Clarity Affects the Bottom Line
Last week I spent a morning leading a management team through a strategic positioning session to achieve more clarity about their business. The next day I read an article containing this quote by the leader of a technology incubator:
My team and I probably saw, heard or read more than 200 business pitches last year. And after about 75 percent of them, we didn’t understand the businesses. I’m convinced that this is a primary cause of entrepreneurial failure. Every entrepreneur needs to be able to clearly and succinctly communicate the essence of his or her business to an intelligent stranger.
While it’s important for startups to have an elevator pitch, it’s equally important for the management team of an existing business to share a clear vision that provides a context for making business decisions. The lack of this understanding is so common among $10-50M companies that I’ve stopped being surprised when they can’t articulate a clear positioning statement. Why do you think so many companies have trouble with something so basic and so important? I have a theory.
Recently a CEO friend in Dallas shared the “PerformanceManagement” matrix below. While the origin is unclear, it’s a useful framework for examining issues, and it offers a clue as to why so many companies lack the clarity they need to operate efficiently.
For many CEOs, sustaining an up-to-date picture of the company’s value in the market is either neglected or delegated to Marketing because it lacks urgency compared to operation issues and cost management. This falls under the heading of “Poor Planning.” The CEO’s number one priority is growing shareholder value, and clear strategic thinking contributes directly by enhancing the quality of important decisions affecting future value.
If you’re a CEO, do you stay on top of your company’s value in the eyes of players that matter, especially potential acquirers? Or will you leave this non-urgent critical issue unaddressed until the day you’re shocked to read that your closest competitor was just acquired by a company with whom they’d partnered?
When Should You Partner?
Given that we’ve answered the “why partner” question, now let’s think about the “when to partner” question. Marketplace issues, whether threats or opportunities, commonly drive partnership decisions. For each issue, consider three factors that determine your desire and ability to grow through partnering:
- Timing: What is the timing associated with this threat or opportunity? Is it immediate or long-term?
- Potential Impact: What is the potential impact of some threat or opportunity that is currently presenting itself? Is it high or low?
- Ability to Respond: What is my current ability to respond? Is it strong or weak?
As far as the Timing factor goes, if an issue, i.e. a threat or an opportunity, is not immediate, set it aside. Maybe someday you’ll find time to worry about that one!
For each immediate issue, determine whether it can have a relatively high or low impact and how strong is your ability to respond. Here’s a diagram depicting these points, followed by a brief description of each one:
High threat/opportunity, strong ability to respond (“Pursue Aggressively”)
This issue is too pressing to postpone, and your company has the resources needed to address it aggressively through product enhancement and new product creation.
Low threat/opportunity, strong ability to respond (“Quick Hits”)
When you spot a weakness in a competitor’s ability to respond to such an issue, attack by leveraging your strength in this area.
Low threat/opportunity, weak ability to respond (“Prepare to Respond”)
These are usually “who cares” issues now that may grow into high impact issues later, so keep an eye on them while doing little to address them.
High threat/opportunity, high ability to respond (“Create Partnerships”)
If you can’t adequately respond to a pressing threat or opportunity, a partnership is the right answer. A partnership can be a precursor to an acquisition.
If I’m right and I’ve communicated clearly, you have a better understanding of why and when to form a business relationship. These are practical business concepts that will ensure your efforts are directed at the best opportunities to achieve the desired outcome for your business – a business that knows where it’s going!
So Why Partner at All?
Developing a partnership strategy is a critical concern for any company. Key to its formulation is an understanding of why partnerships make sense and under what circumstances they should be pursued. Understanding the context for developing a partnership strategy clarifies the decisions that need to be made.
So why partner at all?
“Whether it sells computers, clothing, or cars, your firm’s fate is increasingly linked to that of many other firms, all of which must collaborate effectively in order for each to thrive… more than ever before, success depends on managing assets your company doesn’t own.” (from The Keystone Advantage by Marco Iansiti and Roy Levien)
While this is universally true, it’s especially the case in immature and fragmented markets where no one company can possibly own all the pieces of a solution. Customers face a bewildering array of possibilities and choices. Gaining their attention and commitment is not as simple as relating your value proposition. You’re not just selling against direct competitors – you’re usually competing for a piece of a finite budget, and the customer can choose to invest in another area while declining to buy anything from you or your competitors.
By understanding the broader space in which you compete and by knowing how your company fits within that broad context, you’re more likely to successfully educate your customer and help them move to a buying decision. If you’ve analyzed the total market and have partnered and/or acquired to achieve a more complete set of offerings, you’ll be in a position to meet almost any customer’s needs.
So what are the most common reasons to partner? Here are some that come to mind, in no particular order:
- Increase: ability to deliver, credibility, revenue, market presence
- Leverage market clout and intellectual assets of market-leading companies
- Become certified on a process or technology
- License a product or technology
- Remove a competitor
- Negotiate strategic alliances
- Prepare to execute acquisitions
While these are fairly specific, here’s a matrix that boils the reasons down to the most common ones:
In evaluating potential partners, determine early on which drivers are important to your company, the partner, or both. Then begin compiling a list of specific factors that may be important to the target partner. These may become critically important in later negotiations (we’ll talk about “elegant negotiables” another time).
Next we’ll address the issue of when to partner, i.e. under what circumstances does it make sense).
Assessing the Value of High Tech Companies
In a recent post, long-time friend and colleague Michael D’Eath speculated about how the acquisition landscape is changing, especially the extent to which roll-ups seem to be an increasingly frequent exit path for startups. Implicit in this process, of course, is how the startup will be evaluated.
A key component of the 20/20 Outlook process is assessing value in the eyes of potential acquirers. A value analysis framework I’ve found helpful consists of a total of 12 different attributes rated as “strong,”“credible,” “limited,” or “none.” In the diagram below, the 12 areas are built in 4 categories from the bottom up, starting with how flexible, patentable, and scalable the company’s technology is (“Credible Technology”).
Secondly, market credibility is assessed for how established the company is, the strength of the initial customer base, and how capable the company is in successfully delivering a solution (“Credible Market”).
Next, the health of the business is rated in three areas: vertical packaging, repeatable sales model, and repeatable delivery (“Credible Business”).
And finally, we make an analysis of progress in gaining a good reputation with the analyst community, achieving broad scale customer adoption, and market thought leadership is made (“Market Dominance”).
Assessing the current state of each attribute can highlight areas of weakness that need attention and perhaps more resources, as shown in this example.
With respect to Credible Technology, this theoretical company has flexible and patentable technology that is still somewhat limited in its scalability. It’s in an emerging market (i.e. established market = limited) that hasn’t quite broken through to mainstream (i.e. still low on the Gartner hype cycle). I won’t drag you through each attribute, but you can clearly differentiate those that are driving up value and that need attention.
Acquisition Market Outlook
The timing of an exit is naturally influenced by overall activity levels in the market, and today’s market outlook for acquisitions is mixed. The pace of merger and acquisition activity has slowed down somewhat, but the picture is far from bleak. Large strategic companies continue to grow through acquisition. Private equity investors still have capital and are looking for opportunities to put it to work. Owners of private companies are looking for timely exit strategies, and prices are still strong for high-quality assets.
While there were several high-profile deals in 2008, the volume of software acquisitions M&A transactions decreased from the previous year. Fewer large-scale transactions occurred, while middle-market deals were more prevalent.
Valuations were generally steady. EBITDA values in 2008 were down less than 2% year over year, and 2008’s median EBITDA multiple remained higher than 2006. Buyers still seem willing to pay solid prices for attractive acquisitions.
What are the characteristics of software industry acquisition activity thus far in 2009?
Overall transaction volume dropped 10% from the same period in 2008, and aggregate transaction value dropped 27%. On the other hand, large companies like Oracle and IBM remained very active, and most people I talk to expect the acquisition market to rebound somewhat in the middle of 2010.
BerkeryNoyes provides merger and acquisition services for middle market companies. Each year they publish reports on trends in acquisitions for key industries. Most of the research for today’s post was drawn from information on their site, which is included in the 20/20 Outlook blogroll.
The CEO Dilemma
Leaders of high technology firms often face a dilemma: while they feel compelled to spend all of their time in their business, they realize they should spend more time working on their business. A high tech CEO has a finite amount of time that must be allocated across multiple activities such as overseeing operations, managing costs, marketing, sales, vision, and partnerships.
The reality of keeping a high tech business moving forward while maintaining positive cash flow often leads the CEO to focus almost all his/her time on operations and cost. With so much time spent on these two activities, they can become his/her comfort zone. Days can become consumed with adjusting business processes and managing costs.
While these activities are necessary, investors and boards want more. They want to see a clear path to a dramatic increase in the future valuation of the business, and they want to see the CEO spending time to accomplish this. How the CEO changes his/her own behavior usually takes one of two directions, depending on whether the company is growing.
If the company has a proven business model in an expanding market, the CEO needs to focus more effort and attention on marketing and sales to accelerate growth. The business model has been proven, and increasing the effectiveness of “turn the crank” activities must be the objective. On the other hand, if company growth has not materialized or has stagnated, the CEO must modify and expand the vision that drives the company in order to break it out of its slow growth mode. New vision and strategy often dictates more alliance-building and strategic partnerships to support the new vision.
The trick is to create a pragmatic framework for managing implementation of the new vision while continuing to keep operations humming and costs down. The 20/20 Outlook process was developed to address the dilemmas and challenges faced by CEOs desiring to grow the business and communicate more effectively with investors and board members. Augmenting the management team with an experienced outside adviser enables the CEO to create breakout initiatives while continuing to manage daily operations.
Source: Conversation with Executive Edge
Build a Viable Business, or Build Toward an Exit?
If you’re a CEO, board member, or investor in a high tech company, growing shareholder value is a top priority. The obvious challenge is taking the right steps and avoiding the wrong ones. Two divergent views on how to grow value are commonly held:
- Focus on growing a viable business and let the exit take care of itself, and
- Base each corporate decision on your targeted exit strategy.
For years I was certain that the former view was the best one. Simply keep evolving the business with desirable products and services offered at a reasonable price with good support, then at some point you’ll be acquired or else the conditions will be right for an IPO.
In today’s increasingly competitive environment, I’ve reconsidered that position. Most companies find that an IPO is out of the question for now, so if they articulate an exit strategy, it’s “to be acquired.” While building the business continues to be important, the complexity of the current market landscape and, even more importantly, the speed at which the market and market perceptions change, demands a more sophisticated approach.
Taking a stand at either end of the continuum above can result in failing to reach the preferred exit. If you focus only on growing a viable business, you may survive but you may not trigger the financial event that the investors and shareholders want to occur. On the other hand, if you focus solely on the exit, the business can suffer and your company may be eliminated from consideration by potential acquirers.
The purpose of 20/20 Outlook is to ensure that the proper balance between these extreme positions is achieved, i.e. that the company’s value increases through relationships with potential acquirers and potential acquisitions while you continue to grow the business. The process defines clear steps that enable you to (1) view your company through the eyes of potential acquirers and potential acquisitions, (2) define a realistic exit strategy, (3) align your product strategy in light of what you’ve learned, and (4) define and execute partnerships that move you closer to an exit.
More on this next time. In the meantime, additional information about 20/20 Outlook can be found at www.2020outlook.com.
