The art of acquiring growth in a globalised world

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Wim Elfrink, Executive Vice President, Cisco Services & Chief Globalization Officer, Cisco Systems, Inc.

As the information technology revolution, driven by globalisation, sweeps through the emerging economies it is spurring innovation and allowing the creation of unexpected and disruptive business models. Traditional borders are fading away as markets for products, services, and labor become integrated around the world.

India, China, and other "emerging markets" such as Poland and Brazil, are undergoing dramatic change and modernization, especially regarding technology and their workforces. Most of these countries are growing far more quickly than traditional markets. Two hundred million people will be urbanized over the next five years and most of that will take place in emerging markets.

What does this mean for the companies who aspire to be global leaders? How do home grown companies innovate and drive sustained growth in this era of global competition and accelerated business cycles?

In his India@75 speech, CK Prahalad envisioned India becoming a source of global innovations - new businesses, new technologies and new business models. He exhorted companies to not only learn from best practices but focus on next practices seeking new patterns of opportunity and having the courage to pursue them.

For companies aspiring to grow in a globalised world, where to compete is just as important as how. Companies must match their distinctive capabilities with sectors where profitable growth is likely to occur.

While organic revenue growth through gaining market share is important for companies, it seldom guarantees long term growth. As a McKinsey study concluded, a company’s choice of markets and M&As are four times more important than outperforming in its markets. While execution and fundamentals are critical, growth seeking companies must look beyond best practices in strategy, operations, marketing, and organization. Companies must understand that the choices they make today and where they decide to place their bets will shape their growth trajectory over the next five to ten years.

At Cisco, acquisitions and partnerships, have been, and remain a core competitive differentiator for the company and a compliment to Cisco's strong internal engineering and R&D capability which continue to produce market leading solutions for our customers. Continued focus on customers and their needs is a major driver behind both Cisco’s acquisition and partnership strategies. Since its very first acquisition of Crescendo Communications, Cisco has chosen to enter certain growth markets using acquisitions as disruptive innovation tools and has developed unique competences in sourcing, closing, and integrating companies.

More than ever, today it’s critical for companies to look carefully at their growth and innovation strategies. While it depends on the nature of the company, it’s important to harness various forms of innovation to drive growth and this means striking the right balance between innovating internally, acquiring innovation and partnering with companies.

In the technology sector and other innovation driven industries, as new markets arise, acquisitions can provide you with the velocity and critical mass to be able to execute into those new spaces. For Cisco, the most important validation in an acquisition is the customer validation. Cisco is very focused on how to innovate and provide value to customers as well as be able to take advantage of disruptions to enter new markets. By acquiring smaller companies in the early stages, Cisco can capture technology and move into a new market much earlier than its competition. For example, Cisco entered the set top box market through the acquisition of Scientific Atlanta, the consumer space with Linksys and the video server space with Arroyyo.

Of course acquisitions that aren’t well thought out can be quite counter productive; remember the tech boom days of the 1990s. Companies spent $3.5 trillion on acquisitions between 1992 and 2000, making those eight years the most active M&A period in history. During the boom, the focus was on acquiring quickly because if you waited, the value shot up as companies went public. Now it’s almost the opposite; since companies are unable to go public that easily, you are almost always better off waiting.

Companies looking at acquisitions must carefully work out the timing of the acquisition, selection of the target, and assessment of risk. The clutch and gas pedal are timing and price. Timing is an art form. If purchasing firms acquire early they could potentially get less assets while if they acquire later, they pay a lot more and may end up with a loss making proposition.

The approach to take normally depends on the markets. In markets that are consolidating and where there are a lesser number of acquirers, it’s almost always better to wait and watch till companies gain critical mass. In newer markets or accelerating markets, it’s better to go earlier and acquire the first mover companies. It depends on what the market assumptions are, the market a particular company is addressing and the position of the purchasing firm.

Selection of the target depends on the purchasing firm’s requirements. In transformative acquisitions, purchasing firms discern a new market and see a strategic roadmap and superior profit potential in the long run. A specific deal should, for example, be linked to strategic goals, such as market share and the company’s ability to build a leading position.Sometimes it’s specific business units who want to acquire a company to address a hole in the product line up or if they are late to market. Purchasing firms should develop strong business development teams who are keenly aware of what’s happening in the industry.

It’s imperative to assess the strategic risk and see if the acquisition makes strategic sense. Purchasing firms need to do customer diligence, evaluating customer experiences with the technology, gauging the technology development risk, and judging the timing and financial risks. Uncertainty and complexity are two variables that purchasing firms must take into account to make the right decision about the right acquisition at the right time. While "complexity" challenges in acquisitions are real, visible and significant, it is the "uncertainty" variables -- the unpredictability of markets and product success -- that present the larger challenge for purchasing firms. It’s best to buy companies that bring along limited uncertainty.

During the acquisition process, Cisco carefully reviews the fit between the core competencies of the new company and Cisco's internal team, projecting what the early stage company can become with Cisco's resources behind it. In these instances, it is really the talent that is being acquired. A major part of Cisco's acquisition rationale includes acquiring the people who will keep the technology evolving. Keeping technology on the leading edge means retaining the talent who can grow the technology. Cisco believes that people are the strategic asset in an acquisition and prides itself on its rate of employee retention using retention as an important measure for successful acquisitions.

Different acquisitions demand different approaches. Certain deals, especially those focused on raising revenues or building new capabilities, require fundamentally different approaches to sourcing, valuation, due diligence, and integration. Sometimes, it may be best to blend operations of the two companies immediately; other times, keeping them separate may be preferable.

Cisco’s acquisition strategy involves a global quest for markets and talent. To drive growth, Cisco is constantly on the lookout for billion dollar markets and tries to find the best possible platform to approach them. Cisco also seeks to increase its presence in the markets it is already in.

The biggest mistake companies can make is by not taking risks and missing markets. Apart from acquisitions, investments in small companies in new spaces are also strategic because it gives you enormous opportunities to learn. Sitting on boards of the companies enables you to closely watch and learn how a technology is evolving and where the market is headed.

Innovation in today’s age, when it is globally intensifying, is very difficult to pursue without having supplements from the outside. We are faced with both threats and opportunities in today’s disruptive economy. Indian companies should seek to change the landscape and be aggressive in acquiring the technology and talent required to conquer the markets and build long-term competitive advantage.

Wim Elfrink

Wim Elfrink
Executive Vice President, Cisco Services & Chief Globalization Officer
Cisco Systems, Inc.


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