Sep 4, 2020 | Change, Innovation
Robust ecosystems have points of balance; change is incremental, competitive, and evolutionary, leading to a revised point of balance.
When a species becomes dominant, that dominance becomes the source of weakness over time, as evolution requires responses to changing circumstances. A dominating player in any system resists change, as that involves increased levels of short term risk, and dominating players are generally risk averse.
Occasionally, an unpredicted catalyst appears, throwing the rules against the wall. Established incumbents fail to evolve quickly enough to accommodate the changes and survive. This is as real a process in commercial life as it is in the natural world.
The introduction of rabbits and the cane toad into Australia’s ecosystems have had the same impact on the pre-existing status quo as has the evolution of the microchip has had on the commercial world. The microchip unleashed a series of innovations for which the pre-2000 economic ecosystem was unable to recover. The now dominating players were little more than single cell commercial organisms, and many did not exist, at the change of the centuries.
Commercial ecosystems are no different. There will be times of consolidation based on the strength of the balance sheet of the dominating players. This becomes the source of weakness as they become locked into the status quo which produced them.
It is pretty clear to me that there are 4 stages in the commercial development of a market:
- Start-up stage. One player emerges, that effectively redefines a market in some way, followed up quickly by a series of fast followers. This is normally generated by some sort of catalyst, unanticipated by market incumbents, and leads to what is seen at the time as unprecedented periods of growth. Think Ford, General Electric, and those around the move from the vacuum valve to the microchip, from Allan Turing during the war to Gordon Moore in 1965.
- Scaling stage. The new players fight for dominance, with most of them going to the wall, while a small number, scale and consolidate to a position of dominance, if not monopoly. Think social media, web browsers, mobile computing.
- Leverage for profit. The new ‘kings’ leverage their dominant position for maximum returns, optimising processes, and minimising risk in pursuit of profitability. Facebook, Google, Microsoft and Amazon are all following this pattern.
- The cycle repeats. A catalyst appears that changes the rules of the game, again. Some may survive in a different form, others will disappear.
This is a Darwinian process applied to our economic and commercial ecosystems. Charles Darwin’s much quoted musing in the header applies as much to commercial systems as it does to natural ones.
The speed of change, enabled by digital technology has concentrated the cycle time from decades to a few years, and now arguably, a few weeks. It took 30 years for the vacuum tube to morph into scalable microchips, a decade for the early versions of the net to enable distributed computing, and a couple of years for that to create a system that might support new communication tools. Then, Facebook created a new model that blitzed the competition and led to absolute domination of a new ecosystem. A similar story led to Amazon, and Google, while Microsoft, the monopoly operating system player of the 80’s and 90’s, threatened with anti-trust breakup, evolved with incredible speed and agility into something new.
In the last few months we have seen examples of businesses and institutions that have evolved at a pace unimaginable a year ago, to face the challenges of Covid.
It may be fanciful, but it seems to me that market dominance contains the seeds of the dominators own destruction. This is a pattern followed not just by companies from Wedgewood, the British East India Co, Ford, GE, Microsoft, but to countries. Rome, China, Britain, and dare I say it, the US, while China is rebounding.
I speculate that this is the result of the crushing of opposition, and resulting lack of ‘genetic’ diversity that occurs as short term risk is minimised while profitability is maximised. Lack of diversity in the commercial DNA leads to commercial vulnerability, just as in the natural world
Ford ‘invented’ the modern version of the production line, (the Venetians had it first in the 1500’s) but could only make one type of car, so GM ran over the top of them with choice. Kodak dominated photos, but they defined themselves in a particular way, and despite being the ones who invented the virus that would kill them, digital photography, they failed to evolve. Same story with Blockbuster. They absolutely dominated global video rental, defining themselves as video rental stores. The then CEO John Antioco put in place a strategy that anticipated the growth of subscription streaming services. Blockbuster even had the opportunity to buy Netfliks at a give-away price at the time. However, the board, dominated as it was by those whose sole interest was short term profitability, got rid of Antioco, and the strategy that may have saved them as a significant if not dominating player. They actively rejected the opportunity to evolve, signing their own death warrant.
On each occasion, in each domain, there has been some sort of catalyst that has led to the demise of the dominating enterprise.
It seems to me that this current Corona crisis is another such Darwinian catalyst?
We have already seen many businesses struggling, and many ‘hitting the wall’ and I suspect there will be many more, while some, mostly smaller and more agile businesses are doing very well. Question is, will a few of the dominating enterprises fail the test of rapid evolution, and disappear?
I am prepared to bet that many will, and be replaced by businesses we have not yet heard of, that are able to deploy digital tools in almost real time. Just look at the manner in which Zoom has been able to harness the opportunity, blowing away incumbents like Microsoft.
Sep 2, 2020 | Governance, Marketing, Small business
How do you execute on that BEHAG?
How do you fulfil the vision?
How do you accomplish the mission?
These are all questions I get from time to time from people stumped at the point where the dream, whatever label you choose to put on it, has to be turned into some sort of activity.
A dream in the absence of the steps to achieve that dream is commonly called a fantasy.
The process that I help people through is what I call ‘Hindsight Planning’
It has four distinct steps.
Step 1. Understand the market dynamics.
There is no avoiding the necessity to understand the drivers in the markets you are seeking to leverage. The technologies, barriers to entry and exit, capital requirements, regulatory requirements, major competitive factors, and a host of others all play a role. In the absence of at least having some idea of the ‘Current state’ of the market, you risk that plan being just a shattered dream. Unless you understand what it is you want to change in order to grow, and what the probable drivers of that growth will be, it will remain a fantasy.
Step 2. Agree on the shape of the business down the track.
Planning horizons change from market to market. Technology markets are changing almost as we speak, some others have very long lead times, although it is often these that are disrupted by newcomers who throw the long held beliefs that have driven the market over the wall and change everything. Nevertheless, difficult choices need to be made. What you will do and how, but often more importantly, what you will not do and why.
Step 3. Plan backwards.
Having agreed the shape and size of the business in 1, 3, or 5 years, whatever horizon you have agreed on, the task now is to ‘put yourself there’. Imagine the outcome has been achieved, and then articulate the steps you have taken in that journey. This might seem just to be an exercise in words, and to some extent that is true, but importantly, it is also an exercise in perspective. Working backwards enables you to test ideas, assumptions and choices, against an outcome you have agreed has already occurred, albeit in your collective minds. In that way, a ‘reality filter’ of sorts has been applied.
Some of the obvious questions that need to be answered may be:
- Where did the revenue come from? Growth is not possible in the absence of revenue, so list the sources on a whiteboard. Current customers, new customers, channels, business models, products, technical achievements, geographies, and so on. However, do not just list them, articulate in some detail how it has happened. Again, that past perspective adds real ‘grunt’ to the conversations.
- Where did the capital come from? Growth is a veracious consumer of resources, particularly capital. How did you fund that growth? Reinvestment of retained earnings, capital raising from friends and family, or from the markets, public and private, debt finance considering the necessity for assets as collateral?
- What is the dominant business model? Are you a middleman, retailer, on line item sales, subscription sales, did you achieve a position to monetise arbitrage opportunities, and so on. Digital has delivered a host of new and emerging business models to us over the last decade, but one thing that has become clear, if it was not already, is that differing business models do not live comfortably in the same house. Therefore, if your revenue streams come from different business models, the structure of your resulting business needs to be decentralised by those differing business models.
- What is the ideal corporate structure? Have you remained private, are you publicly owned, a partnership, Joint venture, franchise system? There are many options, and as in the previous question, potential siblings rarely successfully live in the same house.
- What capabilities were required to succeed? This is a question in two parts. Firstly, what capabilities were required from individuals, technical, strategic, financial, and all the other factors that make human beings able to contribute? Secondly, what were the organisational, leadership and cultural factors that enabled the organization to leverage the capabilities the individuals brought in each morning as they turned up to work.
Step 4. Execution of the plan
As noted, a plan of any sort remains a fantasy in the absence of the means to execute, and deliver on the plan.
Executing on a plan to achieve an objective has a few wrinkles that must be accommodated:
- ‘No plan’, as George Patton said, ‘survives first contact with the enemy. This means that the plan must be sufficiently agile to accommodate the unexpected, while remaining focussed on the objective.
- All stakeholders, and most particularly those who are employed, must not only know the plan, but they must understand and ‘buy into’ the objective, while reacting tactically to the unplanned things that confront them. The means to achieve these usually mutually exclusive outcomes, is that they not only understand their role, and the part their role plays in the larger objective, but they must also be prepared to be more than just an unthinking functionary, doing as they are told, or at least as they understand they are being told. It is a process of critical thinking and feedback going up, down, and very importantly, across the management chain. Not an easy thing to achieve and one we normally just attribute to some natural ‘leader’ who emerges. However, everyone has the capacity to be a leader, simply by being a participant in the process and holding themselves accountable for the actions of others.
- Operationally deploying ‘Nested’ functional plans. Like the operations of a mechanical watch, to tell accurate time, each part of the mechanism must contribute in a defined way to every other part of the mechanism, while not being overtly connected. There are always a range of flywheels driving others of varying sizes that are doing different roles, that all add up to that accurate time. An organisation is just the same, and this diversity of role, timing, and relationships to other flywheels must all be kept in synch if the outcome is to be achieved. No easy task, which is why it so often fails. Successfully driving towards an objective, means that the various parts of the mechanism of the organisation must work be synchronised in ways that are able to accommodate the tactical opportunities and reverses that inevitably occur while not losing sight of the objective. This all requires what I call ‘operational nesting’
When you need an expert to help you think about these things, let me know.
Aug 31, 2020 | Change, Management, Marketing
We are in uncertain times, and under those circumstances, perhaps counter intuitively, there are many opportunities for all forms of M&A activity.
For many owners of SME’s, this Covid crisis is the last straw.
You have worked hard for years to build a business, survived and prospered as technology has changed the competitive landscape, avoided the trap of not managing your cash well enough to cover the unanticipated, and survived the various financial meltdowns that have occurred.
Now you are ready to sell, as there is no way the kids want to work as hard, and thanklessly as they have seen you work, and the current uncertainty makes an easier life seem very attractive.
Following are 10 of the traps I have seen over the years, which have resulted in a seller obtaining less than a business may have been worth to a buyer.
Never forget the role that psychology plays in the process.
There are many financial and strategic due diligence boxes that will need to be ticked over the course of a successful transaction. However, the psychological drivers on both sides of the transaction will have a profound and often unrecognised role. From beginning to end, it is an all in negotiation, where skill and experience will play a huge role. This is a double edged sword, and can be made to work for you by judicious planning and execution of the sale process.
Appearing too keen to sell.
Once you appear really keen to sell, that influences the context of negotiations. Nothing is as obvious to a buyer as the desperation of a seller.
Not marketing and managing the selling process.
Marketing plays a decisive role in setting the context for a transaction. How many buyers you can interest, how you go about identifying and generating that interest, how you communicate with interested parties, what information you provide, and when, and how you conduct yourself. It will consume a lot of time and effort when done well, done poorly; you will ‘get done over’. Selling a business is no different to selling a piece of capital equipment, or a tub of yogurt, it is a process to which there is more than one party, with ranges of interests, drivers, motivations and resources available. Pretty obviously, the more keen and genuine buyers the better.
Having unrealistic price expectations.
Few will see the business as you do, and most owners of SME’s consider their emotional commitment over the years has a value. It may do, so long as it is reflected in the financial and strategic value to a buyer, but in itself, it has no value to a buyer. The manner in which the price is structured can vary enormously, from a ‘cash on the barrel’ agreement to swaps of shares, delayed payments, and work-outs dependent on future earnings. Each has their own set of challenges which need to be anticipated and factored into the calculations in a realistic manner. However, going into the process with unrealistic expectations can sour the well.
Poor anticipatory Due Diligence.
Any serious buyer will undertake a DD process, the depth and investment in this will be driven by the size of the transaction more than anything else. Making it simple for the buyer will be appreciated, and add to the trust they have in the forecasts you may make. Anticipating questions that may emerge during the process, and answering them before they are asked defuses them as a potential issue. Removing potential negatives before they become objections is sales 101. Never forget the rules of sales apply, so leverage them.
Ignoring the qualitative elements.
Can you work with these people? Are you prepared to have them take over the business, and its relationships you have nurtured? Do the emerging conditions of purchase cause you to lose sleep?. It may be that none of these apply, so you do not care. However, I have seen transactions turn sour at the last moment after considerable effort, just on the basis of personality, so consider it early and avoid the pain.
Risk assessments.
Every transaction has risks, covering them in an anticipatory DD process so you have the answers before the question is asked, is extraordinarily useful. A buyer will make their own assessments, but the better yours are, the more likely that any difficulties in the negotiation will be papered over. Selling any business is based on the assumptions that a buyer will make of the value that business will add to them. I.e, it is all about revenue and margins over time. The temptation of the seller will always be to beef up the forecasts, which is usually a mistake. Be realistic, but break the revenues down into its components and make assumptions at the more granular level. For example, costumer margins, the trends over time and the influences that adverse events have had. Any comprehensive buyer DD will ask the questions, so have the answers in a robust defensible form.
Understand the strategic value to every potential buyer.
Every buyer will be different, understanding the drivers of each is critical to maximising the price. Make your own assessment of what strategic value your business can add to theirs. This analysis is always way more than just a calculation of future cash flows, although that will always be the starting point. Items such as an assessment of the value of your brand to a buyer, the rate of customer churn, longevity of customer relationships based on barriers to entry and exit, recurring revenue vs ad hoc sales, and many others, will all add to the strategic value to a buyer. Each potential buyer will value these items differently, so developing a nuanced understanding of their business is an essential element of the sale process.
Avoiding the cost of good advice.
Professional advice can be expensive, and for an SME owner keen to maximise the dollars in their pocket, a seemingly avoidable expense. The problem is that selling a business can be a complex exercise, and is always more complex than it first seems. Having good accounting, legal and strategic advice is like any investment, it is made to either make or save money. In the case of the sale of a business, the objective is to maximise the sale price, and minimise the risk to the seller. Experienced buyers will often overwhelm a potential seller with documentation, questions, and promises which conceal the gaps and traps into which the unwary and poorly advised can easily fall.
No plan B.
Selling a business can be a lengthy and difficult process. Many spend time on the process that would be better spent managing the business they are setting out to sell, optimising the value that someone might pay for it. As a flip side of the same coin, many invest themselves in the sale process in the absence of a plan B. When a sale falls through, not only to they have to get back the running the business, they have to deal with the unfulfilled expectations of customers, employees, and yourself.
As a final point, when you get the unsolicited offers, do not invest too much time in considering them in the absence of a real demonstration of the intent of the hopeful buyer. There are many reasons for an unsolicited approach, and none have anything to do with maximising the value for you, as the seller.
Aug 28, 2020 | Leadership, Management
Have you ever noticed that problems are rarely solved by those who have not seen them first hand?
Core to ‘Lean’ philosophy is the Japanese term ‘Genchi Genbutsu’ which carries the meaning ‘go and see’.
In other words, when you have a problem, do not pore over spreadsheets, seek counsel from a friend, or check in with your boss. Instead, go to the source of the problem and see for yourself.
Few do this, and as management becomes increasingly isolated from the processes that support them, we become ever more creative with the reason why we do not down tools, and go and see.
Some of the usual excuses I have heard.
I am too busy.
If you are accountable for the smooth running of a process or person, you have no greater responsibility than to ensure the problem is solved. If it is not your problem, but it is no one else’s either, then take the initiative and go and see, take responsibility. You should never be too busy.
I do not know the source of the problem.
Often this is a legitimate concern, but it is not an excuse to do nothing. By contrast, it should be the best catalyst to set about determining the cause of the problem. Go and see, apply some critical thinking, peel back the layers of symptoms to properly understand the causes of the problem, and eliminate them.
It is not my problem.
Functional siloes and the mismanagement of KPI’s in bureaucracies of all types, are commonly the cause of this common refrain. We have complicated management structures and accountabilities so much in the past decades that everyone has the ability to point somewhere else, or simply walk away. Leadership and culture are the only antidotes. Built into the management culture must be the recognition that a problem somewhere in the organisation, ultimately impacts on everyone. Therefore, everyone has a responsibility, if not accountability, to call it out.
I cannot get there.
Again, often a legitimate barrier, especially in the corporate world where the location to be seen is distant, and there are travel approval processes to be navigated. Sometimes, you might be able to visit via the great video conference technology now available. However, technology is never a perfect substitute for a set of eyes, and the impact of someone coming from a remote location to examine the problem, and help find and implement solutions.
It is uncomfortable.
Yes, often it is, especially when dealing with a person. However, avoiding the conversation, embarrassment, confrontation, anxiety, or whatever it is that is stopping you, still does not address the problem. You just have to go and see.
It is not a problem, it is an opportunity.
The flip side of every problem is opportunity, for those who are able to see it. Where do you go to see an opportunity? The place may not exist. This should not stop you going to where it may exist and looking, perhaps building a ‘minimal viable product’ and testing it in the market. Some of the most successful products I have conceived and launched had their origins in conversations with consumers in supermarkets. Watching what they did, and asking why they did it is a source of ideas about all sorts of things, including identifying things that may not have been noticed as a problem to be solved.
None of these excuses hold any water, they are a cop-out, and are actively avoided in enterprises that have the potential to be great.
Aug 26, 2020 | Marketing, Social Media
The fundamental problem with ‘digital advertising’ is that there is little competition for ideas.
In the past, with limited availability of media, the competition happened before the public got to see anything, as those that controlled access to peoples eyeballs did the fact checking, curation, and idea vetting.
Now that is gone, and there is unlimited competition without the curation, the competition is for attention, then for head-space.
The competition for attention, now has infinite potential to consume the competition of ideas, hence we have the crap that just keeps coming at us in increasing volume.
There are some versions of curated content on line, where the ideas are curated and vetted as they were before, but they are struggling for survival in the sea of social sharks consuming everything around them of any value, and squirting out shark-shit.
And, that is all before the rampant fraud in the digital ad supply chain is considered.
