Smart Strategy needed in Tough Times

The future ain't what it used to be. 
--Yogi Berra


Today, the stock market dipped below 10,000 again on news of China's adjusted growth figures, fear uncertainty and doubt in Europe, and faltering consumer confidence in the U.S.  When you speak of a double dip in July, it is supposed to mean two coats of chocolate syrup on a vanilla soft serve cone.  Unfortunately, it may currently mean the economists have seen their shadow and we are in for six more months or more of bad economic weather.  


It is my opinion as a strategist, this is the time to get it right in terms of products and markets, business models and organizational structures.  It has to be assumed that operational efficiency has been achieved over the past 18 months.  This is evidenced by the up tick in corporate profitability in stagnant markets.  But inefficiencies brought on by an unfocused market positioning or a fuzzy strategy are just as burdensome as operational inefficiencies when markets are not growing.  I encourage executives to critically analyze markets in the near term, not just in terms of growth opportunities, but with a view toward getting out of the ones you cannot dominate and jettisoning under-performing products.  When it comes to building brands and conquering markets, less can be much more as the right focus leads to profitable market penetration.


The pressure of challenging markets can suffocate a weak strategy or it can provide the crucible for getting strategy right.  It is my belief that easy growth and profitable business models can actually cause companies to avoid making tough but correct strategic decisions.  In the current economic environment, you have little choice but to get it right.  Take the time to research your markets and critically examine your go-to-market strategies and business model.  It's time to be very smart about how you go to market.  Otherwise, the next few  months may be painful.  To politely paraphrase John Wayne.  "Business is tough; but it's tougher if you are not smart."




Mark Towery
Managing Director
Geo Strategy Partners
http://www.geostrategypartners.com/
The leading B2B/Industrial Market Research and Strategy Firm.

Driving Profitable Growth

We are developing a webinar series entitled "Driving Profitable Growth."  Stand by for details and dates.  We will focus on how to identify opportunities, how to determine the opportunities that are best fit for the enterprise, and how to formulate a "go-to-market" strategy.  A partner firm will also address how to operationalize and implement a go-to-market strategy.

Geo Strategy Partners
Where you are...where you need to be... how you get there

the Leading B2B/Industrial Market Research and Strategy firm

Biggest Merger and Acquisition Disasters

This is worth reading when you are in the intense and heady negotiation phase and just before you sign and LOI.

Biggest Merger and Acquisition Disasters

Should you pay for Synergy? in a merger or acquisition

It seems the best words in our business vocabulary get ruined through overuse and mismanagement much the same way a pristine tropical paradise turns into to a ghetto of ugly strip shopping centers and boxy condos over time.  One such word is “synergy.”  A really great word, frankly, that conveys the simple but powerful idea that the combination of two or more entities can be greater than the sum of their parts.   It is in fact the Raison d'être of acquisitions. However, not only has the word synergy been misused and misaligned, the miscalculation of  synergy is probably the single reason the majority of acquisitions never meet expectations.

But how do we realize synergy in a corporate environment?  Typically, it is one of the following ways:

·         Market Synergy:  Company B can sell more of Company A’s products and services through its channels, and vice versa.  This can be a result of geographic coverage, industry span, or customer penetration;

·         Product Synergy:  The products and services (or technologies) of the two companies are complementary and complete each other making either more valuable or easier to sell;

·         Management or organizational Synergies:  Management, organizational structure, and culture can cut both ways.  Ideally, the combination of talent and structure will create additional value; very often it is the source of post-acquisition friction and negative synergy;

·         Economies of Scale Synergies:  the simple idea that activities and functions – particularly general and administrative – can be shared and redundancies eliminated.

As you can see by the definitions, synergy only occurs after a merger acquisition transaction is complete.  Therefore, it does not exist prior to the deal.  Therefore, one can argue that the business being acquired does not yet include these intrinsic properties of synergy and the seller should not be compensative for value that will only be created when the buyer integrates the company into their organization.

But, then we have the troubling issue of free will and at least perhaps for a few more years, a free market.  The value of a company is set ultimately set through negotiation between buyer and seller and beauty is of course, in the eye of the beholder.  So, for a buyer, when is it appropriate to consider synergy as justification for paying a premium over what net book value plus discounted cash flow would justify?

The conservative buyer will take the position, "why pay a premium at all?"  There are two basic reasons to consider a premium; 1) to convince a seller to sell; 2) to convince a seller to sell to you and not someone else.
You can only justify a premium if the the value to you as purchaser is greater than the company as it exists today.  The seller certainly has no right to capitalize on the extra value that will accrue to you, but they do have the right to hold out for a premium if they think they can get it.

Because no two companies are the same, and private companies' stock is not traded publically, the basic value of a company comes down to the following fundamentals:

·         Future Earnings Value:  book value (or net assets) plus the net present value of future earnings.  This is the only accurate way to value a business as it exists independently.  The key to an accurate valuation; however, are the underlying assumptions which support the future earnings proforma.

·         Market value:  Just like in real estate, this is what comparable companies are being sold for.  That’s why you often hear investment brokers talk about multiples of EBITDA, but multiples are only a proxy for discounted cash flow.  The problem with purchasing a private company is there is no real market and comparable acquisitions ultimately come down to what a competitor is willing to pay for the same company.  If the seller has another suitor, it is likely you will have to pay a premium if you want to “out-bid” the other suitor.

·         Seller’s value:  at the end of the day, you can only buy a private company if a private seller is willing to sell it for your offer price.  Emotions and irrationality come into play here; particularly for a smaller firms where owners often have an inflated view of the value of their company.  The bottom line is you sometimes may have to pay a premium to overcome this irrational valuation if the acquisition is valuable enough to your company.

So, should you pay for synergy?  Theoretically, no, since it does not exist until after the deal has been consummated.  However, if you feel you have to pay a premium over what book value plus discounted future earnings can justify in order to overcome market value pressure or seller reluctance, synergy is the only way that premium can be paid for over time.  In this regard, it is important to be very analytical in determining what real synergy (not vague hopeful synergy) can be realized and then be willing – reluctantly and cautiously – to spend some small portion of it in order to realize its greater overall benefit.  However, if you spend too much of the yet unrealized potential value at transaction, you may in effect remove the entire profit motive that made the acquisition attractive in the first place.

Putting too much value on synergy is why most acquisitions fail to meet expectations.  While considering synergy to justify a reasonable premium is a very rational and economically sound approach, it is a slippery slope and the one area where buyers often substitute hope for strategy; ego for analysis; and emotion for planning.  Synergy doesn’t exist until you create it; spend its future potential stingily.

Mark Towery

Managing Director

Geo Strategy Partners

http://www.geostrategypartners.com/

The leading b2b/industrial market research and strategy firm

Industrial and B2B Market Research: it’s the “How”

In B2B industrial market research it is not who you know; it is not what you know; it’s how you find it out.

In business-to-business markets, the universe of customers and competitors is finite and fairly well defined. In industrial markets, the universe is typically even smaller and more defined, to the point where in some sectors, it is possible to know all current customers and competitors. Because of this, companies often assume they know their customers and competitors well and do not require additional market insights or competitive intelligence. Our experience in Voice of the Customer research has shown that this is rarely this case; and often clients themselves are surprised at what they can learn from existing customers though the right research approach and data analytics.

When B2B and industrial firms do hire a research consultancy it is often to help them enter a new market. Again, they often fall victim to a false assumptions about the nature of business to business research They seek and often select firms that have specific experience in that particular industry sector. While familiarity with an industry can be helpful, the selection of a research firm should be made on its ability to identify and access respondents and for its methodologies for analyzing data and producing market insights. Clients often ask us if we have contacts in a market sector they want to investigate. Often we do- sometimes we even have an extensive database. What we have found, however, is having pre-existing contacts is of little value when we actually get into the thick of a project.

The nature of B2B and industrial research is that you are often looking for a specific decision maker buried within a company: the person responsible for purchasing mold block material; outsourcing online learning; specifying polymer modified asphalt; choosing solar encapsulant; or purchasing control valves and actuators. It is unlikely that such a custom list exists particularly when you add various screening criteria to the equation. Even when we do have extensive contacts in an industry sector, we find our existing contacts typically do not match our target group of respondents.

Certainly, pre-existing contacts can sometimes help you identify the real respondents, but other methods such as old fashioned secondary research that includes diving into databases, mining published information, and tapping into social media are more effective. For very specific industrial applications, we often develop our lists as we conduct our research, working our way through gatekeepers to respondents and then seeking referrals and other insights. For custom research, we have never found this method to fail, although it can be time consuming and tedious.

One can spend 30 years in an industry and have over 300 current contacts and still not have the right 100 needed to carry out a targeted study. When selecting a market research firm, I encourage clients to ask about the methodologies a firm will use to research and identify respondents as opposed to how many individuals they already know.

Industry knowledge can be helpful to analysis but it can also affect objectivity. Industry knowledge that is dated can also make you blind to new market trends, emerging technologies, and converging competition. It is much better to focus on a market research firms’ methodologies and approaches to analyzing data and producing market insights than to concentrate on their specific industry background. Market research and analysis is a science and the emphasis should be on ensuring an objective approach for gathering information and a sound methodology for analyzing it. Otherwise, you end up with an ill-conceived opinion or worse, faulty analyses and flawed conclusions. It’s not who you know; it’s not even what you know; it’s how you find out what you need to know that counts in market research.

Mark Towery
Managing Director
http://www.geostrategypartners.com/
the leading b2b/industrial market research and strategy firm

Understanding the three levels of Business Strategy

I believe it is always important to address the fundamentals of any discipline.  We often get trapped by the short-hand of our own jargon and forget the underlying principles behind the concepts. This is certainly true of strategy. In my research for a new book on adaptive strategy, I've been amazed at some of the blurry thinking about strategy.  For this reason I would like to address in this posting, the simple but important distinctions between the three levels of strategy.  Because this is my blog, I will use my own definitions of the levels of strategy:

Level 1 – Go-to-Market Strategy which focuses on products and markets

Level 2 – Competitive Strategy or Business Unit Strategy which is about creating and sustaining a competitive advantage

Level 3 – Corporate Strategy or Portfolio Management which is about creating additional value through the intelligent combination of businesses.

My assertion is that Level 1 or go-to-market strategy is the level of strategy best understood by practicing executives.  It is where the rubber meets the road and where most marketing and strategy energy is spent. The biggest strategic mistakes in go-to-market strategies are related to faulty research or focusing on markets as they exist today rather than where they are headed.  But the real effectiveness are go-to-market strategies are driven by the power and discipline of the competitive strategy.

Competitive Strategy or business unit strategy is the essence of competition and the ultimate source of sustainable success. It drives the need for go-to-market strategies. Companies get off track with competitive strategy when they confuse it with operational efficiency or benchmark to their competitors to the point they lose their unique advantage. Competitive Strategy is about doing things differently than your competition and making disciplined trade-off decisions about what you choose to do and not do.  It is about aligning all activities to ensure they support and reinforce the competitive advantage. And it is about sustaining a core positioning while innovating your business model to keep up with product and market cycles.

Corporate strategy, in my view, is the least understood, most difficult to get right, and the most misapplied of the three. It should be about combining businesses to strengthen the competitive strategy of all of them.  It is often about growth for the sake of growth or a misguided substitution of performance improvement for strategy.

I will start in the middle, because competitive strategy or business unit strategy is really where companies create and drive a competitive advantage.  In formulating a competitive strategy, you must analyze the industry structure and the nature of competition along with your core competencies and key assets to determine how best to position your company in a unique and advantageous position on the competitive landscape.  You must then create a business model that allows you to create and capture value differently than all competitors within the field of competition.  Next, you must align all internal activities and processes so that they support the strategy and reinforce each other.  Finally, you invest in the additional core competencies and assets that you need to fully leverage and sustain this competitive advantage.  Every decision you make must be in concordance with the strategy and strengthen the competitive advantage.

Once the competitive strategy is set, you have a disciplined process to determine which markets fit with the organizations strategy and what product offerings and positions can be chosen.  You are then ready to develop go-to-market strategies.  This is the most basic of all strategies, and describes how organizations choose which markets to enter, which products to develop, and how to position products in the market to achieve the greatest competitive advantage.

There are two parts to a go-to-market strategy:  1) determining which products and which markets to enter; and 2) determining how to position and market products within a given market.  If your competitive strategy is not firmly in place, there is always the temptation to enter markets where you cannot compete successfully over time or make acquisitions or investments that do not reinforce the strategy.  This can be a waste of resources and also weaken the core strategy.  Once you have selected the products and markets to focus on, market research is the key tool to support go-to-market strategy formulation.  You need insights from customers, intelligence on competitors, and you need to understand distribution channels and market trends to determine how to position and price products, what kind of strategic messaging will be most effective, and through what channels to most effectively market your products.  Go-to-market strategies should always be a slave to competitive strategy;  you must have the discipline to avoid the most enticing opportunities that dangle their low-hanging fruit if they do not help you reinforce your competitive strategy.

Corporate Strategy is more sophisticated and elusive.  It is often viewed as portfolio management or a way to diversify risk.  Shareholders have the ability to manage their own investment portfolios; however, so this should not be the primary mission of corporate strategy.  Corporate strategy should be about combining businesses in a way that adds value to each.  It can be about diversification against market cycles but only if the business units in total can share competencies or resources or achieve greater performance as a result of being part of one organization.  In short, the whole must be greater than the sum of the parts.  To this end, there must be an inner strategic mission (Core Purpose) of the corporation that articulates the special formula by which this synergy can be achieved.  The sobering fact is that companies typically divest the majority of acquisitions or investments they make in new businesses because they ignore this simple concept. Michael Porter's research into competitive strategy revealed that companies ultimately divested over half of the acquisitions they made in new industries.

A successful corporate strategy starts with a core purpose that defines the organization.

Jim Collins (Built to Last and Good to Great) outlines five characteristics that must exist in a corporate core purpose:

·         One, it absolutely has to be inspiring to those inside the company.
·         Two, it has to be something that could be as valid 100 years from now as it is today.
·         Three, it should help you think expansively about what you could do but aren't doing.
·         Four, it should help you decide what not to do.
·         Last, your expression of what you stand for has to be truly authentic to your company. Companies that fail on this count are often the ones that really don't stand for anything and never will.

Ultimately, however, when new businesses are added to a corporate portfolio they must be able to share resources, skills, or activities in a way that creates a stronger competitive position for all.  Otherwise, there is no reason to combine them in a single organization.  Like go-to-market strategy, corporate strategy should also be enslaved to the business unit competitive strategy.  This is a simple concept but one that is ignored at great cost.  Corporate executives should declare a kind of Hippocratic oath to first do no harm to any business unit or shareholders’ wealth when seeking growth opportunities.

Mark Towery is Managing Director of Geo Strategy Partners

a leading b2b/Industrial market research and strategy firm

http://www.geostrategypartners.com/