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Which way to grow?

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Suits The C-Suite

In the World Bank’s January 2018 Global Economic Prospects report, the Philippines was expected to post a steady 6.7% growth this year and in 2019, before a slight decrease to 6.5% in 2020.   Although the estimates are lower than the government’s 7.0% to 8.0%, the Philippines is still seen by the World Bank to continue being among the fastest-growing economies in Southeast Asia.

With a strong and positive growth outlook for the country, the questions that now face C-Suite leaders of big and small businesses alike, are: Where do you want to take your business moving forward? How can you capitalize on this growth? And ultimately, when will you do it?

Given current market conditions and anticipated opportunities, it would seem that the time to act is now. Companies would benefit from taking a proactive, rather than reactive, stance. They should also pay attention to market trends, in order to leverage on these to seize opportunities and propel the organization’s priorities.

ORGANIC GROWTH VS INORGANIC GROWTH
There is no doubt that growth is always on the agenda of every business. The only question is how this will be achieved.

While companies have a wide range of diverse approaches to grow their business, the challenge is to identify the right one for the business’ strategic direction. Smaller enterprises generally favor growth from an internally focused organic approach, while larger enterprises usually prefer to take an externally driven inorganic growth strategy, such as through acquisition. There’s no one-size-fits-all solution. Management and business leaders need to assess which strategy best suits the organization. Both avenues are open to companies of any size and both avenues have their advantages and disadvantages.

ORGANIC GROWTH
Taking on an organic growth approach (or growth from within) involves, among others, a focus on growing the operations, reinvesting the profits in income-generating new assets, and improving productivity to increase the bottom line. Expanding from within gives management a deeper understanding of its business and allows it to quickly take advantage of changes in the industry. This also allows management to control the pace of growth in order to maintain one that is comfortable for the organization. However, this generally takes a longer time given the usually limited resources for growing the business. The risks of organic growth lie in expansion that outpaces the ability to effectively manage, stretches resources too thin, strains capital, or diverts focus from the business’ core mission.

INORGANIC GROWTH
Inorganic growth, which can be done via mergers and acquisitions (M&A), can result in accelerated growth as market share and assets are immediately larger; new skills and knowledge become available, and access to capital and new markets may be easier. However, this generally has greater financing requirements, which, in turn, entails higher cost of funding.

Naturally, experiencing a sudden increase in size also presents significant management challenges that increase with the size and complexities of the new entity created. People and branding issues are likely to arise. At the same time, systems, sales and support capabilities must be scaled and positioned to meet new demands. No matter how ideal an M&A initiative looks, seamless operational integration on the back and front ends are the real keys to its success.

TO INVEST OR DIVEST, THAT IS THE LONG-TERM GROWTH QUESTION
The 17th Edition of EY’s Global Capital Confidence Barometer issued in October 2017 states that 98% of the surveyed respondents see the global economy as improving or stable, and 99% see the M&A market as improving or stable. From among these respondents, 56% intend to pursue acquisitions, indicating that M&A is a cornerstone of today’s corporate route to growth. And where there are buyers, there are sellers. Hence, forward-looking leaders focus on selling assets in the same way they focus on acquisitions. Strategic divestments are a key to raising capital and deploying it into a company’s core business.

Likewise, out of 900 corporate executives from around the world interviewed in a recent survey, 76% answered that their most recent divestment created long-term value. By applying leading practices to the process, selling assets and reshaping portfolios can help companies concentrate on higher-growth opportunities and create value for stakeholders. Although selling can mean a short-term dip in top-line growth, redeploying and reinvesting capital in core activities, expanding into new markets or developing new products can lead to longer-term growth and higher value.

Local conglomerates are also revisiting their portfolios and are using M&A’s and divestments to expand their businesses. Among the notable M&A’s and divestments in the past two years are the following:

• A food manufacturer’s (Buyer) acquisition from another food manufacturer (Seller) of the selling rights to manufacture and distribute a global food brand’s products. This enabled the Buyer to expand its food portfolio while the Seller on the other hand was left to focus on its snack foods and beverages business;

• A conglomerate involved in mall operations, among others, ventured into a new business with its acquisition of a logistics company as part of its strategy to address the emergence of e-commerce, which is threatening the malls’ foot traffic;

• A conglomerate acquired an e-commerce business as part of its strategy to invest in new disruptive businesses that provide innovative solutions to evolving markets;

• A telecommunications company divested its remaining stake in a utilities company to focus on its telco business and fund ongoing network upgrades and expansion;

• A real estate developer (through a joint venture with a retail group) sold to a petroleum company its shares in a convenience store chain to focus on its core businesses. The petroleum company, on the other hand, sees the acquisition of the convenience store chain as complementary to its retail fuel business and marks its entry into the fast-growing domestic convenience retail market; and,

• A conglomerate’s energy unit invested in a power company to increase its footprint in clean coal technology that provides reliable and affordable power, particularly in Luzon.

While the impact of the above transactions has yet to be seen, these conglomerates believe that the M&As and divestments they have undertaken are a step towards reaching their desired growth.

TAKE ACTION
With the economy continuing to grow, one has to pay attention to market trends and use these to seize opportunities to propel the company’s priorities and explore outside the organization’s comfort zone. By taking better-informed and decisive action, management is better able to find the right balance between future risk and reward. Part of this challenge is understanding that growth is not just about investing, but sometimes, it’s also about divesting at the right time.