Employing Excess Financial Resources
Unlike most companies where financial challenges have been most often in the form of resource scarcity, this rare company had amassed a significant amount of cash. It recognized that it needed to put that cash to productive use if it were to continue its current growth and profitability trends.
The company had the options to: make an acquisition, invest more heavily in new product development, or continue to accumulate cash. The company’s base products were approaching the end of their growth cycle. To remain a viable enterprise, the company could not simply accumulate cash, unless it planned to liquidate itself, which was an unacceptable option. The company had product development efforts underway, but these were unpromising and uninspiring. As the company’s board of directors viewed this situation, acquisitions were the only viable course of action. Potential acquisitions fell into one of two categories: (1) those that had significant technical and market development risk, and (2) those with products that were also mature and lacked significant growth potential.
The board did not have confidence that management was able to develop new products with strong market potential, or make a success of products with development or market risk. The board opted to acquire a company whose products were mature and–as it turned out–nearing the end of their growth cycle.
It was a bad decision. The acquisition did not generate significant additional revenues or profits. Ultimately, the money invested in the acquisition was wasted, in addition to the diversion of management time to making and tending to the acquisition. This situation suffered the results of the lack of objective advice. Later the company received better advice–to change management–and the company grew to become an outstanding success.
When choosing and implementing strategies, boards should realistically assess the strengths and limitations of current management, and make a change when necessary. When facing a critical issue, both management and boards should carefully consider if they are reacting to perceived pressures, while failing to seek an objective perspective.