As technologies converge and product life cycles shorten, it is becoming much more common for companies to engage in all the innovative research and development that they need to remain competitive. As an alternative to developing this in-house, more and more companies are using acquisitions to buy in innovation and development. How can we ensure we make the right decision? To help us Peter Lawson introduces the themes in ER’s major report ‘Acquisition for Innovation’.

There have been many examples of buying in innovation and development. In recent years Cisco Systems, the Californian networking equipment company has been involved in 40 acquisitions. Each of these acquisitions were leading edge and allowed Cisco to broaden its product offering; none of them were in mature markets. In a way because of the large number of acquisitions Cisco is covering itself, not expecting all their acquisitions to succeed. They are happy if 2 out of 3 are successful and 1 out of 3 is ‘just so so’. Furthermore even when the technology purchased through acquisition does not live up to expectations, the skilled staff which they have acquired, for a rapidly growing enterprise, is a major benefit in itself ¹.

It is timely then, that, as acquisition is becoming an ever more important source of product innovation, ER Consultants should have sponsored a research report which summarises the mechanisms and options for acquiring for the purpose of innovation.² Furthermore, in identifying these mechanisms and options Elizabeth Garnsey has identified much that is practical and useful when considering the generality of mergers and acquisitions and not just those that are concerned with innovation.

The pressure to innovate has already been demonstrated and the report fully considers the difficulties and risks of launching new products and services in new markets. Clearly, making an appropriate acquisition is key and to do this the acquiring company must understand both the environment in which the innovative company operates and its internal dynamics.

The range of possible change involved in technological innovation and also the range of risks attached are identified. Whilst the risk/change matrix clearly specifies the site of highest risk it also points out that caution is becoming less and less an option even though acquisition can be disruptive to existing companies.

It falls to few companies to achieve the almost total market dominance of a Microsoft but those who do achieve such pre-eminence have discovered the key to successful innovation. The secret is to enter a new industry several years before a new standard is adopted. Innovative companies are able to identify the drivers of innovation because they understand the evolution of technologies, industries and markets.

The concept of product life cycles is also key. A company may produce many discrete products which do not follow a common life cycle.

Individual product life cycles are affected by technological developments which result in, for example, overlapping product lives. LPs, singles, audio cassettes, CDs and mini-disc and now MP3 are a case in point.

Much care has to be taken to monitor the evolution of a product life cycle as it moves towards commodity status. For example, Acorn Computers failed to recognise the acceptance of MS-DOS as an industry standard. Also technical excellence does not guarantee market dominance – the technically inferior VHS video recording format achieved market dominance over the Betamax system because the developers of the technology formed alliances with distributors and suppliers and so were able to impose their product design.

Innovations diffuse among their users and understanding this evolution is also important. An approach to classifying users has helped innovators to understand the phases of the product/market life cycle. Latecomers to the market often require a different product from those that enter the market early. Thus an innovator’s prospects are affected by an interaction between their product’s life cycle and the maturity of the markets which in itself determines industry structure.

Those considerations and understandings which enable sense to be made of competitive environments and structures and which can also underpin strategic action to support innovative acquisitions are emphasised, for example:

• shaping industrial standards
• establishing early relationships with key players
• keeping informed on change in industrial and consumer environment
• aiming at technological leadership

Why acquire?

Of course, acquisition is not the only way to acquire new technologies. Other approaches may include:

• internal development
• licensing arrangements
• strategic alliance (sometimes incorporating licensing arrangements)
• joint ventures 

But research specifies the particular advantages of acquisition when related to innovation, for example:

• Acquisition simplifies the problems relating to multiple decision-making and intellectual property
• Acquisition affords ownership and control
• Acquisition is a mechanism for the diffusion of innovation
• Acquisition creates synergy where the competencies of the acquirer and the acquired complement each other,for example, where a company with developed manufacturing and distribution systems acquires a company with highly developed innovative competencies

The importance of giving sufficient attention to merger integration has long been emphasised by ER Consultants and it is pleasing that such exhortations are supported by Elizabeth Garnsey’s research findings. She emphasises that an acquiring company has to know itself, its strengths and weaknesses particularly in relation to the emerging markets and new technologies. Clearly the acquirer has to come to a full understanding concerning how the target firm can contribute to the achievement of its strategy. Exactly how this is likely to be achieved will determine the way that the acquisition is implemented.

Releasing synergy should be the purpose behind selecting the type of acquisition pursued from the following spectrum:

• autonomous – where the acquired entity becomes a separate business in the corporate group
• combined – where an organisation is created which mixes characteristics of both organisations in a new or novel way
• assimilated – where the new unit is subsumed and reshaped to fit existing structures and procedures 

After the acquisition

Owning the acquired unit’s technology is one thing but realising the value of the new assets is quite another. Often this is achieved by allowing the growth of a new business area after acquisition. This looks much like the growth of an independent business but has the advantage of sufficient capital. There are many successful examples of this approach.

Fully understanding what has been acquired is vital. This may mean suspending ‘normal’ business judgements as the acquirer comes to understand how the acquired unit has evolved. Managers in established firms may have little understanding of the entrepreneurial firm and see only the lack of procedures and control rather than the technological breakthrough for which it had been acquired.

In the past acquisitions took place after a growing enterprise had developed the capacity to generate revenues. These days, particularly in the case of biotechnology and internet sectors, acquisitions take place earlier, reflecting the accelerated pace of growth in these sectors. Acquisition may take place before such companies are in profit and also when the development work is far from complete. In these circumstances the acquirer must foster the innovative and creative culture and capability, which in the end was the reason the acquired unit was bought. The task is turning an entrepreneurial start-up into a professional organisation without the loss of the creative capability. As the start-up matures this process may demand a very different set of skills and capabilities from those of the entrepreneurial founders of the enterprise.

In a start-up enterprise internal dynamics and relationships are very important. Small organisations are able to react and respond to opportunities without the inflexibility that is often characteristic of larger, more complex, organisations. However, the research identified corresponding disadvantages for small organisations such as:

• lack of credibility
• lack of marketing skills and experience
• the inability to attract investment
• shortage of management and manpower resources
• limited economies of scale and scope
• difficulties with intellectual property

Whilst these disadvantages may be overcome by acquisition, the acquirer must also take great care to manage the new acquisition. Very often the staff in high tech companies are very attractive to the labour market and do not necessarily see any great benefit from being associated with a new employer whether or not security and kudos is on offer.

The final section of the report deals with acquisition planning and management suggesting that attention to pre- and post-acquisition issues require equally rigorous attention.

¹ ‘The Bigger the Better’ by Bill Roberts in Electronic Business, November 1999
² Acquisition for Innovation – A report into the organisation and human dynamics of acquiring innovative companies. Elizabeth Garnsey, 1999. Published by ER Consultants. ISBN0 946934 07 8

To obtain a copy of Acquisition for Innovation please contact Peter Lawson:

T +44 (0)1223 315944
E peter.lawson@erconsultants.co.uk