by Bill Vinck, Excendio Advisors
Digital transformation is considered by many leaders as a key to long term business success. Why so? There is research that suggests:
- The rate of organic revenue growth for firms competing in new digital ways can be greater than that of traditional firms.
- Similarly, the rate of EBIT growth for firms competing in new digital ways can be greater than that of traditional firms.
Given that organic growth potential, additionally, a well planned and executed acquisition plan can also prove attractive to achieve incremental growth.
In this article there are three major points to consider:
- Every firm has a Value System and every M&A transaction’s success will be a function of the successful alignment of the Value Systems of the firms involved.
What is a Value System?
A firm’s value system is the formal, and as importantly, the informal criteria according to which myriad daily decisions are made. Crudely expressed it’s “…How we do things here…”
These criteria are sometimes documented but often not. They are related to business processes but are distinct from them. They are found in the numerous daily activities conducted throughout the firm.
Employees at all levels make daily decisions on a variety of topics:
- Do we accept this order or not?
- Which of our product or service offerings do we present to a client?
- What new concept and ideas, such as product or service ideas, do we bring to senior management for review?
- Do certain decisions have a specific safety or ethical component?
- What topics are essential to communicate to what communities? Customers, employees, management, etc.
These of course are just a few examples of the hundreds of daily decisions made in every business.
- A key sign of good management is that its’ Value System is clear, consistent, and well understood throughout the firm.
Imagine the chaos in a firm where these daily decisions are made in an arbitrary fashion. Further, imagine the relations between two firms joined by an M&A transaction in which they have dueling value systems. That incompatibility historically accounts for numerous integration failures.
What drives the Value System?
There are many possible answers to this question. A firm will talk about its’ responsibility to its’ employees, to the community in which it resides, and to the customers it serves. Those responsibilities often define various behaviors displayed. The firm’s strategy may provide other answers.
However, I would urge that the fundamental driver of the Value System is gross margin impact. All other business imperatives are dependent upon regard for margin impact.
- While a firm will pursue various strategic objectives, they are fundamentally attempting to preserve or enhance their gross margins.
One may dispute the point, but margin erosion is on no one’s list of near- or long-term objectives. If a leader insists on pursuing margin destroying activities for whatever purpose, one should at least be clear on the extent of that destruction.
Given the above, a firm involved in digital transformation using M&A as a tool to achieve their goals would be well advised to be aware of the Value System concept and its’ role.
Further it would be reasonable to conduct a Value System review as part of standard due diligence.