Strategy P. 15

Popular wisdom holds that blue-chip companies can somehow grow continuously. According to the authors, however, the struggle of corporate icons like Kodak, Digital and Xerox demonstrate that natural limitations, managerial complexity, a lack of stakeholder harmony and antitrust concerns make continuous growth increasingly difficult. Rather than seeking growth at any cost, they suggest that companies seek alternative ways of moving beyond natural growth limits. The authors draw on a host of examples -- from Microsoft, J.P. Morgan, IBM and others -- suggesting that companies finding themselves confronting this scenario can either break up their company, create new corporate forms or make a graceful growth-to-value transition. In evaluating their options, say the authors, the corporate executives must consider their company's position in its life cycle -- growth, stall or post-stall. Stalls can be anticipated by assessing the natural limits of the company's dominant growth strategy and its pattern of financial performance. Executives must also realistically assess their company's capacity for both innovation and new-business creation in order to decide whether their capital and talent would be better spent on core business development than on the reckless pursuit of high growth. Choosing alternate options is not easy, suggest the authors, given the pervasive culture of continuous growth. The first step toward making constructive decisions for a company's future, however, is to acknowledge that unbounded growth may indeed be a myth.

Data from a decade-long research project puts advice to managers in context, country by country.

Much of the recent research on mergers and acquisitions (M&;A) seeks to link the market valuations of individual companies, as well as overall stock market levels, with merger activity and performance. In their review of work conducted in this field, the authors present a primer on ways to measure whether M&;A actually creates value and then offer an overview of the "winners" and "losers." But the long-held observation that stock prices affect merger activity was confirmed in 2001, they say, by work that revealed a correlation between high merger activity and high market valuations. Several other studies have shown that acquirers who pay with stock underperform their peers in the long run, whereas acquirers who pay cash outperform their peers. Another line of inquiry, according to the authors, finds that the level of the stock market when an acquisition is announced affects short-term and long-term merger performance. The short-term effects are positive for acquisitions announced in high-valuation markets and negative for those undertaken in low-valuation markets. Supporting evidence is provided in other recent work too: Acquisitions that take place during periods of below-average economic growth create more shareholder value than strong-economy acquisitions. The strong performance of low-valuation acquirers and weak-economy acquirers suggests that they are not distracted by short-run market reactions, but instead focus on business fundamentals and true potential synergies. Two articles published in 2002, suggesting that the root cause of such links between valuation and performance may be incorrect valuation by the market, are empirically supported by current work that Bouwman et al. also describe. The conclusion of these various research streams is that stock prices matter, say the authors. The key implication for managers: Be wary of acquisitions made when market or firm valuations are high, and be optimistic about acquisitions when valuations are low. This review includes a comprehensive sidebar of all referenced and relevant research.

Overreacting to corporate scandal will hobble risk taking, innovation and growth

During the late 1990s stock market boom, many large companies established corporate-venturing units, seeking to develop innovative new businesses and spur growth. However, with the downturn of the economy, many of these units ceased operations -- while others managed to survive and a few even thrived. What went wrong with failing companies, and how do those that still have corporate-venturing units manage to succeed? The authors studied nearly 100 venturing units, proposing that failures often occurred because such groups lacked clarity -- both in their objectives and in their business models. Using the example of successful venturing units, such as Intel Capital, Mustang Ventures at Siemens, Lucent New Venture Group and GE Equity, the authors outline four common types of venturing scenarios that, by using a careful, steady approach, companies can execute well: ecosystem venturing, innovation venturing, harvest venturing and private-equity venturing. They discuss the characteristics and benefits of each and how successful companies avoid the pitfalls that snare others. In the end, the authors conclude, there are many ways to do corporate venturing. But to succeed, companies must define their goals clearly and narrowly, understand the differences among the various types, and use the appropriate type for the appropriate activity. The ultimate key to accomplishing that, say the authors, lies in effectively employing the differences to their advantage.

People often talk about business competition as if it’s a short race: Get to market first and you are bound to win. Indeed, the importance of first-mover advantage has been drummed into the heads of many business executives, and some have almost been brainwashed to think that speed is everything. But when a new technology like the Internet threatens to transform an industry, the companies that are quickest to respond aren’t necessarily the ones that reap the greatest benefits. In fact, choosing a fast strategy can lock them into a set of decisions that actually hurt them in the long run. Instead, organizations that choose the right strategy for the entire race & #8212; both for the early and late stages & #8212; will come out ahead. Specifically, we have found that companies that respond quickly by launching a spinoff usually have difficulty achieving true staying power in the market. For enduring success, incumbent companies are better off creating a group that is & #8212; or will eventually be & #8212; integrated within their organizations. Only then will they be able to tap fully into their numerous strengths and assets, leveraging their incumbent’s advantage.