In this article, Dr. Heuer will introduce a strategic decision making matrix for small to mid-size businesses. This framework will help to label their own core strategy. Out of this, areas of special attention emerge that will help maximize the companies value creation.

The Framework

The matrix below has two dimensions: The “Sources of Growth” and the “Final Destination” for a company.

Sources of Growth

The Sources of Growth are None, Organic (internally) and Acquisitive (external). It is possible for a company to pursue both organic and acquisitive growth at the same time, though this will create a strong competition for resources internally.

No Growth

If a company chooses not to grow, it still needs to maintain its position in the marketplace. Even though it does not want to change itself, the context it operates in changes outside of its control. Such changes include new market entrants, new markets, new technologies, and new processes. To maintain its current position, the company requires investments (capital) to compensate for these contextual changes.

Organic

Here, a company grows organically by developing new, or enhancing existing markets, using its own internal resources. These activities are based on new internal ideas, technologies or processes. The growth is not achieved through the acquisition of existing businesses or technologies. Challenges here include the consistent and repeated development of new ideas and their successful integration into the business.

Acquisitive

In this case, the company grows through acquisition instead of internal development. The challenge here is to first find existing companies that have several characteristics:

• they are at the "foothills" of their growth curve,
• they can fit into the company's culture, processes & technologies,
• the acquisition makes sense for the general direction the company wants to pursue (this has to include resulting scale effects for the whole business), and
• the company is open to being acquired at a reasonable price.

The Final Destination

The Long-Term Intention of the small company can be Stand-Alone, Absorption and Spin-Off. A company either intends to go it all the way or be wholly or partially acquired by another company. A merger is actually a special case of Absorption.

Stand-Alone

If the company intends to remain independent, its focus has to be on preserving resources as much as possible to re-invest them into the business itself. The payback for the investors has to come from growth and dividends. Typically, the company cannot sustain rapid growth unless it has a substantial cash cow or acquires capital from the open market through shares.

Absorption

A company that wants to be integrated into a larger organization needs to attract such buyers to its business, and it should preferably run its operations in such a way that they can be easily analyzed and assimilated by a larger buyer.

Spin-Off

This type of company wants to be in the business to generate new markets and then sell them to an incumbent or attacker. This is a twist on the Absorption model, since the company sells some parts but retains its core.

Nine Strategies Emerge

A short summary of each:

ACQUISITIVE & STAND-ALONE

The company wants to grow through acquisitions to become a force itself.

The focus has to be to raise capital for the purchases and to develop a world-class acquisitions process that integrates the new team member as efficiently as possible.

The capital side needs to come from internal efficiencies, cash cows, or the capital markets.

The acquisition process needs to be able to identify appropriate acquisition targets, objectively assess their value differential, plan the assimilation with a high degree of certainty, and assimilate them as quickly and cost-effectively as possible.

ORGANIC & STAND-ALONE

The company wants to grow internally to become a force itself.

Internal Processes and Product Development are the main foci of such a company.

The internal processes are important to free up resources that can be used to grow existing markets and develop new ones. This company needs to be able to generate, develop and test new ideas on large scale to feed the growth curve without causing issues for the operational efficiencies.

NO-GROWTH & STAND-ALONE

The company wants to maintain its current standing and not grow significantly above inflation/industry.

The main areas of focus for this company strategy are Partnering and Internal Excellence.

Partnering allows the small company to extend its intellectual reach. More and more new product ideas are born by multiple crafts working together (see The Medici Effect).

Internal Excellence is required to generate the necessary resources to drive the expensive product development process. This includes operations efficiencies as well as the product development process itself.

ACQUISITIVE & ABSORPTION

The company wants to grow through acquisitions until it can generate a substantial premium from a buyer.

The focal areas of this strategy are Roadmapping and the ability to determine Key IP.

ORGANIC & ABSORPTION

The company wants to grow internally to generate enough value to yield a substantial premium.

This requires the development of an Attractive Growth Curve. The acquirer will pay for the predictability and richness of that curve. The value inside the growth curve does not necessarily have to include operations, since the acquirer can replace those with his own.

NO-GROWTH & ABSORPTION

The company tries to be acquired without a visible growth curve.

The only reason why an acquirer would be interested in a company that does not grow is because it has something that keeps him from growing himself. Typically, this is IP in the form of Secrets, Patents, CRM, or Key Talent.

ACQUISITIVE & SPIN-OFF

The company wants to acquire new businesses, increase their value and then sell them. This is a typical LBO.

ORGANIC & SPIN-OFF

The company wants to grow new ideas internally and then sell them to move to new ideas. This is the classic COLONIZER (see “Fast Second”).

NO-GROWTH & SPIN-OFF

The company wants to develop ideas and quickly sell them without managing the operations of growth. This is an IP foundry. It resembles corporate R&D departments and Think-Tanks.

Resources

The Medici Effect, Johansson,
ISBN 1591391865

Winning, Jack Welch,
ISBN 0007197675

Fast Second, C. Markides,
ISBN 0787971545