Developing a New Product or Service? Consider Acquisition

96 percent of businesses fail within 10 years. 80 percent of consumer products fail annually. Statistically, it’s obvious that launching a new product or service is challenging. Entrepreneurs pour their lives into starting their companies and while some of the lucky ones become the next Facebook, most struggle to succeed.

Even large established corporations face obstacles when releasing new products and services due to intense rivalry from competitors, lack of expertise or simply little to no market demand for their “great” idea. There are countless examples of failed products:

  • Betamax – Although Sony’s Betamax was first to market and a superior technology, it lost out to VHS, which consumers favored.
  • Microsoft Zune – The Zune was supposed to be an alternative to Apple’s iPod, but because of Apple’s strong grip on consumers and the music industry, Zune failed to take off.
  • Colgate Kitchen Entrées – Using the same brand name for toothpaste and food was a mistake. Consumers did not find toothpaste very appetizing and the product failed to take off.

Looking back, it’s easy to see why some products failed, but at the time, it would have been difficult to predict consumer reaction. This is why companies often use acquisition as a tool to add new products and services. Research and development can be costly, and there’s no guarantee of success. In acquisition, however, you can bypass this difficult start up period and pick companies that are already established and have proven themselves in the marketplace.

This is a common tactic in the pharmaceutical and tech industries. Large pharma companies often build their product pipelines by acquiring smaller companies after they have developed and tested new drugs. Recent transactions include Johnson and Johnson acquiring Actelion for $30 billion to gain access to high-margin medicines for rare diseases, and Thermo Fisher acquiring Pantheon for $7.2 billion to further expand in the biopharma industry.

In the tech industry, behemoths like Google, Facebook and Amazon scoop up promising startups and exciting new apps for their talented engineers. Deals that have made headlines include Facebook’s $1 billion purchase of Instagram;  other deals fly under the radar. For an undisclosed price, Google recently acquired startup AIMatter to build its computer vision capabilities. The strategy of acquiring as a form of research and development can help companies remain competitive and successfully add new products and services.

Rather than working through the trials and errors of learning about a new market, with acquisition you gain immediate access to new customers and capabilities. If you want to develop a new product or service, consider if an acquisition might help you achieve the same goal.  Essentially, acquiring lets you pick winners.

Photo credit: Robert Nelson CC BY 2.0