Most large corporations have annual processes to allocate capital and other resources across business units and for strategic initiatives enterprise-wide. The typical practice is to begin with a strategy or “strategic refresh,” develop a long-term (three- to seven-year) financial plan, and lay out a highly detailed budget for the first year of the plan. Unfortunately, the processes are often both muddled and rigid; they typically take months to iterate, generate reams of distracting detail—and then fail to allow for sufficient flexibility to adjust resource allocation over the year. The result: a failure to align resources with strategy.

Every company faces unique challenges. Not all of the measures we describe in this article will be appropriate in every situation, and there’s no one-size-fits-all list of process improvements. However, we find that in most cases, senior leaders should do the following:

• As part of the strategy or strategic refresh, identify the role of each business in realizing the company’s strategy (for example, to accelerate growth, improve ROIC, or to divest) and the company’s ten to 30 most important initiatives.
• Use a streamlined approach to develop the company’s long-term financial plan by employing a value driver model, with only a few line items for each individual business unit or product line.
• Ensure that the long-term financial plan allocates resources to the company’s ten to 30 most important initiatives.
• Match next year’s budget to the first year of the long-term financial plan.
• Keep to a compact planning schedule.
• Design in-year flexibility, at a regular cadence, to allocate more (or less) resources to existing or new initiatives.

In this article, which is part of our ongoing “Strategy to action” to help companies improve resource allocation, we explain each of these six critical process improvements.

1. Identify each business unit’s role and the most important enterprise initiatives

Every strategic refresh should address two fundamental questions: first, what is the role of each business in realizing company strategy (such as to accelerate growth, improve ROIC, or divest), and second, which specific initiatives are the highest priority for the company, within that business and across the enterprise. In our experience, we have found that the sweet spot for companies is ten to 30 essential initiatives. If the list is longer than that, it can diffuse attention and become impractical to manage. If it’s shorter, it probably misses some important initiatives that top management should be involved with.

For example, a company may announce that its strategy is to grow in Latin America. That may be a terrific idea, but without more detail it isn’t actionable. Resources can’t be allocated to catchphrases. What would a practical Latin America growth strategy look like? To start, the company should identify the specific countries it will focus on. Next, it should spell out the major considerations, such as whether the company intends to enter a country on its own (perhaps using a team in a country relatively near where it already has a presence), partner with an existing player in that market, or make an acquisition. The company should also allocate the capital needed for whichever of those options (or others) it intends to pursue. Nor is money enough. The company should identify which business or team will be accountable, name a full-time team leader, be clear about which steps are needed (for example, identifying targets and building relationships), and make sure that the initiative is not starved of money or senior-management attention.

2. Focus on a small number of key value drivers for the long-term financial plan

Most companies’ long-term financial plans include too many line items. This kind of detail slows down the process, makes iteration difficult, and can obscure the true drivers of value.

To be effective, a long-term financial plan needs to be concise. For example, there is no need for ten or more items under general and administrative (G&A) expenses; the G&A line can stand alone. In most cases, income statements for each business should include only revenues, cost of goods sold, sales and marketing, R&D, and overhead costs—without disaggregating detail. An enterprise runs on value drivers, not accounting items. An effective financial plan clearly lays out the most important value drivers for each business unit, surfacing the few key elements that are most important for profitable growth, return on capital, and other company imperatives.

What do key value drivers look like? Consider a filmmaking company: there is a lot that goes into creating successful movies over a multiyear period. But cut to the chase (as they say in Hollywood), and its model can be simplified to producing three blockbusters and five smaller films. Its most impactful value drivers are the average budgets for large and small films, marketing costs, and overhead expenses. A music subscription business, for its part, would have similarly compact but completely different key drivers: the number of subscribers, revenue per customer, and customer churn.

Many senior leaders push back on “keep it simple,” saying that it is impossible to distill their businesses into just a few drivers. But these leaders are mistaking the forest for the trees—and underestimating the costs of examining too many trees.

In our experience, many senior leaders push back on “keep it simple,” saying that it is impossible to distill their businesses into just a few drivers. But these leaders are mistaking the forest for the trees—and underestimating the costs of examining too many trees. It isn’t possible to achieve 100 percent certainty in a complex business; regardless of industry, a competitive landscape is constantly shifting and usually can’t be predicted to a few percentage points. Parsing excessive line items, meanwhile, takes away time that could be better spent managing issues that have more of an impact, and yields diminishing returns. Often, the extra detail delivers no benefits at all.

While the number of line items should be kept to a minimum, the number of business units or product lines should be sufficiently granular to aid the allocation of resources based on the roles, objectives, and needs of each business unit. For example, a division with a fast-growing business unit and a mature or shrinking business should be divided into two businesses, so that top management can ensure that each has the right goals and resources (even if the division leader remains responsible for execution). In practice, a large corporation’s long-range financial plan should typically cover 20 to 50 product lines or business units.

3. Ensure that resources are allocated to the most important priorities

We’ve been surveying senior leaders for years, and a majority of them report that their organizations are underinvesting. Digging deeper, this usually means that companies don’t allocate the proper resources to the most important strategic initiatives, especially growth initiatives. Often, the long-range financial plan simply states the targets and financial projections for each business unit.

A better approach is to be clear on targets and have the long-range financial plan highlight the specific resources that are allocated to the highest-priority initiatives, whether they are enterprise-wide or within a particular business unit, to make sure those targets are met. This typically requires the company to allocate resources among its business units differently from how it had in prior years, regardless of legacy spending or “fairness.”

For example, one major consumer-packaged-goods company took away the “base” level of spending for some of its legacy European operations because of their lack of growth and relatively low returns on capital. Instead, the company allocated those resources to three specific initiatives in Latin America. And at one leading retailer, the CEO personally ensures the full funding and management of the company’s top six enterprise initiatives, in addition to spending almost one day per week on those initiatives.

4. Base this year’s budget on the first year of the long-term financial plan

Remarkably, the prolonged financial-planning process usually ends with a year one budget that does not tie to the long-range financial plan; instead, the year one budget is often closer to the last year’s budget. In a McKinsey survey of over 1,200 executives, less than one-third of participants reported that their company’s budgets were similar or very similar to their most recent strategic plans.¹ Another study revealed a striking 90 percent correlation in investment spending from year to year.² While some degree of year-to-year correlation is to be expected, it’s clearly impossible for a company to boldly reallocate capital (an approach that our research shows creates the most value for companies on the whole) when it keeps allocating capital to essentially the exact same things.

While the year one budget should be more detailed than the long-term financial plan, the top-line revenues, profits, and cash flows for each unit should always match year one of the long-term plan. Two techniques are useful for making this happen. First, start building the budget based on the initial year of the financial plan, rather than on last year’s budget or current year’s results. Second, require that only the CEO and CFO have authority to approve deviations from the long-range plan. Without that rigor, resource allocation tends to dissipate in a fog of war.

5. Compress the time frame for the entire planning process

Financial planning can be a never-ending story. A senior team starts with a strategic refresh in the first quarter, followed by a long-term financial plan that kicks off in the second quarter, and finishes toward the end of the third quarter. Meanwhile, the budget for the next year begins in the third quarter and wraps up at the turn of the year—or even later. This prolonged timeline invites unnecessary draft turning and complexity, and diminishes the forcing-mechanism value of having to make a decision on the most important initiatives and value drivers.

The resource allocation process should be synchronized and as short as possible, with each step taking a maximum of two months. These steps should be scheduled as late in the year as possible, while still allowing ample time for rigorous analysis and meaningful debate. The entire process should also be contiguous.

One consumer retail company’s process serves as an example of an inefficient resource allocation timeline. The company conducts its annual strategic refresh in April or May, followed by long-term financial planning in September and October. Finally, after about two more months of hiatus, the budgeting process takes place from December until March for the calendar year that has already begun. Each step in the process is excessively time-consuming and remarkably disconnected from one another. A consumer-packaged-goods company, by contrast, demonstrates a more effective resource allocation timeline. The company initiates its annual strategic refresh in May, which drives the long-term strategic financial plan and resource allocation process conducted from June until September. The long-term strategic financial plan flows into the annual budgeting process, which starts in October and ends in November.

A process that runs from May to November is better than one that runs all year long and into the next, but it can still be significantly improved. First, any gaps in the processes should be eliminated; the longer plans sit, the more stale and less urgent they become. Second, decision makers should realize that multiple iterations are a tax on their time—they should receive one or two bites of the apple, and put in the work up front to make sure there aren’t excessive numbers of drafts. Finally, the second quarter is simply too soon to start; it provides an unnecessary cushion, at the expense of harder deadlines and greater focus.

Nothing so concentrates the mind as 24 weeks to finish a strategic refresh, a long-term financial plan, and year one of next year’s budget.

Precise timelines will vary depending on the enterprise—which in turn depends on its industry (technology companies, for example, move much faster). But to borrow from the old saying, nothing so concentrates the mind as 24 weeks to finish a strategic refresh, a long-term financial plan, and year one of next year’s budget. In most cases, a company should begin its strategic refresh shortly after midyear and complete the refresh before the end of the third quarter; immediately commence its long-term strategic financial plan once the refresh is completed; and then, when the long-term strategic plan is done, immediately turn to its budget for the upcoming year. For a company whose fiscal year matches the calendar year, the process would begin after midyear and finish in mid-December (exhibit). Across industries, CFOs of companies that have more compact timelines report that they outperform their peers on numerous dimensions.³

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6. Build in year-round resource allocation

Budgets are never perfect—which is exactly what one would expect, since circumstances change over the course of the year. For many companies, the approach to in-year flexibility is to allocate the resources to each division or unit leader and give them the decision rights to reallocate among lines they control, as they see fit. This, however, creates a perverse incentive for divisions or business units to hoard resources they don’t need, spend it on lower-priority items or, even worse, underinvest in strategic initiatives to meet short-term targets.

To prepare for inevitable changes in the number of resources needed and available during the year, the authority for meaningful flexibility in resource allocation should belong only to senior leaders, at the enterprise level. An investment committee, including the CEO and CFO (and ideally only one to three additional voting members, with the CEO making the deciding call) should meet monthly to make important in-year investment decisions.⁴ These monthly meetings should be for decisions, not for progress updates or general reviews. The agenda should address only those matters that require a decision—and the result should never be “deciding to decide.” Key decisions that the committee may make during these meetings can involve allocating funds for stage-gated projects or projects that were provisionally approved during the annual planning process, discontinuing projects that aren’t likely to meet their objectives, and approving new projects that arose after the annual planning cycle.

Flexibility usually requires setting a reserve of unallocated funds that can be used during the year for new initiatives that were not anticipated during the planning process. Withdrawals from the reserve should be authorized only by the CEO or investment committee and must align with well-defined criteria, such as affirming that the release is for a strategically vital initiative or covering essential external costs, such as dealing with natural disasters. While there is no universally applicable percentage for the “right” amount to reserve, a general guideline is to set aside 5 to 20 percent of the corporation’s budget. For businesses operating in sectors with longer project lead times and minimal market volatility, such as utilities, a strategic reserve of about 5 percent of the budget may be sufficient. Conversely, industries characterized by rapid market changes and fluid resource allocation, like software, may find a reserve of approximately 20 percent more appropriate. Consumer-packaged-goods companies, for example, may encounter a newly launched campaign that fails to meet its targets or a competitor that launches a new product that senior leaders did not anticipate. As situations arise, the investment committee should reallocate resources quickly, opening up opportunities for other businesses and initiatives throughout the year.

Certain projects are easier to stage-gate during the formal planning cycle, such as pharmaceutical companies preparing to make significant investments in marketing once regulatory approvals are obtained. Other allocations of capital may be approved only provisionally because they require further analysis (for example, proof of concept for a new technology, or decisions to drill to a gas or petroleum deposit); in those cases, the investment committee should withhold that capital for in-year allocation. The key is to build in flexibility. An effective resource allocation process anticipates change and maintains at least a monthly cadence—and ideally, one that is more frequent than that.

The processes for turning strategy into action should be radically simple. The most effective processes clearly spell out the strategy and the role of each business in achieving that strategy, identify the most important value drivers, ensure that the most important initiatives have the resources they need, insist that the budget matches the first year of the long-term financial plan, keep to a compact planning schedule, and design and demonstrate in-year flexibility. After all, managing a large corporation is already complicated enough.

This content was originally published here.

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The popular conception of entrepreneurship is that it comes in two sizes. Venture-scale startups aim for billion-dollar valuations within a decade by targeting large markets disruptively through innovative technologies or business models. Such aspiring “unicorns” capture the attention of many venture capitalists and angels and include success stories such as Google, Meta, and Airbnb. On the other end of the spectrum, small business entrepreneurship encompasses ventures that start small and often remain so, competing in mature markets using established templates, such as local restaurants, retailers, and service firms.

But in between these poles lies what we term “the mighty middle,” the often overlooked segment of startups with the potential to scale meaningfully and rapidly, though not necessarily to extreme valuations. These businesses, which we have studied extensively, offer great opportunities for entrepreneurs and their employees, and can be successful by employing different strategies for funding, hiring, and competing. The mighty middle deserves closer consideration as it may often offer a lower-risk, higher-return path for founder value capture, as well as more numerous opportunities than venture-scale startups.

The Mighty Middle of Entrepreneurship

In our research, we define the mighty middle as startups that have a feasible path to reaching valuations in the high single-digit millions to high tens of millions within 5-10 years. These companies often target midsize niches, akin to “blue lakes,” in contrast to venture-scale startups aiming for “blue oceans” and small businesses competing in “blue ponds.” An example of mighty-middle entrepreneurship is Supply, founded by Patrick and Jennifer Coddou in Fort Worth, Texas, in 2015. The company produces men’s grooming products, sold directly to consumers online. Leveraging community-building, Kickstarter campaigns, social media ads, and an appearance on Shark Tank, Supply grew to millions in annual sales with only a handful of employees before being acquired in September 2022. Though the details are private, acquisitions of such businesses are often at 4-6X EBITDA multiples, indicating an attractive payoff for the founders.

While mid-size companies have long existed, changes over the last twenty years mean mighty-middle businesses can now be built cheaper and faster across many sectors. The rise of the internet allows these businesses to target a national or global audience from the outset in a cost-efficient manner. Global, targeted advertising platforms like Meta, the ability of third-parties to sell on major ecommerce portals like Amazon and wholesale platforms like Faire can accelerate customer acquisition. Rich tech stacks, open source software, and online platforms like Shopify reduce the cost of software development. Global supply chains and computer-aided manufacturing make it easier for entrepreneurs to produce innovative designs in small batches and at affordable price points. All of this means that there are now more mighty-middle opportunities that can be profitably pursued with limited resources, which also opens up this form of entrepreneurship to a more diverse set of entrepreneurs.

The Mighty Middle Playbook

Recognizing the distinctiveness of mighty-middle startups has important implications for entrepreneurs, investors (including angels, VCs, and corporations), and policy makers.

For entrepreneurs, one key implication is that mighty-middle startups need to be built differently. Because so many VCs and angels focus exclusively on venture-scale startups, mighty-middle startups generally need to be bootstrapped, started as a side hustle, or funded with savings. An example is Little Stocking Company, a maker of girls apparel, founded by two friends and former nannies in Portland Oregon. To get started, they put $300 of materials on a credit card and then used revenue from initial Instagram orders to fund the business — and continued working other jobs while building up sales. Grants may also be feasible, though primarily for startups with deep technical innovations (e.g., SBIR grants in the U.S.) or social impact aims.

Different approaches are also likely to be needed for building capabilities, hiring and competing. Skilled employees may understandably be less willing to work for equity compensation for unfunded startups, necessitating a slower pace of hiring, more use of contractors, or founders undertaking more tasks themselves early on. For example, Sahra Nguyen was a journalist and filmmaker before founding the fast-growing Vietnamese-coffee brand Nguyen Coffee Supply. In launching the business, she faced critical tasks outside of her expertise including figuring out how to import raw beans and navigate customs, roast their unique robusta beans, and attract customers via online ads. While a VC-backed startup might have hired early employees to gain this knowledge, she initially took a DIY approach and learned new skills through searching the internet, her network, and taking online courses before progressing to hiring online contractors and then eventually full-time employees. They are now found in over 2,000 locations nationwide. Also illustrating this DIY approach is, Mike Perham, solo founder of Sidekiq who describes his current revenues as “being closer to $10 million than $1 million.” With occasional contracted support from a graphic designer and lawyer, he leveraged his software development background to create a Ruby task scheduler used by enterprise customers like KickStarter, Netflix, Comcast, and Conde Naste.

Yet counterbalancing these challenges are several advantages of the mighty middle for entrepreneurs. Most obviously, they offer greater potential upside compared to most small business opportunities. For many entrepreneurs, mighty-middle opportunities may also offer a more desirable risk-reward tradeoff compared to venture scale start-ups. Entrepreneurs who reach a certain level of scale in the mighty middle typically do so without outside professional investors, retaining more control and equity. This allows them to start paying themselves from firm profits, without having to wait for an acquisition or IPO. The absence of professional investors also reduces pressure to take high risks for aggressive growth. Additionally, with more opportunities in this range, entrepreneurs have a better chance of finding a life-changingly profitable mighty-middle opportunity than a venture-scale one.

For venture capitalists, angels, and other investors, we believe the mighty middle is valuable as language for distinguishing between a startup that may not fit their investment aims but which may still be a “good business” for the entrepreneurs. At the same time, the mighty middle provides a framework for working with entrepreneurs to “upscale” ideas by targeting broader markets. The mighty middle can also be a good fit for private equity-style investing once startups reach a degree of scale and profitability. Here we have seen funds that provide either minority investments (so-called “growth” investors) as well as holding companies like Tiny and Constellation Software, which acquire portfolios of mighty-middle software startups (though this aggregator playbook has been challenging for some in e-commerce).

For corporations, the mighty middle offer a promising source of innovation, making them attractive suppliers or acquisition targets (and which may chip away at their established offerings if ignored). In the food CPG space, established corporations and private equity firms look for mighty-middle businesses that are achieving some early traction (generally several million dollars in annual sales) as acquisition targets around whom they could “scale up” and leverage their economies of scale in distribution and manufacturing. National retailers are also increasingly working with consumer-oriented mighty-middle businesses that achieved their early traction online, bringing their innovative products and brands to a broader audience. For instance, the men’s soap brand Dr. Squatch is sold in major retailers including Target and Walmart (and now majority owned by Summit Partners after an investment in 2021), and food startup Recipe 33 sells their flavor-infused almonds nationally in retailers like Whole Foods, Sprouts, and HyVee.

Finally, many university, regional development and government programs aimed at enhancing entrepreneurship can also benefit from more explicit recognition of how the mighty middle are different. While stories of venture-scale outcomes can offer important lessons and be inspiring, aspiring entrepreneurs may be more likely to identify mighty-middle opportunities and these opportunities may offer a preferable risk-reward balance for many entrepreneurs. So more examples need to be shared of the “hero journeys” of successful mighty-middle businesses. Care should also be taken to highlight that most startups, even those that grow, are unlikely to receive much external equity investment. This also suggests an opportunity for accelerator-like programs emphasizing mentor feedback but not necessarily future investment. We also believe it can be helpful to point entrepreneurs in the mighty middle to sector-specific communities like E-Commerce Fuel (e-commerce), Indie Hackers and MicroConf (internet), and Zebra Startups (solving societal problems).

Overall, the mighty middle spotlights a segment of the entrepreneurial spectrum that bridges the binary of the behemoths and the boutiques. By understanding the distinctiveness of this segment, entrepreneurs and those who support them can be better prepared to build startups that embody significant growth potential even if they are unlikely to ever achieve the extraordinary scale highlighted in many entrepreneurial narratives.

This content was originally published here.

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This is no time to be caught short of cash, or long on inventory, or both: not when interest rates are double what they were a year ago and revolving credit is hard to find. Not when the International Monetary Fund projects that the world’s advanced economies will grow just 1.4% next year. Not when it’s harder than ever to predict and balance supply and demand, which were whipsawed by the pandemic and have not yet regained equilibrium. Not when the number of business bankruptcies, while lower than at the peak of Covid, is up 23% over last year.

Even short of bankruptcy, many otherwise viable companies could face a liquidity crisis caused by the combination of rising costs, pandemic-driven changes in customer behavior, lingering supply chain problems, uncertain sales in a wobbly business environment, and the nearly certain difficulty of finding short-term capital.

Liquidity is often seen as a problem for finance, but, in fact, operations play a leading role in preventing or addressing cash problems. Companies that revamp how operations, sales, and finance work together can generate cash and earnings before interest, taxes, depreciation, and amortization (EBITDA) — often quite a lot and often very fast. Strengthening sales and operations planning allows companies to take charge of their destiny regardless of external disruptions — which is a particularly useful capability right now.

Middle market companies have much to gain by making this transformation. We’ve seen companies improve working capital by 20–30% and increase EBITDA substantially in just a few months. One private-equity-owned manufacturer of vitamins and nutritional supplements, for example, saw a 10% gain in EBITDA largely by making its overseas sales and distribution (where most of its growth potential lay) more connected with manufacturing operations in the United States. That helped drive down production and shipping costs.

By the same token, the impact of poor sales and operations planning hits the middle market hard. That’s partly because these companies are disadvantaged if they need outside capital. In an AlixPartners’ 2023 survey, 96% of turnaround and restructuring experts said the middle market is most at risk from today’s capital constraints. Midsized companies are also threatened because they often sell to large multinationals, which increasingly use their muscle to pay suppliers later, in some cases trying to lock in easy terms they won during the pandemic. Because middle market companies tend to be less diversified, they are more vulnerable to shocks. And, because of their size, their “liquidity runway” — the time they have before a cash shortage becomes a crisis — is shorter than for big companies.

Every company has some kind of process for aligning supply and demand. In smaller companies, it’s often very informal: Sales comes in with a forecast, the CFO discounts it, production adds some back as a cushion, and every quarter people adjust things. Many have a more sophisticated process, but it tends to be rigid and unresponsive to weak signals from the market, which leads to fire drills in production, if business is unexpectedly good, and fire sales, if things fall short. In both cases, the emphasis in the process is on managing production smoothly, not on generating cash and margin.

What’s needed — especially by the middle market — is a transformed sales and operations planning process that threads the needle between informality and bureaucracy and gives executives the ability to adjust operations to increase cash generation and profitability.

This transformation has four elements:

An aligned team among operations, sales, and finance.

When these teams are aligned, they are  empowered with knowledge of how the company uses and generates cash. “Aligned” is the key word. Operations and sales planning should be managed in a cross-functional “war room,” but it won’t work unless all participants are explicitly motivated by items that affect cash generation and margin, which aren’t usually among the KPIs ops and sales track. In most companies, the operations team is measured on cost of goods, defect rates, machine utilization, and the like; sales teams tend to track and reward volume, with special incentives for promotions and so on. Those incentives should be changed to include cash and working capital measurements (e.g., days of inventory, average discounts, average days outstanding for receivables).

Forecasts need to be recast, too, so they model how predicted levels of production and sales will affect all three views of the enterprise: income statement, cash flow, and balance sheet. The team also needs an enterprise-wide view of liquidity needs, biggest threats to liquidity, and biggest sources of cash — that is, which products or lines of business consume or churn out the most cash. Those reveal what levers you can pull.

More rigorous and flexible forecasts.

It’s not uncommon for CFOs to cut the sales team’s forecasts by as much as 25%, partly because sales teams tend to be too optimistic and their predictions sometimes aren’t defensible enough. Another problem is their time horizon. In our experience, it’s best to build rolling mid-to-long-term (3–14 month) views of demand, use them to produce three-month forecasts that are solid enough so you can make purchasing and marketing decisions, and tweak them weekly or monthly. Too far out, plans won’t be reliable; too close in, you can’t act strategically.

Don’t forget — as many companies do — to use data on customer churn and loyalty to test, validate, and adjust forecasts. You’ll want to tune that view of demand in four ways: First, to get a clear picture of where cash and EBITDA are (and are not) coming from, build out a picture of profits as well as volume; you want to know which products and customers provide the most — and least — profit, and pay close attention to their orders and behavior. Second, as you should with your overall budget, create scenarios for the long-term view — for example, what high, medium, or low demand would be, or what would happen if sales suddenly skewed to the lowest-price or least profitable items you sell. Third, predetermine the indicators that would tell you whether a scenario is coming to pass; this will make it harder to ignore warnings. Finally, use monthly and quarterly reviews not just to track the forecast to plan, but to revalidate its premises.

A similarly rigorous map of supply.

The should include material, component, and labor availability. Among other things, you will want to identify components or supplies that have the longest lead times or where your knowledge of conditions upstream tells you to beware of price or supply shocks. Many providers help companies build supply chain “control towers” to track availability and pricing in near-real time, often with help from AI. These used to be the nearly exclusive province of multinationals, but they are now within the reach of most middle-market budgets.

Operations that optimize profitability, not predictability.

An operations plan that guarantees uninterrupted production of your least profitable products isn’t good. With the knowledge you now have about the profitability of products and customers, a better flow of information from the field, and an empowered cross-functional team, you can now exploit whatever flexibility your operations have to shift production from one location or product to another or prioritize orders from profitable customers. You can make analogous changes to inventory management. Viewed strategically, inventory can be a liquidity drain or a new customer-acquisition tool — “bad” or “good” inventory — and managed accordingly. Thinking long-term, you can reorient capital spending to increase operational flexibility in the areas that have the most direct impact on cash and margin.

A program like this released $17 million in working capital — a reduction of about 180 days — for a $2 billion-in-sales consumer goods company based in the Mississippi Valley. The company’s operations were knocked off balance after Covid wreaked havoc on its supply chain and caused demand to whipsaw, as big online retailers suddenly scooped up business from local shops. Its forecasting model was shot; unable to know where sales were coming from, one business unit was forking over nearly a million dollars in late-delivery penalties and air freight. Working from guesstimates, factories produced the wrong mix of products and procurement purchased too little of some components and too much of others, so that fill rates (the percentage of orders completed in full and on time) plunged from 95% to about 75%. To try to cover orders, the operations team stocked up $12 million more in finished-goods inventory than the company needed. Previous attempts to address the problem had looked at it piecemeal — at supplies and components, at production planning, at forecasting — rather than systematically. We worked with them to build a rough-cut capacity model that allowed revealed potential supply-demand imbalances months earlier than before; improve analytics skills on the forecasting team; and institute a monthly cadence of sales-and-operations-planning meetings that brought data and decision-makers into the same room.

Without a systematic view, the incentives and good intentions of each player in this game — procurement, production, and sales — will almost always pull it out of balance. The operations team is uniquely placed to bring the system together, because the pain is felt there first, in the form of stockrooms that aren’t being emptied or orders that can’t be filled. By the time the pain appears in cash and EBITDA, it’s late — sometimes too late.

This content was originally published here.

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Companies need to take risks if they want truly impactful results.

Devastating wildfires, floods and droughts are already revealing the catastrophic effects of climate change. Yet, a rapidly warming planet is just one of multiple sustainability megaforces that threaten our way of life. It is clear that business as usual is no longer an option.

Firms have an important role to play in fixing the world’s problems. Not least because they are often the cause of those problems. More pragmatically, they need to act because their operations are also being impacted, through supply chain issues, raw material scarcity or environmental challenges, for example.

A host of new regulations and increasing consumer pressure are also forcing organisations to behave more sustainably. What’s more, business surely has a moral obligation to act, to ensure there is a planet fit for us and future generations to inhabit.

While most companies make claims about their sustainability credentials, the reality is most are still not doing enough. A 2022 report by the New Climate Institute found that many leading companies are failing to keep their own climate pledges. And while 51 percent of Fortune 500 companies acknowledge biodiversity loss in some way, only 5 percent have actually set measurable targets to address the issue.

Adopting radical corporate sustainability

The good news is there are companies making a real difference. Outdoor clothing brand Patagonia, ice cream makers Ben & Jerry’s and fast-moving consumer goods multinational Unilever are all high-profile organisations whose actions are truly shifting the dial when it comes to sustainable business.

In their own ways, these familiar names are committed to what I call “radical corporate sustainability”. They are engaged in actions that have a substantial impact on sustainability issues. In some cases, they are even driving systemic change within an industry.

What does it take for business leaders and their companies to engage in initiatives that fundamentally help address today’s global sustainability challenges? This is the question I explore with students taking the INSEAD MBA elective Radical Corporate Sustainability.

The course looks at how such transformative action can be realised in a specific business context. By examining companies doing this successfully, we can gain insights into the challenges and opportunities of adopting a radical corporate sustainability approach. This can translate to real impact when students take these lessons with them back into industry upon completion of their MBA.

A matrix to measure sustainability

Companies often face a dilemma between delivering real sustainability impact and gauging if being more sustainable is financially viable. To help with this assessment I’ve developed a sustainability-business case matrix (see figure below). This examines the trade-offs companies are making in seeking real and meaningful impact. On the vertical axis is the certainty of the business case: What is the likelihood, amount and time horizon of financial payback from a given option? On the horizontal axis is the sustainability of the option: How much real impact is the action really going to make?

As we discuss in the course, the reality is that most companies’ actions on sustainability are still taking place in the bottom left-hand corner of the matrix. They usually have a strong business case but limited real impact on the issue.

Take the hypothetical example of a fizzy drink manufacturer trying to address the health issues of its products (obesity and diabetes due to high sugar content). There might be a strong business case with a sustainability rationale for introducing a new range of no-added sugar drinks. This option could suggest the company is playing its part. But it also presents no significant risks to its business model. It could make a slight difference, but doesn’t offer the fundamental change health advocates would argue is required. With the pressures on companies today to be seen doing something, this is the business-as-usual scenario.

Alternatively, the company could commit to phasing out all added sugar drinks in five years – as shown in the central cell of the matrix. This would likely have a much bigger long-term impact on health (especially if it is a large drink company), but there would be more risk entailed. There would need to be substantial efforts to reduce those risks involving multiple stakeholders, such as efforts to change consumer tastes or strengthen public policy interventions, to shift the category away from high added sugar drinks.

To make a real difference in the short-term, the most radical sustainability action would be to immediately wind down all sales of added sugar drinks. Of course, given the highly competitive nature of the soft drink industry, this option could be financially catastrophic. But perhaps this view is merely unimaginative or a case of giving up too easily. An inspired leader in a forward-looking company could decide to take on the challenge. Perhaps they could see ways to outmanoeuvre the competition. Maybe they could find common cause with competitors, and other stakeholders, to develop a lasting industry-wide solution to the problem.

The aim of the Radical Corporate Sustainability course is to get beyond business-as-usual. It is to go beyond the business case and show future (and current) business leaders how they might strive to find ways to move their companies towards the right of the matrix.

The radicals

In the course, we look at firms already making a real impact and discuss examples of radical corporate sustainability identified by students as part of a group project. The case studies include Shiok Meats, which aims to disrupt the food industry by growing meat from cells in the lab; chocolate producer Barry Callebaut, which has embraced sustainable cocoa production;and resins business DRF, a part of Dutch multinational DSM, which tackled the use of chemicals of concern within its industry.

These firms are all very different, but they all demonstrate how you can make an argument for sustainable action. Arguments that go beyond corporate reputation, brand value or your bottom line.

Take Olam International, a leading food and agribusiness, an example presented by students. As one of the world’s largest suppliers of cocoa beans, coffee, cotton and rice, the company faced key sustainability issues around dignified farming, diversity and inclusion, water usage, soil quality and food waste.

Realising that assessing its impact on these issues through financial capital alone was not enough, it developed a new integrated impact statement framework. This also assessed its operations through the valuation of social, human, natural and produced capital. The results of this new way of decision making have since led to real, meaningful change. This has included a threefold increase in small farmers enrolled in sustainability programmes since 2017 and an 89 percent reduction in coal energy usage from the 2019 baseline.

Radical corporate sustainability is not just the remit of multinationals either. Another example presented by students was KOKO Networks. This Kenya-based, climate-tech company aims at replacing the use of charcoal for heating and cooking with bioethanol to improve indoor air quality and minimise deforestation. Since being founded in 2013, its network has expanded to over 750,000 customers who now source ethanol for their clean burning stoves from KOKO’s high-tech vending machines located in corner stores across East Africa.

What seems clear in most cases of companies really shifting the dial, is that there is a need for strong leadership, vision, and a commitment to overcome internal resistance and ensure all stakeholders are on board. You need people like Yvon Chouinard (Patagonia), Paul Polman (Unilever), Sandhya Sriram (Shiok Meats), Antoine de Saint-Affrique (Barry Callebaut) and Helen Mets (DSM). They first take a stand on the moral need for the business to make a real and impactful change to the way success is measured in the organisation.

Radical corporate sustainability requires leaders who are ready to say, “We’re going to do this because it’s the right thing to do and it’s the right thing for our business.” Of course, this also often comes with the belief that the business will likely reap additional benefits, whether financial or otherwise, in the long term.

There is still much work to be done around the area of radical corporate sustainability. The actions and approach needed vary widely depending on the specific organisation and industry. But by examining these success stories and sharing the opportunities such actions can present, we can identify new ways of operating that radically shift the needle towards truly sustainable business.

This content was originally published here.

The post Making Radical Change a Business Sustainability Imperative appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

For most unicorns—startups with a $1 billion valuation or more—it can take years to see a liquidity event.

Take Twitter, which went public seven years after its 2006 founding. Or Uber, which had an IPO after a decade of operation in 2019. After all, companies first have to succeed and build up their valuation in order to not go bankrupt or dissolve. Few are able to succeed and capitalize in a quick and tidy manner.

So when do unicorns exit, either successfully through an IPO or acquisition, or unsuccessfully through bankruptcy or liquidation? The above visualization from Ilya Strebulaev breaks down the time it took for 595 unicorns to exit from 1997 to 2022.

Unicorns: From Founding to Exit

Here’s how unicorn exits broke down over the last 25 years. Data was collected by Strebulaev at the Venture Capital Initiative in Stanford and covers exits up to October 2022:

Overall, unicorns exited after a median of eight years in business.

Companies like Facebook, LinkedIn, and Indeed are among the unicorns that exited in exactly eight years, which in total made up 10% of tracked exits. Another major example is Zoom, which launched in 2011 and went public in 2019 at a $9.2 billion valuation.

There were also many earlier exits, such as YouTube’s one-year turnaround from 2005 founding to 2006 acquisition by Google. Groupon also had an early exit just three years after its founding in 2008, after turning down an even earlier acquisition exit (also through Google).

In total, unicorn exits within 11 years or less accounted for just over three-quarters of tracked exits from 1997 to 2022. Many of the companies that took longer to exit also took longer to reach unicorn status, including website company Squarespace, which was founded in 2003 but didn’t reach a billion-dollar valuation until 2017 (and listed on the NYSE in 2021).

Unicorns, by Exit Strategy

Broadly speaking, there are three main types of exits: going public through an IPO, SPAC, or direct listing, being acquired, or liquidation/bankruptcy.

The most well-known are IPOs, or initial public offerings. These are the most common types of unicorn exits in strong market conditions, with 2021 seeing 79 unicorn IPOs globally, with $83 billion in proceeds.

But the number of IPOs drops drastically given weaker market performance, as seen above. At the end of 2022, an estimated 91% of unicorn IPOs listed since 2021 had share prices fall below their IPO price.

A less common unicorn exit is an SPAC (special purpose acquisition company), although they’ve been gaining momentum and were used by WeWork and BuzzFeed. With an SPAC, a shell company raises money in an IPO and merges with a private company to take it public.

Finally, while an IPO lists new shares to the public with an underwriter, a direct listing sells existing shares without an underwriter. Though it was historically seen as a cheaper IPO alternative, some well-known unicorns have used direct listings including Roblox and Coinbase.

And as valuations for unicorns (and their public listings) have grown, acquisitions have become less frequent. Additionally, many major firms have been buying back shares since 2022 to shore up investor confidence instead of engaging in acquisitions.

Slower Exit Activity

While the growth of unicorns has been exponential over the last decade, exit activity has virtually ground to a halt in 2023.

Investor caution and increased conservation of capital have contributed to the lack of unicorn exits. As of the second quarter of 2023, just eight unicorns in the U.S. exited. These include Mosaic ML, an artificial intelligence startup, and carbon recycling firm LanzaTech.

As exit activity declines, companies may halt listing plans and eventually slow expansion and cut costs. What’s uncertain is whether or not this lull in unicorn exits—and declining influx of private capital influx—is temporary or part of a long-term readjustment.

This content was originally published here.

The post Charted: How Long Does it Take Unicorns to Exit? appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

Shortly after the sudden death of her beloved husband, Priya Gowda learns that the company he built from a small dairy farm into a major Indian conglomerate is in deep financial trouble. Unbeknownst to her and his investors, her husband had taken on a lot of short-term, high-interest loans, and the company is struggling to make its payments. As sole heir to his majority stake in Splendid Ice Cream, Priya is now its de facto CEO. Her creditors advise her to sell or liquidate the company, but Priya is determined to preserve her husband’s legacy. Her daughters, however, worried that the business is taking too high a toll on her, beg her to let it go. Should she give in to them or keep trying to save Splendid? Expert commentators weigh in.

This content was originally published here.

The post Case Study: When the CEO Dies, What Comes First: His Company or His Family? appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

The pressures of the recent global crisis, evolving demographics, high interest rates, and the cost of capital that hit the world in early 2023 have forced global businesses to adapt—including those in the Middle East region. Savvy leaders, however, view these disruptions as growth opportunities. Research shows that companies that set strategies to consider all available growth pathways are 97 percent more likely to outstrip their peers in growing profits.

But to thrive in this era, companies should devise structural solutions that not only manage costs but also choose to grow in a way that builds resilience and drive long-term value creation.

In this interview, Abdellah Iftahy, Mazen Najjar, and Kishan Shirish, share their views on how companies in the Middle East can take advantage of the timely jolts to create new growth opportunities. They stressed that rigorously focusing on activating growth pathways and executing with excellence can help companies achieve profitable, sustainable growth in these uncertain times.

An edited version of the conversation follows.

McKinsey: The mood globally is somber. Do you think this is the same for companies in the Middle East?

Mazen Najjar: At this stage it’s pretty obvious that the mood is somber around the world and that we are heading toward uncertain times. But when it comes to the Middle East region, I am happy to report that, particularly in the Gulf (and to some extent in the Middle East overall), the mood is more positive.

It’s a region that at the end of the day—like any part of the world—is facing its own headwinds and tailwinds.

But it’s also a time where the region is able to seize this moment and embrace growth. Countries in the Middle East can use this period to catch up and, in fact, even leapfrog.

The region is still forming its own capabilities and there is a bit of a gap between capabilities and aligning that to the growth agenda. However, if we look at the tailwinds, we believe it is the time that, if a country has a bold ambition, then very well-articulated plans are executable at all levels.

Here I’m not only talking about what the central governments are doing, but about what organizations are increasingly doing. I’m also talking about a time where there is an appreciation of the will power it takes to get to these growth results. There seems to be a collective will in this region to use this time to, as I said, not only catch up but actually leap.

McKinsey: What makes growth so critical for companies in Middle East, and why should they double down on growth?

Kishan Shirish: I think that most players in the region are bound to focus on growth because the whole economy is geared toward growth. So if a company wants to continue to be a relevant player in the region, it needs to ensure that it gets its fair share of that growth.

From my perspective, I believe that growth is the only way out from the current moment that Middle Eastern economies are facing, given the leadership of each country, their vision, and the imperatives that they have from an energy- and economic-transition and job-creation perspective. If a company wants to keep its relevance in the market, it needs to be contributing to—and capturing—a fair share of the growth. I think both governments and private sectors are bound to focus on it, given the needs that exist in the region.

Growth is essential for Middle Eastern organizations—governments, private sector, and all the rest. I would be willing to bet that “growth” is the first word you would hear out of the mouths of almost 100 percent of the decision makers in the region.

The other thing I will mention is that growth is a self-fulfilling prophecy and, in many ways, is an element that bears its own fruits and dividends. Through research that we’ve conducted, we’ve realized that the more an organization focuses on growth, the greater the multiple it will get out of growth. If it spends 2.4 times its resources on growth, it will gain 2.4 times overperformance. So for all these reasons, I believe that organizations in the region will more than prioritize growth.

Abdellah Iftahy: Many trends offer unique opportunities for organizations to tap into new growth. Consumer behavior is changing fairly rapidly, shifting the growth pools from one area to another. For example, e-commerce is growing quite fast.

Brick-and-mortar sales have stagnated in some of the segments, as the competitive landscape has become more and more demanding within this space—which in itself brings new challenges for companies to consider and look for growth in different ways.

And finally, the regulatory environment also presents a new challenge for some distributors and family businesses currently at play within the ecosystem. Growth within the consumer and retail space is important for value creation going forward, especially when it comes to expanding into new adjacencies, business building, and personalization given the growing digitally-savvy consumers.

McKinsey: How can companies achieve outsized growth?

Mazen Najjar: I think it’s important to distinguish how growth is seen. In our latest research, we saw that there is an expectation that 80 percent of growth will come from the core.

I think a key distinction is that growth will come from scaling the strengths of the core and rendering organizations to be more efficient. It also will definitely come from creating new growth avenues in the form of establishing new businesses that will disrupt and complement sectors, and disrupt incumbents to create the growth.

McKinsey: What are some of the most important things to consider?

Mazen Najjar: I believe that organizations should ask themselves various questions. Do they have a comprehensive growth agenda that they debate at top level in their boards and their C-suites? Do they have chief growth officers or the equivalent? Are they building capabilities to drive performance in their core businesses? Are they monitoring growth metrics? Are they incentivizing everyone in the organization to drive growth?

And speaking about business building, are they establishing a business-building vertical? We believe that business building is an institutional capability; it doesn’t happen by luck. If you look at the big tech companies in the United States and other places, you do realize that these companies have a competitive advantage in building a muscle that can add revenue lines and new businesses when they need to. This is a muscle that needs to be developed by organizations in the Middle East. Such a comprehensive agenda is needed to pursue growth in the region.

Abdellah Iftahy: I fully agree with Mazen. I think new business building will probably be a bigger pillar for growth for companies in this region than elsewhere. When you compare the maturity curve of our industries in the region—especially B2C industries—compared to other more advanced economies, you can see the capability or leapfrogging in some channels.

Kishan Shirish: I believe that the region presents a lot of opportunities for disruption and to do things differently. We are starting to see a lot of companies trying to capture those opportunities, which exist for multiple reasons. First, there is capital available as well as a willingness to invest in their geographies and bet on local champions and local companies to really disrupt.

Second, there is a bold aspiration and vision in all dimensions, including in cutting-edge industries such as energy transition, blockchain, etcetera. We have government agenda or a central agenda trying to create the right incentives for those to flourish.

I think those two ingredients can help make a company successful. And as Abdellah said, the appetite to innovate and leapfrog from a consumer and corporate perspective makes for a good combination for successful new business builds. I think we have an incentive not only to focus on the core, but also on the adjacencies on the new businesses.

McKinsey: What are top performers doing differently?

Mazen Najjar: One of the differentiators is that top growers not only make an explicit choice to grow, but make decisive actions aligned to that agenda. They’re articulating where the growth will come from. They’re defining what this achievement could look like. And they’re doing that not only at the top of the house, but in such a way that the entire organization understands what they are trying to achieve. For example, looking at core performance—they break this down into the specific levers that need to be improved so that the overall organization generates more growth.

So what do companies need to do differently on products and segments and on how they go to market, how they operate and how they approach their customers? Getting to a granular level, creating a transparency, and then linking the entire performance of the organization and individual groups to this achievement differentiates today’s successful organizations.

There are various global players that are very, very active. In fact, ambitions have accelerated five to ten times compared to a few years ago. The majority of organizations today realize the importance of this lever. The same brain coordinates new business building and the core, but new business building uses a different muscle from taking care of the core. And I think that, when it comes to business building, Middle Eastern organizations have realized this.

There are a few organizations that have gone some way in developing an explicit agenda on new business building capabilities. They have appointed dedicated executives who are in charge of this and have created investment pools. We have to remember that, in this case, you need capital; it’s not a breakeven that will happen in a year or two.

McKinsey: What determines success in execution? What are the two to three main actions that can make this attainable?

Mazen Najjar: There are two or three elements I would like to single out. One is a realization that, at the end of the day, transparency on the success of what is trying to be achieved is very important. Tying incentives to achievement transparently and treating every single stakeholder like a partner in an organization is proving to be essential in driving ambitious growth agendas. If every individual in an organization does not feel that they are principals on this journey, then the organization will struggle.

Abdellah Iftahy: Talent capabilities and capital allocation are truly key to success. Take an example from the consumer and retail industry, where we have seen retailers go after a new pool of talent and compete with tech-first companies to recruit digital tech and analytics talent. Then they either host them within their organization or in hubs where the talent is. They adjust their talent and recruiting models. When it comes to the capabilities, some of the retailers have stated that they want to be tech first going forward before being a retailer.

This shifts completely the way they think about making money, how they drive traffic, and how they monetize through advertising and many other services that they offer to their consumers.

Kishan Shirish: Another example is if I look at the players in the Middle East region that have been systematically growing over the last few years, I see them looking at growth through a different lens.

If we look at a business at the bottom-line level in an aggregated perspective, I think it is always going to be difficult to justify these long-term bets. I believe what the visionaries in the region are doing really well is to separate short-term wins and long-term growth bets.

There are adjacencies where organizations are willing to allocate a lot of capital but are also ready to take difficult decisions very quickly, so that if something is not working, they shut it down. I think with the companies that are succeeding, not only the executive team has this growth vision, but the shareholders also share the transparency.

Otherwise it’s very difficult to justify a big reallocation of capital without immediate returns. The business that does a significant reallocation of capital will be impacted over the next few years until these new ventures and growth levers start working. It is crucial for the board and shareholders to have this mindset, as well as across the organization, to make this growth transformation work.

Making the conscious choice to grow creates powerful momentum that orients the entire business, from the C-suite to frontline employees—a choice that is currently pertinent in the Middle East, a region ripe for growth. A growth blueprint defines the crucial elements on which growth leaders need to focus once they have made a deliberate and purposeful choice to grow. This blueprint also prepares an organization to unlock growth opportunities during timely jolts. The clarity of purpose and vision that comes from such choice is what helps leaders and their teams believe in the seemingly impossible and make it happen. Now is the time for business leaders in the Middle East to seize the opportunity, foster resilience, and create long-term value.

This content was originally published here.

The post How leaders can drive business growth in the Middle East appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

In a LinkedIn post shared last year, the general manager of PepsiCo Labs, Anna Farberov, shared her frustration with the strategic errors start-ups make when pitching to corporations. Having attended 3,500 such meetings, she felt she had the expertise to detail their mistakes. However, the backlash to her post was severe, with employees and founders of start-ups keen to highlight the issues they faced when approaching corporations. Both sides clearly wanted to collaborate. But they struggled to find ways to engage in successful and lasting engagements.

For start-ups, even securing an initial meeting with a corporation can be tough — let alone establishing a partnership. Cold calls are a lottery. Corporations are a “black box” to external entrepreneurs, and initiating contact with decision-makers can be difficult. As a serial (and quite successful) entrepreneur told us, “I wouldn’t even be able to enter their office, let alone start a collaboration.” If even experienced entrepreneurs struggle to secure the chance to collaborate, one can only imagine how difficult it must be for first-timers and early-stage start-ups.

Initiatives such as “speed-dating” events, where multiple start-ups pitch to corporate representatives, can facilitate the process. At such events, often organized by intermediaries, corporate “scouting teams” look to generate an inflow of ideas, technologies, and solutions for the company. Despite such efforts, start-ups are still unlikely to capitalize on this crucial first encounter.

At the first meeting, early-stage start-ups must garner sufficient interest to secure a follow-up meeting. A good performance during that first interaction is essential. There are usually no second chances. But how can start-ups gain that critical second meeting?

To answer this question, we attended 150 one-on-one meetings between start-ups and corporations including IBM, Sony, SAAB, L’Oréal, Scania, Toyota, and AstraZeneca. The meetings were organized by Ignite Sweden—a nonprofit initiative that aims to foster innovation by connecting tech start-ups to large companies. Our observations helped identify insights into the best ways for start-ups to generate corporate interest in collaborating after the meeting. The following best practices helped the start-ups we observed secure that all-important second meeting.

Have clear, yet flexible goals.

Depending on their stage of development, a start-up’s goals might include collaborating on a proof of concept, working on a pilot, making a sale, or co-creating products. A start-up with clearly stated goals helps the corporation see possibilities for engagement. This can lead the corporation to offer alternatives that a flexible start-up could use to tap into unforeseen opportunities.

For instance, one gaming start-up, Attractive Interactive, adapted its technology for SAAB to help pilots land in harsh weather conditions. The company’s COO said, “It was exciting to apply our knowledge of gaming development on brand-new issues.” This collaboration would have been unimaginable for Attractive Interactive before its meeting with SAAB. Not all start-ups need to pivot in this way but those that do may see potential they hadn’t previously envisioned. Thus, clarity with flexibility is a virtue.

Address existing problems and needs.

Start-up team members should understand the corporation’s needs in sufficient detail before the first meeting. Such preparation might simply involve perusing the corporate website and industry-related documents before the pitch. This aligns solutions with the corporation’s existing efforts to create customer value by improving current processes, products, and services.

In one example, Toyota Material Handling collaborated with IPercept Solutions, a deep-tech start-up that provides AI services for tracking industrial machines. In the initial meeting, IPercept were able to show how their solutions closely fit the needs and ambitions of Toyota Material Handling. The implementation of these tools radically improved the latter’s process, according to Mattias Dahlgren, Maintenance Manager at Toyota Material Handling.

This example shows how start-ups that address existing problems and provide innovative solutions can make themselves indispensable to corporations.

Address ease of integration and collaboration.

Start-ups must know how to integrate their products into the corporation’s existing processes. The start-up should make it easier for the corporation to engage with them by first understanding the latter’s current workflows.

One start-up created a machine-learning algorithm to help Alfa Laval — a leading global heat transfer, separation, and fluid handling provider — assess precisely when its heat exchanger required cleaning. Thanks to this collaboration, the corporation, founded in 1883, could deploy intelligent heat exchangers despite its lack of expertise in this domain.

Present use cases and new value propositions.

During the meeting, the start-up should show how it would create new value for the corporation and its customers. One approach would be to talk through a corporate-specific mock use case. Alternatively, actual use cases based on the start-up’s engagement with other corporations could be presented.

These opportunities for creating value should be communicated via simple demo presentations that emphasize the ease of integrating the proposed solutions with existing channels. Pilot collaborative projects with corporations are particularly useful for early-stage start-ups because they boost the latter’s legitimacy and help expand their client base.

Assemble the right team.

Beyond the start-up’s founder(s), it is useful to involve business development and technical experts who can engage corporate representatives in fruitful dialogue. Teams composed of both technically competent members (e.g., CTOs) and those with business development backgrounds are better able to understand how the start-up’s technology benefits the corporation. With the right team, possibilities can emerge beyond the start-up’s technology and the corporation’s challenges. Founders whose technical background was strong but who could not explain their technology or its applications usually failed to attract audience interest. Teams must therefore include members who can explain potential uses of their services alongside those who can answer technical questions.

The list of do’s and don’ts below distills our observations of how start-ups can ensure successful first meetings that lead to follow-ups and collaboration.

What to do in the first meeting.

 What not to do in the first meeting.

Start-ups can achieve a desirable level of engagement by first engaging with what they know about their corporate partners. Only then should they focus on co-creating products and services. Start-ups that have clients who can demonstrate how their technology would help the corporation are practically guaranteed to gain the latter’s interest in follow-up meetings. Their efforts should therefore be geared toward understanding the corporation’s value streams, its customers, and potential ways of creating more value.

In this way, start-ups can overcome the challenges of navigating the corporation’s often complex internal functioning. They can get to know the corporation and its ways of working. And they can build on this knowledge to receive an invitation to a second meeting where both teams can focus on innovation.

This content was originally published here.

The post How Startups Can Land a Second Meeting with a Corporate Partner appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

CPG companies increasingly allocate time, attention, and resources to instil environmental and social responsibility into their business practices. They are also making claims about environmental and social responsibility on their product labels. The results have been evident: walk down the aisle of any grocery or drugstore these days and you’re bound to see products labelled “environmentally sustainable,” “eco-friendly,” “fair trade,” or other designations related to aspects of environmental and social responsibility. Most important is what lies behind these product claims—the actual contribution of such business practices to achieving goals such as reducing carbon emissions across value chains, offering fair wages and working practices to employees, and supporting diversity and inclusion. But understanding how customers respond to social and environmental claims is also important and has not been clear in the past.

When consumers are asked if they care about buying environmentally and ethically sustainable products, they overwhelmingly answer yes: in a 2020 McKinsey US consumer sentiment survey, more than 60 percent of respondents said they’d pay more for a product with sustainable packaging. A recent study by NielsenIQ found that 78 percent of US consumers say that a sustainable lifestyle is important to them. Yet many CPG executives report that one challenge to their companies’ environmental, social, and governance (ESG) initiatives is the inability to generate sufficient consumer demand for these products. There are many stories of companies launching new products incorporating ESG-related claims only to find that sales fell short of expectations.

How can both of these things be true? Do consumers really care whether products incorporate ESG-related claims? Do shoppers follow through and buy these products while standing in front of store shelves or browsing online? Do their real-life buying decisions diverge from their stated preferences? The potential costs—particularly in an inflationary context—of manufacturing and certifying products that make good on ESG-related claims are high. Accurately assessing demand for products that make these claims is vital as companies think about where to make ESG-related investments across their businesses. Companies should therefore be eager to better understand whether and how these types of claims influence consumers’ purchasing decisions. Is a shopper more likely to purchase a product if there’s an ESG-related claim printed on its package? What about multiple claims? Are some kinds of claims more resonant than others? Does a claim matter more if it’s appended to a pricier product? Is it less meaningful if it comes from a big, established brand?

Over the past several months, McKinsey and NielsenIQ undertook an extensive study seeking to answer these and other questions. We looked beyond the self-reported intentions of US consumers and examined their actual spending behavior—tracking dollars instead of sentiment. The result, for CPG companies, is a fact-based case for bringing environmentally and socially responsible products to market as part of overall ESG strategies and commitments. Creating such products turns out to be not just a moral imperative but also a solid business decision.

Products making ESG-related claims averaged 28 percent cumulative growth over the past five-year period, versus 20 percent for products that made no such claims.

To be clear, this is only a first step in understanding the complex question of how consumers value brands and products that incorporate ESG-related claims. This work has significant limitations that merit mention at the outset.

First, although this study examines how the sales growth of products that feature ESG-related claims fared relative to similar products without such claims,¹Many factors can influence growth—including distribution, pricing, marketing, and product claims not related to ESG. This analysis was not designed to control for all variables. It did control for factors such as brand size, brand type, and price tier, as well as how long a product has been in the marketplace. it does not demonstrate a causal relationship that definitively indicates whether consumers bought these brands because of the ESG-related claims or for other reasons. For instance, the study does not control for factors such as marketing investments, distribution, and promotional activity. It primarily explores the correlation between ESG-related claims and sales performance.

Second, McKinsey and NielsenIQ did not attempt to independently assess the veracity of ESG-related claims for these products. It is of course paramount for the development of a sustainable and inclusive economy that companies back any ESG-related claims they make with genuine actions. “Greenwashing”—empty or misleading claims about the environmental or social merits of a product or service—poses reputational risks to businesses by eroding the trust of consumers. It also compromises their ability to make more environmentally and socially responsible choices, and potentially undermines the role of regulators. This research is limited to assessing how ESG-related claims correlate with purchasing behavior.

Getting granular with ESG in store aisles

In collaboration with NielsenIQ, McKinsey analyzed five years of US sales data, from 2017 to June 2022. The data covered 600,000 individual product SKUs representing $400 billion in annual retail revenues. These products came from 44,000 brands across 32 food, beverage, personal-care, and household categories.

Six types of ESG claims

Six types of ESG claims identified on product packages:

NielsenIQ’s measurement capabilities enabled us to identify 93 different ESG-related claims—embodied in terms such as “cage free,” “vegan,” “eco-friendly,” and “biodegradable”—printed on those products’ packages. The claims were divided into six classifications: animal welfare, environmental sustainability, organic-farming methods, plant-based ingredients, social responsibility, and sustainable packaging (see sidebar, “Six types of ESG claims”). The research also drew on consumer insights from NielsenIQ’s household panel, which tracks the purchasing behavior of people in more than 100,000 US households.

At the most fundamental level, the analysis examined the rate of sales growth for individual products by category over the five-year period from 2017 to 2022. We compared the different growth rates for products with and without ESG-related claims, while controlling for other factors (such as brand size, price tier, and whether the product was a new or established one). The results provide insights into whether, and by how much, products with ESG-related claims outperform their peers on growth and how different types of products and claims perform relative to each other.

Not every brand that made a claim saw a positive effect on sales, and the data indicate a plethora of nuance at the product level. But this study did broadly reveal, in many categories, a clear and material link between ESG-related claims and consumer spending. The following four overarching insights are important for consumer companies and retailers that build portfolios of environmentally and socially responsible products as part of their overall ESG strategies and impact commitments.

1. Consumers are shifting their spending toward products with ESG-related claims

The first goal of the study was to determine whether, over this five-year period, products that made one or more ESG-related claims on their packaging outperformed products that made none. To compare, we looked at each product’s initial share of sales in its category and then tracked its five-year growth rate relative to that share.²As an example: among large brands in the frozen-dessert category, products with a “plant based” claim grew at a rate of 8.5 percent over five years, compared with 4.4 percent for comparable products without “plant based” claims, resulting in a growth differential of 4.1 percent. We learned that consumers are indeed backing their stated ESG preferences with their purchasing behavior.

This study did broadly reveal, in many categories, a clear and material link between ESG-related claims and consumer spending.

Over the past five years, products making ESG-related claims accounted for 56 percent of all growth—about 18 percent more than would have been expected given their standing at the beginning of the five-year period: products making these claims averaged 28 percent cumulative growth over the five-year period, versus 20 percent for products that made no such claims. As for the CAGR, products with ESG-related claims boasted a 1.7 percentage-point advantage—a significant amount in the context of a mature and modestly growing industry—over products without them (Exhibit 1). Products making ESG-related claims therefore now account for nearly half of all retail sales in the categories examined.

Growth was not uniform across categories. For instance, products making ESG-related claims generated outsize growth in 11 out of 15 food categories and in three out of four personal-care categories—but only two out of nine beverage categories. Shopping data alone can’t explain the reasons for such variances. In the children’s formula and nutritional-beverage category, for example, it’s possible that buying decisions reflect advice from doctors and that consumers probably won’t let ESG-related claims outweigh clinical recommendations.

The overall trend, however, was clear: in two-thirds of categories, products that made ESG-related claims grew faster than those that didn’t. Evidence from NielsenIQ’s household panel showed that some demographic groups—such as higher-income households, urban and suburban residents, and households with children—were more likely to buy products that made one or more ESG-related claims. Still, the research shows that a wide range of consumers across incomes, life stages, ages, races, and geographies are buying products bearing ESG-related labels—with an average of plus or minus 15 percent deviation across demographic groups for environmentally and socially conscious buyers compared with the total population. This suggests that the appeal of environmentally and socially responsible products isn’t limited to niche audiences and is making genuine headway with broad swaths of America.

2. Brands of different sizes making ESG-related claims achieved differentiated growth

Large and small brands alike saw growth in products making ESG-related claims. In 59 percent of all categories studied, the smallest brands that made such claims achieved disproportionate growth. But in 50 percent of categories, so did the largest brands that made these claims (Exhibit 3). Some examples of category variance: in sports drinks and hair care, smaller brands grew more quickly, while in fruit juice and sweet snacks, the larger brands did. (The data can’t explain the underperformance of medium-size brands, but it’s possible that they lack the marketing and distribution scale of large brands and the aura of credibility that may benefit smaller brands.)

What about newer versus established products? Newer ones making claims outperformed their newer, nonclaiming counterparts in only 32 percent of categories.³We defined established products as those that recorded sales in the first year (July 2017 to June 2018) of our study data. We defined newer products as those that recorded no sales in the first year of our study data. For the purposes of this study, newer products included, for example, new sub-brands, new product lines from existing brands, and new flavors and pack sizes from existing brands. In 68 percent of categories, established products making ESG-related claims outperformed established products without them. Again, the data don’t explain these discrepancies. One hypothesis is that shoppers may expect newer products to make ESG-friendly claims but are pleasantly surprised when older products make them. (Notably, established products that made ESG-related claims also tended to experience slower sales declines than established products that didn’t.)

Similar performance rates were seen across all price tiers for products that made ESG-related claims. Success in the less-expensive price tiers might, in part, reflect the high prevalence of private-label products making such claims. In 88 percent of categories, private-label products that made them seized more than their expected share of growth.

This finding suggests that consumers choosing private-label brands may not merely be searching for the cheapest items available—they might also be eager to support affordable ESG-related products. During an inflationary moment, when affordability is probably becoming more important to consumers, CPG manufacturers and retailers might consider interpreting these data as incentives to offer their value-seeking shoppers more ESG-friendly choices at these lower price points.

3. No one ESG-related product claim outperformed all others—but less-common claims tended to be associated with larger effects

Consumers don’t seem to consistently reward any specific claims across all categories: we found no evidence that a particular claim was consistently associated with outsize growth. However, we did find that less-common claims were associated with higher growth than more prevalent claims. This might show that claims can be a means of differentiation, especially if they also have a disproportionate impact on a company’s ESG goals and impact commitments.

Products that made the least prevalent claims (such as “vegan” or “carbon zero”) grew 8.5 percent more than peers that didn’t make them. Products making medium-prevalence claims (such as “sustainable packaging” or “plant-based”) had a 4.7 percent growth differential over their peers. The most prevalent claims (such as “environmentally sustainable”) corresponded with the smallest growth differential. Yet even products making these widespread claims still enjoyed roughly 2 percent higher growth than products that didn’t make them, suggesting that commonplace claims can be differentiating.

An analysis of NielsenIQ’s household panel data also reveals a positive association between the depth of a brand’s ESG-related claims and the loyalty it engenders from consumers.

Brands that garner more than half of their sales from products making ESG-related claims enjoy 32 to 34 percent repeat rates (meaning that buyers purchase products from the brand three or more times annually). By contrast, brands that receive less than 50 percent of their sales from products that make ESG-related claims achieve repeat rates of under 30 percent. This difference does not prove that consumers reward brands because of ESG-related claims, but it does suggest that a deeper engagement with ESG-related issues across a brand’s portfolio might enhance consumer loyalty toward the brand as a whole.

4. Combining claims may convey more authenticity

This study also analyzed the effects on growth when a product package displayed multiple types of ESG-related claims. On average, products with multiple claims across our six ESG classification themes grew more quickly than other products: in nearly 80 percent of the categories, the data showed a positive correlation between the growth rate and the number of distinct types of ESG-related claims a product made. Products making multiple types of claims grew about twice as fast as products that made only one.

We are not suggesting that companies can simply print more claims and certifications on their products and expect to be rewarded. These claims must of course be backed by genuine actions that have a meaningful ESG impact, and companies should heed the serious warning about greenwashing we presented in our introduction. Nonetheless, this finding does suggest that consumers may be more likely to perceive that a multiplicity of claims (rather than only one) made by a product correlates with authentic ESG-related behavior on the part of the brand. It also indicates that brands might be wise to reflect on their commitment to ESG practices and to ensure that they are thinking holistically across the interconnected social and environmental factors that underpin their products.

What does this mean for consumer companies and retailers?

Over the past century, global consumer consumption has been a central driver of economic prosperity and growth. This success, however, also comes with social and planetary impacts that result from producing, transporting, and discarding these consumer products. It should thus carry a moral imperative, for consumers and companies alike, to understand and address these impacts to society and the planet as part of buying decisions and ESG-related actions. Product label claims—if they represent true and meaningful environmental and social action—can be an important part of fulfilling this moral imperative.

For companies at the forefront of manufacturing and selling consumer packaged goods, there is no one formula for investing in environmentally and socially responsible product features and claims. Opportunities exist on multiple fronts. It’s important for consumer companies and retailers, first, to prioritize and invest in ESG-related actions that deliver the greatest advancement of their overall ESG commitments and, second, to inform customers of those actions, including information conveyed through product label claims. Our research points to a few insights that companies might consider as they attempt to advance their ESG commitments while also trying to achieve differentiated growth.

Companies will probably have a greater ESG impact and a better chance of achieving outsize growth if they incorporate high-impact ESG-related claims across multiple categories and products.

This study does not answer all questions about the impact of investments by consumer companies in environmentally and socially responsible products. It does not assess the veracity of ESG-related claims, the relative environmental or social benefits of different claims, or the incremental cost of producing products that authentically deliver on those claims. It does, however, provide an important fact base revealing consumers’ spending habits with regard to these products, and this may help companies accelerate their ESG journeys. There is strong evidence that consumers’ expressed sentiments about ESG-related product claims translate, on average, into actual spending behavior. And this suggests that companies don’t need to choose between ESG and growth. They can achieve both simultaneously by employing a thoughtful, fact-based, consumer-centric ESG strategy. The overarching result might be not just healthier financial performance but also a healthier planet.

This content was originally published here.

The post Consumers care about sustainability—and back it up with their wallets appeared first on Matt Dallisson Global Executive Search | Leadership Consulting.

In line with that goal, business leaders report that their companies are currently building 50 percent more new businesses per year than they did two to five years ago.²“New-business building in 2022: Driving growth in volatile times,” McKinsey, November 14, 2022. But as effective as building new businesses through internal innovation and organic growth can be, it’s often not sufficient for companies pursuing ambitious growth agendas.³“Choosing to grow: The leader’s blueprint,” McKinsey, July 7, 2022. Instead, these companies could take a lesson from digital disruptors and embark on a series of well-considered acquisitions.

Large companies are no strangers to the benefits of M&A, but their focus tends to be on acquiring one or two businesses to leverage economies of scale and capture cost synergies. Digital disruptors, however, acquire many more companies to accelerate their growth, a strategy that has proven successful. Companies that make, on average, more than five deals per year grow at double the rate of companies that only selectively pursue M&A. They also spend 38 percent less on each acquisition deal,⁴n = 1,000 companies, median-deal-size analysis over a ten-year period. allowing them to pursue a more programmatic approach: building a portfolio of companies that help them scale rather than going all out for one or two big targets.

One of the compelling advantages of this programmatic “buy and scale” approach to M&A is that it can succeed even under seemingly adverse conditions. According to our research, the businesses that perform best are those that defy conventional wisdom and embark on bold M&A moves regardless of economic downturns.⁵Jens Giersberg, Jan Krause, Jeff Rudnicki, and Andy West, “The power of through-cycle M&A,” McKinsey, April 30, 2020. And as valuations have come down from their lofty heights, costs per acquisition are coming down, too. Start-ups with great talent and intellectual property (IP) are more open to acquisitions again.⁶“How start-ups can manage uncertain times: Insights from leading venture capitalists,” McKinsey, December 13, 2022.

How incumbents can make buy and scale work for them

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In our experience, successful buy-and-scale efforts have five things in common.

1. A broad range of M&A goals based on a clear strategy

Digital disruptors undertake acquisitions for four reasons, each dictated by clear strategic objectives.

2. Governance structures to manage a portfolio of start-ups

Companies following a buy-and-scale approach typically establish a growth management office (GMO), an agile, growth-focused version of the IMO (integration management office) often used to manage acquisitions. In McKinsey’s latest survey on new-business building, most of the respondents who met or exceeded their revenue goals had in place formal governance structures, realistic expectations for required investments, and timelines to profitability.⁸“New-business building in 2022,” November 14, 2022.

A typical GMO has three main tasks:

Once an acquisition is under way, the GMO sets up a lean M&A squad team to manage it, typically consisting of the senior business leader who drove the deal plus two or three working members. To get the effort off to the best start, functional and business experts from the incumbent spend time at the target to gain a deep understanding of its structure, assets, and needs.

3. Incentives tied to clear KPIs

Aligning incentives across the incumbent and start-up is critical in creating transparency on expectations for the path ahead. Road maps with clearly defined milestones and deliverables—such as revenue or customer targets or completion of a product-development stage—provide a mechanism for releasing additional funds and triggering bonus payments. Employee motivation and retention can be boosted through a range of measures tied to organizational goals, such as stock ownership plans. This approach requires the incumbent to develop a set of standards on bonuses, stock ownership plans, incentives, and performance management, which will be invaluable in getting alignment with the board and creating a consistent framework for integrating future acquired start-ups.

When one European cleantech company acquired several small businesses, for example, it offered their founders and executives vested equity in the newly merged entity to motivate them to continue to push for growth under the new ownership.

4. Retention of the start-up’s entrepreneurial drive and culture

When the primary purpose of M&A is to grow a start-up, the acquirer must curb any tendency to overcontrol the target, instead taking steps to uphold the acquisition’s entrepreneurial drive and decisiveness. Among mergers that take this approach, 72 percent avoid the typical first-year revenue dip.⁹Brian Dinneen, Christine Johnson, and Alex Liu, “Post-close excellence in large-deal M&A,” McKinsey, June 29, 2021. They do so by ensuring that the start-up’s leaders retain full decision-making authority in recruiting, product development, and other key areas, such as keeping office locations separate and dedicating each employee to either the incumbent or the start-up, with no overlapping responsibilities.

Since the value lies in accelerating the startup’s growth momentum rather than capturing cost synergies, they don’t attempt to integrate complex systems. McKinsey research shows that growth businesses that are separated from the incumbent’s core IT, marketing, data, and analytics functions and processes are significantly more likely to exceed growth expectations than those that are not.¹⁰“2021 global report: The state of new-business building,” McKinsey, December 6, 2021. At a portfolio scale, this approach also simplifies integrations and allows the start-ups to move quickly. However, the incumbent will need to establish standards, such as APIs, so that start-ups can integrate with each other as needed. These standards can vary depending on the needed depth of integrations, and the incumbent will need to review them often to ensure that they have systems in place to support scale and mutual benefit for the acquired businesses.

This separation of functions can take many different forms. For instance, when a global car manufacturer acquired a Silicon Valley start-up, it stipulated that operational requests from the parent company must be routed via its CEO so that tech talent could stay focused on the job at hand and not be flooded with unnecessary daily challenges.

Cultural fit is critical to the success of an integration, according to 95 percent of executives in a McKinsey survey.¹¹Oliver Engert, Becky Kaetzler, Kameron Kordestani, and Andy MacLean, “Organizational culture in mergers: Addressing the unseen forces,” McKinsey, March 26, 2019. Similarly, 25 percent of survey respondents cited a lack of cultural alignment as the primary reason for integration failure. Poor cultural cohesion can have a detrimental effect on retention rates, as Niklas Östberg, CEO of Delivery Hero, points out: “Younger companies often employ a young workforce who are quick to jump to the next company if they don’t like the new direction.”¹²“Achieving M&A success by letting start-up acquisitions be themselves,” McKinsey, February 7, 2020. Our experience suggests that if a company has retained more than half of the new talent three years after an acquisition, that counts as a big success. To keep employees on board, incumbents need to show sensitivity and respect for cultural differences.

New-business building in 2022: Driving growth in volatile times

5. Start-up access to incumbent’s assets

In successful buy-and-scale efforts, incumbents deploy their own assets—sales force, customer base, brand, capital, scale, knowledge, and so on—to accelerate an acquisition’s growth. They don’t wait until the deal is done to define the nature of the collaboration but use the acquisition contract to specify how the start-up will access the acquirer’s five core assets:

Sharing financial assets can be critical, too. Many incumbents provide working capital or funds for business building to help start-ups access low-cost capital and skip funding stages.

Developing buy and scale as a strategic muscle

Top companies look at M&A as an innovation engine.¹³Jeff Rudnicki, Kate Siegel, and Andy West, “How lots of small M&A deals add up to big value,” McKinsey Quarterly, July 12, 2019. With this approach, M&A becomes a powerful means of competitive differentiation as acquirers build organizational capabilities and establish best practices across all stages of the M&A process.¹⁴Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder, “The ten rules of growth,” McKinsey, August 12, 2022. Successful acquirers build their M&A muscle by constantly identifying, pursuing, and integrating high-potential targets and embedding this capability in their business strategy. Such an effort works best when a company takes the following two steps.

Set up a venture-building board to oversee all new business and growth initiatives

A venture-building board should be made up of members from in-house strategy, innovation, and M&A teams; a venture-capital investor with an objective view of the business; and external experts to fill any knowledge gaps.¹⁵Markus Berger-de León, Jerome Königsfeld, Leo Leypoldt, and Kai Vollhardt, “How to build a unicorn: Lessons from venture capitalists and start-ups,” McKinsey, October 19, 2022. This board typically meets monthly to review and approve budgets for new businesses launched by the incumbent (which are presented by representatives from the in-house incubator or accelerator) and to assess and approve M&A opportunities (presented by the GMO).

The GMO is in constant contact with the internal incubator or accelerator team that focuses on organic growth initiatives and what the company needs to accelerate them (talent, technology, IP, market access, or other assets), so that it can seek out acquisitions that provide these elements. One key requirement of the venture-building board is to ensure that M&A activities support the business’s overall strategic objectives and are complementary assets to the new businesses that the incumbent itself has launched.

Create deal-management tools

Successful companies create tools that the GMO can use to identify targets, assess their potential for accelerating growth initiatives, and help inform decisions on whether to acquire them. To identify targets, successful acquirers use tools that automatically scan databases such as patent registers, commercial registers, GitHub, and LinkedIn for possible deals in line with specific criteria. To assess a target’s potential fit, they score it against criteria such as how many developers it has (for acqui-hiring) or how many regions and customers it covers (for international expansion). And to help with decisions to invest, they use predictive models that evaluate factors such as team experience (professional and educational), funding (including the presence of anchor investors), digital footprint (through web traffic and semantic analyses of keywords), and financial data (drawn from company reports and press statements).

At one international consumer goods company, the venture-building board meets monthly to assess, prioritize, and make funding decisions for new growth opportunities, both M&A and organic.¹⁶“How to launch a new business: Three approaches that work,” McKinsey, April 22, 2021. It evaluates potential targets and new-business-building ventures via an “opportunity funnel” that extends from idea sourcing to opportunity identification, prioritization, diligence, action, and portfolio management. Taking this approach, the company has built an engine that is able to successfully manage up to ten acquisitions per year to drive growth.

We see other companies taking a slightly different approach—for example, keeping a list of potential acquisition candidates that are prioritized by the GMO and reaching out to cultivate them for fit and a possible deal. Once a deal is approved, the GMO sets up a dedicated M&A squad to take responsibility for every stage of the acquisition, from due diligence to integration.

For approaches like these to work, senior leaders need to carve out blocks of time to cultivate targets and develop long-term relationships that may eventually lead to acquisition.

Strategic M&A is a catalyst for growth. That doesn’t mean making one big game-changing acquisition. Rather, it means pursuing frequent small acquisitions that fuel innovation across multiple areas and support in-house businessbuilding efforts in line with corporate growth objectives.

This content was originally published here.

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