I’ve had a really engaged and focused set of workshops recently around growth options with C-leaders of mid-sized, complex firms. To become a complex firm, each had to develop competencies in one of the four main growth drivers: Internal R&D, M&A, Partnerships or Venturing.
Each of the firms I was working with has had success in their swim lane but wanted to “game out” what a different approach would look like. What I want to highlight here is where the issues typically emerge after the honeymoon is over and the new entity is stressed through shifts in market events.
While each of these is a substantial area of practice on its own (and could easily be a white paper), as we discussed them, I realized that there is value in considering them together at a high level. The insights we see at this level allow us to avoid the “grass is always greener” issues of choosing an approach.
By getting clear on each of these, and where issues appear, we can plan better and anticipate where we need to strengthen the business case prior to investing.
#1: Internal R&D
When the firm was formed, they had a “genesis” event that gave rise to a completely unique offering. This hard-won knowledge propelled the early firm towards its first established line of products or services – as well as its own captive group that helped improve on its core and win further market share. Over the course of its ongoing operations, the firm was able to mature these internal capabilities. However, once the initial offer reaches a plateau, they do what many other firms do when faced with this issue: they place a substantial bet on entering an adjacent market.
Where it goes wrong:
- Competence in their core leads to overconfidence in the ability to enter the adjacent market. When a firm has gotten comfortable with its ability to generate success in its core offerings, it frequently over-invests in the adjacent work. This can lead to big misses (see posts here, here and here).
- Greater than anticipated channel investments. A second area that creates issues is when a firm overestimates its channel’s ability to successfully market and deliver an adjacent offering. Big unplanned investments occur when the current team is either upskilled or augmented.
- Sunk costs dampen crisp decision making. This pathology occurs when a project is initiated and misses its benchmarks, but because of intangible attractiveness, it retains investment. This gives rise to the “zombie” project that doesn’t ever die.
#2: M&A
This term is applied to a broad scope of work where one entity acquires control of all or a portion of another with the intent of building out a stronger offering on behalf of a market segment. The variety here is endless – from acquisitions done for areas ranging from talent, capability or channel strength. A key metric is the relative size of the transaction relative to the parent, which may be small, near parity or significantly larger (sometimes called a reverse acquisition).
Where it goes wrong:
- Cultural Friction. This is hands down the most underestimated and persistent long-term issue. I have worked with teams years (sometimes decades) later that still retain the identity of the parent firm to the point that it affects their ability to fulfill promises to its clients.
- Product & Process Complexity. There is always significantly more resistance to integrating product roadmaps and processes than anticipated during the deal cycle. Business P&L leaders will argue vehemently for the need to sustain both road maps because there are always demands from niche, pre-acquisition firms that are hard to unwind.
- Channel Overlap. This is when the two channel organizations compete with one another for the same customer’s business. This one is usually combined on paper quickly, but like the persistent cultural issues, the best and most independent of the channel resources inevitably will migrate to competition.
#3: Partnership
For our discussion today, a partnership is when two entities choose to create a third entity that will deliver value to the two parent firms. These can be very beneficial to firms with a deep capability that is seeking to enter an adjacent market. For example, when Microsoft wanted to go deeper into the smaller customer relationship management space, they partnered with Nimble to quickly add the capability.
These are among the hardest deals to strike and maintain.
Where it goes wrong:
- Perceived inequality. It takes a great deal of work to put one of these agreements in place, and the senior leaders who work the deal out have powerful constituencies behind them that are pushing for more. Once the deal is struck, there is a constant battle within each firm around who “is winning” in the partnership.
- Mismatch in time expectations. In the case of large and small partners, it’s a bit like a patrol boat and an ocean liner working together. The striking of the original deal is one thing, but matching the ongoing decision-making timelines can put great stress on the relationship.
- Changes in personnel. These tend to be driven by strong personal relationships on both sides. When one of the principles in the deal needs to move on, it frequently spells trouble for the partnership.
- Creeping commitment levels due to pressure on the “parent.” One of the most common issues in a partnership is when the parent comes under some financial stress and needs to cut back. When this happens, it’s very easy for the partnership “investment” to come under pressure with predictable results.
#4: Venturing
This occurs when equity investments and mentorship by a larger firm is made in early-stage organizations with provision to gain insight, and perhaps cooperation with an internal business unit. This investment provides leveraged and buffered bets, typically in advanced or emerging technologies. These tend to be medium-term commitments that last around 5-7 years.
Where it goes wrong:
- Creeping portfolio complexity. For the investing firm, the mentorship and relationship management work multiplies quickly. This can morph into quite a complex portfolio, resulting in substantially more overhead than anticipated.
- Variable interest from core business. Core business units start our very interested, and then when the distraction of running the core business returns can be absent creating a vacuum for the investee. The best of these combine passion and personal relationships which tend to rotate frequently inside corporate entities.
- Challenges of holding KPI alignment when the entities direction deviates from lead investors. It is easy for the core business to forget that they are a minority investor in the venture. The investee is still an independent entity, bound to serve the investor base as a whole. This creates predictable tensions to find win-wins.
How to Get it Right
Now that we’ve identified some of the most common challenges, here are three effective ways that you can begin working through them – so that you can make the most of your investment:
- Use a tool like STRIDE to build a “sprint” team with all four CGL voices present to minimize blind spots. It is so easy to fall victim to confirmation bias early in the evaluation cycle. Once these issues settle in, they need a very integrated and direct approach to finding a path forward.
- Pull out the initial plan. Next, do the scenario work on what success now would look like, as well as what precisely is driving the miss. Do some work on the revised base case and what everyone can expect.
- Revise your process to have robust upside and downside discussions up front. Binary thinking comes into play way too early. Attorneys are great at protecting each firm’s assets but can easily take the strategic “magic” out of a deal. Talk about the full fidelity of the possible, and keep the magic.
In my advisory work, I’ve been privileged to help with diagnosis and support for firms feeling the issues of doing deeper value development work. If you’d like to begin a dialogue please reach out at 847-651-1014 or set up an appointment using this link.
Related posts you can benefit from…
