Table of Contents Hide
- What is Corporate Development?
- Why Corporate Development?
- Corporate Development Structure
- A Corporate Development Team’s Job Description
- Implementing Corporate Development Strategy
- Metrics for Evaluating an Organization’s Corporate Development Effectiveness
For firms wanting to scale and flourish in their market, corporate expansion is a normal and desirable process. Every company needs a long-term corporate strategy development for successful growth. If you want to work in corporate development, you need to learn more about how it works.
This article delves deeper into corporate development, covering criteria for measuring success and techniques for achieving it.
What is Corporate Development?
Corporate Development (Corp Dev) is the department within a company that is in charge of making strategic decisions to grow and restructure the company’s business, build strategic partnerships, and/or achieve organizational excellence. Corp Dev’s mission is to generate opportunities for the firm by actions such as mergers and acquisitions (M&A), divestitures, and deals that capitalize on the value of the company’s business platform.
Why Corporate Development?
A corporation requires corporate development to develop and implement creative strategies that will allow it to capitalize on its competitive advantage and, as a result:
- Improve the company’s financial and operational performance.
- Make it possible for the company to exceed its competition.
Internal vs. External Concentration
In certain ways, corporate development is an important inward-looking job for a company. It is necessary to close gaps in the organization’s geographical reach and product portfolio.
Corporate development, on the other hand, is a critical outward-facing activity for any firm. This is because organizations are dynamic entities with valuable assets that can be monetized. They are also grown through various combinations of transactions and partnerships. As a result, the corporate development department must innovate and generate a diverse set of business partners and transaction options.
Corporate Development Structure
#1. Centralized Model
Corporate development is typically a centralized role since it provides the Corp Dev team with a bird’s-eye view of the business. Thus it allows them to identify possibilities and dangers. This enables the organization to capitalize on being the first to market in the event of an opportunity. Also, it allows them to take pre-emptive action in the event of a threat. A framework like this also enables the corporate development team to negotiate deals with other businesses that fit nicely into the company’s portfolio.
A centralized Corp Dev department does not indicate that the department operates in complete isolation from the rest of the company’s operating groups. For example, after purchasing a company, the corporate development team assists in integrating the purchase into the company by working with support functions and business lines within the company as well as vendors outside the company.
#2 Hybrid Model
The corporate development department is lean under this organizational style, with only a few Corp Dev experts. When analyzing potential alliances and strategic deals, this small team relies on a network of external and internal resources for subject matter expertise.
#3 Decentralized Model
A decentralized Corp Dev organizational paradigm denotes the absence of a central corporate development department. Instead, a corporate development team is formed on an as-needed or ad hoc basis. They can get members from diverse internal departments.
The knowledge necessary for the individual business development project determines the exact membership of the team. If the project was a divestiture, for example, the Corp Dev team will have a lot of experts from the corporate finance and legal departments.
The centralized form of corporate development is the most common, whereas the decentralized approach is the least popular.
A Corporate Development Team’s Job Description
Corporate development groups are in charge of a wide range of functions. The scope of those functions varies greatly from firm to organization. Many people believe that Corp Dev is just concerned with mergers and acquisitions (M&A), yet – especially at major firms. However, Corp Dev is usually involved in a variety of other projects than M&A.
The following are some of the most popular Corp Dev responsibilities:
- Developing operational excellence
- New strategic ideas are being studied and funds are being invested in (this encompasses mergers, acquisitions, and also strategic divestitures)
- Developing forecast models and budgets to establish asset allocations and track the company’s performance
- Dealing with regulators from the government and/or the industry
- Ensured capital sufficiency
- Non-core business assets must be identified and managed.
- Enhancing the client/customer experience
- Increasing company productivity
- Participating in financial conferences, shareholder meetings, Investor Days, and earnings announcements to explain the company’s strategy to shareholders.
- Product creation and market penetration
- Portfolio administration
- Understanding the primary revenue and expense drivers; establishing the most relevant Key Performance Indicators (KPIs) for measuring and evaluating company performance
Implementing Corporate Development Strategy
The following tactics are widely employed to attain corporate development goals:
#1. Acquisitions and mergers
Large organizations frequently acquire/purchase smaller firms that have expertise, knowledge, clients, sales, profitability, and/or cash flow that can benefit the acquiring company greatly. In other circumstances, a company may acquire a company that it believes has potential. Subsequently, they then remodel its business model to steer it in a new, presumably successful direction. Corporate development experts must be knowledgeable in the corporate appraisal, risk management, financial modeling, negotiating, and integration to carry out such acquisitions.
Corporate development teams:
- build a target list
- value the companies in a financial model
- negotiate deal terms
- integrate the acquisition into the company when carrying out mergers and acquisitions.
Corp Dev teams frequently form a Transition Services Agreement (TSA) between the buyer and seller to ensure effective integrations. A TSA describes the kind and duration of the seller’s continued provision of services to the purchased business. This adds value to the buyer by giving them time to integrate the newly purchased business. It also benefits the seller by allowing them to reduce stranded expenses and rearrange their processes (especially if only a part of their business has been acquired by the buyer).
#2. Long-term Collaborations
A corporation gains a competitive advantage by establishing a reputation in the marketplace as a “partner” of choice. This is because solid partnerships made of multiple firms provide economies of scale to all parties. Furthermore, to avoid a pricing war/race to the bottom with a possible competitor, businesses frequently seek to form alliances with them.
In addition, building partnerships requires far less capital than acquiring a company. Given the desire for innovative partnership formation, knowing how to form long-term alliances with other businesses provides a competitive advantage.
#3. Carve-outs & Divestitures
Companies face both internal and external pressure to ensure that their portfolios are employing money efficiently. As a result, divestitures and carve-outs have become a more prominent corporate development strategy.
Offloading assets in a structured manner, based on regular portfolio reviews, can result in a significant return for the organization. This is yet another Corp Dev duty that necessitates considerable financial modeling, Excel abilities, and a firm grasp of business valuation procedures.
#4. Strategic Alliances
Strategic alliances allow the organizations involved to better manage risk, harness key expertise and assets and accelerate entrance into new markets. They are particularly prudent vehicles for entering emerging markets such as India, China, and Brazil because they assist the company entering the new country informing the necessary business relationships and learning the relevant business practices more quickly than would otherwise be possible.
Furthermore, strategic alliances frequently result in more efficient capital utilization because the cost of the investment is shared and the risk is distributed among the partners based on their skillset/asset contribution.
#5. Innovative Transactions to Increase Shareholder Value
Activist shareholders and hedge funds frequently put a firm under external pressure by expressing their preferences and views on the company’s performance and strategic direction. The demands made by such investors operate as incentives for the corporate development team to create new types of deals to maximize shareholder value.
Metrics for Evaluating an Organization’s Corporate Development Effectiveness
The following are the most common metrics for assessing the performance of a company’s corporate development department:
- Net Present Value (NPV): The larger the NPV, the better the Corp Dev team’s performance is judged to be.
- Return on Investment (ROI): Similar to NPV, an increasing ROI signals a strong Corp Dev department.
- Internal Rate of Return (IRR): The bigger the margin by which the IRR exceeds the company’s needed rate of return, the better Corp Dev performs.
- Revenue growth: Another statistic used to assess the performance of a Corp Dev department is revenue growth.
- Strategic Factor Analysis: A higher score for the corporation in its strategic factor analysis implies that the corporate development department is operationally efficient.
- Synergy Capture: A corporation is said to have captured synergy if, following a merger and acquisition, the combined performance and value of the two organizations outperforms the combined performance and value of the two organizations individually. The synergetic effect of a transaction/deal is frequently visible in stock share prices – if the synergetic effect is good, share prices rise.
- Dilution/accretion study: If a dilution/accretion analysis demonstrates that earnings per share would rise following an M&A, the Corp Dev team is thought to be good at creating shareholder value.
- Customer retention: Because one of Corp Dev’s responsibilities is to concentrate on improving the customer/client experience, greater customer retention rates show the Corporate Development team’s success in that area.
- Employee turnover: Corporate development can help to achieve and then sustain a low employee turnover rate by assisting in the creation of corporate success and operational effectiveness.
A good corporate development strategy begins with you deciding where you want your company to be in a decade. By completing the simple activity indicated above, you offer yourself the best opportunity of developing a corporate development strategy that achieves your goals.
As we’ll see, you don’t have to keep to the plan rigidly – there will be possibilities and, undoubtedly, some negatives along the way. However, recognizing what you want is critical to obtaining it.
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