Michael’s M&A Playbook: Strategy Development and M&A
Strategy development is an essential management process to formulate clear guidance to achieve long-term profitable growth. A well-crafted strategy provides a roadmap, enabling organizations to make actionable decisions and allocate financial and human resources effectively. Portfolio analysis and strategy development go hand-in-hand, and this article explains how to use a strategic portfolio analysis to develop an M&A strategy. The combination of portfolio analysis and M&A allows organizations to make informed decisions regarding which companies to acquire or sell to achieve strategic objectives and optimize their overall portfolio.
M&A is a strategic tool, and the earlier you see it that way, the more successful your M&A journey will be. By clearly defining the long-term strategic objectives, organizations can ensure that M&A activities align with their long-term vision. Whether the goal is to expand into new markets, diversify product portfolios, or enhance operational efficiencies, the M&A strategy should be a means to achieve these objectives.
Strategic Portfolio Review and M&A
Strategic portfolio analysis is a systematic approach that enables businesses to evaluate and manage their portfolio of projects, products, and investments to optimize returns while minimizing risks. It involves assessing the composition and performance of an organization's portfolio, considering factors such as investment opportunities, resource allocation, risk tolerance, and strategic alignment. The analysis provides valuable insights into each portfolio component's strengths, weaknesses, opportunities, and threats. By evaluating the portfolio, decision-makers can make informed choices about resource allocation, prioritization, and investment diversification. Let’s discuss in more detail what a portfolio analysis does.
Understanding Portfolio Reviews
A portfolio review helps companies align their product offerings with long-term strategic objectives. It allows them to evaluate whether their current portfolio supports their vision and if any adjustments are needed to ensure coherence and relevance in the market. By analyzing the performance of different products or business units, companies can identify opportunities to optimize resource allocation. It may involve reallocating investments from underperforming areas to high-potential segments, maximizing return on investment.
Portfolio reviews provide an opportunity to assess a company's risk exposure. By identifying any concentration of risk within the portfolio, businesses can take proactive measures to diversify their offerings and minimize potential vulnerabilities.
Companies can uncover growth opportunities they might have overlooked through a comprehensive portfolio review. It could involve expanding into new markets, developing new products or services, or leveraging synergies between existing offerings.
Portfolio reviews equip decision-makers with valuable insights to make informed choices. By analyzing each portfolio component's financial and strategic performance of each portfolio component, executives can prioritize investments, divest from non-strategic assets, or explore partnerships and acquisitions that align with their objectives.
How do companies perform a portfolio review? You usually want to understand how the assets perform (i.e., financial indicators), how they fit into your strategy (i.e., strategic fit), what your growth expectations are, and how risky they are (i.e., risk-benefit analysis). Let’s look at some methods.
Boston Consulting Group Matrix
Many companies use the Boston Consulting Group (BCG) matrix that uses growth and market share for the analysis. It may be tricky for some companies to get the data for a specific market share or future growth, but you can work with estimates.
In the “Star” area, you have products with significant future growth and high market share. You want to keep those products. In the “Cash Cow” area, you invested in those products in the past, and now it is the time to exploit them financially. Since the future growth is low, you also keep the investments low. The area of the “Pet” (which was initially named “dog”) is the area where you want to stop investments and potentially sell the product/company if possible. In the area of high future growth but low market share, you need to define whether you want to invest in increasing your market share. Assuming you keep those products, regularly review their performance and return on investment.
Other Portfolio Methods
There are many other portfolio methods that you can use for your analysis. In addition to the BCG matrix, I have often used “future growth” and “profitability” (e.g., business unit EBITDA performance, ROI, EVA, or similar performance indicators) for the analysis. Other companies use a more qualitative approach when they analyze the strategic fit. Here are a few different methods:
Product Life Cycle (PLC) Analysis: This framework examines the stages a product or service goes through the introduction, growth, maturity, and decline. Understanding the life cycle stage of each item in your portfolio can guide strategic decisions regarding resource allocation, marketing efforts, and potential modifications.
SWOT Analysis: Conducting a Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis provides an overview of your portfolio's internal strengths and weaknesses, as well as external opportunities and threats. This analysis can help you identify areas for improvement, capitalize on market opportunities, and mitigate risks.
Market Attractiveness/Competitive Position (MACP) Matrix: The MACP matrix evaluates each product or service based on its attractiveness and competitive position. It helps identify the most promising offerings that align with attractive markets and have a strong competitive advantage.
Customer Segmentation and Analysis: Segmenting customers based on various criteria (e.g., demographics, behavior, needs) can provide a deeper understanding of how different products or services perform within specific customer groups. This analysis helps tailor offerings and marketing strategies to specific segments.
You can choose the best method for your company and adjust the different approaches. The important thing is that you understand your product and service portfolio.
Aligning M&A Strategy with Portfolio Analysis
A portfolio review can result in three outcomes:
No change in the portfolio
A buy-side M&A transaction
A divestment (i.e., a sell-side deal)
It’s not always necessary to change something in the portfolio. This is often the case when you have recently taken portfolio decisions, and you need to see how those turn out. It usually takes some time until you see the planned outcomes.
One of the outcomes of the portfolio analysis can be the decision to invest in a product or service where you expect significant growth. You can develop your product or buy another company if you do not already have it. Considering the time-to-market if you start from scratch, M&A can be the right strategic tool to enter this market quickly. Time-to-market is reason #1 for M&A. Read more about it in this article.
If you have a product or service in the “pets” area (low market share and future growth), you should consider selling it.
Implement A Portfolio Analysis in the M&A Process
In summary, strategic portfolio analysis is a powerful tool for organizations seeking to optimize investment decisions, maximize returns, and manage risks effectively. Businesses can make informed decisions about resource allocation, diversification, and prioritization by evaluating the portfolio and aligning it with strategic goals. Regular monitoring and review ensure the portfolio remains dynamic and adaptable to changing market conditions. Through strategic portfolio analysis, organizations can achieve a well-balanced portfolio that drives long-term success and sustains competitive advantage in today's ever-evolving business landscape. Let’s summarize the most important topics and tips:
Include a portfolio analysis regularly in your strategy meetings.
Use well-known portfolio analysis approaches and adjust them to your needs.
Analyze which areas in your industry are growing and open an opportunity for a buy-side M&A transaction.
Address the underperforming products and services and consider divesting them (i.e., sell-side M&A transaction).
Following these principles, M&A becomes a tool to achieve your long-term strategic objectives. When strategy development and M&A work hand in hand, organizations have the potential to create a stronger, more competitive position in the marketplace and drive long-term success.
