Innovation During M&A

Mark Herndon headshot
By Mark Herndon
Chairman, M&A Leadership Council
May 25, 2017

Let’s face it. Most acquirers aren’t very good at innovation. Cost synergies, yes. True innovation through the deals we sponsor or integrate? Not so much. Oh, sure, we talk a great game in the boardroom, but when it comes down to actually delivering on the innovation bullet point in your deal-book or making something real out of the half-baked assumptions you stuffed in the financial projection model as a placeholder, there’s typically a lot more talk than action.

"Innovation distinguishes between a leader and a follower.”
— Steve Jobs

There are lots of reasons for this failure and lots of room for improvement. I hope these observations and this downloadable resource, Maximizing Innovation Through M&A, at least scratch the surface on a very important subject that doesn’t get nearly as much attention as it deserves. My sincere thanks to my friend, colleague (and former boss!) Bud Taylor for his thought leadership and his inputs on this issue. Bud is the author of a highly recommended book, Customer Driven Change, and consultant to the likes of Microsoft, Toyota, Whirlpool and Korea Telecom.

Keys for Maximizing Innovation through M&A

  • Define innovation correctly. 

    Before we can mobilize on a strategic M&A target objective like “acquire a company with product innovation capability,” we have to be very specific about what we mean. This may be harder than it first appears since "innovation" has become a catch-all phrase like "leadership" and "strategy" that can mean whatever someone wants it to mean. Some see innovation as only breakthrough, industry game changers. Some see it only as changes to product features/functionality. Others see it as any process improvement idea that might be worth considering and other definitions in between. The Economist said it best: “Innovation is fresh thinking that customers value.” Whatever your definition, start by clarifying among your leadership team what specific type of innovation capability is most important for you to acquire.

  • Incorporate innovation throughout the M&A deal lifecycle. 

    Next, let’s take an honest look at your internal M&A process. How effectively is innovation reflected in your M&A strategic objectives by region, business unit or product line? Do you have a weighted criterion that places a premium on prospective target companies with more substantive innovation potential? What about due diligence? How and when do you take a thorough look at the target company’s historical innovation track record, their innovation processes and systems, and their talent most directly responsible for leading innovation efforts going forward?

  • Know when to integrate vs. when to innovate.

    In many integration efforts, you have to crawl before you can run. In other words, job #1 post-closing is to achieve what we like to call “steady-state operations.” Whether your organization attempts to accomplish this within the first 100 days or during the first year, usually, the prerequisite condition is to align processes on a “where is/as is” basis and leave the “optimization” or, in this case, the innovation for tomorrow. The problem is that for many acquirers – even highly experienced acquirers – tomorrow never comes. As a result, the long-term value creation potential, including some of the most valuable innovation opportunities, get left on the deal-room floor.

A better approach is to use Bud Taylor’s innovation opportunity framework to drive specific types of innovation at each stage of integration through specific priority initiatives. For example, what Work Changer innovation opportunities could be captured from best practices and continuous improvements early in the integration process? What Market Changer innovation opportunities (such as near-term product/service enhancements or combinations that were not possible pre-close) could be quickly targeted to key customers or market segments? And finally, once you have achieved basic steady-state operations, what Game Changer innovation opportunities can now be tackled by re-scoping and re-launching a final phase of integration intended to deliver the long-term innovation potential you originally envisioned?

To quote Steve Jobs, “Innovation distinguishes between a leader and a follower.” The same is true with M&A capabilities. The ability to maximize innovation during M&A distinguishes between a leader and a follower. Thank you, Bud, for these important contributions! Now, can I finally have a raise?

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