Leveraging excess capacity

Leveraging excess capacityCan I turn a problem into an opportunity? Part of the creative craft of the entrepreneur is to do just that. So the problem of excess capacity, in fact, offers a growth opportunity to the business that can use this situation to leverage benefits from an acquisition which has the opposite problem – too much demand.

Most entrepreneurs would love to have the problem of too much demand but it can be problematic for the business which cannot resolve the problem.

Customers who have to wait too long for product or service delivery don’t usually congratulate the supplier for being successful. In practice, they are more likely to complain and then tell all their friends how bad the service is.

This can be damaging to the company brand and result in long-term reputation problems. However, the business with excess capacity which can solve the excess demand problem is in an ideal position to use this as an acquisition opportunity and in doing so step up their revenue levels.

Since most companies suffer from too little demand, a company which has excess demand can be an ideal acquisition, especially if the price paid is based on the actual revenue levels rather than potential. If the business can be readily integrated into the acquirer’s supply chain, the acquirer can quickly optimise the excess capacity and bring in new revenue.

When we think of capacity we should not just think of plant and equipment. Capacity can be any form of productive asset including warehouse space, distribution capacity, idle staff, unused patents, office space, retail shelf space and so on. We should be on the alert for spare capacity throughout the business and seek out acquisitions which can effectively utilise what we are already paying for but which we are not leveraging into revenue.

Strategic acquisitions have this as their foundation. We seek out an acquisition which we can exploit because we already have the capability and capacity in place to exploit them. The acquired product added to our product portfolio. The acquired customer base can absorb our existing product range. We can reduce the head office headcount in the acquired business because the work can be absorbed by our existing staff and so on. Instead of having to build new infrastructure to take advantage of the acquired products and services, we use our existing resources, thus dramatically reducing the additional scalability costs.

Success in an acquisition strategy comes from finding an attribute of the acquisition you can exploit beyond simply growing the acquired business. What you are looking for is something which the combined entities can exploit to gain significant synergies. In this case, we are using what we have in abundance to deliberately target potential acquisitions where we can use the excess capacity to advantage. So acquiring a business which already had similar excess capacity would rule it out as a potential acquisition unless there was some other attribute within the target which we could leverage. But finding a business which can use the excess capacity makes great commercial sense.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.

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