“Innovation is the specific instrument of entrepreneurship, the act that endows resources with a new capacity to create wealth.” -Peter Drucker
“The only worse design than a pie chart is several of them.” -Edward Tufte
One of my favorite hobbies is oversimplifying the world, and I’ve decided to share my latest instance. Two very different kinds of thinkers exist; I call them Pie Charts and Venn Diagrams. How are they alike, how do they differ, and which one is your default thought process?
A Pie Chart is useful for gaining perspective on the distribution of a resource. It shows the relative percentage that each portion of a finite thing is allotted within the whole. While it can identify how large an opportunity is today relative to other parts, the universe could change tomorrow, e.g., the size of the pie may increase or diminish.
A Venn Diagram illustrates how two or more things are related. Are they separate? Do they overlap? If they overlap, then to what extent? The Diagram evolves as the size of each circle changes, as the degree to which they overlap grows or diminishes, or as a new circle is introduced.
How does using a Pie Chart versus a Venn Diagrams influence our imagination?
Pie Chart thinking constrains your vision to that which already exists. An everyday example is seen in political economics. Portraying the U.S. economy as a zero sum game (i.e. a pie chart) manipulates us into focusing on how someone is taking our piece of the scarce resources that constitute the pie. In business, the outcome of Pie Chart thinking is usually suboptimal. For example, when a company’s only growth option is “more of the same” or “sell harder,” a Pie Chart mindset is behind it.
Remember “think out of the box”? A Pie Chart is the box outside of which we need to think all the time, not just during brainstorming sessions at offsite retreats. Venn Diagram thinking enables you to break out of the box by forcing you to consider which of several circles you will include. The size of each circle is unbounded, and the overlap between them is dynamic. Venn Diagram thinking empowers us to envision how we can grow the pie, while Pie Chart thinking inhibits innovation by limiting our consideration of alternatives.
Understanding the difference between these two modes of thought elevates our vision. Consider the effect of Pie Chart thinking versus Venn Diagram thinking on what we choose to emphasize, on the perspective we bring, and on the outcome we experience:
Pie Charts emphasize how two things are different; Venn Diagrams encourage a search for synergy. Pie Charts constrain us to a finite perspective; Venn Diagrams encourage us to include more factors. Pie Charts divide the whole into its constituent parts; Venn Diagrams influence us to identify common interests and create unity.
How can we apply this heightened vision to lead our companies more effectively? Here are a few examples:
- Organizational Dynamics: Root out instances of narrow, self-interested departmental silos (Pie Chart) and replace them with improved collaboration and common commitment (Venn Diagram).
- Product Management: Notice when product managers focus very narrowly on their own product lines (Pie Chart) and encourage them to see consider whether the combination of their products with additional products and services can accelerate growth (Venn Diagram).
- Strategic Partnerships: When a manager is at an impasse trying to grow the business using available resources (Pie Chart), identify a compelling reason that a partnering company would share needed resources (Venn Diagram).
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.
CEOs rarely (never?) google to find a consultant with ideas to accelerate their business. To help a CEO with strategy, you first have to get on his/her radar, then bring credibility to the initial conversation. The relationship always begins when a CEO tells a mutual friend about a particular business challenge, then that friend introduces 20/20 Outlook as a reliable and trusted source of breakout strategies.
Earlier this month, 20/20 Outlook LLC celebrated its fourth anniversary. While it’s hard to believe it’s been four years, it’s easy to understand enables success. In a business that relies 100% on referrals to gain new business, having wonderful friends and associates means everything. Thank you!
NOTE: In December I started sending the Accelerated Vision CEO Digest once a month to about 400 CEOs and a few other friends. It shares valuable articles of interest to CEOs in a rapidly consumable format, along with an inspirational saying or two. If you’re a CEO (or a wannabe) who’d like to be included, send a note to firstname.lastname@example.org.
Joel Trammell requested a guest post for his American CEO blog, and it’s called 2014 Issues for a 2016 Exit. You’ll find many other great thoughts for CEOs there, and since it’s a two-part article, subscribe there and/or here to make sure you get the second half next week.
Think your non-tech company won’t be impacted by this trend? Has your market been around awhile? Are things likely to continue pretty much as they have? Think again. A recent article in TechCrunch suggests that the market has reached a tipping point that could affect you. Many non-tech companies acknowledge that success increasingly depends upon how well they leverage technology, and they’re making bold moves to acquire software and other technology companies to strengthen their competitiveness. If you’re in high tech, you should check it out; if you’re in another industry, it’s imperative to learn more.
CEOs are increasingly aware that the technology-based operations of their company are critical to gaining market share and growing revenue. Large companies shop for technology that will make them more competitive. Business combinations that would have seemed baffling in the past are becoming commonplace, for example:
- a chemical and agricultural company bought a weather technology company;
- an auto company bought a music app company;
- an insurance company bought a health data analytics company.
As technology becomes increasingly accessible, astute organizations are leveraging this trend with several key business objectives:
- Erase the hard line between online and brick-and-mortar commerce;
- Deepen interactions with customers;
- Gather and incorporate more data intelligence on their business;
- Add critical technical talent.
If you lead a non-Fortune company, following their lead in making startup acquisitions may be imprudent or impossible. However, frequent conversations with astute CEOs suggests taking three straightforward steps:
- Get an outside audit of current software systems to learn how dependent upon technology your company is and whether it’s time to modernize in order to compete more effectively.
- Talk to thought leaders in your network about how the intersection of business objectives and spending on technology work in your market.
- Recognize that, as each operating division begins to understand how critical technology is to their business, information technology (IT) departments are decentralizing (believe it or not, there was a time when mature companies had a mail and logistics department with an actual mailroom.)
Computing has changed the way every type of business happens. Savvy CEOs understand the value of technology to their businesses and are exploiting it in every functional area.
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.