“The best way to support dreams and stretch is to set apart small ideas with big potential, then give people positive role models and the resources to turn small projects into big businesses.” – Jack Welch

The ability to turn vision into concerted action is a critical requirement for ambitious companies. The army has a useful phrase: ‘Maintenance of the aim.’ It means staying focused on the objective even as the eddies of battle make the initial plan redundant. How do ambitious companies maintain the aim? Our view is that they are extremely effective at setting priorities, building a ‘company way of doing things’ and then delegating implementation.

Research by McKinsey found that 22 percent of C-level executives in large companies said that their strategic plans identified the right issues but did not implement plans to pursue them. This is why habits are so important. To coin a phrase, ‘stuff happens.’ Few plans survive contact with the enemy. Ambitious companies find it easier to inculcate shared habits and a shared vision of the future. With these guidelines in place, it is easier to delegate authority than to micro-manage a response to every new situation.

Diversify or specialise?

The fashion for diversification ebbs and flows. In the Sixties, large conglomerates were in vogue. Diversity seemed to be the antidote to risk. In the Seventies, The Boston Consulting Group encouraged companies to take a portfolio approach that favoured a mix of ‘cash cows’ and ‘stars’, with high market growth rate and high relative market share. In the Eighties, In Search of Excellence encouraged businesses to “stick to the knitting,” and corporate raiders penalised flabby companies.

2006 saw a surge in mergers and acquisitions activity. Indeed, the UK equity market shrank by £64bn, 4.1 percent of its total value, because of M&A and share buy-backs. Some of this activity relates to diversification but much of it is about smart consolidation. Around the globe, hostile takeover bids have set a new record for M&A activity with a total deal value of $3,800bn. The surge was fuelled by profitable companies with large amounts of cash as well as a growing band of private equity investors.

All this happened despite research suggests that only three in 10 big deals create value for shareholders. Two analysts from Bain, a management consultancy, suggest four rules that will help companies avoid this pitfall:

1. Stay close to your core business. Add scale, similar products or similar customers. Novelty often disappoints.
2. Ask and answer the big questions in due diligence. It’s more than an audit. Get information that will help decide if the deal will make business sense.
3. Integrate quickly where it matters. First, focus on the areas that will achieve the biggest revenue gains or cost savings.
4. Expect problems and set up early warning systems to detect them.

Berkshire Hathaway successfully juggles different businesses in different sectors and consistently manages successful acquisitions. How? Instead of looking for elusive synergy that will make a deal pay, Warren Buffett buys companies at or below their intrinsic business value, only buys businesses that he understands (by which, one suspects, he means ‘aren’t selling snake oil’) and which have a good track record and predictable future prospects. In other words, diversification works if each decision makes good business sense in its own right. Diversity on its own isn’t enough. Ambition requires guiding priorities and focus.