-pop shops. The company’s initial focus was figuring out “how do we regain share with millennials?” But that’s a TAM view of the world. Shifting to a TAP view of the world, they realized that there may be business opportunities in the B2B space, by partnering with those on-demand apps and mom-and-pop shops.
Managers focus on maximizing one’s share of the market for existing products. Founders focus on finding new markets to solve existing but underserved problems.
Test Like an Entrepreneur (Not an Engineer)
The second step is to test like an entrepreneur. Once you have found a large total addressable problem, you can’t just launch a product and hope for the best. You also can’t think like an engineer and try to remove every possible risk or uncertainty. You have to experiment to validate the problem, the solution, and the business model to bring it to market.
As you are testing, it’s vital to watch out for what we call “innovation theater” — convincing yourself and others that you are on the right track as a justification for decisions made in the past. You need to be relentless in your testing to find the actual commercial truth, so that you can inform the decisions that need to be made in the present and the future.
For example, a financial services institution was interested in building new solutions within their lending business. Like other lenders after the financial crisis, the institution had become conservative with its lending practices. But through a series of rapid, low-cost experiments, they were able to identify a lucrative niche in personal lending and an innovative product that had high value for consumers and excellent risk-adjusted returns for the institution.
The entire process from post-it note to launching the product in the market took under 12 months, less than one-third of the time the division’s previous new product launch required. Critical to this rapid time to market was a culture of “radical candor” on the team to stay focused on what the market was saying, rather than what they wanted to believe, or what validated their prior assumptions.
Invest Like a VC (Not a Banker)
Most companies invest in new growth opportunities like bankers. They want to be sure they get their return on investment. They will take the certainty of an incremental return over the possibility of an exponential return. Venture capitalists, on the other hand, have a portfolio mindset, knowing that not every investment will generate a positive return. But they look to the overall value of the portfolio and make sure that every investment generates learning to improve the return on that portfolio.
One of the ways the financial institution was able to accelerate its time to market was by launching multiple experiments simultaneously. They knew that most of them would fail, generating incremental losses. But the one that ultimately succeeded generated exponential gains, which more than compensated for the expense of the other experiments.
We recognize that this is a very different way of thinking and working for established companies. But our experience is that after an initial period of discomfort and unfamiliarity, it unleashes an enormous amount of energy, enthusiasm, and creativity.
There is another advantage as well. In our experience, the most important factor in the success of any acquisition is timing. Even the right deal will fail if you are too early or too late. This portfolio approach to organic growth enables companies to create a testing ground for potential M&A strategies. The real-world learning and ear-to-the-ground experience means you not only get the opportunity right, but you also know when the timing is right. The result is better organic growth and a better success rate for M&A.
Originally published in HBR by Mark Bonchek, David Kidder, and Anne Berkowitch