(Charlotte, NC – August 21, 2018)
In a previous newsletter, we discussed the importance of establishing a consistent acquisition strategy. One critical step in establishing an executable acquisition strategy is to first understand your own Company’s core competencies. Successful acquirers can achieve a variety of benefits from acquisitions, but the strategies are always anchored on the Company’s core competencies (1).
Defining core competencies is critical to identifying a company’s critical competitive advantage and creating a logical hierarchy (or map) of service gaps or adjacent service offerings. Incorrect definition of core competencies could cause a company to invest in areas too far away from its core competencies, while neglecting its core profitable business. To identify your core competencies, first identify the five following assets (2):
1. Your most differentiated and strategic capabilities
2. Your most profitable customers
3. Your most critical product offerings
4. Your most important channels
5. Any other critical strategic assets that contribute to the above (such as patents, brand name, or position at a control point in the network)
Once a clear and accurate understanding of the five areas above is agreed upon, begin to examine successive segments or areas of the market radiating out from the Company’s core. Segments should be prioritized based on their competitive and economic landscapes. Also note that defining non-core markets and segments, or limitations to core competencies, can be valuable. Mapping out the potential areas should be the starting point of any growth strategy in business. The degree to which these segments are related to your own core is key to establishing your organic and inorganic strategy across the boundaries.
Nike is an example of a company that understands its core competencies and applies them into adjacent moves. Nike begins by establishing a leading position in athletic shoes in the target market. Next, they launch a clothing line endorsed by top athletes. This allows the visibility needed to gain market share in other accessories or equipment. They have established distribution channels and are able to lock in suppliers for each respective sports market.
On M&A, companies should incorporate core competencies into any acquisition strategy. Acquisitions that best leverage existing competencies into segments or markets that only change one variable from the core (e.g. geography) have a higher success rate for adjacency or tuck-in acquisitions (2). While transformational acquisitions are generally further away from the core, it is still important to leverage the core competencies to yield a higher probability of success.
(1) Bain & Company: Repeatable M&A in Consumer Goods
(2) Profit from the Core: A Return to Growth in Turbulent Times by Chris Zook
“North Inlet Advisors, LLC” provides financial advice to companies on capital formation, mergers, acquisitions, divestitures, restructurings, and other complex corporate transactions. North Inlet Advisors is not a retail broker-dealer, does not conduct underwriting activities, provide research, analyst reports, or solicit or carry accounts, or offer or sell securities products to retail customers. North Inlet Advisors is registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”). Please visit www.finra.org and www.sipc.org, or North Inlet’s regulatory webpage for more information.