I have been writing in this blog about innovation and capturing its value to the business for virtually as long as I have been writing to this blog at all. And in that regard, and with an organizational focus I cite, by way of particularly pertinent example, my series: Keeping Innovation Fresh (see Business Strategy and Operations – 2, postings 241 and loosely following for Parts 1-16.)
I developed and presented that series with a simple and immediately significant goal – helping organizations with innovative potential to both develop this font of value and to create sustaining value and wealth out of it. So I wrote about building systems that would support the innovative and inventors, and help them to navigate the processes and challenges of moving their ideas and prototypes into the more mainstream productive side of their business. But I did not write about the innovation process or hands-on innovators or inventors per se, except as needed in passing for purposes of discussing organizational systems.
My goal here is to flip that discussion around, and for the most part simply assume an existing innovation-supportive organizational system – and mechanisms and organizational structure for transferring new innovations from the lab bench to production. My goal here is to discuss innovators and the innovation process per se. And as a basic orientation to that discussion to follow, I begin by noting that innovators and sources of innovation do not readily fit into any single simple cookie-cutter pattern. And their diversity, and the way that innovation as a process and innovators who bring it to the organization disrupt standard and tried and true systems and processes, often leads to real resistance to creative change and to those who would bring it.
As a starting point for this, I focus on the innovators themselves, and by loosely organizing them as fitting into three basic categories:
• Individual and even idiosyncratic innovators with their creative and often iconoclastic spirits and approaches,
• Collective efforts at developing and refining ingenuity through organized research and development teams, and
• Crowd sourcing innovation, and opening up the creative potential of the more openly sourced community.
All three have their roles to play in the cutting edge, creative organization and all can effectively contribute to the overall organization and its ongoing success, while being supported for and rewarded for their creative and even disruptively creative contributions.
This is the first installment to a new series that I offer in a fundamental sense as if a direct continuation of my Keeping Innovation Fresh series, as cited above. And I will focus in my next series installment on individual innovators, and on identifying and talent scouting for them in new hires and within the organization. I will also discuss supporting and guiding the innovative effort in this context, and doing so without disrupting everyone else in the process or stultifying the creative endeavor – and while keeping the teams that those innovators are in working effectively and meeting their overall more standard goals and priorities too. That mix, I add, it not easy and that is why creative effort can all too often be blunted and its value potential lost.
Opening up the online business model for new and emerging opportunity 1: outlining some of the basic issues and challenges
Last November, 2012 I finished a series on best practices for using YouTube and related rich-media marketing approaches (see YouTube marketing 9 – developing viral marketing reach from a business model and strategic planning foundation) in which I noted that:
• A business that goes viral in its marketing reach is in a very similar position to a business that offers a highly innovative and novel product or service – a true blue ocean innovation to the marketplace.
• In both cases, the actual target demographics that would want to purchase may be quite different than initially anticipated.
• In both cases, market analysis and two-way sharing of information and insight are essential to making meaningful connections that will systematically lead to sales, to business stability and strength and to competitive advantage.
And I have also written about Web 2.0 oriented businesses (see for example Moving past early stage and the challenge of scalability 8: web 2.0 business models.)
Up to here, however, I have barely scratched the surface as to what a Web 2.0 oriented business model actually entails, as organizations that pursue that strategic and operational approach go online and seek to develop and expand an online reach. My goal here is to at least begin to more fully address the issues and factors that go into that. And I begin by repeating a fundamental reality of online marketing and business that I have already noted several times in this blog:
• The closest parallel to physical distance in cyberspace is a mathematical inverse of bandwidth, where slower speeds of connection online equate to being further away for bricks and mortar businesses.
• But with increasing proliferation of high speed and wide broadband connectivity and with the ever-increasing expansion of what wide broadband connectivity means as a minimal requirement, any business that goes online can realistically hope to reach geographically widely distributed audiences and with effective immediacy.
That has some immediately significant consequences. Among them, and to further build a foundation for this discussion, it should be noted that:
• When physical distance per se ceases to be a pertinent market-defining factor, the closest approximation to a local market becomes a needs and interests oriented target demographic. (I will hold off on elaborating on this point for now and simply note here that I am going to post an installment on online demographics oriented marketing in this series.)
One of the points that comes directly out of the above six points as developed up to here is that any business that goes online faces at least the potential of building a truly global audience and marketplace – and certainly if it really understands the dynamics and qualities of its prospective marketing and sales audience and what qualities its members hold in common, that by trait correlations define the group. And that is where this narrative begins to get more complicated and nuanced in the real world – and in real cyberspace.
• You have a product or service that you would want to sell, and when you do so online you potentially face and reach a truly global marketing and sales audience.
• So at least in principle, even a very narrow niche market-oriented offering that could not reach a sufficiently large interested target audience in any physically localized marketplace, might succeed online. After all, online you can at least in principle, tap into the buying potential of many, most or even all of the physically dispersed online members of a marketing demographic who would constitute an interested customer base.
• In cyberspace and for purposes of product design and development, online marketing and sales, the closest approximation of a local market is that target demographic. That understanding drives the Web 2.0 oriented business.
But let’s consider some of the potential complications to this story that can and do arise.
• Buyers always have finite and limited resources that they would have to tap into in making a purchasing decision, with limits to their time and energy that they can devote to a product or service search, and limits to what they can and will spend monetarily when they find what looks to be a good offering.
• When a potential buyer is making purchasing decisions that involve more standard and even mainstreamed products and services, businesses compete for their consumer dollars against businesses and providers who are largely coming from within their own industries and even their own niches within their industry. And consumers might start their search by going to a favored and familiar business to buy from, but they often make their purchasing decisions on the basis of search engine queries where they look for both products and sources simultaneously and by using basically standard search terms.
• But when a product or service offering is truly novel and disruptively new, chances are higher that businesses offering them are competing against businesses that offer different and even very different types of products and services when competing for those consumer dollars. And it is likely that there is no standardized set of search terms that would automatically lead to a selling business for a truly disruptively new offering.
• Disruptively new and novel offerings tend to be much more attractive, at least at first and when still new and disruptive, to pioneer and early stage adaptors who value novelty per se. And they only become attractive purchase options to middle stage and late adaptors later and as those consumers see others buying in. But even there and within the pioneer and early adaptor market cohorts, and even where members of those groups are looking to acquire new and cutting edge per se, they would be looking in many cases more widely than just to your specific types of products or services. So your offerings would be competing for these consumers’ limited resources against new and novel in general, plus standard and generic as these consumers meet their basic and ongoing needs.
• So knowing your true competition becomes more complex as you offer distinctively new and novel, than would be the case for more mainstreamed offerings that would cater more specifically to mainstream, established markets.
• But at the same time, and returning to the points raised and noted at the top of this posting, new and disruptively novel is also quite specifically where blue ocean strategies and larger emerging market opportunities would be found.
• So in the mind of a startup owner, and at the heart of any Web 2.0 and explicitly online-oriented business model that they might deploy, and certainly as that uses more cutting edge and early adaptor-oriented communications and connectivity channels and approaches – you will often find a desire if not an explicitly stated and planned intent to achieve blue ocean success. When is that realistic and how might a new business’ chances be improved for succeeding there? What should be its perhaps more conservative Plan B, and when should breakout success and blue ocean strategy development that would lead to it be the Plan B?
This is the first installment to a new series, and as noted above, I plan on discussing online demographics marketing as part of it. I also plan on discussing the open questions raised in my last bullet point immediately above, and more. Meanwhile, you can find this and other related postings at Startups and Early Stage Businesses. You can also find related material at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
Commoditizing the standardized, commoditizing the individually customized 1: a brief historical sketch as background for discussion
We as a species make and use things – tools and products made with them including other tools. Our species’ scientific classification name is Homo sapiens, where “sapiens” is used to designate us in terms of capacity for thought and perhaps wisdom. But a name such as Homo faber, highlighting our propensity for creative building and fabricating would be at least as appropriate. We devise and design and build, and we build the tools needed to build other more derivative tools, in order to build what we as an end result goal seek to produce.
For most of our history, and I add our tool making prehistory too, that meant building from the materials at hand and with any standardized and developed manufacturing skills employed, required to work in the face of any variations in the raw materials at hand that might be encountered. And we built for our own use or for the use of members of our own immediate family or community. The history, and I add prehistory of our building and creating efforts, insofar as our prehistory can be discerned from the record of tools and artifacts that remain from then, was local and customized and in a fundamental sense essentially purely artisanal – and handcrafted – until relatively recently.
Settled communities and a move from a more nomadic hunter gatherer existence meant our ancestors could realistically accumulate more things than they could carry at any one time and on an immediately ongoing basis. From the perspective of the things we build, use, and keep or discard, the development of agriculture and settled communities meant we began to build more to last and for longer ongoing reuse, and we began to accumulate – and to build a progressively wider range of tools and end-use products. And specialist builders – specialist artisans began to proliferate.
Specialists, particularly expert in the manufacture of specific types of tools and the products made from them appear to have first appeared well before any written record, and certainly when you consider some of the highly elaborate devices made from flint and other persistent materials that archeologists and paleontologists have found. We can only guess, baring discovery of a wider range of artifacts preserved in glacial ice or by other means but it is likely that at least some objects manufactured from wood, grasses, animal hides and other non-persistent materials were also produced by specialists with particular skills too. But either way on that, evidence I have read of and seen in museums and other repositories and common sense would suggest that at least some specialist artisans lived and worked at least as far back as the early Neolithic era and even back into the Paleolithic.
The settled community led immediately, it seems, to an explosion in the numbers of types of tools and artifacts produced, used and kept, and of the numbers and diversity of artisans who made them. And production became more standardized with time and according to settled basic designs and motifs within culturally distinct groups and so did the basic raw materials that would go into the manufacture of any given end-use product. Wider ranges of materials were used and this led to further, exponential growth in the diversity of items producible and of items actually, consistently produced. And communities grew in scale and connected through increasingly widespread trade and commerce, and through shared culture and governance and law. I, of course, present this in what is essentially cartoon form as my focus here is on the artifacts and objects made and their diversity, and on the emergence of specialist producers who would sell what they make, and increasingly for the products of other specialist manufacturers.
And I cut ahead from that to the first mass production, still primarily following an artisanal approach but as a larger organized effort, and to the earliest assembly lines. And with that manufacturing innovation, I come to what could be seen from the perspective of this rough timeline to a point that is still, at least historically, very close to our immediate past.
This “history” up to here really is more cartoon than anything else and offered here more for discussion of what comes next as Henry Ford’s real invention – the assembly line took off and became mainstreamed in production and manufacturing everywhere. Suddenly more standardized copies of essentially anything that could be mass produced in repetitive step stages, could be produced and more quickly and more cost-effectively and more inexpensively to the buyer and consumer than ever before while still bringing a significant profit to the manufacturer. Henry Ford did not invent the automobile; he built cars that the average citizen could afford, starting with his own employees and people like them in their communities. Businesses that mass produced, and with assembly line and similar manufacturing effectiveness multipliers, came to dominate their markets and their industries and manufacturing production as a whole.
• And what began as artisanal production of essentially one-off products, standardized to basic design perhaps, but manufactured from varying raw materials, shifted to larger scale and even mass production of more identically uniform end products, with standardized methods and starting from more uniformly consistent starting materials – that in many cases were themselves the products of manufacturing processes.
• And as a basic progression and as a result of a series of paradigm shifts, handcrafted and artisanal as the basic pattern of production gave way to mass produced and I add machine produced, as finished consumer oriented products were manufactured from components and materials that were themselves manufactured, and generally from still further removed manufactured products – with the products ultimately used, one step further removed from true raw materials with every step of this progression.
• And this is where automation enters this narrative, as basic rote performance, repetitive production steps are increasingly removed from direct human hands-on production and carried out by machines – self-directing tools.
• And mass produced standardization became the norm and certainly going into and in the 20th century and for the West and increasingly everywhere else too. And this is the starting point that I had in mind when first thinking through this posting – this state of manufacturing as a current baseline for comparison.
I am going to continue this discussion in a next series installment where I will delve into some of the defining issues as to what artisanal production is, in a mass produced and assembly line driven world. And I will proceed from there to examine the new and still actively emerging re-individualization of production as we approach the options and capabilities of a post-assembly line design and manufacturing world. Meanwhile, you can find this and related postings at Business Strategy and Operations and its Part 2 continuation page.
Acquisitions and divestitures 6: exit strategies and the sale and acquisition of complete businesses 3
This is my sixth installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Business Strategy and Operations – 2, postings 358-362 for Parts 1-5.)
I began a discussion of exit strategy-based complete business divestitures in Part 4 where I introduced three test case scenarios that collectively illustrate some of the core issues involved here. To briefly recap and orient from there and for purpose of clarifying this posting, I repeat that:
• Scenario 1 represented sale of an established business by an owner who seeks to step away from it to retire.
• Scenario 2 represented sale by a serial entrepreneur who builds out new businesses to sell them and with that exit strategy built in as their default, essentially from the beginning.
• Scenario 3 arises when a business owner gets that offer that they cannot refuse and decides to sell because of it.
I briefly addressed the issues of evaluating and selling a business according to Scenarios 1 and 3 in Part 5 and specifically recommend reviewing Parts 4 and 5 of this series as foundation material for what is to follow here. My goal for this posting is to at least briefly analyze and discuss Scenario 2 with its types of divestitures and acquisitions. And I begin there from an operationally and strategically lean and agile business development perspective. (See my two series: Virtualizing and Outsourcing Infrastructure at Business Strategy and Operations, postings 127 and loosely following for its Parts 1-10, and Moving Towards Dynamic Performance Based Business Models as can be found at Startups and Early Stage Businesses as postings 123 and loosely following for its Parts 1-8 for background materials and discussion on lean and agile business planning and execution per se.)
• An entrepreneur who moves in on a prospective unique value proposition with a goal of building a marketable business venture around it, plans and builds with one goal – to reliably and at minimal risk and upfront-cost, set up and build a business resource that can be sold off on a short timeframe when ready, and at a substantial profit.
• Operationally, the goal in that is to build well enough so that the offering put on the market would be an attractive buy that could be cost-effectively brought to market.
• And that means building this commodity enterprise to be stable and sound enough to develop and realize its unique value proposition, but with a very pronounced focus on developing and presenting just that.
• That means limiting to a minimum anything extraneous when planning and building, and with third party outsourcing or virtualization or other approaches applied as appropriate. The goal there is to limit both extraneous fixed operating expenses and the development of non-essential in-house supported resource base.
From the buyer’s and acquisitions side of this:
• Their goal in this is to limit the level of extraneous resource duplication and other cost expanders that they would have to buy, that they do not specifically need,
• In order to acquire and bring in the specific unique value proposition capability that this offering would bring to their own business in meetings its ongoing and long-term strategic needs.
What I am outlining here is a very business sales and divestiture, and acquisitions-oriented lean and agile approach. And here is where this type of exit strategy takes on a very specific meaning for newly forming business ventures as divestiture and acquisition objects:
• A whole range of business infrastructure systems and functionalities can reliably be expected to become essential that would in most cases be held in-house as a business expands and scales up,
• And the overall value and cost of all of this supporting structure can come to outweigh all but the most compelling unique value propositions for a potential acquiring business, making development from scratch and other options more viable alternatives to acquisition for gaining that specific source of unique value.
• And when businesses develop directly matching or at least directly competing alternatives to a unique value proposition that a potential acquisition holds, it ceases to be a unique value proposition and loses potential marketable value from that.
• But in many and even most cases supporting functional requirements are simpler and more easily handled on the side rather than by dedicated specialists when the headcount is still very small and business processes have not begun to expand in detailed complexity.
• So startup and early stage are the business stages where it is easiest to develop and offer a marketable business venture that is closest to being pure unique value proposition than at any other stage or time – before all of those supporting structures and systems have elaborated. So for reduced extraneous expenses, a unique value proposition can hold greater acquisition value at that stage.
• This, collectively, can make the build to sell serial entrepreneur model very successful and profitable and certainly for entrepreneurs deeply experienced in building and managing, and marketing and selling startups.
I am going to turn in my next series installment to consider resource divestiture as a fundamental component of change management, and of course correction when a business is in or at least rapidly approaching crisis. And as a foretaste to this, I note here that a big part of making that work is to strategically prepare and carry through this type of divestiture so as not to be caught in an entirely buyer’s market – and with a goal of realizing fair value for what is sold off. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2. I have also included this series installment in Startups and Early Stage Businesses.
Acquisitions and divestitures 5: exit strategies and the sale and acquisition of complete businesses 2
This is my fifth installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Business Strategy and Operations – 2, postings 358-361 for Parts 1-4.)
My goal for this posting is to flesh out something of the How of selling, and from real awareness of the perspective of the other side of the table and acquiring a business that is being offered on the market as an end point of an explicit exit strategy. I began this in Part 4 where I laid out a set of three orienting scenarios that display differing circumstances and contexts through which this decision to divest can arise. And as noted at the end of that posting, my goal here is to discuss this process from the perspective of a very balance sheet oriented approach as to costs, returns and valuations.
I want to begin that and set the stage for this discussion by way of an analogous example – the sale of a home that the sellers: Bob and Mary, and their family have lived in.
1. Bob and Mary do some homework and find out what comparable houses in their neighborhood are being offered for when put up for sale, how long they stay on the market before being successfully sold, and what they tend to actually sell for.
2. They assess their own needs – they want to purchase a somewhat larger house in their case, but for the purpose of this example the precise details are not as important as is the simple fact of their having specific goals and strategic objectives. They assess their resources – they are going to have to sign a new mortgage as well as all of the rest of the paperwork and want to make sure that the sum total of their mortgage payments plus any other expenses related to their purchase stay within their own budget planning parameters. This means assessing what they would need to receive in payment for their old house and it also means coordinately considering what they will have to pay for any new home too, up-front repairs and so on included, so the numbers on both ends of this process work for them.
3. Their old house shows the wear of use and they find themselves asking both each other and their real estate broker they are listed with, what if anything they should do to fix up their house to make it more saleable. And their bathrooms are out of date as is their kitchen, and some of their rooms show paint scuffs and similar problems – and one of the bedrooms is painted in what some might consider an off-putting pink color. Strategically, they find that it would not be cost-effective to update the bathrooms or kitchen as those are the types of detail work that new home owners like to personalize to their own taste in making their new home their own. The expense to the seller would not be recouped for their doing this from increased realized sales price. But going through and painting interior rooms, and certainly that pink bedroom in a neutral white would both increase sales price received and shorten the time their old house stays on the market. So this would be a cost-effective step for them.
I am going to end this analogous example there with those details in place and turn to apply some of the same reasoning to the three scenarios of Part 4.
1. In all three scenarios, both potential sellers and potential buyers should assess what a divestiture-offering business has as assets and liabilities so they know what its likely overall net worth would be. And in keeping with the logic of the first bullet point of the home sale analogy, they should get a sense of what the market would bear for this. Here, depending on both the overall economy and on marketplace and other pressures in their industry, a business offering might be expected to be overvalued, undervalued, or more or less accurately valued in comparison to what would be expected in a neutral, stable market. This would, for either the homeowner or business owner, help them to determine wither to proceed with plans to sell or not and it would inform any prospective buyer whether it would make more sense to buy this business or to find alternative approaches for meeting their ongoing operational and strategic needs.
2. Point 1 above addressed issues of what is possible. Point 2 addresses the issues of what is needed, and within what time frame.
3. And Point 3 specifically addresses the key points of difference between the three scenarios of Part 4 of this series, and how any proposed business divestiture would be planned for and prepared for so as to maximize profits to the seller, by maximizing attractiveness and perceivable value to any buyer.
Briefly recapping those scenarios here for orientation in this discussion, Scenario 1 represents sale of an established business by an owner who seeks to step away from it to retire. Scenario 2 represents sale by a serial entrepreneur who builds out new businesses to sell them and with that exit strategy built in as their default, essentially from the beginning. Scenario 3 arises when a business owner gets that offer that they cannot refuse and decides to sell because of it.
Starting with the simplest case for Point 3 issues, with the third Scenario – it would be foolish for the seller to change or update anything as their prospective buyer clearly wants to acquire this offering exactly as it is, operational and fixed-resource asset equivalents of scuffed wall paint and all.
A Scenario 1 seller would quite possibly want to selectively update and improve at least some operational process and physical resource-based assets to make their business a more competitively attractive offering. Here, they need to know what a prospective buyer would look for as sources of value in their business, and where they might see due diligence or up-front cost disincentives that would at the very least prompt them to limit what they would pay in a final offer. This would in many cases be based on meeting industry standards, or exceeding them where unique sources of competitive value are in place in the business for sale. But exactly as is the case with the house seller, their goal would be to limit any improvements made to those that would bring in a positive return on investment in the form of increased sales price, faster and more reliable sale or both. There and just looking at building the sales attractiveness of their offering, if they could bring their business to a point where potentially acquiring businesses would offer more in order to preclude competitive buyers, that would be best. But they would not, for example, want to upgrade their employee cafeteria if that would cost them but not influence any realizable sales price. And to follow through on that, if repainting their cafeteria would not improve their value or saleability, de-duplicating, updating and data cleansing their customer database might, and particularly if their customer loyalty and reach constitutes one of their defining sources of competitive value. What would be done here and how, and how this would be marketed should be considered significant strategic decision points in this business process.
The reasoning of Point 3 of the home sale analogy becomes more interesting and I add more complex when you consider it in the context of a Scenario 2 divestiture, and for businesses that are in effect built primarily to be sold off for profit. I am going to delve into some of the issues that would arise there in my next series installment. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
Acquisitions and divestitures 4: exit strategies and the sale and acquisition of complete businesses 1
This is my fourth installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Business Strategy and Operations – 2, postings 358-360 for Parts 1-3.)
So far I have focused in this series on businesses that acquire or sell off select functional parts of their infrastructure, according to an analytical understanding as to how they can both maximize realizable value in the here and now, and reduce ongoing expenses and risk that is disconnected or at least inefficiently connected from their sources of ongoing monetizable value and profitability. I turn in this installment to consider sale of the complete business, and in that context cite a brief but select set of working case study scenarios:
1. The owner of a business builds their enterprise from scratch, and to a point where it is an effectively profitable ongoing concern with a steady, reliable customer base and market-appreciated products that are generally viewed as being of high quality at a good price. But as time passes, this owner starts thinking about retirement. They want to move on in their life and to spend more time with their family and they want to travel more and to pursue some interests they have never had time for while building and running their business. So they begin thinking in terms of an exit strategy in which they would sell off and increase their retirement funds, as well as building a more substantial inheritance for their children.
2. An entrepreneur sets out to build a business around a new product idea that he sees as holding real value. But his goal is not to become a long-term owner and manager of this new enterprise. His goal is to build an attractive offering that another, larger business would want to acquire in order to fill a strategic gap in their systems – a gap that his business’ existence highlights specific awareness of. So he seeks to build to explicitly offer a saleable set of resources as a complete and ideally competitively attractive offering. Serial entrepreneurs who live, at least professionally for the startup and early stage processes and challenges and who are much less interested in the follow-through of running a business long-term tend to gravitate towards this approach, and they frequently invest significantly from what they bring in from the sale of one startup, in building their next venture.
3. An entrepreneur builds a business, taking it through the uncertain startup and early stage business steps. This is his baby and he is in it for the long haul. He invests what he can in it in personal funds and much more so in time and energy and emotional capital, and he builds solidly, creating a well-respected brand and real customer loyalty. Some of his product offerings are very cutting edge and some are more mainstream to what he does and he successfully scales this business up to a respectable level of annual business and profitability. He did not build this to sell it, and he is not thinking in terms of doing so – until he gets an eye popping offer from a large multinational corporation that really wants to capture the value of his company’s brand and products for their business, and access to his customer base. So suddenly he finds himself asking the question, and talking about his with his wife at home, as well as with his senior executive team and others at work. I have seen this type of scenario play out in a couple of variations depending on what is offered on the table – a straight cash and stock buyout, or a cash and stock plus continued involvement offer where the acquiring company would own outright, but the selling CEO owner would stay in-house for at least a transition period and then be on retainer as a consultant for some further period of time.
I have intentionally left out anything like hostile takeovers of publically traded companies here and am planning on addressing that and similar scenarios in a future installment. The scenarios that I would address here are all willing on everyone’s part even if not necessarily planned for, long-term by any of them. And they all revolve around sale of a complete business as a value creating acquisition and as the end point of an explicit exit strategy, even if it is one not always long planned for.
I am going to continue this discussion in my next series installment with an explicit balance sheet oriented discussion of costs, returns and valuations. As a foretaste of that I note here that any such analysis has to consider both immediate and short-term costs and returns created and received, and also longer term factors and consequences as this acquisition would impact upon ongoing strategic positioning and competitive strength. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
Acquisitions and divestitures 3: conceptually and operationally organizing and understanding what is to be divested and acquired 2
This is my third installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Part 1: right-sizing and orienting for business strength and growth and Part 2: conceptually and operationally organizing and understanding what is to be divested and acquired 1.)
I took an overview approach in Part 2 in which resources were broadly categorized according to their fit in the owning organization – where fit specifically refers to capacity to contribute to financial and competitive strength and position. And as a lowest value-supporting level in this, I identified resources that might make good marketable divestiture offerings as Level 4 resources (see the definitions and their organizing resource taxonomy as outlined in Part 2.) And I ending that series installment taking a very high level black box view of potential divestiture offerings, where only costs, and potential returns on investment and profits were considered – but not the details of what goes into them.
• My goal for this posting is to break open the box to see what would go into a divestiture package, or from the acquiring business’ perspective a potential acquisition.
And I begin addressing that by noting that an effectively architected divestiture consists in many if not most cases, of a complex and well-considered mix of components. The best way to explain and analyze that is with a working example, so for a focus of discussion consider a very large and diverse information technology company that had its start, and built its initial national and international reputation on computer hardware and supporting software. When desktop computers opened up as a significant and then even major sector in this market space and industry, they moved into that too with their own lines of hardware – outsourcing operating system and end user oriented software (e.g. office productivity tools) to other businesses that specialized in that emerging market and its needs. They went through some significant downturns and recoveries over the years, and found themselves at a point where software, and particularly back-end and business infrastructure-supporting and enabling software was a much more important source of growth and market strength for it than its desktop computer hardware division – though it was still developing very significant levels of income and profit from its still ongoing mainframe and supercomputer lines and it had developed a very extensive and profitable business practice from business consulting, and on helping client companies to more effectively select and us their resources to drive business and generate profits. So it decided to divest itself of its desktop computer hardware division and move on, and ideally with a profit from the sale of this systematically organized asset as well as a reduction of what was rapidly becoming a strategically disconnected source of expenses. They found a buyer that would work with them in this in China, and a contractually organized and defined deal was brokered. Yes, the corporation I write of here is IBM and I have trimmed a lot of details out of the above description (e.g. their earlier pre-electronic computer history and their very active involvement in the still emerging field of nanotechnology, to cite just one overlooked business line.) The company that I note as having bought out IBM’s personal computer business is, of course, the Lenovo Group, Ltd.
• When a business acquires a large, complex holding such as an entire division or business line from another large company, they actively seek to acquire a workable and rapidly if not immediately productive business system, with hardware and design specifications, copyright and patent control and ownership, and more, that they can integrate into their overall business operations as a source of profitability for them.
• This may or may not include all of the physical plant space that has been dedicated to the operations included in a divestiture – building sites and certainly where a buying business is located in another country and when it has what for itself, is an in-country location for this acquisition in mind that would be more cost-effectively available. So everything in a proposed divestiture package might not hold equal or even significant value to a buyer. That has to be taken into account by both involved parties.
• This type of deal might or might not include expectation that employees and managers who worked in that area of the selling business would stay on. But at the very least this would almost certainly include abrogation of any non-compete agreements that those employees had signed with the selling business, so the buying business would be legally allowed to negotiate with them to stay on through the transition.
• For businesses in a country such as China, technology transfer agreements are always on the table as an obligatory requirement, so transfer of proprietary information ownership, licensing and other arrangements always have to be decided upon, and across agreed-to timeframes as well as for immediate here and now purposes.
• And there are definitely situations (e.g. where anti-monopoly laws might come into play, or where national security concerns might block or limit a foreign sale) where outside regulatory law might become involved.
Ideally, both divestiture selling and acquisition buying businesses come out of this ahead, and stronger – and with both parties having to deal with and resolve as few surprises as possible. Good negotiations and contractual agreements identify and remove post-signing surprises before they can arise.
From a seller’s perspective, the final package can effectively and profitably include elements that would be retained in-house if simply considered on their own, but where greater value is obtained from them by bundling them into a divestiture package than would be realized by simply holding onto them. The value and due diligence significance of the individual parts of the package are important, but the overall impact and realizable value and profit from assembling and selling the entire package is likely to determine the outcome of any decision making process as to whether to sell or not.
And as a final thought here, a divestiture and acquisition agreement can mark the beginning of a more comprehensive and long-term mutually profitable agreement between two businesses, where they for example, each work with the other in providing resources that are needed but that do not fit into that other’s lean and agile core infrastructure or systems requirements in maintaining and providing its unique value propositions.
Up to here I have only considered the selling and buying of selected parts of a business. I am going to turn in my next series installment to consider the sale of entire businesses, and exit strategies. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
Acquisitions and divestitures 2: conceptually and operationally organizing and understanding what is to be divested and acquired 1
This is my second installment in a series in which I look at acquisitions and divestitures and related processes, and examine businesses from a very modular prospective as to how value is created and sustained (see Part 1: right-sizing and orienting for business strength and growth.)
I began this series in Part 1 with a briefly sketched list of issues that would enter into this discussion and begin working my way through that list here with its point one, which I rephrase for content as follows:
• If a business, in seeking to keep its own organizational structure and process lean and strategically focused, decides to divest itself of a commoditizable portion of its business as a profit-generating way to divest itself of excess or disconnected resources, what might it package for sale in this way, and how would it decide what to include here?
I also added “why” in my Part 1 bullet point and will address that here too. And I begin this posting with some basic questions that should go into any decisions to acquire, maintain, drop as a write-off or divest as a marketable offering.
1. What is the core, differentiating source of value that a business would provide, and either in its products and services, or in how it brings them to market, that would set it apart and give it competitive strength and position? What is minimally and obligatorily required for this business to develop and sustain its sources of unique value offered, as a lean and agile organization? This can only be answered reliably and fully, with everything needed included and all else trimmed out, on the basis of careful and point by point analysis, considering all resources in place and processes and procedures through which they are utilized. (Level 1 resources.)
2. Now, and also in keeping with a realistic lean and agile approach – here geared both towards cash flow and profitability and risk management, what buffering should be added in for resources held and processes and procedures followed, to allow for the realistically possible and reasonable but perhaps unexpected? (Level 2 resources.) This is where basic business flexibility enters in, and capacity to respond with agility and speed to new and emerging opportunities and challenges in remaining effectively competitive.
3. And what capabilities should be in place for ramping up resources and capabilities beyond that in the event of bad and worst case scenarios becoming this business’ working realities? (Level 3 resources.) This is where due diligence and risk remediation enters in, and where backup servers and other necessary contingency resources are categorized. This, I add is also were at least certain mandatory resources such as insurance coverage would be included.
With write-offs and monetizable divestitures in mind, I add one more category to that classification list:
4. What is left over that is there and being maintained and perhaps even at significant ongoing cost, but that does not directly and necessarily support the business and its financial and competitive positions? (Level 4 resources.)
So this posting is about identifying level 4 resources and how they are reliably and distinctly appropriate to that categorization, and beyond that, determining their marketable values, net any costs for bringing them to market as a part of a rightsizing process.
1. It makes more sense financially to simply discard and write off resources that could not be marketed except at a loss for doing so, and that could not be presented as having marketable value to others. Consider old and broken hardware here, that would not be considered salvageable through recycling programs as a working example.
2. It may make sense to donate resources that would offer no or low return to the providing business, but where their offering would provide real value to others. Donating old and outdated but working computer equipment to a school or charity comes immediately to mind for me here, though there are a great many other possibilities here that make equal sense. And along with offering tax deductions, this type of charitable activity can offer tremendous marketing value by highlighting the positive values of the donating business and its employees.
3. Some resources might be directly separately sellable and for an immediate profit. Think of this as resource-by-resource piecemeal divestiture. Here I state “profit” as I assume that any value to the business will have already been written off so its listed value in place is zero.
4. Some resources, and even if directly marketable and sellable for a profit as piecemeal divestitures, might also hold opportunity for greater returns, if organized and bundled, and marketed and sold as value added bundles in combination with other component elements. For purpose of this and subsequent discussions I would identify this option and approach as value added divestiture. This can mean anything up to divestiture of a complete working but strategically disconnected organizational unit of the business.
Distinguishing between these four categories meaningfully, and capturing value for returns on investment if not outright profit calls on holding a detailed understanding of the available marketplace for what is to be offered – which essentially by definition is going to be different from the marketplace and market space that the business works in as its main venue of value creating and selling activity. If it only looks to its own markets for this, for example in reducing excess resources of a type it uses, it is primarily going to building up its own direct competitors. Making a profit and organizing and selling off excess or unneeded resources without simply strengthening the competition is going to require in practice at least, marketing to non-competing businesses or organizations. (The one potential exception I can think of here would require something in the way of non-compete agreements that would for example carve up sales territories, but that would in most cases violate any antitrust or competition laws in place.)
And with this, I add a complication to this developing narrative:
• A value added divestiture might come together as a profitable offering by combining excess or fundamentally unneeded resources together with resources more valuable to and central to the selling business, where the combination so produced offers more return value to the seller than simply holding onto those resources would.
And with this, I reach a point where discussion turns to building and evaluating a value added divestiture, and terms of acquisition and use by any buyer – where at least hopefully, antitrust laws would not be a source of due diligence concern. I am going to continue this discussion at that point in my next series installment. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
I have written on occasion in this blog about acquisitions, and the acquisition process, generally in combination with a discussion of mergers and about how both impact upon operations and strategy, or upon specific management or leadership issues (see for example, Transitioning into Senior Management: M&A Leadership Part 1 and Part 2.)
I have also repeatedly written about lean and agile operations and strategy, and on developing an organization for financial soundness and competitive strength according to a lean and agile approach (see, for example my series Virtualizing and Outsourcing Infrastructure, at Business Strategy and Operations as postings 127 and loosely following.) And as a significant part of that I have written about prioritizing for what a business does best and for what creates its defining value propositions and sources of strength. And I have written about the need for maintaining the right balance of resources needed for that, while identifying and limiting the organizationally disconnected and irrelevant that have come to serve more as cost centers than sources of positive value.
I have not, however, discussed divestitures per se, and the development of excess or disconnected resources as commoditizable market offerings that could be sold off as a route to their being cut away. Resources cut back upon should not necessarily just be discarded as write-offs for equipment, supplies and raw materials, or physical plant, or be downsized and forgotten for excess staff.
• What is strategically disconnected for one organization for achieving its goals and creating value, and strategically ineffective and wasteful to maintain, at least in-house, might be worth a great deal to another business that would see this as meeting its own direct high priority strategic needs.
• These now strategically disconnected resource bases can include what for the selling business would be considered unneeded physical resources, or organized and expertly trained teams that have been working with those physical resources and with proprietary business knowledge in doing so, or include some combination thereof. The point here is vitally important – what might be excess fat for trimming in one place and context might be gold and essential for maintaining competitive strength and business vitality elsewhere. For a combined-package commoditizable resource base with equipment, proprietary knowledge and trained staff, think of a business divesting itself of a complete coherently organized division or other organizational subsystem that no longer fits into its strategic planning or needs determination.
When viewed in this light, cutting out the extraneous and the strategically and goals-determined unneeded, should not just be about cutting back to an essential core of capabilities and somehow discarding everything else. It can also be about repackaging and selling, and as a path to gaining, or at least recouping value from investments made that would not simply be retained and continued in-house. And when done effectively and through best practices approaches this can generate very significant one-time revenue gains as well as enabling longer-term business collaborations and the forming of ongoing new revenue streams. I have only mentioned sales up to here but licensing and related options can be important here too.
1. This posting is a first installment to a new series in which I will discuss in at least some detail, what might be offered as a commoditized product and why, and
2. How specific resource selection for this would be determined, and how resources might be organized and bundled, and marketed for third party use.
4. I will move on from a general discussion of the decision making and operational processes involved in divestitures to discuss two very different but important acquisitions and divestitures business models, where this type of divestiture product development and commerce flow based upon it can become a major source of ongoing revenue and even the primary source of incoming revenue for a business. One of these models, starting with the negative side of this overall phenomenon, is what I call the chop shop model (after businesses that “acquire” cars to dismantle them and sell them for parts). The other basic model focuses on creating overall systematic value, and generally that means unique sources of value for the acquiring companies. This, I call the value added model.
This is just a rough outline for what is to follow in this series, and I will be filling in more details to this starter contents listing as I go along. I am going to begin that process in my next series installment with point one of my above numbered list. Meanwhile, you can find this and related postings at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.
I tend to focus on and write about best practices, and in the course of my work and when mentoring or training others, or here in this blog. But if there is one exception to that more general rule, it is in how I discuss leadership. As I have noted many times, leadership skills are learnable, and our best teachers in this come from the examples, positive and negative set by others as they seek to manage and to lead. And our best teachers in this really are, in many cases, the worst examples set by people who flounder in the attempt. Our best teachers can be our worst-case example teachers. That is what I find myself coming back to here.
If I were to add an exercise to this posting, as I do for some of my jobs and careers postings (see my Guide to Effective Job Search and Career Development and its Part 2 continuation page), it would be:
• Make a list of the five or six qualities or conditions that are most important to you in making a workplace a good place to be in and contributing to. Set this list aside and come back to it a few times as you give yourself time to really think through what is long-term the most important to you. Let the list expand out to whatever length makes sense to you, but with a clear goal that you in fact follow through upon. Cut this list back to five or at most six entries, selected and phrased so as to capture what is collectively most important to you.
• Now do the same thing in reverse, thinking back and listing the most problematical, irksome, alienating, discouraging and disengaging qualities or conditions that a workplace can be defined by as a matter of practice. Come back to this and review and tune it to capture what would make you dream of heading for the exit, just as that first list covers what would make you look forward to Mondays and the start of a new work week.
If you work with others, and report to a supervising manager; if you work either directly or indirectly for a chief executive officer or owner, and with peers and colleagues, it is all but certain that most of the issues that you list, positive and negative alike involve interpersonal interactions, and expectations of what should and should not be taking place, and how well reality meshes with your expectations. You may have a bad desk chair and dim lighting, but bottom line, if you also have a really problematical coworker who behaves abusively or steals credit for work that you have done – and they are allowed to get away with that, this is going to be more important as a negative. It is certain that if you have a great workspace and related physical work conditions, and a really great, supportive boss they will find themselves on your positive list before that office furniture does. We are a social species and interpersonal trumps impersonal and inanimate virtually every time in scales of importance, positive or negative.
And this brings me to the issue of trust and trustworthiness. Businesses are social institutions and networks of goals-directed interpersonal relationships and shared effort, and are best built from foundations of trust and from a shared understanding of trustworthiness. Any fundamental breech in trust and in the sense of trustworthiness on the part of the supervisors and executives we report to, is in effect a poison, and a cumulative poison at that, to the business as a social organization and to its capacity for its members to work together toward commonly held goals.
I could bring this posting and its discussion into focus here, by citing the issues of compensation, and both as a matter of salary and benefits, and perks. I do not think that many people would expect an entry level new hire to get the same pay and benefits, or receive the same perks as a long-term senior executive with extensive and vitally important skills and experience. But when the CEO of a bank that is in trouble, and that is seen to be in trouble from senior level mismanagement, publically and bitterly complains that their compensation might be limited to no more than 400 times that of an average employee, that conveys a corrosive message. Salary and benefits and perks can legitimately and realistically vary but differences have to make sense if they are to be positives for that business.
But my goal here for this posting is not simply to limit discussion to that type of point, which I have raised before. My goal is to discuss how even reasonable seeming differences in perks can create barriers to communication and shared understanding if ill-chosen and badly prioritized – and how the identification and limiting of dysfunctional barriers should be a part of the management and leadership job. So I set aside the 400-fold and larger salary plus benefits, that would obviously serve to isolate leadership from any real contact with the people they lead. I am going to focus here on the manager’s office and on the race to win a coveted corner office, with a personal secretary and for large organization even a personal staff organized by work responsibility around protecting your time by isolating you from direct contact with the business as interpersonally connected community. And I focus here on that simplest level in this, in having a separate office with a door that closes, shutting out the people who report to you.
True, everyone needs privacy at times, and quiet for undistracted work and managers often find themselves discussing confidential issues and information. So they do need to have a place where they can talk freely and privately with individuals or small groups. The problem is when they enter their office, seal themselves in and simply act as if meaningful connectivity with their teams and with their business will somehow ooze through anyway as if by osmosis.
• This might not matter when everything is going smoothly and according to consistent pattern – but if problems or the potential for them are developing, and you as a manager are cut off, how would you even know? How could you know until, that is, that problem has emerged and grown to a point where are least some members of your team see it as having become so serious that they in effect force their way past your door?
And with this, I go back to that list development exercise that I proposed earlier, and I make a prediction as to an item that, depending on how it is stated might be found on the positive list, the negative list or both. If you report to a manger as they connected and aware, and positively, supportively involved while still giving you room to make decisions where you should be doing that? Are they, on the negative side, disconnected and leaving you without guidance or information that they should be sharing with you, until the wheels have left the road? If this happens do they positively try to help correct this mess or do they either stand there berating you for not in effect reading their minds, micromanage you or both?
• When a business is in transition or facing change, and as either possible challenge or opportunity, a manager really needs to be there and actively connected, if they are to support their teams and make sure they have the resources they need to do their jobs.
This does not mean leading too closely and it does not necessarily mean meeting with team members every day – through there are times when that is needed, and particularly in avoiding or resolving a crisis, or in facilitating capture of a novel opportunity where a team member needs support to reach that goal. This does mean knowing where and when to have that open doorway available, and for two-way use.
I am going to finish this posting with some thoughts based on my own personal experience. One of the most rewarding, and I have to add transformative experiences I have ever had as a manager came for me early in my work life when I found myself starting a new job without that nice windowed office available – so I moved into the cubicle and open workspace area of the team I was managing to work directly with them. I found this so valuable, and both for me as a manager and for the team I was working with, that I could directly see the issues they faced, that I intentionally took this move at other times and on other work assignments too, and even when I actually had that office – which I then used as a team conference room. I have not always taken this approach, but there have been times when I have and it has made all of the difference. So I suppose I am writing about making the right management and leadership decisions as to the how and where of what you do so that you belong more on the positive lists for what you do than on the negative lists, and on the positive lists for what you chose not to do too.
I have decided to add this posting to my strategy and planning list, though I acknowledge that it is at least as much about jobs and career planning. So I add it to Business Strategy and Operations – 2 and also to Guide to Effective Job Search and Career Development – 2 as a supplemental posting there. I also note here that related material can also be found at the first pages to those directories: Business Strategy and Operations and Guide to Effective Job Search and Career Development respectively.