How can Private Equity-backed companies leverage innovation to stay competitive?

Article by Cesar Donofrio, Co-Founder, and CEO at  MakingSense

Private equity (PE) backed companies are constantly under pressure to remain competitive in the market. But, in the majority of cases, pressure to deliver attractive returns in short time frames leads to numerous unwanted mistakes. Excessive focus on short-term financial engineering rather than investment in innovation and long-term development holds back timely adaptation to a changing world.

In this way, it is simple for businesses to fall short of paying attention to transformational change within their sector, which can drive them downward rapidly into being uncompetitive compared to other companies that focus on long-term change.

A 2024 Deloitte study finds that traditional private equity strategies fall short. The study points to adopting a “smart beta” strategy, investing in sectors with long-term growth prospects driven by megatrends like sustainability and digitalization.

Below are some of the strategies that private equity-backed firms can use to balance investors’ expectations and use innovation to remain competitive in the market.

Operational Optimization

In the evolving business environment, PE-backed companies face unprecedented change, and being agile has proven to be the key to success rather than irrelevance.

But it is not just a question of following the trend and investing in new technologies such as AI, machine learning, IoT, cloud computing, etc. The first step towards a wise investment in innovation is to measure the technological maturity of the company’s current processes, products, and services. This first check is required to set priorities to maximize value and lay out realistic business objectives. 

In turn, a smart and agile strategy starts with prioritizing high-impact initiatives that address operational pain points and improve the external and/or internal customer experience. Working closely with strategic technology partners provides them with new solutions and less risk. By having the proper technology, such companies can automate routine work, improve decision-making, and anticipate future market demands.

Secondly, digital transformation, if strategically applied, not only automates but also triggers innovation and boosts the firm’s competitive advantage in the long term.

Team efficiency: Making workforce optimization crucial

Workforce efficiency is a critical factor for businesses. However, having the backing of investors demands an even bigger challenge in scaling up operations without incurring additional costs associated with new, in some cases unnecessary, hires.

Optimizing the existing workforce becomes a priority, which involves maximizing the productivity of each employee through the implementation of various tools. Here, the Design Thinking methodology is fundamental to meeting the objective of getting the full efficiency out of the available workforce.

Others invaluable resources to facilitate that goal include automating repetitious processes and regular employee training that allows them to increase professional development within the firm. It is a tactic that keeps costs under control while fostering a dynamic and innovation-stimulated working environment, key to staying ahead in a shifting marketplace.

The ability to discern when to scale your workforce is equally vital. This helps to ensure balance, maintain work quality, and seize opportunities presented by new clients, as the company will have the necessary staff to handle the growth.

Increase Company Valuation

One of the most effective ways to increase a company’s valuation, regardless of whether PE has previously backed it, is to pursue a dual strategy combining organic growth with expansion through acquisitions.

Organic growth, founded upon acquiring new customers and expanding the existing revenue base, demonstrates the strength of the business model and its ability to scale effectively. This may be achieved by investing in digital marketing, adopting customer feedback to improve the overall customer experience process, creating new products or services, and, of course, expanding into new markets, geographically or in terms of target market.

In other words, strategic company acquisitions can improve growth and increase a business’s value by venturing into new markets, technologies, human talent, or operational capabilities. Synergies can be made by combining complementary businesses like a tech company and software training provider, that, rather than compete with each other, they complement to reduce costs, rationalize operations, and boost product offerings. 

In this particular point, close attention is necessary to ensure that acquisitions are in the company’s long-term plans and have the same philosophy. Not only may this have the potential to drive up financial valuation, but it also positions the company as an industry leader, attracting investors as well as consumers.

For example, a top law firm in North America was looking for a strategic partner to develop a strategic vision and clear roadmap to revamp its business with the help of technology. Together, they embarked on converting its paper-based processes into a cutting-edge digital platform and developed a digital platform enabling real depositions, easily and remotely, in less than 10 months.

This cooperation led the firm to the spotlight of modernization and expansion. With the establishment of the gap between the contact from human relation to the online platform, this firm established an exemplary model of the success of embracing technology with the aim of expansion and growth.

Innovation is the magic wand that private equity-backed companies need to be successful in a changing world. By cultivating an innovation culture, technology-enabled, presence in innovative ecosystems, customer-led, fast and agile practices, and measurement of impact, these companies can be the leaders in their industries and be long-term success stories.