The title of a popular business book years ago was All You Can Do Is All You Can Do. And it’s true, but sometimes choosing the right thing to do is all-important.
The dilemma for many CEOs is that they stay so busy running the business that they end up with too little time spent thinking about how to accelerate its growth. The old saying often applies: “It’s hard to remember that the original objective was to drain the swamp when you’re up to your ass in alligators.”
Speaking recently with a highly successful CEO who’s grown and sold several companies, he speculated on what determines how open a CEO is to coaching. His experience and mine perfectly aligned: a serially successful CEO will seek input and help from friends far more often than a first-time CEO and founder. Highly successful people learn how to choose advisors they trust in order to achieve the success they desire.
The stumbling block for many a founder and CEO of an established small company is that he or she comes to believe in his/her own abilities so much that they’re unable to accept the help that would take them to the next level. No matter how passionate they may be about accelerating growth, their complete reliance upon their own judgment closes their minds to innovative ideas, even if the source is someone they trust.
If you run an established business, test yourself with these questions:
- If an experienced CEO took a deep look at my company and told me I had to make big changes in order to grow, would I be open to changing?
- If a partnering expert offered to develop an alliance strategy that could double the growth rate of my company, would I listen to learn how?
If the answer to either of these questions is no, your company may already be decelerating or it’s about to hit a bump in the road. Once that happens, it will become even harder to carve out time to consider innovative ways to grow.
Are you focused on maintaining your role as chief problem-solver in your company, or are you passionate enough about growing your company to seek help trusted friends? Sometimes all you can do, by yourself, is not enough.
The Oxford Dictionary defines opportunity as “a set of circumstances that makes it possible to do something.” Although opportunities are generally thought of as spontaneous, serendipitous, and not amenable to process, is it possible to find them systematically?
In general, an opportunity is a chance to move from state A to state B; a business opportunity requires an interaction with another person or organization to create a desired outcome. Since a business opportunity implies a relationship, a thorough understanding of how and why relationships are created is the foundation of systematic opportunity discovery. Although some opportunities arise through original creative thought, even those are based on an understanding of relationships.
The exchange of money for goods and services is one type of business interaction, but it represents a desired outcome, not an opportunity. While the ultimate measure of success is revenue generation and profitability, value creation must precede it. An opportunity is created by an exchange of resources that enhance value. What classes of value-enhancing resources are there?
Five of the most common are:
1. new products and technology,
2. brand recognition,
3. additional staffing,
4. customer relationships, and
5. new markets and industries.
A majority of business opportunities arise from the recognition that one or more of these resources can be leveraged to add value to existing offerings. How can we intentionally and systematically identify and define opportunities based on this principle?
The process that leverages this knowledge comprises 4 steps:
1. Define your company’s value relative to others.
2. Define other companies’ value relative to yours.
3. Leverage individuals gifted in identifying and defining new opportunities.
4. Discover opportunity in the gaps.
Valuing Your Company
A crystal clear picture of your company’s value is a critical enabler of systematic opportunity discovery. What resources does your company have, and which ones does it need? Well-understood strategic positioning affects the bottom line positively. It minimizes investing in opportunities that deliver little or no return while enhancing the chance of finding richer opportunities.
Valuing Other Companies
The second step depends upon the first. Knowing clearly what your company offers, you can view other companies through this lens: if another company were to acquire mine, what would be the increase or decrease in the value of the combined companies? An exit strategy approach is a proven way to identify value in other companies, and you’ll learn what resources you may have that they need.
Leveraging Gifted Individuals
Some individuals are naturally gifted in identifying and defining opportunities. Harnessing this strength by including the right individuals in your company. If your team lacks this strength, augment your team with advisors who possess vital insight into opportunity discovery.
Opportunity in the Gaps
Opportunity is driven by accurate perceptions of value, so clarifying your understanding of what others find valuable versus what you find valuable leads to discovery. The gaps between companies represent potential opportunities.
To systematically discover opportunities, the CEO must to set the right tone. Leading your company to an opportunistic frame of mind is less tangible but vitally important. Set the right example by staying curious and remaining open to new possibilities, then follow this four-step process!
A frequent and costly pitfall in dealmaking is unconsciously giving away an “elegant negotiable” i.e. something you don’t value that could be of high value to the other party. Identifying and leveraging elegant negotiables will dramatically shift the outcome of dealmaking in your favor.
While recently discussing deal points with a client, I suggested using elegant negotiables to our advantage. The term wasn’t familiar to him, even though he may employ it instinctively. I first encountered it 20 years ago in negotiation training that I’d arranged for my work team, and I’m continually surprised that such a useful concept is not more widely known and used.
Suppose you’re engaged in a discussion with a potential partner to distribute your product with their product suite. Growing incremental revenue from a currently inaccessible set of customers is your goal. One issue is branding: should your product be “white labeled” as part of their suite, or should it clearly carry your logo and be represented as your product?
In this specific case, you don’t care as long as the product gets distributed and generates incremental revenue, so you quickly agree to let your product be shipped without your logo. In doing so, you may have given away a significant bargaining chip that could be used to extract something of high value – for free.
Before defining the distribution agreement, you should have discussed the branding issue to understand how important it is to the other party. Discovering the other side’s strong aversion to having your brand in their suite, you could then “reluctantly” trade your branding in exchange for something of high value to you, e.g., a stronger endorsement from them and online access to their CRM to enable your company to track sales in real time.
Uncovering the other side’s interests is a key starting point. My favorite book on negotiation, 3D Negotiation by Lax and Sebenius, contains a complete treatment of the entire negotiation process. While it doesn’t talk specifically about elegant negotiables, it will increase your understanding of all aspects of the process, and in particular, how to develop a clear picture of the interests of all parties..
Identifying and clarifying interests is critical in spotting elegant negotiables. Stop yielding valuable negotiating power!
“…the availability of information about a threat or opportunity has little influence on who wins and who loses. What makes the difference is what a company does with that information.”
— Clayton M. Christensen, Scott D. Anthony, Erik A. Roth in Seeing What’s Next, 2004
Business challenges come dressed as high-impact threats and opportunities, and each demands a response. The strength of your ability to respond is the primary determinant of your next move, whether you opt to: 1. compete (fight), 2.alter direction (flight), or 3. develop an alliance (unite).
The authors of Seeing What’s Next suggest that asymmetries of skills or motivation play a critical role in determining our next moves. “Asymmetries of motivation occur when one firm wants to do something that another firm specifically does not want to do. Asymmetries of skills occur when one firm’s strength is another firm’s weakness.”
In focusing businesses on growth-accelerating strategies, our consistent guidance has been to adopt a three-phase approach: “clarify, comprehend, connect.” Assuming that the CEO has aligned the company around a crisp, clear view of its own skills and weaknesses (i.e. clarify) as a foundation for effective execution, the second step is to evaluate the relative strengths and weaknesses of the competition (i.e. comprehend). When one firm demonstrates strengths in markets in which another firm’s capabilities are weaknesses, and vice versa, a self-fueling partnership (i.e. connect) may be an alternative to fight or flight.
The choices of responding to a significant threat or opportunity are:
Fight (asymmetric analysis highlights your company’s relative strength)
When your company’s processes and offerings are much stronger than competitors, leverage your unique capabilities to increase market share at the expense of competition.
Flight (asymmetric analysis highlights your company’s relative weakness)
When the cost is prohibitive of overcoming a competitor’s strengths that far outweigh your own, refocus on other markets or submarkets where your company can be a dominant player.
Unite (asymmetric analysis identifies complementary strengths and weaknesses)
If it’s clear that combining your resources with those of another company could make both stronger by compensating for weaknesses, the oft-overlooked third option is to create a symbiotic partnership.
The bottom line for any CEO? Develop an eye for asymmetries, then make a rational decision between fight, flight, or unite!
(A more detailed discussion of these alternatives are found in the excerpt “The Innovator’s Battle Plan” that is drawn from the book.)
In the classic Steve Martin bit from early Saturday Night Live days, he’s a pitch man with a compelling hook: “How to make a MILLION DOLLARS and NEVER PAY TAXES!” After dramatically repeating the offer several times, he pauses to reveal the answer: “First, get a million dollars. Then…”
This post might be called “How to BUILD A VALUABLE COMPANY and SELL IT FOR A FORTUNE!” The first easy step? “Build a valuable company.” Assuming that you’re already doing that and your exit strategy centers on being acquired, four factors will impact success:
- Strategic importance of your product/technology/service
- Intensity of the competitive environment
- Existence and visibility of urgent, unsolved customer problems
- Presence of an insider relationship
Gauging the strategic importance of your offerings to a potential acquirer’s portfolio of capabilities is critical. Imagine all acquisitions resting along a value continuum. On the left end are low value (for the seller!) types of acquisitions like asset sales. Moving toward the right are transactions whose value is based strictly on financial parameters (e.g., discounted cash flow).
At the extreme other end of the continuum are companies whose value is so strategic to the acquirer that revenue and profitability are of little consequence. An example I’ve seen is a small software company with technology that uniquely solved an urgent problem for a multi-billion dollar enterprise. The valuation received was such a high multiple of the acquired company’s revenue that its financials were almost irrelevant to its value.
A common mistake in identifying potential acquirers is casting too narrow a net. Try listing 20 potential acquirers. Listing the first half dozen will be easy, but most of those are likely more financially-driven than strategic. Building out the list of 20 can lead to a discovery of previously unrealized strategic value in adjacent spaces.
A company in a highly competitive environment is motivated to move quickly to close gaps in its offerings. The trick is connecting during the time when the potential acquirer begins to realize it has to act. Wait too long to engage, and they will solve their competitive challenges through internal efforts, or by partnering with or acquiring another company. Getting on their radar at the right time is critical.
Urgent Customer Problems
An acquirer with a strategic competitive need is caught in a situation characterized by two attributes:
- A high-impact opportunity or threat exists.
- The company has a weak ability to respond.
Nothing will drive the acquirer forward faster than demands from customers having problems solvable by the incorporation of your company’s products, technology, or services. An effective way to validate value to the potential acquirer is to engage them in a proof of concept to solve a real problem.
The presence of an insider relationship is often the single most important success factor in getting and staying on the acquirer’s radar. Developing an internal champion who is already convinced that the companies should be working together for mutual competitive reasons optimizes the odds of success.
If you have an insider relationship with a target acquirer, use it; if you don’t, get one. Having already built a strong industry network will pay huge dividends at this point.
When to Prepare
Early in the life of a company, management has to focus on building a strong business. Deep analysis in preparation for an exit can be a distraction at this point.
Waiting too long to apply exit strategy thinking, however, is also a mistake. Once the business starts to prove itself, begin investing for the future by creating a valuation framework for your company. Build and maintain a list of 20 potential acquirers. Understand what clusters of acquirers need in order to grow. Fill gaps in your offerings to fill those needs and increase your value to potential acquirers.
Start building your exit strategy 12 to 24 months in advance of searching for an acquirer. By the time you decide to enlist an investment banker’s help, you’ll understand the universe of potential acquirers, you’ll have moved into a strong position that maximizes your valuation, and you’ll arm your investment banker with maximum ammunition and motivation.
Competing too hard will kill your business. If you see competition everywhere, you may be strangling your company’s growth.
Working with CEOs and management teams to create growth strategies, I watch for existing practices and attitudes that may hinder growth. It’s challenging enough to launch a new venture or a restart a faltering business without creating internal obstacles that weigh it down. An unrealistic view of competition can severely limit or slow the company’s rate of growth.
A famous CEO mentor was fond of telling me, “If you don’t have a competitor, you don’t have a business.” Competition is a great motivator. If you have a company in a market with no competitors, either the market you’re pursuing isn’t really viable, or you lack the constant competitive motivation needed to keep you at the top of your game, or both.
The diagram above illustrates how your perception of competition can affect your company’s rate of growth. Perceiving no competitors suggests that you haven’t yet identified a winnable market worth pursuing. In this situation, a company constantly chases one-off deals, is too inwardly focused, and may be in too weak a position to accelerate revenue by leveraging external assets through partnering.
The converse obstacle, defining competition too broadly and seeing it everywhere, leads to a lack of focus and an obsession with growing market share one percentage point at a time. A “quarter-inch deep, mile wide” market approach precludes finding a repeatable sales model that leads to higher margins and greater working capital. A better path is to pick one or two close competitors to focus all your competitive energy on.
The bottom line is that an unrealistic view of your company, its capabilities, and its relative strengths and weaknesses vis-a-vis other companies will impede growth. The reality deficit can come from many places, but it falls to the CEO to recognize and remove this obstacle whenever it exists, especially when the CEO is the source. Carefully consider whether you are encouraging your team to view the company through rose-colored glasses (no competition) or constantly raising the specter of competitive doom to motivate them (competition everywhere).
How then do top-performing management teams compete effectively?
- They realize that focusing on competing against too many others weakens their company by draining its resources, so they choose instead one or two closest competitors and focus on winning against them.
- They prioritize “growing the pie” over increasing the size of their slice.
- They stay outwardly focused to learn what the market is telling them about customer demand.
- “Know thyself.” They understand their company’s strengths and weaknesses so well that, when a high-impact threat or opportunity arises that can’t be addressed organically, they create self-fueling partnerships that enable them to respond quickly.
An astute CEO can often augment organic growth with acquisitions, but a majority of acquisitions fail to deliver expected returns. CEO Carol Koffinke of Beacon Associates says that “60 to 80 percent of all mergers and acquisitions fail to meet their merger goals.” Why do they fail?
Much has been written about acquiring companies’ failure to realize the value they envisioned for their acquisitions and the why’s: a lack of proper due diligence, cultural mismatch, lack of integration planning, unforeseen market factors, etc. However, of all the possible reasons for failure, M&A experts put the lack of a clear vision at the top of the list.
Source: “Creating and Executing a Winning M&A Strategy,” Merrill Data Site and The M&A Advisor, October 2013
While a clear vision can accelerate execution of any growth strategy, successful M&A demands a level of clarity most companies fail to achieve. Why do companies launch into an acquisition without sufficient vision and planning? Here are the most common reasons we’ve encountered in working with top executives:
- Some CEOs don’t naturally think strategically. A CEO who’s risen through the operational ranks can end up with a “make stuff, sell stuff” philosophy and a view that strategy is merely a set of slides for board and investors, while in fact, a clear strategy drives revenue and profitability.
- A CEO can be overwhelmed by the daily pressure of running the business. Periodically answering the question “are you working on or in your business?” can prevent the urgency of daily concerns that distract from the CEO’s paramount responsibility – increasing shareholder value.
- Pressure to make quarterly goals can diffuse and erode the shared view of a company’s purpose. A process called business entropy (e.g., repeatedly accepting non-core business) can eventually dilute the strength of a company’s brand and slow its ability to generate new business.
How can a CEO be more intentional about growing the company through acquisition?
- Find a way to set aside time to think and discuss new directions. In this new social media world, it’s easy to develop a chronic short attention span. Focused thought is required to create breakout strategies.
- Take an honest look to make sure you’re not hanging onto more than you should. How to cross the second chasm, i.e. growing a company from small to big, is described in Doug Tatum’s insightful book, No Man’s Land. Pick up a copy and read it this weekend. (If you think you don’t have time, you need to read it.)
- Discuss growth challenges with objective trusted advisors. Use CEO peers at Vistage and experienced consultants as soundingboards to call out any “elephants in the room.” They will help you establish the clear vision needed to drive your acquisition initiatives.
TexasCEO magazine just published my latest thoughts about partnerships. In addition to correcting myths about partnerships in general, it describes major types of self-fueling partnerships and the series of steps you can employ to accelerate the growth of your business.
As always, let’s hear your feedback, either below or the TexasCEO web site.
How does a company get acquired? FICO’s acquisition of Infoglide provides an excellent example of applying deliberate steps to increase the odds and accelerate the process.
CEO Mike Shultz graciously allowed us to describe the backstory in a short case study. Read it to discover what you can do to attract potential acquirers.
“Gear up” means “to prepare for something that you have to do” or “to prepare someone else for something” (source: Cambridge Dictionary). To assess whether your company is prepared to grow, ask whether your management team has clear answers to 4 questions:
1. Does the company offer something special enough to compel customers to spend money?
The instinctive answer is “of course it does.” After all, a customer base exists and the company is stable, even if growth is slow. But can the management team relate a shared, crystal clear vision of the company, its category, and its primary benefit? The kinds of companies it sells to? The roles of people within those companies that are involved in purchasing? Other unique qualities that differentiate you from competitors? Answers to these questions comprise a company’s strategic positioning, and a lack of team alignment on it leads to huge inefficiencies.
2. How does the company fit into the bigger picture of the market served?
Understanding which companies are competitors and which are potential allies is essential for sales success. Companies often assume competition exists when there may be a chance to partner effectively instead. Understanding the needs of other key companies leads to a clearer understanding of current opportunities, where value exists in your market space, and the potential to leverage the success of potential partners to provide better customer solutions.
3. What relationships with other companies can accelerate growth?
Most CEOs are skeptical about partnering with another company because it’s perceived as too difficult to be successful. While most partnerships fail because of poor analysis, poor planning, and poor management, a well-planned partnership can enable a company to leapfrog its competitors.
4. How can the company operate more effectively to bring the CEO’s vision to reality?
Having the right growth strategy is important, but execution ultimately determines success. Once a company reaches a certain size, growth can be limited by having outmoded or inappropriate processes in place. “We’ve always done it this way” is not an acceptable answer. Outside help may be required to drive the strategy into successful execution.
The chart below illustrates three levels of “gearing up” that a company can find itself in: stalled, moving, and accelerating.
Learning how to accelerate your vision and take your company from “stalled” to “accelerating” will be the topic of a subsequent post.