When internal growth is the goal.

• Author: Duberman, Lewis D.
• Position: Internal growth compared to growth from acquisitions

When internal growth is the goal The big business story of the 1980s has been mergers and acquisitions. Small wonder if you look at the numbers: more than 100 of 1983's Fortune 500 companies have since been acquired, merged, or taken private. And in the past five years, 143 companies--nearly 30 percent--have been replaced on the 500 listing.

But recently in boardrooms and major business publications a more compelling story has begun to surface--a reemphasis on innovation in certain parts of American industry.

The explanation is easy. More and more, companies are realizing that acquisitions ultimately will not get them where they want to go. Cash that was used to pay down debt cannot be used to foster new ideas, develop new brands, or sustain existing brands that, without support, would shrink. This is particularly true for consumer products companies.

For the cost of a major acquisition of an established brand name in a "hot" industry, a company should be able to develop several new products internally. The initial cost of this strategy is high due to research and development, manufacturing, and marketing expenses. Over the long term, though, the cost of internal development, rather than acquiring new products in which another company has invested the start-up money, should be demonstrably less--and the payoffs significantly higher.

We've experienced this at Helene Curtis, most recently with Salon Selectives, a hair care brand that went from the drawing board to a $100-million brand in less than two years.

Research has continually shown that, in most industries, a strong correlation exists between market share and profitability. The smart management strategy is to invest in new products now that will build market share and then create profitability in the long run.

Corporate policies of internal growth based on a company's technological expertise and marketing savvy will be the norm for the 1990s. For the company that sticks to its knitting, the logical choice is to invest in brands where, given the company's experience, the returns are higher and achieved sooner than investing in an expensive acquisition.

Let me give you an example from my own experience. In the personal care industry, where growth is achieved primarily at a competitor's expense in market share, Helene Curtis has had 18 percent annual sales growth over the past five years, much higher than the industry average. Today, it is the seventh largest company in this $9-billion industry--up from 29th five years ago. And the key to this record has been a straightforward, somewhat old-fashioned management strategy: to growth by creating new product...