Innovate or acquire? That’s the strategic question

Many companies reach a point in their development where they have to make an important decision: Innovate themselves or acquire a competitor? Of course, it isn’t always an either/or decision. Nonetheless, business owners should consider the pluses and minuses of both approaches.

Innovating to grow

Innovation is a broad term that encompasses many strategies — all of which are intended to help the company achieve goals such as boosting profits, improving cash flow, or diversifying products or services. Common strategies are:

• Research and development of new products,
• New market penetration via geographic expansion or enhanced product/service offerings, and
• Increased productivity resulting from internal improvements or enhancements.

Each strategy takes time, effort and capital. Understandably, business leaders can be hesitant to devote such vital resources to innovation initiatives and risk decreases in productivity and profitability.

Combining companies

For companies that don’t want to bet the farm on internal development, acquisitions can be appealing. If you’re looking to expand a product line, for example, it might be more time- and cost-effective to buy a competitor that already offers the goods you want.

Your acquisition target has already done the hard work — including funding, testing and creating the product or service and building a client base. By buying this competitor, you may incur less risk than you would by investing your own capital and building the product from scratch. The same holds true for geographic expansion and productivity improvements.

But business combinations come with their own risks. To fully benefit from any acquisition, your company needs to “stick the landing” — efficiently integrate operations and retain divisions and employees capable of ensuring that innovations continue to pay off. For many buyers, that’s a tall order.

Considering your options

In an ideal world, companies would devote resources to innovation and also make the occasional acquisition to bolster their standing in particular markets. But most companies don’t have the luxury to do both simultaneously. Please contact us for help examining the risks and potential rewards associated with each option.

© 2016