Constant transformation is the key to survival for businesses. This has been more true since the arrival of Covid-19. Businesses that were slow in embracing technology have taken the biggest hit, be it the coaching centres or those restaurants which were yet to register on delivery apps.
Consider the case of Reliance: At a time when most oil companies are suffering, the company has succeeded in bucking the trend by registering a large gain in market cap. What made it possible? A timely plunge into the businesses of future — telecom and technology — that not just kept its head above the water, but also helped the company make the most of the crisis.
But entering a new business or digitally transforming a company is not everyone’s piece of cake. Organisations that make any such move face the obvious challenges — assembling a new team, raising capital, developing brand identity — while also running the risk of disturbing the well-set processes at the present business. But, let’s accept the fact that when it comes to coming up with new age products and solutions, its the ‘lean and mean’ startups that rule the roost. Clayton Christensen has dealt with this fact extensively in his book ‘The Innovator’s Dilemma’, which we will discuss at the end of the article.
So, what can bigger players do?
Make the best use of the biggest tool at their disposal — money — to evolve themselves from time to time and that too without going through the grilling process of developing a business/technology from scratch. And that can be made possible by acquiring new disruptive entrants that fit the larger vision.
Walmart’s eCommerce journey best demonstrates why buying startups is the best way for companies to march forward. Up until recently, Walmart’s reaction to the challenge presented by Amazon was the case of ‘too little, too late’. So when Doug McMillon took over as CEO in 2014, he was asked to not “just run the company but prepare it for the future”. But it was only after 2016, that the company was seen making some serious moves in the eCommerce front. In September 2016, Walmart purchased eCommerce company Jet.com. The very next year it acquired three smaller peers and among them were two startups — Moosejaw, a leading online active outdoor retailer, and Parcel, a last-mile delivery company.
The result: the retail giant registered a 207% growth in the number of eCommerce buyers between 2017 and 2019, according to a report from Nielsen and Rakuten Intelligence. (https://www.emarketer.com/content/walmart-tops-amazon-growth-across-five-cpg-categories)
Similarly in India, where it had earlier failed to set up retail stores by itself, it is now the biggest eCommerce player, thanks to the acquisition of Flipkart.
Just like a man cannot himself produce everything he needs, building every segment from scratch doesn’t make sense for businesses. If there are two parties: One with a lot of money and the other with talent and ideas but short of cash, a merger is obviously the best way forward. It is just how the economy functions.
Why buying makes better sense
An already ringing cash register
Cash is the life-blood of any business. And this is where buying holds the biggest edge. Imagine putting a lot of money and hard work into something only to end up waiting for years to get something back. Well, this is the case when you start from scratch in majority sectors. On the other hand, buying a startup (either profitable or loss-making) ensures a steady flow of cash from day one.
Having a good cash flow also makes it easier to attract funding. Anyone, be it a bank or an investor, finds it more comfortable to put money into a business that is already up and running.
A lot less risk
When you buy a company, you know its history, its customers, market share, and most importantly the business model, which has already gone through several tests over time. This significantly cuts down the risk as compared to starting afresh based on hypotheses, assumptions and predictions.
Along with the business, the buyer also gets his/her hands on a recognised brand identity, which takes years to build through marketing, endorsements, and referrals.
Talent and Infra
When it comes to technology startups, the most important aspect, any founder or investor would say, is finding the right talent. A survey in 2019 found out that skills shortage in the tech industry is at an all-time high with 67% companies struggling to find the right talent. And if you need employees with knowledge of big data/analytics, cybersecurity and AI, your job is even more difficult. (https://home.kpmg/xx/en/home/insights/2019/06/harvey-nash-kpmg-cio-survey-2019.html)
Buying not just saves you from this headache, but also gets you people who are already set in their roles.
Not just talent, the right infrastructure, many a time including office space at key locations, also leads to huge savings on time and money.
How to know if your company is ready to expand?
Before you make the ‘build or buy’ decision, its important to assess your own company to make sure the existing business is on solid ground. In particular, you have to first make sure that the money being arranged for the expansion does not end up hurting the already set operations. Similarly, the management team should have enough depth and experience to be able to give proper time and attention to the acquisition and get the best deal finalised.
Along with the internal dynamics, it’s important to study the market and the economy as a whole. A thorough understanding will also help you in deciding if its better to buy or build.
The Innovator’s Dilemma
Coming back to the most important literature in this topic, the book by Clayton Christensen best explains the dynamics between companies and innovation and why its common that market leaders and incumbents fail to seize the next wave of innovation in their respective fields.
In the book, the author argues that its not the bad decisions, but the habit of making good decisions that brings the downfall of companies by making it difficult to adopt new innovations. (The ‘innovator’s dilemma’ is that ‘doing the right thing is the wrong thing’.)
The excerpt from the book that captures the key point:
“The very decision-making and resource allocation processes that are key to the success of established companies are the very processes that reject disruptive technologies: listening to customers; tracking competitors’ actions carefully; and investing resources to design and build higher-performance, higher-quality products that will yield greater profit.“
On why startups hold an upper hand in implementing new technologies, Christensen says as new entrants have little or nothing to lose, they enjoy the freedom to apply new technologies largely by trial and error, at low margins. This allows them to operate sustainably where incumbents could not.