Growth Strategy Conventional Wisdom Revisited

With stock prices depressed and start ups anxious to raise cash, we may see an uptick in M&A activity and joint ventures in 2009. That may be wishful thinking (I know a few start ups that certainly hope to find a strategic partner aka buyer), but if consumer confidence can stabilize, it may not be unrealistic. What, then, to expect from companies' efforts to buy growth?

Several case studies and lots of data show that organic growth produces more lasting business benefits than growth through partnerships or acquisition. As Will Ander, a retail consultant for Chicago-based McMillan/Doolittle LLP, puts it: “You’ve got to ask: Does putting two brands that are struggling together make a better product in the end?” However, two recent examples suggest that the conventional wisdom is not always smart.

Carly Fiorina was a controversial CEO and led HP into a controversial acquisition of Compaq. At the time, industry pundits thought the plan to leverage Compaq’s position in personal computers was fatally flawed. A bitter proxy battle ensured, the deal went through and Fiorina got the boot. I am not a Fiorina defender. However, fast forward 6 years – HP has surpassed Dell as the worldwide PC market leader. And today, the printer business is stagnant and it is HP’s PC business that is the growth engine of the company.

More recently, a Christmas 2008 example started two years ago when Macy’s saw an opportunity in the toy category. They wanted to avoid becoming an also-ran behind Wal-Mart and needed margin insulation that a unique assortment would provide. Rather than go it alone, Macy’s conducted a pilot with FAO Schwarz (www.fao.com) in late 2007. FAO Schwarz had had its own problems and motivations, having emerged from bankruptcy in 2004.

The pilot proved a success and in May 2008, the two companies announced an agreement to build out full-size FAO Schwarz shops of between 1,000 and 3,500 square feet in approximately 75 Macy's locations across the country and smaller FAO Schwarz departments of between 200 and 300 square feet in another 200 stores in time for the holidays.

The stores were built out and proved successful enough that late last month Mike Duff of BNET reported the companies announced plans to add about 400 more, mostly smaller FAO Schwarz shops for a total of about 675 over the next 18 months.

The moral of the story: Organic growth is not the only path to lasting business benefits. Smart brand pairings can produce compelling results that have staying power.