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To Change Or Not . . . Is the Wrong Question

Small and frequent changes can ensure you’re always relevant to your market.

To Change Or Not . . . Is The Wrong Question

As a small-business owner, your job is never “done”. There’s always a carry-over of tasks from one day to the next. But not only the daily operational tasks, also the strategic tasks in building your business to support your financial needs.

While operational tasks produce value for your customers, strategic tasks are about creating owner value. The latter inherently implies change.

So, if change is mandated, how often and how much must our business change?

A recent article by McKinsey & Company describes its decade-long research into how mergers and acquisitions affected the performance of the global top 1,000 companies. The findings show how re-positioning the portfolio of markets and products, through small M&A deals, drove above-average returns to shareholders. Conversely, companies that made infrequent or “big-deal” transactions, or relied mostly on organic growth, not only performed poorly, but some even lost value.

Although many of our clients are working on acquisition-based growth, the majority of small businesses are not in the M&A space, so, how exactly is this McKinsey research relevant to entrepreneurs?

Many of the research findings speak to fundamental principles that apply to both big and small companies, like moving with the market. But the questions remain, when and how big to change?

First, the timing of change. The article shows that there’s an optimal rate of change of 2 or more small deals per year. Over the 2007-2017 period, the top-performing companies changed by a total of between 10% and 30%.

Importantly, companies that changed to little, too much, or too infrequently often lost significant value, whereas companies that adapted their positioning with frequent, small changes, came out tops.

In other words, for small business, the key is to programmatically and proactively implement small changes that keep you relevant to your market. If you wait until you’re forced to change, your change is already too late.

Next, how big should each change be? The study discusses 2 factors: M&A deal size, and the acquired company’s market position relative to the buyer’s.

The optimal deal size was around 2% of the acquiring company’s value. The ideal “closeness” was for the acquired business to match an existing but non-core business unit in the buyer’s group.

For most small businesses, this translates to diversifying with a new but similar product line, or expanding an existing line with a few new features. These changes could lead to either expanding to new types of customers or capturing more value from your existing client base.

Combining the “when” and “how big” questions, I’d apply this as making a rapid series of small, iterative changes that rely on frequent and early market validation.

How else would you keep your business relevant?