Acquisition ≠ Innovation

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Significant growth from innovation is difficult to achieve for large, established enterprises. The median revenues of the Fortune 500 were $11B last year, so even the most successful breakthroughs often fail to really move the needle on growth for companies that already operate at scale.

It is no wonder that these organizations are increasingly looking to acquisitions to hit top line growth expectations. Buying is viewed as easier than developing in-house.

The path to this decision is well traveled and the data support the strategy. Old research conducted by the National Science Foundation and U.S. Department of Commerce highlights the problem. The study found that since World War II, small entrepreneurial firms have been responsible for half of all innovations and 95 percent of all radical innovation in the United States. Other studies revealed that small firms generated twice as many innovations per R&D scientist and 24 times as many innovations per R&D dollar as compared to firms with more than 10,000 employees. While this research is dated, things haven’t been getting better over the past ten years (especially if you remove Apple from the analysis.)

While a healthy level of acquisition can comprise a sound growth strategy, this approach is not synonymous with innovation. When compared to successful homegrown innovation, acquiring growth is expensive and comes with significant integration risks. An overreliance on this approach will ultimately allow the organization’s innovation muscle to atrophy and will negatively impact morale, motivation and performance. I suggest balancing your inorganic growth strategy with investment in innovation competencies that consistently generate breakthrough concepts and deliver real growth.