Attacking “Business Entropy”
Not long ago, I wrote a post on how clarity affects the bottom line. It emphasized the importance of a sharing a common vision among a company’s management team and laments how often it’s inadequate. “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.” The point has since arisen in several CEO discussions, and as I continued to ponder how it happens, a relevant term suggested itself from the fields of physics and cosmology.
Entropy. According to Merriam-Webster’s Online Dictionary, entropy is defined as “the degradation of the matter and energy in the universe to an ultimate state of inert uniformity” and as “a process of degradation or running down or a trend to disorder.” These words could also describe how the purpose, meaning, and direction underlying a successful business can lose strength over time.
When brand new ventures pursue funding, investors want to understand the business and seek answers to questions like:
- What category of business is this?
- What is its primary offering?
- Who are its competitors?
- What are the competitors’ weaknesses that can be exploited?
- What makes the company’s offering unique in the market?
- How will it gain advantage in the market and keep it?
and so forth. In a well developed business plan, these questions are answered clearly and formulate the company’s strategic positioning.
As a business grows, it naturally changes, causing the strategic positioning to evolve. New competitors enter the market. The product strategy and product mix react to external economic forces. Customer requirements result in development of new products and services. Acquisitions occur. Partnerships are struck.
Such changes affect the strategic positioning of the company and also the shared management vision. If the company positioning is ignored as these changes occur, the business equivalent of entropy can begin and proliferate. The previous “uniformity” of vision gradually erodes. A “degradation” of the company’s messaging about itself, its products, and its services follows a “trend to disorder.” The lack of shared vision within the management team causes inertia and delays in execution.
Thankfully, the remedy to this “business entropy” doesn’t involve a comprehension of cosmology. All it requires is foresight and a willingness to take action. Periodically, especially during and after significant game-changing events, the company’s strategic positioning must be reviewed and revised. Senior management and other key players should reach a consensus vision about the company, its market, its competitors, and its direction. And of course, outside assistance can facilitate the process.
Important Indicators are Up
Because I help companies define an exit strategy and grow value accordingly, I’m always seeking better sources of data that capture the current state of the investment world. Pitchbook is one source that publishes particularly useful information about fundraising, investments, and exits. A recent Pitchbook presentation suggests that we’re on the verge of significant growth in private equity investment during the next year, and that’s good news companies moving toward an exit.
One factor mentioned in the Pitchbook prez is that capital overhang is high and growing. When that happens, valuations tend to increase because so much money is looking for a place to land and produce a return.
Additionally, chart below depicts that the number of quarterly private equity exits through corporate acquisitions, initial public offerings, and secondary sales is on the upswing after reaching a low in early 2009.
Finally, one of the best analysts in the business, Richard Davis of Needham and Company, commented in his newsletter that it’s been 25 years since he’s seen so many companies in a great position for an IPO.
Taken together, all these indicators suggest that, despite the continuing malaise in the broader economy, a CEO who keeps his/her company’s partnerships, product strategy, services, and partnerships aligned with potential acquirers can expect to see greater opportunity this year and through the next.
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?
I’m On a Mission!
In Bob Dylan’s song “Gotta Serve Somebody” he points out that, no matter who we are, we all have to make significant choices:
You’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody
The implication is clear for our spiritual life, but the broader principle applies in our work life. At the core of what drives us are competing priorities, and the one at the top will be the “decider” most of the time. What is the top driver in your work life?
What drives me personally is a passion for building effective business partnerships. Over the years, I’ve seen great ones lift companies to new levels of value and effectiveness. Much more often, I’ve seen poorly planned ones consume significant resources with little or nothing to show for the effort.
Three principles characterize the most effective partnership strategies – context, planning, and execution:
Context means understanding your own organization and its offerings in relation to the market they live in. What kind of company are we? What value do we deliver? Whom do we compete against? How are we unique? A simple positioning project can bring great clarity of thinking and purpose, yet it’s amazing how unclear the answers to these questions often are. If you don’t understand your own company, don’t expect success in partnering with others.
Planning partnerships is imperative. Stephen Covey’s second habit “Begin with the end in mind” is based on ancient wisdom from Aristotle that’s often ignored. Once armed with a clear understanding of your market positioning, you’re ready to think about partnering and what you want to accomplish. What is your vision for growing the value of your company? If you clearly understand where you’re going, business partnerships will help you get there faster.
Execution of partnerships requires effort and resources. Why expend time and effort in creating a business relationship only to let it die from lack of care? A partnership needs focus in order to produce expected benefits. Increasing the odds of success requires architecting self-sustaining elements into the partnership from the beginning, and that can only be done successfully through clarity of purpose and a clear vision for growth.
Anonymous, my all-time favorite writer, said it best:
“Action without Vision just passes time.”
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).
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.
Introducing 20/20 Outlook
Near the end of 2008 after laboring in high tech companies for over 30 years, it became clear that some personal reinvention was in order. Wide-ranging experience in a multitude of roles yielded a perspective that friends have described as unique, and I wanted to combine what I’d learned in three leadership areas – M&A, product strategy, and partnerships – into a process that would benefit small to medium organizations.
In my role as chief marketing officer at Infoglide Software, I’m fortunate to work for Mike Shultz, a talented and experienced serial CEO who has also become a trusted friend. When I told him about my desire to help multiple companies, he was immediately supportive and was key in crystallizing the idea of 20/20 Outlook. He even offered to let me develop and prove the system by applying it at Infoglide.
Earlier this year, the 20/20 Outlook process began to evolve. While the goal of aligning efforts across the organization to support an exit strategy was clear from the beginning, defining the steps of this new methodology took significant thought and interaction with the management team before it began falling into place. 20/20 Outlook will continue to evolve but has already proven to be quite valuable in its current state.
In future posts, I’ll share thoughts and ideas here about how the process works and how it can benefit other companies. I hope you’ll come along for the ride and join in the discussion!
