This is part two of a three part discussion about the elements required to take an idea for a new venture, acquisition or partnership from concept to profitability. In the previous post, I outlined the three essential elements using the analogy of an internal combustion engine: compression, spark and fuel.
Today, I will talk about the fuel-air mixture that has to be present to create internal combustion. Combustion is the desired result of a fuel-air mixture – just as there are desired outcomes of any business proposition. In order to have quality output, you need quality input. In the case of a proposed business venture or partnership, this means considering the quality of the proposed business model of a new venture, the maximum outcomes and the plan to integrate this new business.
First, ask yourself: if successful, what is the maximum outcome of this proposed venture?
Find a way to quantify the “maximum potential energy” of this metaphorical combustion. Will there be enough energy to propel our organization forward? There are many, many modestly profitable ways to plant a new business case, but only a few that will yield the kind of results that will really push your organization to new ground.
One of the most powerful tools to aid in this effort is your imagination. If you could assume success for yourself and your partner in this next move, what are the outcomes? Is it transformational? Partnership and engagement is hard work, with significant hurdles to success. To sustain effort and momentum in the face of resistance, you need the promise of a great outcome.
Next, evaluate the potential outcome relative to all partners and customers.
Let’s ground this in some specifics by looking at a “definite yes” acquisition. Suppose the core value proposition for the current business has a simple margin of 50 percent when you account for the basic consumables and labor for a product unit. You have a great opportunity for an acquisition that brings lots of new revenue, with margins of 35 percent. On the back of the envelope it all looks great — instantly accretive to shareholder value.
The reality of this is that the higher margin product will always receive the first fruits of the organization both in talent and financial investment. It takes a great deal of discipline to build an organization that can manage two (or more) unique business models. Without proper planning, the new acquisition will languish as resources are devoted to the higher margin product. My advice in these situations is to either have a plan to increase the margins of the new unit, or put an appropriate operational firewall in place that allows talent and money to be effectively apportioned.
You also need to carefully evaluate the effect of the acquisition on your ecosystem of suppliers and partners. Businesses tend towards stability in systems where their suppliers and customers become very comfortable with product feature and pricing levels around the core business. If a new product or service is injected, the system is naturally disrupted. Do you recall the ill-fated Chrysler – Daimler pairing? The meshing of those organizations in all dimensions was problematic – design processes, marketing approaches, manufacturing operations and supply chain all clashed with very expensive results.
There must be sufficient “juice” in the deal to overcome the entrenched value chain and internal friction.
In this world of fast-paced, emergent change how do we get this right?
1) Model it.
We are now in an era where really good analytics are accessible to business owners of every size and scope. Use a business model map, create a spreadsheet and build your own model. Examine your assumptions carefully and make sure that the fundamental drivers of the ecosystem are based on good, thorough research.
2) Validate it.
Once you have done the paper study, make sure you leave the building and validate it. Talk to members of the supply chain and get their feedback. Talk to lead customers who would be early adopters. Use good survey techniques and make sure the numbers add up. It’s also important to avoid confirmation bias by engaging a professional.
Repeat steps one and two until you are rock solid. You must know the market and have it modeled. Then..
3) Do the hard work first.
Steps 1 and 2 will yield a list of key assumptions that need to hold true to have a sufficient payback for the event to add value to company and shareholders. If you did step 2 well, you know the most highly leveraged unknowns in the equation – those items which are key and critical to success. Make sure you attack those first before you scale! Expecting inventions to occur as you need them is the most common mistake I see in this area. Systematically de-risking your model may feel so old school and slow, but will yield huge results with much lower risk.
In the next post in this series, we’ll examine the last piece: is there a spark to activate the potential value of the opportunity? If you are enjoying this series, please send me an email, or tweet me your thoughts.
Related posts you can benefit from…
