9. ix
Introduction
The speed and complexity of change in high technology’s business
landscape requires rapid evolution. To enduringly thrive developing,
producing and supporting technology-driven products and services, a
business has to quickly advance. Capabilities and managerial focus
constantly adapt, sometimes tectonically.
Mergers, Acquisitions, Partnerships, Restructurings, Turnarounds and
Divestitures are essential tools for transforming a technology-based
enterprise with requisite speed and agility. The author presents a
condensed guide to devising and implementing major business
changes.
Chapters also address strategic marketing, sales and ecosystem
relationships. New products, services and processes are the foundation
of most partnerships and other types of business reconfigurations. A
strong grounding in marketing, sales and strategic linkages sets the
stage for augmenting or refining a business. Moreover, significant
executive ego and achievement pressures influence large business
moves. Customer and partner rationale can be stretched to cement
authority for change. A back to basics view of the most influential
marketing strategy, sales and external business network factors puts
the soundest footing under new business configurations.
10.
11. 1
Strategic Partnerships
The principle objective of strategic alliances is access to
complementary markets and technologies, much faster or with lower
risk than otherwise possible. Greatest impetus to form affiliations
usually comes if development costs are rising quickly, particularly
where they’re faster than the company’s rate of growth, and, product
life cycles are contracting.
The benefits of strategic relationships include speeding development
time, reducing marketing and technical risk, attaining cost
competitiveness, acquiring individuals of rare talent or other valuable
assets, and blocking competitors. Inexorable technology and market
change makes strategic partnerships such as outsourcing, alliances,
joint ventures and acquisitions increasingly important. Responding to
a changing environment, partnerships can rapidly improve or defend to
sustain and advance competitiveness.
The complexity of strategic partnerships increases with the rate of
growth, heightening the importance of honouring conventional
wisdom about these unions. Links in the chain of success include:
Mutual respect
Shared goals and vision
Strong mutual commitment
Joint pragmatism
Vigorous ability to innovate
Trust
A single integrated team
Fairly shared risk
Fulfilling these simultaneous elements of a productive linking requires
extensive relationship surveying and engineering.
Partners see in each other the ability to access strategically vital
capabilities in a harmonious manner that is not readily available
elsewhere. These rare capabilities need to provide mutual contribution
12. 2 Rapid Advance
that will be sustainable over the long-term. Joint dependence sets the
stage for the other elements of a successful partnership. Both
organizations need to feel that they have picked winner partners, and
mutually work to make each other and the combination successful.
The boundaries of partnership must be well defined, such as whether it
is for a technology, product group, application sector or geographic
market. Articulating limits for the relationship is usually crucial to
achieving buy-in on both sides, and at several management levels.
Defined boundaries also reduce the likelihood of migration into
competitive positions.
Partners must have similar objectives, shared vision and strategy, as
well as compatible cultures, values and personalities. These are the
foundation of success. They are fundamental to a workable pairing of
two entities, yet also among the most difficult aspects of prospective
partnerships to assess. Vision and culture embody many things, and
one can never have complete information about another. Even when a
partnership seems harmonious at one point in time, the subtleties of
different history and personalities, as well as unforeseen future events
means that there are many forces that can separate objectives.
Communication, shared vision and common strategy keep outlooks
aligned.
Compatibility of culture, personality and values, as well as trust enable
two other aspects of the pathway to success: a willingness to change
that engenders adaptability; and, open access to each others’ strategies,
which abets effective planning.
At the same time, the strong mutual commitment at the core of any
successful, sustainable relationship must be cemented in ways so that
when things get tough, neither party can easily walk away. This
begins with unwavering support at the outset from senior management
at both firms. Commitment paves the way for measures such as
investing in each other, sharing development costs, and contractually
committing to supply and purchase terms. Prospective partners must
have comparable stakes in the success of the venture. Otherwise, a
more traditional superior-subordinate relationship will arise from the
different importance each party places on the relationship, which will
13. Strategic Partnerships 3
undermine effectiveness. Cross-commitment should not go so far
however as to become a suicide pact. Some mutual barriers to exit
from the relationship are necessary, but if conditions deteriorate badly,
both parties should strive to preserve a survivable way out.
Strategic alliances in turbulent technology-driven environments have
the greatest chance for success if both parties are adaptable and
innovative in technology, products, markets, and business processes.
Creating and then managing new products, services and processes is
ultimately what linking is about. Thus, innovation and flexibility are
at the root of both companies’ abilities to make the relationship work.
Organizations that innovate naturally, in both technology and
processes, have improved chances of pairing, particularly as the degree
of departure from the familiar, the amount of co-operation, and level
of interaction all climb.
Prospective partners must be pragmatic about the likely duration of
their alliance based upon the rate of change of the underlying
technology and environmental conditions. If the rate of change is slow,
association can typically last much longer than if the rate of change is
rapid. The overriding consideration is that the union can only be viable
as long as the joint effort maintains leadership in technology, quality,
and market access.
Furthermore, partners need to trust each other. Reliance should be
safeguarded through comprehensive mutual intellectual property
agreements. An intellectual property protection framework allows
both parties to be forthcoming with each other, delivering full and
unencumbered disclosure about technology, markets, and other
sensitive matters. Trust is the cornerstone of communication.
Communication comes when the relationship is carried out with a
single team, carefully structured with players from both parties. The
crux is to understand who the key people are, and how they fit into the
resulting joint organization so that they can continue doing what they do
well. Take measures to ensure that the pivotal people remain with the
integrated team. Don’t just talk to the top people. Get to know the
second level people as well.
14. 4 Rapid Advance
The skill is to figure out who are the most connected experts. They are
often not in the most prominent positions on a traditional organizational
chart. They are identified by asking a wide range of people which
colleagues they consult most frequently, who they turn to for help, and
who boost their energy levels. This is how to get a sense of how work
really gets done among a group, to help identify talent, and nurture the
most in-the-know employees. A single team of the brightest and best
among the two groups is then more easily built.
The unifying force of a single and consistent team, as well as channels
for regular and open communication among them contribute to a
successful co-operation. High bandwidth, low overhead
communication channels vitally foster adaptability to prevail in a
changing environment.
Partners must also fairly share risk. Cross investment is one
dimension, in both money and sweat equity. Partner firms need to
develop cross-functional capabilities, and be committed on both sides
to understanding each other’s processes, systems, workflows,
organizational structure, priorities, and reward systems. The two sides
can’t just get familiar with each others’ products and technology.
Knowing the way each other functions helps work get done across
organizational boundaries. Partners can then better make mutual
obligations to specific business, technology, competitiveness, and
quality milestones. Formal performance yard sticks help to signal for
corrective action as combined effort progresses. Up front
understandings and obligations diminish the likelihood for partners to
subjectively criticise each other, and maintains focus of both on
critical objectives.
Among the most important characteristics of strategic partnerships is
to deliver the whole product necessary to win market leadership. Why
is this so important? The reason is the largest and most profitable
revenue streams flow to market leaders, creating longevity of an
attractive market position to retain priority attention from the coterie.
Furthermore, with market leadership and the whole product, success
becomes more likely. This is because the fate of the initiative is then
largely within the collaborators’ control, rather than a disproportionate
dependence on outsiders who may be difficult to influence. Partners
15. Strategic Partnerships 5
need to construct a relationship with market leadership and the whole
product as prime objectives.
When formulating and operating a joint effort, partners sustain success
by making required compromises in equal measure at the same time.
Trade-offs by one should not be made in exchange for unspecified
future considerations from the other. This leads to disappointed
expectations, and can undermine an otherwise sound co-operation.
Investments by both partners throughout the alliance should be
specific and mutually agreed upon.
Regardless of planning and efforts to make exchanges in real-time,
disputes will arise. A conflict resolution process gives each party a
defined avenue of redress for unforeseen issues that come up. A
dissention work-out mechanism should be part of the up-front
partnership agreement. After difficulty strikes, agreeing upon a
resolution vehicle becomes significantly more difficult.
Firms seeking competitive advantage through joint efforts can pursue
different levels of involvement. Strategic partnerships cover a
spectrum from low to high co-operation and interaction:
Purchase agreement, where even this basic level of partnership can
be complicated for strategically critical elements because of
exclusivity and mutual obligations
Patent or technology license
Franchise
Cross-license
R&D consortium
Co-production
Product or market exclusivity
Minority equity participation
Joint venture
Merger
Acquisition
Considering this spectrum, lower co-operation and interaction
alliances can often come together more quickly, as well as disband
16. 6 Rapid Advance
more easily when the basis for the alliance changes. Less involved
structures also provide an easier environment in which to bring in
multiple partners. Higher co-operation and interaction alliances
should be used as the scale of investment and cost of failure climb.
Whatever legal form, and sharing of risk and reward, partnerships
between companies are like any other where the greater the interaction
and co-operation, the more particular each company should be. Many
possibilities for joint ventures, mergers and acquisitions should be
evaluated, but only a minority completed. The right ingredients and
timing are rare. Businesses must be particular when contemplating
prospective partnerships, especially as the relationship becomes more
involved.
Characterizing a prospective partnership requires detailed due
diligence. It is a significant part of obtaining reliable information
about the quality of the assets on the other side. However, unlike the
perceptions of some, the purpose of due diligence isn’t so one can find
issues in order to negotiate better. Some jockeying goes on, but
arming for negotiation is not the lasting value of due diligence. The
larger and ongoing benefit that endures after the partnership goes into
operation is to identify issues so the relationship can be better
managed.
To fully assess opportunity and risk factors, due diligence in
evaluating potential partners should include:
Technology
Products, including products under development
Markets
Sales, service and support
Marketing
Customers, especially customer satisfaction
Operations, including production and sourcing
Legal and regulatory circumstances
Management
Employees
Culture
17. Strategic Partnerships 7
Financial considerations should also be part of investigations for
strategic partnerships. However, a trait of relationships offering rare
opportunity for dramatic growth is typically that financial profiles of
current circumstances are of lesser importance than other due diligence
items. 1
This is because non-financial matters dominate joint
innovation capability and the capacity of joined organizations to create
competitive advantage and sustained long-term increases in
shareholder value.
Nevertheless, financial due diligence should cover:
Return on investment
Earnings per share contribution
Discounted cash flow: estimated future cash flows discounted back
to present value
Residual (terminal) value
Free cash flow: earnings plus non-cash charges, less the capital
investment needed to maintain the business
Economic value added: a combination of net profit and rate of
return, in a single statistic; net operating profit after tax, minus the
weighted average cost of capital
Most of the preceding partnership discussion has been about formation
and operation. However, cessation must also be considered. Some
take the view that cessation of a consociation is a sign of failure, as it
is in marriage. But, in changing technology and market circumstances,
an end is often a natural outcome, even with a short life span. Partner
companies’ failure to plan for termination is more often the avoidable
shortcoming. Greater time typically is invested in formative decisions
than cessation. Management of partnering firms should consider how
1
The most common exception to a secondary role for near-term financial
circumstances is in acquisitions where the firm to be acquired is comparable in size
or larger than the acquirer. In such cases, the acquirer may not have the financial
resources to carry the target, should significant difficulties within the target business
arise post-transaction. If so, financial due diligence, particularly regarding margins,
cash flow and net income becomes a chief due diligence and decision matter.
18. 8 Rapid Advance
to terminate the united effort, including buyout provisions, and the
effect on each of the parent companies.
Small-Large Business Pairing
There are special considerations for small firms. A common issue for
a small organization seeking strategic partnership is that the
prospective partner is much larger and better established. This
incongruity presents some interesting challenges. Regardless of size,
the bottom line remains that both see in each other the ability to access
strategically vital capabilities in a harmonious manner which is not
readily available elsewhere, and a mutual significant ongoing
contribution. But, timing is significant, particularly for the larger
partner.
Sizeable prospective partners generally are best approached in slow
times. Overtures to larger partners during quieter times are important
when the initial business volume prospects from the collaboration are
low, as often happens while technology, product and market
development take place. Larger potential partners need to be solicited
when they will be more receptive to speculative ventures to fuel
growth. This is when they have the best chance to see the need for
significant innovation to propel future expansion and most likely to
take an open-minded look at the potential of the smaller player’s
technology and capabilities.
Partnerships of disproportionately sized companies also need to
contemplate an instability effect when considering interaction short of
merger or acquisition. If the little company ends up being important to
the big one, the big company often cannot risk not owning the little
one. On the other hand, if the little company ends up being
unimportant to the big one, it will be cast-off, often badly wounded.
The smaller company frequently needs to be willing to be absorbed or
be cast-off, as one of the costs of the partnership. Exclusivity and
take-over provisions are common requirements of a larger partner that
can lead to the instability effect. Stable long-term co-existence for
disproportionately sized partners, who haven’t merged, is unusual.
19. Strategic Partnerships 9
Partnerships of dissimilarly sized business also can undergo increased
risk of “hold-up” compared to like-sized collaborating entities.
Typically, one firm or the other makes investments specific to the
particular co-operative project, where those assets have limited value
in other uses. The gravity of sole-purpose investments is often much
greater for the smaller firm. The mismatch of dependency and sunk
costs for the partners creates the possibility that the other firm will
delay, in terms of payment or other corresponding forms of
participation, in order to gain advantage, perpetuate the status quo, or
renegotiate the terms of the deal.2
Managers need to assess hold-up hazards, and the effort necessary to
monitor and avert opportunistic behaviour. Determining risk, and the
amount of work to avoid difficulty, requires a clear understanding of
relationship-specific asset investments. Where the risk of hold-up
would otherwise be considerable, equity ownership by one firm in
another is often a vehicle for bringing alignment of interests,
especially between disparately sized firms.
Minority Equity Ownership
Short of complete ownership, partial equity participation by one firm
in a (typically) smaller partner is one of the significant influence-ors
that partners have to help align objectives and incentives. The way
partial equity ownership helps is by giving the entity buying-in real
skin in the game of the target’s business. It works best when the
buying-in party delivers a major piece of the puzzle that the investee
company is missing, and when there is joint desire to work together
rather than a forced marriage.
Building on these elements of success, the degree of equity ownership
of one firm in another can be used to provide:
Exclusivity and control
2
“Choosing Equity Stakes in Technology Sourcing Relationships,” Kale and
Puranam, California Management Review, Spring 2004
20. 10 Rapid Advance
Alignment of interests
Inter-organizational co-ordination, including linking or regrouping
activities across organizational boundaries to share knowledge and
control
At the same time, the cost for one firm taking an equity stake in
another, especially a smaller firm, can be summarized as:
Reduced entrepreneurial motivation for the staff and management
of the target, due to changed incentives and work conditions
Commitment cost to a particular technology, in an environment of
uncertain viability for the technology
Commitment cost to a particular marketplace approach when there
is volatility about the structure of the industry, the target
marketplace, or demand for the technology
Equity ownership plays an important role accessing valuable resources,
ensuring they remain unique and difficult to imitate. The benefits and
costs of equity participation for both sides can be assessed using the
above framework.
As the benefits of equity ownership grow, and the costs decline, the
degree of equity ownership of one partnering business in another
should increase.
Where the benefits and costs do not point to a clear conclusion about
equity participation, creative deal-structuring and post-transaction
business unit incentives are one way of reducing complexity.
However, an unclear cost-benefit assessment of equity participation is
more often a signal that the partnership with an equity stake may not
be a good bet.
21. Strategic Partnerships 11
Earn-Outs
Equity participation often is suitable, but there is a valuation gap
between buyer and seller. To bridge the separation, a contingent
payment is the typical contractual mechanism. This is a variable
payment tied to future performance of the acquired business. It
addresses future business risk when exchanging significant ownership.
In the technology arena earn-outs are common. Many companies are
targeted for equity investment or acquisition after they have created
valuable technology, but before time has proven out that value in the
marketplace through revenues and profits. The advantage of an earn-
out is to create incentive within the acquired business for future
performance. It is a way for the seller to obtain a higher price, as they
prove the market value in the future. As well, contingent payment
lowers the purchaser’s risk of overpaying, lessens the impact of
differences in information and outlook between purchaser and seller at
the time of the transaction, and provides credibility from the seller
about the asset’s worth.
At the same time, earn-outs carry challenges and unintended
consequences. They can strain the new working relationship if
structured improperly. One difficulty can be the incentive for the
target’s management to maximize the payout formula at a defined
moment in time, which can be at odds with the better long-term
interest of the business. To create a more balanced view between
short- and long-range, graduated payments staged over the term of the
variable payment are usually better than one-time payment schemes.
Another consideration with contingent payments in equity transactions
is if structural integration with the acquirer is necessary for co-
ordinated operation. After amalgamation, it often becomes difficult to
evaluate or even measure the acquired unit’s stand-alone performance.
Linking the contingent payout to actions beyond the target
management’s control introduces significant complexity when
operational integration is foreseeable. Earn-outs are most successful
when the operating entity continues to be largely independent after the
investment or acquisition. In particular, the budgets for marketing and
development as well as distribution channel access should be
22. 12 Rapid Advance
definitive. This way, both sides of the earn-out agreement have
greater assurance that the target entity will have the resources to
deliver its potential.
A further piece of the earn-out puzzle is management retention.
Where extensive integration and control of the acquired entity is likely,
but it is still desirable to retain the unit’s incoming management for
continuity or leadership, it can be better to replace the contingent
payment with a flat retention package. This is a fixed monetary sum
the target’s management receives for staying a certain period of time
post-transaction. To provide flexibility and buyer protection, the static
stay-pay incentive should include the option at the purchaser’s
convenience to pay out and part ways with the target’s management.
A fixed fee mechanism gives the acquirer the latitude it needs to make
structural and management changes to achieve integration. Sometimes,
the acquired management cannot break themselves of the habits of
independence, and rebuff integration efforts. The difficulties may
even be partly due to overreaching commitments of the acquirer during
sale negotiations about post-transaction independence. However
integration friction arises, a flat retention incentive with a unilateral
pay-out option for the acquirer reduces the risk of acquiring inexorable
management liabilities that impair co-ordination. In particular, a flat
sum buy-out clause curtails the possibility of the acquirer being held
hostage by the target’s management about changes that ultimately
inhibit the ability to make the equity partnership work.
The pragmatic implication of these factors for an earn-out is that the
time frame should typically be no more than three years. Integration
becomes more difficult to avoid the further into the future the
contingency term extends. At some point, operations will be
integrated, or set aside, and it will make sense to eliminate the trouble
of earn-out calculations.
Contingent payments are a constructive tool in equity purchase deal
structuring to align purchase value and incentives, but that utility has
limits. As a practical matter, they are best used when an acquirer and
target have an incoming valuation for the acquired business that is
within a factor of five of each other. If the valuation spread is larger,
23. Strategic Partnerships 13
typically even an earn-out will not provide enough of a bridge in time,
information and value to reach an agreement. At the other end of
valuation difference, when the gap is small and valuations by
purchaser and target are within 20% of each other, usually it is better
to continue negotiating and arrive at a single monetary figure. When
valuations are this close, the negotiations and post-transaction control
risk around a contingent payment mechanism can introduce more
complexity than it eliminates. With a small valuation gap, it is usually
better for both sides to transact at a single final valuation without
resorting to an earn-out.
When earn-outs are used, they can be based on revenues, operating
income, development goals or other factors. Definition and
interpretation issues can complicate earn-outs, so measurements and
milestones should be picked that are well defined and subject to little
interpretation. Subjective or complex formulae muddy the waters.
It is also important to uncover as much as possible about each side’s
risk preference and motivations during negotiation, in order to
structure an earn-out that meets both parties’ objectives. Unspoken
ambitions behind equity participation or sale will complicate the
contingent payment, as well as the partnership.
Earn-outs can be a good way to bridge a price gap between buyer and
seller, when they cannot arrive at a single figure. But life is simpler if
the transaction can be structured without a contingent payment. Every
avenue should be explored to reach a meeting of minds for valuation
and future incentives without an earn-out, before entering into one.
Nevertheless, under the right conditions of valuation gap, managerial
control, measurability and access to resources post-transaction, earn-
outs can play a role aligning incentives and valuation.
Joint Ventures
Among the range of partnership mechanisms, joint venture (JV)
deserves special mention. As a definition, a JV is a company funded
by two or more partners, who then jointly share in its profits, losses,
and management.
24. 14 Rapid Advance
Joint ventures are typically used where:
1. An opportunity is strategically imperative for the partners, but the
cost or risk for either company to go it alone is prohibitive. Also,
access to some foreign markets can mandate engaging a local
partner in a JV.
2. Informational differences exist among prospective partners,
especially major mismatches that depend on deep and often tacit
knowledge which do not tend to be revealed well during due
diligence. These forms of private information can arise from
market knowledge, technology, or business processes. Operation
of the JV provides a mechanism for assimilating information and
developing a shared outlook.
3. The cost of collaboration over the near term is relatively small, and
uncertainties or information transfer will be resolved over the
medium term.
Under these circumstances, JVs tend to align incentives with
manageable unintended consequences to form effective partnership
mechanisms. As time goes on, JV’s can often be sequential
investments, leading to future investments and outright buyout, as
uncertainties diminish.
In some ways, JV’s are even more complex than acquisitions. JV’s
can bring in issues that never need to be addressed in an outright
business purchase. In an acquisition, after the close there is a single
owner with full decision authority. JV’s in contrast generate ongoing
issues to be resolved among two or more parent companies regarding
operations, management and governance. JV’s are also complex to
negotiate and operate because in many ways they are an unnatural
business form: JV’s require sharing, and most business strategy is
about capturing.
JV’s typically require a series of contracts to implement,
contemplating many contingencies and conflicts that may arise, and a
mechanism to deal with them. As a result, JV’s commonly take twice
25. Strategic Partnerships 15
as long as acquisitions to negotiate. Whereas acquisitions typically
take three to six months to complete, six to twelve months can elapse
initiating a JV. The time commitment to enter a JV can come as a
shock since some people envision a JV as a smaller deal than an
acquisition. People are usually mistaken who expect comparatively
faster deal structuring and implementation for JV’s than M&A.
Considering operation, splits of ownership and control have a strong
impact on downstream roles and responsibilities for JV partnering
companies:
50%/50% provides equal influence over management, operations
and governance, but at the price of perpetual negotiation among
parents.
Asymmetrical ownership requires that the minority partner cede
almost all managerial and operational control. The test for a
prospective minority partner is whether they’re ready to step aside.
There are jurisdiction-specific thresholds of ownership and voting
control that dictate whether the owner companies need to report the
performance of the JV in their consolidated financial statements.
Especially if significant operating losses are expected from a JV,
financial reporting obligations can shape ownership split preference.
Exit Provisions
Much of the discussion about JV’s deals with formation, but
termination also needs attention. Joint ventures are usually transitory
structures, lasting six years as a broad average. With a relatively short
life span, partners need clear agreement at the outset about how the
end of the venture will be handled. A JV can come to an end when it
has achieved both parents’ objectives. It can also come to a
conclusion because of poor performance or parent deadlock. The
parties to a joint effort need to consider termination during the
formation of the venture.
By way of motivation to consider completion of the JV during front-
end negotiations, consider that about 85% of JV’s end in acquisition
26. 16 Rapid Advance
by one of the partners. To boot, there is even an operational and
success probability dividend for the JV from defining exit conditions
during formation. It arises because absent an adequate separation
agreement, the strains of operating the partnership with no viable way
out encourages each partner to appropriate as much value as possible
from the alliance. Aggressive partner behaviour sours relations and
provokes animosity. Under such dysfunction, performance diminishes
and can even tip the JV into demise. Documented exit conditions from
the outset reduce strain in the relationship of the JV and help it to
succeed.
To put exit provisions in place, both sides need to express conditions
under which it makes sense to divest their interest, or to terminate the
venture, and the manner in which those outcomes will be carried out.
Master exit conditions usually include four components:
1) Exit triggers, defining the point of disengagement
2) Each party’s rights in a separation to assets, products, employees
and third party relationships such as suppliers, customers and
partners
3) Articulation of the disengagement process, including strategic
options, guidelines for creating the disengagement team, and
timelines
4) Communication plan, embracing customers, employees, suppliers,
partners, financial markets and other relevant constituencies
Considering the first item, exit triggers, typical circumstances to
provoke the end of the JV include the inability of the alliance to meet
certain milestones, performance metrics or service levels. Other
dissolution conditions commonly used are breaches of contract terms,
and, insolvency, change of control, or strategic re-direction of one of
the partners. Completion of the JV’s objectives, or, sharply changed
competitive circumstances can also signal that it is time to disband.
Next among exit elements are separation entitlements for the partners,
covering the post-JV period:
27. Strategic Partnerships 17
Inventory of products, materials, equipment, IP, land, and facilities
Revenue sharing, royalties, licensing, and options to buy or sell
products and services in the future that were created within the JV
Rights and obligations to fulfil contractual commitments from the
JV, including to customers, suppliers, service providers, employees
and finance entities
These separation privileges should also aim to reach closure on
liabilities for disengaging partners. Delineating entitlements and
liabilities sets the stage to detail the process of disengagement,
including:
Rights of first refusal regarding separation claims
Mandatory unwind period, to give each partner enough time to
implement its exit plan, as well as giving the JV the time it needs to
meet its obligations and stay competitive if it is to remain a going
concern
Formation of the core disengagement team. The team usually
includes members from the JV, as well as each corporate parent.
Best disjoining results often come from assigning new personnel
from the parent companies, apart from those that oversaw the JV, to
promote impartiality in the separation team through the process
Timeline
These items represent the broad elements of defining exit conditions
for a JV that respects its likely transitory nature, as well as operational
benefits of having clearly defined exit provisions.
Since partner buyout is a common outcome, as a minimum endgame
JV partners can use a nominal cost put option. It gives each party the
right to sell their part of the business after an initial term for a nominal
sum, so that they have a clear way out from a JV that isn’t working.
28. 18 Rapid Advance
The put option may also include a penalty clause for invoking the put
prior to the expiration date of the initial term of the JV.
For a structured buyout under stronger JV performance, there is often
also a call option in the form of a shotgun clause. This is where both
parties offer a price at which they will buy the whole business. The
parent that proposes the higher valuation tender wins. The other side
gets a payment for being bought-out that they should consider
reasonable. As an alternative to a shotgun, especially when there are
strong ownership or parent resource disparities, each side can also
arrange a fair market valuation, with a negotiated sale price, and an
option to go to arbitration to break negotiation deadlock.
Detailing disengagement terms adds value to a JV. However, the
complexity of separation scenarios highlights that joint ventures are a
complex tool for managing risks and rewards in a competitive
landscape. They are a powerful way to achieve business objectives.
There are many situations where JVs are appropriate. But, the time
and difficulty initiating and operating a JV means that there should be
ample exploration of whether there is an alternative contractual way to
get the same result, before deciding to enter into a JV.
Mergers and Acquisitions
Companies that sustain rapid growth generally achieve much of it
organically, but often augment internal activities with the highest form of
partnership: mergers and acquisitions (M&A). M&A acumen is
frequently a key skill for high growth, technology-driven enterprises.
29. Strategic Partnerships 19
The M&A motivation is that in a fast changing, technology driven
industry, it is nearly impossible for an established company to fully
develop and experiment with all of the technologies and business models
that will potentially affect the competitive landscape. Even if the money
can be found to finance so much activity, the war for talent makes it
practically impossible to find enough skilled people. External
technology development, business formation and Darwinian forces need
to have room to play out. The winners can then be acquired.
The need to rely in part on external means to achieve world-class
products grows with increasing product complexity. M&A also becomes
more important with increasing specialization among industry players, or
decreasing product life cycles.
M&A succeeds through innovation in technology, products and
business processes. But, the speed of innovation and adaptation is
vastly different between organic development and M&A. The
difference in speed, and the underlying power of change, is a crucial
distinction. In a technology-centric business, the time to move
organically from idea, through product development, launch and
marketplace ramp-up to a point of significant positive top-line and
bottom-line financial impact is typically three to six years. The time
can be a bit faster in some asset-light businesses, and stretch
considerably longer in asset-intensive businesses such as large-scale
capital equipment and biotechnology. But, three to six years from idea
to significant positive financial impact is the norm. The organically
growing business usually has three to six years to fully adapt and
evolve for major initiatives.
Contrast this with M&A. In M&A, integration needs to happen in
three to six months – remarkably faster. Some aspects of integration
take longer, but substantial portions of activities need to merge this
quickly. The scope of interaction goes far beyond establishing a
standardized accounting or enterprise resource planning system.
Technology M&A usually has one to two quarters to develop
collaborative programs. Unified projects span R&D, strategic
marketing, operations and management processes. M&A needs
adaptation to happen across the business an order of magnitude faster
than organic change. One can think of M&A like adding a high
30. 20 Rapid Advance
combustion substance such as nitrous oxide to the fuel stream of a
piston engine. A suitably adaptable, conditioned system can
constructively harness the increased power from the higher energy
input, unlike a poorly designed or unprepared system that will rebel.
The shock wave of innovation in M&A propagates through business
processes, products, and the culture of a company. M&A can make
the company move much faster, and productively so, but only with the
right opportunities, attitudes, capabilities, and execution. Years of
organic technology and marketplace development can compress into
just a few months through M&A, but the force necessary to achieve
this velocity of change deserves a lot of respect.
The harsh reality of M&A is that by objective measures, a significant
proportion fails to meet up-front expectations, even with the best
intentions and apparent fit of the partnering businesses at the outset.
External and internal events in technology, markets, preferences, and
key personnel can present barriers to success. Management must
understand the typical sources of difficulty, and design the relationship
to counteract detrimental forces.
First off, the core business of the acquirer has to be sound. If the
acquirer gets into trouble during integration, the internal crisis distracts
from making the acquisition work. Deals built on strength are far
more likely to succeed than ones not.
Even with a healthy acquirer, the challenges in M&A are significant.
So must be the opportunity. An exact quantification of the probability
of M&A success is difficult to define, in part because of different
measures of success.3
A magnitude estimate is that only 30%- 50% of
mergers and acquisitions will create any net shareholder value for the
acquiring company, let alone the competitive advantage expected at
the outset. Management faithfulness to the principles of sound
strategic alliances and attention to detail in execution can improve the
3
Value improvement measures for M&A transactions vary. Parameters that
contribute to variation of valuation include short-run or long-term stock
performance; accounting measures of profit or efficiency; bidder and target
valuation; market valuation, and others.
31. Strategic Partnerships 21
odds considerably. The 30%-50% success check is the acid test when
contemplating partnership: The decision about entering into the
arrangement needs to be based on the down-side scenario that it has
only a 30%-50% chance of creating net value. Is the potential
strategic benefit of the deal persuasive enough to go forward in the
face of such risk, knowing the up-front and opportunity cost?
The question of opportunity and risk pulls into focus the imperative for
strategic unions: They cannot just provide a framework for modest
growth or cost savings. They must enable sustained, dramatic,
compounding growth and strategic influence for both partners,
significantly above the level that would otherwise be achieved. This is
usually the only way that the potential payback can be justified against
significant risks. Moreover, addressable opportunities for superior
growth and industry influence in M&A are the wellspring of
stimulating activities and emotional resolve within staff to successfully
operational-ize M&A.
Operational Success
The best way to create energy and enthusiasm for M&A is to
immediately form a new product, service and process roadmap for the
combined business, leveraging the assets of both enterprises. The
roadmap needs to be formed without bias or prejudice. Pre-transaction
notions of how each business competed and differentiated need to be
checked at the door coming in. The post-transaction roadmap for
products and services should be evaluated only for its impact for
employees, customers and shareholders. A compelling post-M&A
roadmap creates unique, new assets which draw heavily on the highest
value, and most strategic capabilities of the incoming units. When the
two business work to create compelling new product offerings in this
way, there is a lot for stakeholders to be excited about, making it easier
to get behind the transaction and operational-ize its potential.
Implementation capability comes down to the availability of resources.
It is relatively easy to qualitatively describe the areas of positive
interaction in a business combination. The general plan for how to
gain advantage needs to be matched with a path to integration with
mainstream operations. This is the way to give intentions force, by
32. 22 Rapid Advance
describing who is doing what and by when, as well as coming to terms
with what other activities will assume lower priority to make room for
the high impact opportunities in the merger or acquisition. As the
people and assets increase that can be readily re-deployed to take
advantage of the opportunities in the transaction, the likelihood of
success grows. Resource freedom gives executives the power to
liberate latent value in the merger or acquisition post-transaction.
A test of conviction and ability to exploit the highest impact
opportunities in a transaction is the 20% rule. It says that in the
highest leverage area of integration, the acquirer needs to be able to
liberate 20% of the target’s capacity to pursue high impact post-
transaction opportunities. The key leverage areas are usually sales,
technology, product development or operational efficiency. Generally,
the liberated 20% of the target’s capacity is matched with at least the
same absolute level of resources from the acquirer, to collaborate with
sufficient depth on both sides of the effort, and assimilate.
The 20% rule is demanding. Few companies have 20% of any key
function underutilized. This degree of collaboration commitment tests
management’s conviction to making the deal work, and finding
opportunities in the combination worthy of setting aside pre-
transaction plans.
As the level of liberate-able resources falls below 20%, the speed and
impact of a positive contribution diminishes. Delayed impact calls
into question the merit of the deal. Slow roll-out decreases the
likelihood of success, because change left until later is much harder to
initiate than change at the outset of the combination. People
acclimatise to an expectation of little rewiring that is usually
unrealistic. Furthermore, the risk of delayed impact is compounded by
increased chance of unfavourable shifts in the competitive landscape
as the collaboration timeline extends. The 20% rule, and the implied
urgency and magnitude of integration, is one of many measures to help
assess M&A, and implement successfully.
The challenges in M&A mean that not only must one observe the
previously discussed considerations for strategic partnerships. There
are a number of elements especially important in M&A:
33. Strategic Partnerships 23
Value Levers Know and agree upon the value drivers in the merger
or acquisition. Rank them, and focus resources on the priorities.
Don’t get bogged down in low value activities.
Feedback Systematically monitor performance achieving stated
objectives in the highest value areas, and apply corrective feedback.
Execution in the areas of highest competitive impact is everything.
Method of Operation The method of operation for the combined
organization must be articulated in detail during negotiation and due
diligence. It is not a detail of implementation to be worked out after
the deal closes. Decide which senior executives and key staff will be
in which roles, including back-up choices for people who leave or
turn down new assignments.
Bandwidth Matching Match the inbound and outbound bandwidth
for communication and material flow through the two organizations
as quickly as possible. For example, the customer service response
capacity for the target company whose products will be quickly
marketed through the acquirer’s larger distribution channel have to
be brought into synchronisation. Bandwidth mismatches create long
response times, slowing integration and raising apprehensions about
the acquisition’s merit.
Integrate Quickly Integrate in 90 days. Drawing integration out
introduces more complexity than it overcomes. Leaving an acquired
business alone keeps people happy for six months at most. A
gradual transition may seem like the way to avoid rocking the boat,
but it only prolongs inevitable integration issues that become more
difficult when left until later. Few executives ever look back at a
merger or acquisition and wish they had integrated slower.
Integration should be driven with the same intensity as if the
company were failing. The need for rapid integration means cultural
due diligence is a must, to ensure compatibility and the ability to
combine quickly.
34. 24 Rapid Advance
Cultural Due Diligence Complete cultural due diligence
immediately after the legal closing date. Cultural investigation
usually competes with the need for confidentiality during pre-
transaction due diligence. Often, only limited data points of cultural
discovery are available until after the deal is announced. Even if a
portion of cultural investigation with staff and partners must wait
until after the deal is unveiled, there should be prompt post-
transaction investigation at multiple organizational levels and
functions of similarity and differences:
Centralized vs. decentralized decision making
Speed in making decisions (slow vs. quick)
Time horizon for decisions (short-term vs. long-term)
Level of teamwork
How conflict is managed (degree of openness and confrontation)
Entrepreneurial behaviour and risk acceptance
Process vs. results orientation
How performance is measured and valued
Focus on responsibility and accountability
Degree of horizontal co-operation (across functions, business
units and product lines)
Level of politics
Emphasis on rules, procedures, and policies
Nature of communication (openness and honesty; speed; medium
- voice, e-mail, face-to-face, documents, on-line)
Willingness to change
Compatibility Acknowledge the consistency of cultures and
executive egos of the two separate entities. As they diverge, the
complexity, duration, and risk of integrating the two businesses grow
exponentially. The further apart they are, the tougher the early
decisions become to quickly overcome differences in strategy and
culture. Increasing size of the acquisition target also drives
integration complexity up geometrically, similarly calling for early
strong actions.
Dedicated Team Plan for distraction of senior management during
the merge. The intensive period of integration for a substantial
merger partner lasts six months or longer. To minimize the
35. Strategic Partnerships 25
unproductive disruption to each business, there must be a dedicated
integration team led by someone who is primarily focused on the
integration. The integration team needs to act quickly to smother
centrifugal forces among competing elements of the two
organizations. The team also must rapidly establish organization-
wide investment and operating policies, performance requirements,
compensation structures, employment terms, and career development
paths for executives and other key employees.
Early Win Create at least one early win from the acquisition.
Examples of early wins include hitting a near-term revenue target,
strategic account win, or margin increase. Best of all is achieving a
business objective that neither business would have achieved alone.
An early win provides a clear signal to all stakeholders of the merit
of the acquisition. It also quells residual elements of discord down
the organizations that inevitably exists. An early win begins a
virtuous cycle supporting the merger or acquisition, as people
increasingly believe in the merit of the transaction.
Leader Selection When choosing executives to run the acquired
business, balance the desire for organizational familiarity with the
importance of cultural consistency. One school of thought is that the
executives running the acquired business should be those with long
tenures in the target business. The argument is their familiarity and
networks will overcome all else. The other school says that long-
running executives of the acquired business will stick to old ways.
This train of thought argues that newer people are more likely to
have the right outlook for change, and a new culture. Both ideas
have merit. The best executives for an acquired business are those
who strike the best available balance. On one side of the judgement
is knowledge of the acquired organization, its industry, and
emotional capital with the employees of the acquired business to
inspire them to achieve objectives. The other side is respect for the
acquirer, willingness to change, and enthusiasm to adopt the new
culture. There is no one best extreme choice between an incumbent
and a parachuted-in head for an acquired business. The decision is
based on the factors of organizational familiarity and cultural
consistency to guide the best selection for executives to run the target
business.
36. 26 Rapid Advance
Retention Incentives Develop a strategy for retaining key
executives and staff. This often includes a financial retention bonus,
“stay pay,” for sticking through the merger period. This helps
employees to look beyond the intense stress during integration. The
expertise of these people is much more valuable than the technology,
products, or market access that they’ve developed. Generally, an
acquisition will struggle to succeed if they leave.
Cultural Translation Create fluid communication and cohesion of
strategies and cultures. Modern communication technology helps
with e-mail, videoconferencing, common electronic work surfaces,
and low-cost telecommunications. But, there is no substitute for
face-to-face contact. Early in the integration process an individual is
needed who can serve as a Rosetta Stone – someone to translate the
two businesses’ processes and terminology. In smaller acquisitions,
the interpreter can be a single person with deep history and expertise
in the capabilities of the acquirer, who can act as an on-the-ground
presence at the target. In larger acquisitions, the Rosetta Stone needs
to be a multi-person team with extensive knowledge of the culture
and competitively significant advantages of both the acquirer and the
target. Whether an individual or a group, the interpreter body should
commence a development program to create the most rapid
communication between businesses, and cohesion of strategies. An
interactive development project early in the integration process
forces people to work together, understand each other, and provides
the opportunity to draw upon each others’ strengths. Because of the
intensity and complexity of communication carrying out
collaborative development programs, sustained meeting of minds is
more easily achieved with a local partner than a remote one.
Audit Concerns Regularly audit the concerns of stakeholders.
Communication is frequently a silent victim in M&A. Limited
communication conceals problems until it is too late. The concerns
of stakeholders, especially customers, must be uncovered and acted
upon.
Customer satisfaction in the post-merger period is often one of the
most telling leading indicators of long-term M&A success.
37. Strategic Partnerships 27
Customer dissatisfaction manifests itself in higher customer care
costs, pricing and profit pressure, and even revenue losses from
defections. Any of these setbacks can undermine the efficiencies and
opportunities upon which the merger was based. Tracking customer
satisfaction, maintaining a running dialog with large customers
during the post-acquisition period, and acting early upon causes of
any deterioration in customer satisfaction, all help to give the
transaction the best chances for success.
Communicate Establish regular communication with stakeholders,
especially customers and employees. They are usually tense when a
merger or acquisition is unfolding. They all want to know what it
means for them, and how the merger or acquisition alters their
previous relationship. Start talking with stakeholders immediately
after announcing the acquisition, and repeat key messages frequently
throughout the integration process. People need to be constantly
reminded and reassured of the big picture as they face moments of
intense localised stress during periods of transformation. Weekly
updates are appropriate to communicate status, progress, and major
decisions.
Customers Keep customers, especially key accounts, at the centre of
attention. Inform customers about how the combined organization is
protecting customers’ interests through the integration. Regularly
and consistently communicate plans and any changes in products,
service and delivery. This includes availability, ordering processes,
support, and, future collateral material. Also, make sure to get the
message out about the strategic direction for the new combined
organization so customers can share the sense of excitement and
opportunity in the transaction.
Recognition Be generous with public recognition of those who
exemplify desired behaviour, to reinforce the strengths of the
transaction. In particular, pay attention to high output team players.
At the same time, come to terms with renegades and under-
performers that are a particular drag on M&A success.
Best-of-Breed Practices An acquirer should adopt practices of the
acquired firm that are superior, especially if the businesses are
38. 28 Rapid Advance
comparable in size. A best-of-breed approach retains accumulated
knowledge, which is a priority in M&A. It also shows respect for
the acquired firm. Adopting superior practices of the target helps
morale among the employees of the acquired firm. It encourages
the combined entity to adopt best practices. Furthermore, it makes
it easier for people from the two businesses to work together down
the road.
In the case where the target company bet one way on an issue, and
the acquirer another, management must handle matters carefully.
Not-Invented-Here syndrome is alive and well in technology
companies. The acquirer must make it part of the company’s
culture to assume that the acquired firm may have superior
approaches.
Common Financial Metrics Similar measures of financial and
operational performance are a boundary condition to success, so
that strength and difficulty is viewed and communicated the same
way. Common terminology, formulae and timing of measurement
as well as reporting all contribute to unifying financial evaluation.
The bottom line in sustainable value creation is to keep objectives in
focus, and to not lose track of them in the distraction of the day-to-day
issues that can otherwise consume a merger or acquisition.
While most of the foregoing applies to all businesses, technology-
driven or not, there is an additional success factor in high-technology
M&A. In high technology, one is often acquiring pivotal technologies
in an early form – the seeds of great things yet to come, rather than the
final form. A core capability for an acquirer’s R&D becomes
qualifying, assimilating, extending and refining new technologies.
This is the way to realize burgeoning potential. The outlook of
ongoing R&D shifts towards making things better, rather than as much
attention on breakthrough innovation. This is because some of the
breakthroughs will be brought in from outside, but all technologies
must be effectively assimilated and product-ized to deliver the value of
technology M&A.
39. Strategic Partnerships 29
Catalytic Technology Overlap
Where technology is to be assimilated through M&A, the degree of
innovation sought from the business combination post-transaction is a
major consideration. Technology may not be the motivator, even in
technology-based businesses. Examples of non-technical drivers
include gains in market share, market consolidation, sales force
efficiency, financial engineering, or financial opportunism. In such
cases, little new post-transaction technology is expected beyond what
the two organizations would have achieved independently. Other deals
are about breaking into entirely new markets, with target technology of
little overlap with the acquirer’s. These situations may also have
inconsequential need for technology collaboration post-transaction.
Where partial technology overlap exists, the opportunities grow for
increased technical innovation from the marriage. Where generating
increased post-transaction innovation is at a premium, the optimal
degree of overlap of the two businesses’ technologies is usually in the
range between 15% and 40%.4
Greater commonality isn’t necessarily better. Similar knowledge
beyond this range usually delivers few technology benefits. With
technology overlap greater than 40%, there is often too little
differentiation of the R&D groups for them to respect the unique
talents and perspectives of the other. The relationship frequently
becomes overly competitive, with Not-Invented-Here syndrome and
restricted information flow as the R&D groups struggle to retain
separate identities and spirits of invention. Technological
collaboration becomes stifled where overlay of capabilities is too high.
Even obvious efficiency gain opportunities through eliminating R&D
redundancy can prove difficult to realize because of territorialism in a
high imbricate scenario. Moreover, with extensive technology overlap,
even if people want to collaborate, they can’t effectively challenge
each other because their capabilities are so similar.
At the other end of the technology commonality range, white space
deals are difficult to make work. Weakly related technologies are
4
“Shopping for R&D,” Mary Kwak, MIT Sloan Management Review, Winter 2002
40. 30 Rapid Advance
often not easy to absorb. The R&D domain knowledge, language,
tools, and challenges are too different to effectively build upon each
other. Without a reasonable amount of technology overlap, people
can’t communicate well enough or understand each other’s issues in
sufficient depth to develop world class capabilities. A moderate
degree of common ground, usually 15% to 40% of pre-transaction
skills and activities, provides optimal innovation stimulation when
grafting technologies in M&A.
R&D Team Concerns
Another technology-specific consideration in M&A is the concerns of
the R&D groups. These groups need special attention as the life-blood
of the combined entity. During an acquisition, the acquirer’s R&D
group can be distressed that the decision was made to invest in an
outside company, rather than investing in their own R&D to develop
similar capabilities or grow into the same markets. At the same time,
the target’s R&D group can be concerned about restrictions or
obligations regarding their future activities. Both concerns should be
explicitly answered.
For the acquirer’s R&D team, management should undertake a frank
dialogue to address concerns. The discussion should articulate the
need to build a market position quickly, and also include any biases of
capital markets or investors favouring acquisitions, IP issues,
imperatives about overcoming competitive barriers, and other factors
encouraging acquisitions. The discourse should continue throughout
the integration process. Management must explain and reinforce why
acquisition was a preferred and necessary route even if some elements
are uncomfortable for the acquirer’s R&D team.
To intercept apprehensions among the target’s R&D group, the scope
of future R&D activities should be clearly spelled out during the
integration process. If changes in R&D activities are going to take
place, it is better to get these out in the open. Better still is to discuss
the positives, such as capabilities and reach of the combined business
that the target business could not have attained as quickly. While
some R&D staff in the target may leave, uncertainty is worse. Clear
expectations communicated to everyone in the target’s R&D group
41. Strategic Partnerships 31
reduce consternation. Transparent communication creates a positive
first impression that the acquirer is honest and forthright, for lasting
benefit.
Early-Stage Acquisitions
An M&A situation that arises frequently in high technology is a
mature business acquires an early-stage one. There are three special
considerations with this disparity that both businesses need to plan for,
in order to make the transaction a success:5
The first is the thinness of management in most early-stage firms.
A larger corporate purchaser can end up dismayed by the amount
of resources that need to go into overdue managerial support. Start-
ups are often for sale because the present management does not
have the depth to sustain-ably grow the business to satisfy
investors.
Second is whether the start-up is truly a business or just an exciting
technology. Businesses have a clear path to profitability, self-
sufficiency, and self-perpetuation. An interesting technology is
not enough.
The third concern when acquiring early-stage companies is to
respect the soul of a start-up. Early stage companies have cultures
of intense spirit. Retaining core employees usually depends upon
preserving a similar culture. Starving the flame of passion and
expression is risky. Once the flame is gone, it is virtually
impossible to rekindle, and the value of the new enterprise can
sharply decline.
Acquisition success with early-stage companies increases when a
larger acquirer is fully aware of a start-up’s management depth, its
stage of development along the road to becoming a true business, and
the culture and flexibility the start-up needs to retain to succeed at
what it does and keep pivotal employees.
5
“High Tech Start Up,” John Nesheim, The Free Press, NY, 2000
42. 32 Rapid Advance
Conflict Management
In any strategic partnership, there will be conflict. The more involved
the relationship, the greater the potential for complex disagreements.
A fast-changing technology and competitive landscape adds fuel to the
fire. As the degree of interaction in a partnership climbs, and the pace
of environmental change increases, the more defined the conflict
management process should become.
All conflict resolution has to be based on a shared decision framework,
called the reference framework. This joint frame of reference
describes how success will be measured together, the metrics to use,
and the optimizing criteria for trade-offs when tensions or exclusive
choices arise.
Certain types of conflict are to be avoided and suppressed, such as
territorialism, political gaming, and other manoeuvres not grounded in
the agreed-upon reference. Outright mistrust of a key player in the
collaboration is also something to promptly repair. However, not all
dissidence is bad.
Some rivalry in a joint effort is desirable and healthy, where the strain:
Arises from new technologies, products, customer service delivery
methods, and business processes
Takes advantage of the combined capabilities of both partnering
businesses, in valuable and market-focused ways
Comes from stretching the areas of interaction in ways difficult to
do as independent companies
Conflict fitting this description is to be discovered, created and
embraced. Side-stepping such encounters are missed opportunities to
gain significant competitive advantage in a partnership.
The way to put effort into healthy tensions, while dispatching
unproductive ones, is to have a defined conflict management process.
43. Strategic Partnerships 33
There are two parts to conflict resolution: 1) managing flare-ups at the
point of occurrence, and, 2) managing escalation. It is important to
have a process for addressing conflict at source, and governing
escalation. Otherwise, a vicious cycle can take hold of ever-smaller
issues being summarily referred further and further up the chain of
command of each partnering organization, undermining trust, creating
grudges, and harming execution speed.
To deal with friction at its source, have a transparent, widely-known
way that all players will deal with dissidence, and, force the discussion
to centre on statistically significant data sets, and direct experiences,
rather than anecdotes and second hand information. A method for
handling disagreements at source, as well as using facts and data, will
be much more effective than some common tonics like teamwork
training sessions, re-jigging incentive systems, or relying largely on
changing reporting lines. These measures of training, incentives and
reporting can help to deal with collaboration discord to a degree, but
they are supporting elements rather than primary success factors of
managing conflict at its origin in a partnership. A protocol for
handling disputes at source is the most important way of productively
channelling the energy of a disagreement.
Have those at the conflict source apply a common set of trade-off
criteria to the decision at hand. Often, disagreements arise because of
different priorities and interpretations of events by team players.
Productivity will slide if people debate endlessly back and forth across
the table about preferred, competing outcomes. Rather, the same
people need to have common criteria linked to the reference
framework, and apply it to the decision matter on the table. This way,
people are using the same measure of success, in the same way, and
can better invest effort in designing a creative solution to the dispute
that keeps it from being a zero sum game.
Even with common criteria for decisions in place and combined effort
to find solutions, some disagreements need to be escalated to more
senior management. When escalation happens, there should be joint
advance up the management chains in both partnering organizations.
44. 34 Rapid Advance
Firstly, team players from both sides present disagreement together to
their bosses. A single voice helps team members clarify differences in
perspective, language, information access, and strategic objectives.
Forcing unified explanation of a mismatch often resolves difficulty on
the spot. Moreover, joint communication at escalation avoids
suspicion, surprises, and damaged personal relationships. These
negative outcomes are associated with unilateral communication and
transmission up one partnering business’ management chain, when
different messages are going up the other side’s hierarchy.
Secondly, insist that a manager in one business resolves escalated
conflicts directly with her management counterpart in the other
business. Sometimes a manager on one side or the other, receiving a
conflict from subordinates, will attempt to resolve the situation quickly
and decisively by herself. Unilateral managerial responses like this
carry significant downstream costs in a complex, interacting
partnership. Disputes need to be resolved bi-laterally, despite the
implied communication overhead.
Pair-wise management interaction across partnering organizational
boundaries can feel cumbersome. But, collaborative resolution by
managers overseeing a joint effort that has come under dispute is more
productive over the long-term. Bi-lateral conflict elevation and
resolution minimizes any sense that one side lost resolving an issue,
keeping trust high, preventing turf battles, and preserving a healthier
environment for future collaboration.
A defined conflict management method increases the likelihood of
long-term success in a strategic partnership. What sometimes gets lost
in the dynamic of making a partnership work is the disagreements
from differences in perspective, competencies, access to information
and strategic focus generate much of the value that can come from
collaboration across business boundaries. The quest for too much
harmony can obstruct teamwork and competitive advantage. When
different competencies and perspectives tackle a problem together, it
greatly increases the chances for a truly innovation solution to generate
industry-leading capabilities. Conflict is to be managed according to
articulated and communicated rules, but differences are not to be
avoided altogether.
45. 35
Staffing and Culture
Quickly Turning Newcomers into Productive Employees
Rapid growth and internal change pushes managers to assimilate a lot of
new employees. Roles and relationships evolve quickly when a business
transitions. During periods of fast expansion, restructuring or turnover, it
is not uncommon to have 30% or more of staff as newcomers each year.
With long learning curves for new hires, especially highly skilled
professional and executive positions, the productivity impact of rapid
integration is considerable.
The most important aspect of rapid on-boarding in technology-driven
business is to get people connected with, and contributing to, the right
interpersonal networks. These are the communication pathways that
will give people ongoing access to technical know-how, political
insight and cultural sensitivity. Make it plain to new staffers that they
are to ask questions with first projects, rather than letting pride or
independence get in the way. Recent additions should also be
encouraged to undertake exploratory conversations with colleagues, to
understand the assets and experience around them.
The importance of environmental discovery: Without awareness and
access to the assets around them, employees can be reluctant to exhibit
ignorance, and will forego asking questions. Employees can then re-
invent solutions that already exist. Employees in a vacuum of
personal contacts may ask counsel of the first person they happened to
meet, when that person may only know a small part of the business.
The goal of introductory activities is to wire people into interpersonal
networks that build awareness of others’ skills and knowledge. Those
strengths can then be tapped when new activities demand new
information and perspectives. Initial tasks should be designed to get
people interacting with those who have the cultural awareness, political
acumen, and technical experience to help the recent addition make
efficient choices. New staff can then become rapidly productive, and
able to take on more difficult tasks.
46. 36 Rapid Advance
At the same time, first assignments should be challenging. Some would
prefer first tasks be simple and quickly achievable to build momentum
with success. However, experience often shows a challenging first
project to be better for integration. A demonstrably demanding first task
helps establish the right work habits and expectations. More importantly
though, the newcomer desire to prove oneself during a demanding first
project helps to build respect among colleagues, creating regard for the
new person’s capabilities and embedding them in the communication
fabric of the business. Especially when a new team member brings
significant incoming experience, expertise and industry contacts, the new
ideas and perspectives help make the business more innovative and
competitive. Building a newcomers’ reputation creates a currency for
the individual that can be leveraged in future projects.
Taking a relational approach to bringing new people on board is an effort,
but it does not usually require a greater investment of managerial time
than traditional approaches to training and personnel integration. When
a new employee develops the right set of co-worker relationships, they
quickly have less need to approach management for advice and
information.
Executive On-boarding
Helping a new executive successfully climb on board requires areas of
special emphasis, and some additional considerations, compared with
staff and junior management roles. Executives need a detailed plan for
getting up to speed, forging effective relationships, and accomplishing
what is expected in their sphere of influence. It is best if this plan is
formed prior to commencing employment. It also helps to have a
communication strategy and business plan in place on the first day.
An incoming senior manager needs to work out which relationships
matter, both those whom she most needs to work with and impress, as
well as those who could undermine her. These relationships should
cover not just the formal organizational chart and board of directors, but
also the power broker subset with outsized influence among those groups.
Hostility to the incomer among existing management should be
identified, particularly among those passed over for the job that the new
47. Staffing and Culture 37
executive is filling. People who were passed over that do not quickly
demonstrate enthusiasm and loyalty for the new leadership in the first
few months need to be removed. New executives often move too slowly
pruning insubordinates, and there is no time in most executive landings
for distraction from disaffected staff.
Turning to relationships, they should be fostered starting with initial
meetings and a schedule for follow-up sessions, as well as team
formation.
Team coalescence, accomplishment and momentum for success are
advanced with a set of concrete projects. The programs should have
specific, achievable milestones, and the ability to achieve some
unarguable victories. Projects with urgency and near-term measurability
create on-going contact and collaboration for relationships and teams.
Furthermore, achievement early on helps greatly to advance the
credibility of the new executive and motivation of her team.
Keeping New Employees Aligned
It is great sport to scoff at the afflictions of large companies. But, rapidly
growing businesses can quickly get big, especially when an increasingly
large number and proportion of the employee base are new to their
positions. A fast expanding business can start to bog down from culture
atrophy when there aren’t sufficient reference points to guide newcomers
about acceptable behaviour.
Culture is the only way to bring harmonization to the thousands of small
decisions that staff and managers make every day. A rapidly growing
business needs to work to impart the right culture lessons to rookies.
New hire and new manager orientation needs to include lectures on
products, markets, customers and operations. There should also be
history lessons from old-timers about the pivotal events and experiences
that made the business what it is today. There should be seminars about
the company’s goals and its technology. A shared sense of history and
method of competition help newcomers to be productive, and keep a
quickly growing company on the right trajectory.
48.
49. 39
Market Targeting
The essence of marketing is to drive the business to commanding
positions in customer sectors where the achievement of corporate
objectives is likely. Those who enjoy sustained success have a
commanding presence in specific segments. The primary difference
between large and small companies is the size of those niches.
Growing, successful companies are not just minor players in large
markets; they are dominant players in specific sectors. Marketing’s
role is to create a strong image of the organization’s prominence to
identified markets, and lead the company to those segments. This
includes bringing present and future requirements of customers into
the business.
Maxim
Focus on specific markets – application, geography and customer
purchase behaviour. Failure to target squanders limited resources.
Succeeding takes longer and is more complex than just about anyone
imagines at the outset. It is better to attend to one sector than it is to
fragment effort trying to find the perfect market across many sectors.
Concentrating resources provides greater cohesion of activity, better
application understanding, faster learning, closer customer
relationships, and a more secure position. In other words, it is tough
for a generalist to compete with a specialist. When one market has
been successfully attacked, then branch out to others.
Segmentation
Following from the importance of concentrating resources, nothing
can be managed if it is too big. Markets should be segmented into the
largest units of homogeneous key needs, decision processes, and
buying criteria, and, separated by heterogeneous ones. To be most
useful, segments should be easily reached and served, sizeable enough
to justify a unique strategy, and distinctive in response profile.
Segmentation improves executive attention, aiding recognition of
50. 40 Rapid Advance
opportunities and threats. It pushes management closer to customers,
facilitating greater understanding of buyers’ needs. Engagement
accesses information critical to strategy formulation, and allows
smaller firms to compete with larger and better-established players.
A less formal way of looking at this: Really understand what segment
will be owned. An insurgent vendor needs to be best of breed in that
niche so that people will think of it when they buy. The size of the sector
has to be large enough to provide sufficient market, but not so big that
competitors that can’t be handled will retain the upper hand.
However, segments should never be viewed as intransigent. A belief
in static segments belies the nature of changing technology and
markets, creating a false sense of security. Segmentation evolves with
competitive conditions. The biggest threat is usually convergence of
previously distinct market segments, broken down by advancing cost-
performance from technological advance.
The best defence is offence. Always look for the rich part of the
market, mapping revenue and profit vs. performance by segment. Aim
to provide performance from aggressive application of the latest
technology that meets the needs of the majority of the market, at a cost
affordable to most. An interesting perspective can be gained by asking
what it would take to win the majority of buyers even without
promotional activities.
The principal front to be wary of is the low end of the marketplace. It
is a frequent source of segment transgression. The pattern of the low-
end is to regularly add features and performance of the high-end, yet
maintain traditional low price. There are few segments at the
commodity end of the market. Investment thresholds are much greater
than in the high-end. The business model of the low-end is difficult to
replicate when those competitors leapfrog a higher-cost player. The
reason is momentum is difficult to re-build with a sizeable
organization and a higher-cost operating structure. It is best to
routinely purge assumptions based on segment history. Doing so
considers segment definitions based upon the optimal performance of
available technology, customer preferences, and migration of both
technological and market factors.
51. Market Targeting 41
For many companies in the premium performance space, segment
renewal can be counterintuitive. They often started in high-end sectors
where greater bootstrapping from high profit margins is possible.
Success can seem to reinforce the merit of a high-end position, with little
further critical analysis. Whatever the historical reason for a premium
performance position though, intense day-to-day activity of those
immersed in the high-end can occlude low-end forces.
Market Assessment
Market assessment looks at the company’s ability to create
differentiation that offers buyers a clear and meaningful advantage,
and also provides adequate return-on-investment (ROI).
Market appraisal typically addresses:
Fit with corporate strategy
Segment-ability of the market to identifiable groups with similar
requirements
Market maturity, and the need for innovation
Market size and growth rate
Accessibility of market chains and webs for supply and
distribution
Leverage potential of infrastructure, both internal and external
Key market choice and rejection influences
Economic climate and volatility
Human and capital resource requirements and availability
Cultural fit
Achievability of required technology performance
Adaptability to required operational performance in technology,
product (features, quality, reliability), brand, sales, promotions,
and support
Attainable revenue, and profit
How success in the market will transform the company
52. 42 Rapid Advance
The outset assessment is followed by a Porter analysis of current and
anticipated future competitive forces within the industry:
Bargaining power of suppliers, based upon the number of suppliers,
switching costs, threat of supplier forward integration, and the
significance of the subject industry to that supplier group
Negotiating power of customers: size and market share of
customers, switching costs between competitive products, and,
threat of backward integration
Likelihood of new entrants, which grow as product differentiation,
capital requirements, and barriers to distribution access all
diminish
Risk of substitute technologies creating radically different business
conditions
Degree of rivalry among current competitors, which becomes
higher as the number of players increases, products become
undifferentiated, industry growth decreases, and fixed costs rise
Influence of complementary players and potential partners
The evolution of the above factors over time, and whether
competitive forces are moving toward or away from the company
Perspective on the last point, how the competitive landscape may
change over time, can be aided by locating where a market is in the
industrial innovation cycle. The process typically takes the following
form:
A significant innovation starts the cycle, which is
followed by a period of agitation where neither
manufacturers nor customers are sure what the product
should be. Standards are few, and both the old and
various incarnations of the new compete. New entrants
abound, and competition increases. Incumbent players of
53. Market Targeting 43
previous technology may have to unlearn what made
them successful in the past to continue competing.
The fluid phase closes when a dominant design emerges.
Competition becomes more intense. Product innovation
yields to production and support process innovation.
Capital investments increase to reduce costs and refine
performance. Consolidation takes place; the strong
become stronger. An oligopoly emerges. If open
standards are adopted, then brand names, distribution and
service become critical.
Subsequent discontinuous innovation will usually cause
one of two outcomes. Small innovations, requiring most
of the capabilities of the preceding state of the industry
tend to extend the state of oligopoly. Major departures
on the other hand require the dominant players of the
preceding state to unlearn much of what they know.
Former strengths can become burdens. Under the major
departure condition, the innovation cycle begins again.
Consideration for the state of the innovation cycle, as well as Porter
analysis, provides the foundation for a systematic assessment of the
enterprise’s strengths, weaknesses, opportunities and threats in a
market. This looks at the present and into the future, to evaluate
market attractiveness for entry. The life cycle framework helps to
design and execute strategy for exploiting innovation. Ultimately, the
value of this effort is to help find one or two highly significant things
in the competitive landscape that can be changed to favorably alter the
environment.
Market analysis thus forms the basis for it’s descendent of marketing
strategy. Marketing strategy in turn spawns plans in products, pricing,
distribution, promotion and support, which themselves have lateral
relationships with other elements of corporate strategy from
technology, to operations and finance. A sound survey of available
market information, and analysis, builds strategy upon the strongest
footing possible to improve the probability of success.
54. 44 Rapid Advance
What does this all mean? In plain cautionary language, it means solve
a generic problem, and really move with the technology. Don’t just
react to isolated hot buttons. And, don’t fall in love with a technical
solution concept isolated from a wider range of system technology
forces that may otherwise alter the identified opportunity before it can
be capitalized upon.
Promoting Novel Technology
Novel technology takes customers beyond their experiences and
traditional usage models. Marketing it holds several unique and subtle
challenges. Promoting novel technology is about describing its
benefits in terms customers will understand, and then removing or
minimizing real and perceived risks. This paves the way for rapid
adoption.
Innovation adoption rates and penetration are affected by five
characteristics that describe customer implications for the technology:
1. Complexity of adoption
2. Trial-ability
3. Compatibility with buyers’ values
4. Relative quality advantage
5. Communicability of benefits
Generally, innovation will only be adopted as fast and far as the
weakest link allows. Marketing innovation requires the supplier to
understand customer impacts of the technology, to build upon
advantages and overcome weaknesses.
Above all else, customers do not want to make mistakes. They want to
be knowledgeable in their decisions, and proud of them. The novel
technology promoter must help customers reach a state of confident
understanding.
Customers move toward self-assured awareness in three distinct
phases: education, confidence building, and finally sustained demand
in the presence of mimicking products from competitors. The
55. Market Targeting 45
sequence may iterate with different levels of management when the
product is being sold to commercial or industrial customers, depending
on the scope of the change that the new technology introduces for the
user, and the size of the customer organization.
Preparation to promote fresh technology begins by gaining knowledge
about the customer’s entire usage process, both upstream and
downstream from the intended insertion point of the new product. In
complex processes and systems, there may be many technical,
operational, human, and marketing effects to understand and embrace
before marketing efforts can begin in earnest.
After understanding customer implications, promotion goes into
motion with education. The objective should be to create a
demonstration of capabilities that has a lot of intuitive and emotional
appeal, sometimes known as a “wow-factor” - a striking look or a
previously unattainable experience. A novel technology should not
rely entirely on specifications.
Teaching begins by filling in whatever gaps in customers’ experiences
limit appreciating the value of the new in their applications.
Customers must be educated so that they can analyze the situation for
themselves and make an informed decision about adoption. They
should get to know the underlying science, capabilities, and limitations.
Their goal is to understand how the product enables new capabilities
and overcomes dominant issues with current technology, as well as the
tradeoffs. A caution though is that a customer’s decision process
needs to be driven by the articulation of reality, rather than the
exhortation of fear. Fear plays to the incumbent. By addressing
opportunity and educating customers, they can then become
comfortable with choosing to adopt the new.
Where the value proposition is radically different from the familiar
past, education may additionally entail the understanding and
acknowledgement of new metrics of performance. Potential buyers
can then come to appreciate for themselves the value of the new.
Radically different technology may also require educating the
customer’s customers, if they are a significant piece of the puzzle to
56. 46 Rapid Advance
create demand for the new technology. Passively waiting for trickle
down learning and feedback through a multi-link market chain retards
widespread adoption. Technology promoters undertake multi-path
dialog to understand the dynamic of the technology throughout the
market chain and evolve the product concept.
After education, the ensuing step is to build confidence in the
technology and its evolving maturity. Assurance is bolstered by
demonstrating customer satisfaction in all regards, and adoption or
recommendation by opinion leaders. The technology must be shown
to equal or exceed established expectations from predecessor
technologies in critical respects. This step removes reasons why the
customer would not want to adopt the new technology. Cost,
reliability, ease of use, ease of interface, security of supply and safety
are all pivotal confidence concerns for customers contemplating
widespread adoption.
The final piece promoting novel technology takes place when the
market crowds with competitive offerings that mimic the performance
of the new. Specmanship and aggressive sales pitches by competitors
confuse and frustrate users. Advocacy efforts should then focus on
end-users of the technology, with a goal to rise above the confusing
furor in the eyes of customers to create market pull.
Pace of Technology Adoption
One of the difficult questions with marketing novel technology is
projecting the pace of adoption. As the time frame varies, the speed of
investment and the degree to which supporting infrastructure can be
developed both change considerably. A faster pace of market
penetration calls for aggressive early investments, and increasing
utilization of established infrastructure for production, support and
distribution. A slower pace of market penetration suggests a more
cautious roll-out of investments while the technology is refined to
meet the needs of mainstream customers.
Keeping a realistic expectation about the time scale of success helps
the business to focus, and make better strategic and tactical plans.
Decisions in step with the timing of implementation help to deploy
57. Market Targeting 47
resources effectively. Where the time frame is longer, there are more
options to hold off on some commitments until later, when the market
and the industry will be more settled. Investments can be better
targeted and less risky. Where the time frame is shorter, resources
have to deploy more rapidly in order to secure competitive footing.
Making sound investment decisions, including being comfortable with
when to be aggressive and when to be more conservative, relies upon
an understanding of the timing and forces governing adoption.
There are two leading influences over the pace of technology adoption.
One is access to supporting industry infrastructure, including agreeable
user behaviour. The other major issue governing speed of take-up is the
maturity of the incumbent functional satisfaction that the novel
technology is intended to displace. Both of these factors have a
disproportionately large contribution to the speed with which a
technology can move to significant market penetration.
Once a technology begins to push existing infrastructure or channels to
market in directions they’re not inclined to go, the time scale of adoption
can easily stretch out by years. Or, if a technology requires changes in
users’ behaviour or attitudes toward acceptance that are untested and
potentially controversial, the time scale of success in marketing novel
technologies can similarly expand.
Rapid acceptance of novel technology generally comes about only in
well-developed industries with leverage of in-place infrastructure,
business models and customer behaviour. Promoters of novel
technologies should look for ways to transform their intended approach
in order to make greater use of the industry assets already in place. It
takes discipline to invest the intellectual energy into making most of the
existing ecosystem better. Confidence in the new technology leads
managers to think they can extensively re-write the existing basis of
competition more often than they should.
Nevertheless, purveyors of new paradigms may need to go it alone.
Where re-use of existing industry assets is not practical, then promoters
of novel technology usually do well to consider that the time scale of
success will likely stretch out. Significant new capabilities and attitudes
take years to develop. Investment choices and management approaches
58. 48 Rapid Advance
improve with a healthier sense of the time-scale of technology
maturation, infrastructure development and market adoption.
Improving Market Entry Decisions with Comparison Case
Analysis
“Our situation is unique,” can be one of the most expensive assertions in
business. When mulling market ingress, there are several biases that can
colour market entry decisions. Emotionally appealing arguments, select
anecdotes that appear confirmatory, individuals’ bias, and group decision
impairments are the usual contributors.
All told, there are numerous issues in information gathering, filtering and
decision-making. Important information that is observable or inferable
can go missing from the discussion, be understated or even
misrepresented. The end result is that often an entry decision is clouded
by overly optimistic expectations for the time to develop a market, the
cost of doing so, ultimately achievable market share, and long-run
efficiency.
To put up-front ingress choices on more solid footing, one of the most
powerful tools is the use of reference case analysis. Precedent examples
look at several past supplier experiences coming to the same or similar
marketplace with an analogous product. Using comparisons is an
admission that there have been other smart people who had their fair
share of opportunity and problems in representative circumstances. By
looking at a number of cases, the favourable track records of the
successful are counterbalanced by those who faced greater adversity. A
more level view then emerges of adoption time, cost and other factors to
better inform the market entry decision. Moreover, because it is external
data that forms reference cases, much of the human bias and managerial
decision impairments are suppressed compared with anecdotal, emotion-
driven mechanisms.
One reason reference cases are powerful is that each instance contains all
of the information relevant to a suppliers’ past trajectory building a
position, including both external and internal factors. It impounds the
external investments required to change customer behaviour and
