The biggest risk to growth is failure to pursue digital transformation and therefore being left behind. Digital technology gives companies access to new techniques and capabilities that create a competitive advantage.
President and CEO
When it comes to their growth strategy, CEOs are heavily focused on inorganic methods, particularly M&A. Nearly half of U.S. CEOs indicated they have a high M&A appetite, and 86% are likely to be making acquisitions over the next three years.
“We’re seeing strong deal activity across all industries, as many companies seek to use M&A as a means for growth and to bring new and increased value to their organizations as they position for a post-pandemic economy,” says Tandra Jackson, Vice Chair of Growth and Strategy, KPMG U.S. “With some $1.5 trillion of dry powder in private equity waiting to be invested, historically low interest rates and the SPAC phenomenon, turning to the deal market is a sensible and strategic growth play for many companies.”
Carl Carande, Vice Chair-Advisory, KPMG U.S. and Global Head of Advisory, notes the importance of mergers and acquisitions to create the optimal portfolio of growth-generating businesses: “If you reverse-engineer how activist investors have generated above-market returns and companies with complex portfolios, it’s been through a combination of portfolio actions such as divestitures, operational actions and investing in the core. And I think that approach is well suited to the current environment, which is reflected in the strong M&A activity we are seeing in the market.”
Carande adds that pursuing inorganic growth, such as M&A or strategic alliances, is no longer about financial engineering or scale. Instead, companies are leveraging inorganic strategies to drive network and revenue synergies. When considering offerings, companies analyze how complementary their customer bases are, how they can push more share of wallet or how they can drive more use of their platforms. He singles out two sectors: technology, media and telecom (TMT), where the deal volume is up due to consolidation in search of content, and the financial sector, where established firms are buying fintechs to boost their digital capabilities. Other sectors where M&A appetite is above average include insurance and auto.
U.S. CEOs are confident in the growth prospects of the domestic economy (83%) and their company (86%) but less confident in the global economy (64%). “Likely the largest factor at play in limiting growth is the unknown around the duration of the pandemic, the longer-term effects of the current delta variant and its impact on major economic factors like supply chain shortages, consumer spending, inflation and unemployment,” says Jackson. “While the economy is demonstrating strength, these factors make it unclear how long the economy can endure at its current pace, and CEOs are highly attuned as they weigh every scenario that could impact key decisions about long-term growth.”
Constance Hunter, Chief Economist, KPMG U.S., agrees that economic growth will continue to be heavily influenced by the short- and longer-term effects of COVID-19. These include the inadequate response to the pandemic in emerging markets, which are not able to match the vaccination rates or fiscal programs of developed countries. This in turn limits the potential of companies that were counting on these emerging markets for continued growth. The current labor shortages and the longer-term effects of lower immigration and diminished population increases also constrain growth potential.
On the flip side, the pandemic has led to a push for digital innovation, especially using data to derive insights, says Hunter. “At a time of high uncertainty, you want to be able to improve your forecasting and improve your visibility,” she explains. “Those firms that use data and analytics to inform their decisions are going to be better off.”
The acquisition strategy of RE/MAX, a leading real estate company, exemplifies how a focus on data can set companies up for future success. During the pandemic, RE/MAX bought a geospatial intelligence organization that provides location data on more than 200 million properties in the United States. This ultimately enabled the company to provide its agents and customers with timely and accurate information. “We want to make good data-based decisions in business and for the community,” says Adam Contos, CEO of RE/MAX.
“Digital acceleration is a big part of our capital allocation,” adds Contos. His approach is in line with the majority of U.S. CEOs, who are following an aggressive digital investment strategy intended to secure first-mover or fast-follower status (77%) and believe that they need to be quicker to shift investment to digital opportunities and divest businesses that face digital obsolescence (75%).
Ajei Gopal, President and CEO of Ansys, an engineering simulation software provider, agrees that digitalization is a key part of any growth-enhancing strategy. “The biggest risk to growth is failure to pursue digital transformation and therefore being left behind,” he says. “Digital technology gives companies access to new techniques and capabilities that create a competitive advantage.”
Digital simulation for instance, helps drive top-line revenue growth by allowing companies to bring products to market faster, explains Gopal. It also improves the bottom line by creating higher efficiencies and eliminating the costs of having to build physical prototypes. “That’s a double positive that can be achieved through the effective use of digital technology,” he adds.
“Digital innovation has to be intentional,” adds Ray Scott, President and CEO of Lear Corp., maker of automotive seating and electrical systems. “Over the last year, it may have been easy to back off innovation and technology, but you have to continue investing and staying focused on the longer-term value creation.” Scott says that his M&A strategy is innovation-driven and he’s looking at companies that will accelerate Lear’s Industry 4.0 capabilities. “You have to have an open mind to displace yourself even when your products are getting you a fair return—you can’t stand still.”
Chrissy Taylor, President and CEO of Enterprise Holdings, agrees that constant innovation is key, especially around the customer experience.
“[Our] customers are looking for more personalized, frictionless experiences—curbside rentals, pickup services, low-touch transactions and overall increased control over their rental options—and new digital capabilities will help us deliver the experience they want,” says Taylor. “By listening to our customers and employees, we’re confident we’ll be able to keep pace and drive transformation. It’s all about reimagining how we can get our customers and goods around the globe and finding the innovative solutions and emerging technologies to do so.”