Good is good enough. That is what I hear from many businesses—the economy is fine, my business is fine, so why should I improve or change? As evidence points to the real gross domestic product (GDP) increased 1.9 percent in the third quarter of 2019, according to the advance estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent.
It’s unfortunate that many business leaders have this attitude, because it stifles employee performance and productivity—the mindset does not challenge the workforce to excel beyond today’s issues—leaders set the bar and keep it there—in fact, they raise and lower whenever they feel like it.
For example, PlyTech Inc. (PTI) is a manufacturer of engineered plywood for a niche, custom furniture market. CEO Mark Bitner and his team have exceeded gross sales for past 3-years, with a year-to-year average net profit of 32%. One day on a cold Wisconsin morning, Mark sat in his office relishing over the financials, giving himself kudos. He was so happy, that he put a freeze on next year’s sales and marketing budget, which basically meant a no spend, no hire policy.
What Mark did not know, however, was that his top competitor, Buildplex Inc. (BPI), was pursuing an aggressive investment in digital marketing technologies—an accelerated growth and valuation strategy based on a new customer acquisition platform.
Mark, on the other hand, sought a status-quo strategy, based on financial stability and a predictable dividend income. Unfortunately and unbeknownst, his complacent attitude would cost PTI a 28% decline in revenues and a negative 4% EPS the next year.
So why do some business leaders or business owners think that past performance is a guarantee of future returns? Answer: a lack of understanding of their business life-cycle structure and external market dynamics. In fact, most will strategize on growth through acquisitions to expand customer base and geographic footprint. And, while this approach may prove cleaver on paper, it doesn't always produce the expected returns, as published by Deloitte, The state of the deal: M&A trends 2019.
Top reasons why M&A transactions have not generated expected value:
As the above diagram suggests, over 55% of the 1,000 executives surveyed from corporations and private equity firms, confess that sales and revenue targets where not met. This is not surprising, since a due diligence acquisition research project is primarily based on historical and expected cash flows from ongoing operations—an acquisition will, certeris parisbus, reflect a high risk move if marketing and sales strategies are not included.
The intent to window-dress the balance sheet through an acquisition is short-term planning and decision-making. Pursuing an acquisition strategy is not being complacent, it is the lack of research on market structure, sales channels, and growth drivers.
Performing a Sensitivity Analysis suggest that a 1 percent point increase in price or a 1 percent point reduction in selling expense may increase a companys' valuation in $millions—most often, a decision to acquire is decided on inputs such as these, rather than, a robust and aggressive, marketing and sales plan strategy.
Similar to Mark Bitner, complacency to consider and include the rapid change in marketing technologies and sales dynamics will prove unfruitful—financial statements are not good predictors of future success—just ask Mark.