By Denise Harrison, President, Spex, Inc.

“Get big fast or go home!” was the mantra of venture capitalists. Webvan spent $830 million to expand into 26 cities at once only to file for bankruptcy after its overly ambitious strategy failed. E*Toys had a market capitalization greater than that of ToysRUs its first day of trading. Greed, irrational exuberance, call it what you may, but common sense was not part of the tune. Good business strategy is based on market knowledge and strategic focus – focus on what you do best and in areas where your competitors are weak.

In recent years many companies saw the Internet expansion as a key trend to enhance growth. Pundits argued that the new economy was immune to business cycles. Webvan embodied growth mantra – to what end?

“Webvan Group, Inc. said it shut down its online grocery-delivery service and will file for Chapter 11, marking one of the most spectacular and expensive failures of the Internet era. Webvan poured $830 million into high technology warehouse facilities and a 26-city expansion plan that most observers have since said was too ambitious.”
The Wall Street Journal, July 10, 2001

This is only one example of how companies assumed the Internet was the “land of opportunity,” pouring millions of dollars into plans that were ill conceived and based on invalid business models.

During this dot.com boom, Intelligent Information Systems (IIS), Durham, NC, a software-consulting firm, evaluated variety of potential growth strategies. IIS was clearly differentiated by its high quality standards and its commitment to total customer satisfaction. To many companies, “quality” and “total customer satisfaction”, are just buzzwords, but to the team at IIS these phrases are driving principles. While many technology firms in the Research Triangle Park were taking advantage of the lucrative public offerings, the senior management team at IIS knew that a public offering would cause the company to lose its focus on customer satisfaction and zero defects. After a public offering, associates would be imagining what they could do with their newfound wealth, watching the stock price daily, hourly, assessing minute-to-minute their net worth. This myopic self-interest would cause the company to lose its competitive advantage.

They had a difficult decision to make during a critical time frame, but 20/20 hindsight shows that the IIS management team chose the optimal direction and course for their firm by focusing on the key areas that set the company apart from the competition.

eBay is another company that turned down easy cash as it focused on its long-term success. It focused on its customers, the sellers of products on eBay’s online auction site. As traffic grew on the site, advertisers asked eBay to participate in lucrative advertising contracts. Short term, these contracts would have significantly enhanced eBay’s revenue and profitability. However, when the sellers on eBay’s site complained about competition from the advertisers, eBay reduced the advertising on the site. eBay focused on the customers who had made it successful to date. If these customers had not remained loyal and had jumped ship to try other auction sites, competitors would have been more successful at competing against eBay.

As eBay expanded, large companies looked to it as a distribution channel, sometimes to unload excess inventory, sometimes simply to have another sales channel. To protect its original customer group, eBay does not offer volume deals or special deals to these large companies. Everyone must play by the same rules. While some of eBay’s original participants feel threatened by the new, larger companies selling through the site, many think that the added participation will drive more traffic to the site, enlarging the overall customer base for all participants’ products.

Historical Examples

Many East Coast readers fondly remember Piedmont Airlines. When airline deregulation looked Piedmont in the face, Piedmont knew that in this new competitive environment they would face challenges from larger, better-financed airlines. How could they compete?

Larger airlines chose to compete in the busiest airports. This head-to-head competition led to inevitable price wars. Piedmont, on the other hand, continued to build its network in the Southeast servicing many airports that other airlines would not even consider. Their strategy paid off as the company was voted “Best Airline,” clearly differentiating itself as the high quality service provider in the industry. Next, US Airways purchased them, and you know the rest of the story!

Market trends are some of the key factors to look at when developing a strategic plan. But in addition to studying the market’s attractiveness, a company must also look inside to assess its own strengths and weaknesses. Compete on strengths and avoid areas of weakness. All of the airlines developed their respective strategies by evaluating the markets, looking at demographics and transportation trends. But Piedmont also chose to avoid competing with better-financed airlines in popular hubs. Instead, it decided to service the area where it was already well established, an area that was less attractive to its larger competitors.

Southwest – yes, another airline story-noted the hub-and-spoke configurations of the major airlines and decided to compete with a no frills, point-to-point service. They targeted the “no frills” traveler in every route they flew-no seat assignments, no first class, no food (well, okay, peanuts) just cheap, efficient service. They developed their model to keep costs low, using only one type of aircraft to maintain, one type of plane on which to train their pilots and flight attendants. Did this service appeal to all travelers? No, of course not, but Southwest excelled at providing low-cost service for the cost-sensitive flyer. Have they been successful? Yes, they are consistently profitable, often the most profitable airline in the industry.

Alamo Rental Car identified the budget-sensitive traveler in the rental car industry. Hertz, Avis, and National were focused on the business traveler who was willing to pay for the convenience of on site rental. Alamo saw people paying for rental cars out of their own pockets while on vacation and determined that many non-business renters were willing to trade the convenience of on-site rental for lower cost off-site rental. Here again, another success story unfolds because a company looked at the market and created new ways to serve customers whose needs were not met by current suppliers.

Don’t follow the leader!

Enron began as a natural gas company. It saw the deregulation of energy markets as the path to future growth. As it pursued this growth, it transformed itself from its roots, natural gas, becoming an energy trading company to meet the market challenges of the deregulated environment. From trading in energy futures it jumped into paper, water (although not for long), weather futures, and finally into broadband. Enron could do no wrong in the eyes of many analysts and its corporate executives. Let’s look at the history.

Enron’s foray into trading began with hedging future energy costs to combat a turbulent energy market. The company needed to lower its exposure to fluctuating energy prices by entering the market to hedge the forward price of energy. This tactic not only lowered risk, but also generated a significant amount of cash with little capital investment-a very attractive results for the capital-intensive energy company. Enron jumped into the trading business with both feet, eventually resembling a financial institution more than an energy producer. The company’s rapid growth was the envy of the industry, the envy of Wall Street growing from $4.6 billion to over $100 billion, the seventh largest company on the Fortune 500 list (2001). For six year’s running it was voted the “Most Innovative” among Fortune’s “Most Admired” companies list.

Now, let’s think about this. Moving from energy producer to a trader of energy is a jump, but sometimes a jump to an adjacent competency is required when an industry is in transition, as the energy industry is in the new deregulated environment. But to assume that this new-found trading competency transcends industry/commodity knowledge is a long shot at best. Enron was initially very profitable as it benefited from its “first mover” advantage, the first to try and understand the new playing field created by energy deregulation. Its success brought competition into the field; now to maintain its profit and growth, Enron not only traded in commodities previously unknown to its personnel, but also started playing financial games to mask the truth about its slowing growth and profitability. While corporate officers either did or did not understand what was going on, their greed and egos caused the demise of Enron. Sadly, Dynegy, Mirant, and Calpine tried to follow in Enron’s footsteps and found that they too had to grow through high risk and questionable financial transactions to keep up with Enron. This was a parade that one needed to be watching, not participating in.

Not all energy companies played in the Enron band. Duke Energy was often castigated for its conservative strategy at analyst meetings during the late 90s. Analysts like the wild ride that Enron was providing (at that time the ride was up). Duke Energy stuck to its guns and remained an energy company that used trading to reduce risk rather than to become a trading company of energy futures. It did not get caught up in the hype and the smoke-and-mirrors transactions of Enron fame. Now, after Enron’s collapse, Duke Energy’s balance sheet remains strong and its prospects for realistic profit and growth are good. Companies that aspired to follow Enron into ever riskier transactions find themselves in trouble:

How to find the right marching beat for your company?

Situation Analysis

First evaluate external forces: What impacts your business from the outside?

Examine your core business by describing your market segments. Market segments are groups of customers with similar needs and preferences. Write down what your customers in each segment now and what they will require in the future. Next evaluate your competition; what are their strengths and weaknesses? Where is each company’s soft underbelly? Next you need to assess trends in technology, supplier issues, economic trends, and any recent or pending changes in the regulatory environment.

Regulatory change was the catalyst that spurred all of the airlines, not only Piedmont, to revise their strategies.

Next look internally; what are your company’s strengths and weaknesses? What is the key intellectual capital that sets you apart from the competition? Again, IIS found that it was the relentless dedication to zero defects and customer satisfaction that set them apart from the competition.

Assumptions for the Future

Next look to the future; how will trends change? What will customers require? What new opportunities should you pursue to achieve your growth and profit goals? What prospects are right for you to consider, given the strengths and intellectual capital that you identified.

Careful analysis leads to focus. Focus allows you to purposefully select the best road to travel.

Strategy Development

A clearly defined strategy that optimizes the future potential of the business is the goal.

This clearly defined strategy includes answers to following:

1. What are you going to do in your core businesses?
2. What new opportunities will you pursue?
3. What must you accomplish internally to achieve steps 1 and 2?

Developing a strategy is defining not only what the company will do, but also what it will not do. Making definitive choices is one of the most important aspects of strategic planning. Choosing the best road for your company may or may not be the road less traveled, but it will be the right road for your company. Your company’s ability to capitalize on its unique mix of assets and capabilities will give it sustainable competitive advantage in its markets.

Denise Harrison is a President of Spex, Inc.  Strategic Planning and Execution. She can be reached via e-mail at Harrison@thestratplan.com.

(C) CSSP, Inc.; 2002

Denise Harrison, President, Spex, Inc.

Many folks take time to make resolutions at New Year’s to better themselves: lose weight, exercise more – you know the usual suspects. But do you make resolutions for what you will do as a business leader? If not, you may want to take some time to reflect on last year’s successes and disappointments and look at trends that are changing the workplace. Then think through what you would like to resolve to do this year. What do you need to change? What do you need to do more of? What do you need to stop doing?

 Food for Thought:

40% of the workforce is made up of Millennials (people born 1980 to 1999). How is this impacting your business? Do you or your management team have what is needed to motivate this group? (Hint: asking why they don’t behave more like you is not the answer here.) As a leader, you are tasked to get the most out of your team. Some thoughts:

• Millennials will need more coaching (we call this hand holding) than previous generations; have you revised your on-boarding process? Set up one-on-one mentoring?
• Millennials will need more frequent feedback (once a year evaluation does not usually fit this group’s expectations) – how are you ensuring that feedback is more frequent consistently
• Millennials want to be involved; ensure that you are not only explaining “how” to do the job by “why” we do it this way and “why” doing it is important (ideally for our customers)
• Millennials may have different communication preferences; texting feedback for a job well done will take little time, but will fulfill the need for frequent feedback in a manner that usually works for this cohort
• Millennials enjoy variety; think through how your leadership team is changing things so that millennials stay engaged

Invest in the high potentials. Often our time is spent managing the bottom tier of performers, looking for ways to improve performance and setting up performance improvement plans. While you do need to handle this group, time spent here is often to the detriment of spending time with the top performers to see how you can help them. Are there obstacles that you can get out of their way? Do they need other technology tools? Resolve to spend more time working with the top performers to ensure that the company is supporting their performance.

Take time to work “on” the business not “in” the business: One CEO makes sure that each member of his leadership team takes 10 days for professional development offsite. He believes outside stimulation allows the team to come up with more creative solutions. This occurs by attending workshops and seminars or joining an executive group like Chief Executive Network (CEN). Often other companies have solved the same problems that you face and can move you up the learning curve faster by sharing their experience.

Harness the technology within your company: Are you utilizing the technology tools that you have in house? Most CEOs agree they are using only about 40% of what is available. Resolve to learn more about the capabilities and decide which of these would enhance your company’s productivity, and then learn how to use it/them.

Focus on the few: A lack of focus is still one of the most prevalent issues among senior management teams. For example, one CEO cut the number of strategic projects in half and led the company to higher growth and profitability. Really, you can do more if you are focusing on less. Have you really selected the key strategic initiatives for this coming year? Have you communicated them throughout the company? Does the company understand the “why” behind each objective? Resolve to keep these initiatives out in front so that when you end the year, you are in a significantly better position.

These are just a few resolutions that I have seen work successfully in the past. What are the business resolutions that you are going to achieve this year? Please share your thoughts on our blog. For more on strategy development please call Denise Harrison at: 910-763-5194 or harrison@thestratplan.com.

©2015 Spex, Inc., Wilmington, NC 28401

By Denise Harrison, President and CEO, Spex, Inc.

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By Denise Harrison, President & CEO

Denise Harrison President & CEO, Strategic Planning and Execution, Spex, Inc.

At the conclusion of the due diligence process you should have at your fingertips a great deal of knowledge concerning the acquisition target. At this point you will be making a go/no go decision. If the decision is a “go,” you have the information that you need to start your integration process if you decide to move ahead with the acquisition. You now know where the strengths and weaknesses are and where the differences are in policies and procedures. You also have an idea of what the organizational structure will look like once the acquisition is completed. But you cannot develop the integration plan in a vacuum; you need the buy-in of the key players of the acquisition target. How do you get their buy-in?

Look to the future to help determine integration priorities

Instead of getting into the details first, we find it is important for the key players on both teams (acquiring company and target) to have a similar vision of where the industry is going and what the key characteristics are of the winning company. If you start with the big picture, often the details fall into place and the priorities become more obvious. Another option, if time permits, is to develop a full strategic plan.

What about risk?

In the due diligence you develop Threats to the business – but you should do this as a joint team and assess which of the threats has a potentially high impact and a high probability. The combined team should discuss different ways of mitigating the risk.

Now for the details

Once you have a big picture view of the industry, have developed the key characteristics of the winning company and have assessed threats, you are ready to discuss the Acquisition Issues that arose during the due diligence process. What topics need to be addressed? At this point, you will spend time looking at the issues that arose from the due diligence – both teams need to be involved in developing solutions. In addition, you need to develop other aspects of the integration plan: Communication – what will it look like to the employees of both companies? What will we tell our customers? What will we tell our suppliers? Are there any policy and procedure changes we need to make as we go through the integration process? What is the transition plan for the health care plan and other employee benefit plans (e.g. 401k)? How are we going to transition the financial system so that we are all working on the same system and there is transparency in the numbers? What do we need to do to get the other business systems working together?

At the end of the Acquisition Issues discussion you need to determine what the key implementation Objectives are – the key projects for the next 30, 60, 90 days and the plans that need to transition over the rest of the year. You will need to set and communicate goals so that people understand what targets they are shooting at to achieve success.

Now you need to discuss the detailed plan with the owners of the business – ideally they have been involved in its development – but still you need to check back and make sure they are fully bought in – otherwise this can be a deal-breaker. This means you need to be brutally honest about what is going to change after the acquisition is complete. A financial forecast is a must – and this too must be agreed to – you must have a clear understanding of what the numbers will look like during the integration phase. You must have agreement on the integration plan and the financial forecast before you close on the deal.

In addition to the integration plan you need to think through how your company will add value to the acquisition target – because if there is no value-add, this probably is not a good acquisition.

After the closing

The first two quarters will be the most important in terms of getting buy-in from the acquired company. If this is the case, why do so many companies miss the importance of this time period? A common mistake is putting all the energy into “doing the deal” and then not focusing on the integration process in the “after deal let-down”. This lack of focus can seriously impact the success of the acquisition. The newly acquired team needs to know that they are now part of a new team and that they are appreciated for the capabilities that they bring to the table.

During the initial period after the closing

Set-up a meeting before the month-end closing to make sure that the financial accounts have been properly transferred to the financial system. Check on progress for the integration objectives – is anything veering off-track? Can you get it back on track or do we need to reset expectations? Get into this routine right away – this will help prevent large surprises down the road. Try to get the acquisition target onto your financial system within the first quarter after closing – then the numbers should be much more transparent as everyone is working with the same system.

Make sure that you have sufficient resources allocated for the integration process – providing support and follow-up as required by the integration objectives. Often people do not allocate enough of these resources and the acquisition drifts and small problems grow into crises. There should be as many, if not more, resources dedicated to the integration process as you had doing the due diligence.

Communicate

In a vacuum rumors spread both within the company walls and outside in the marketplace– make sure the acquiring company team is visible – talk about what is going on and what is going to happen – even if it is unpleasant. Hiding information does not make the bad news go away.

Monitoring

Monthly: make sure the integration objectives are on track

Quarterly: do a deep dive into the financials – are there any red flags?

After one year – release the escrow – there should be not major surprises after 12 months – unless you have not been involved. Monitor your key metrics:

• Are you meeting your financial targets?
• Are you retaining the key people?
• Has the acquiring company added value to the acquisition?
• Would you do the deal today if you knew what you know now?

Integration is a complex process and each deal will generate different objectives. We have found that, if you agree on a shared industry vision and the characteristics of a winning company, the priority objectives become clear to the teams on both sides of the table. Integration objectives and goals will flow from the common industry vision. This is not to say there will be total consensus – there still will be some difficult times, but this will get the team on the path to a successful integration process. This integration is often neglected during the after deal let-down, but if your team focuses on integration and resources are allocated to make the process a success, your acquisitions will be more successful. Remember, more the 80% of acquisitions fail to live up to management expectations.

Integration Process – Option 1 – 2-3 Days

This process can occur either before or after the transaction is completed, ideally before.

1. Future Scenarios – look at future trends
2. Leading Company Profile – what are the characteristics of a successful company?
3. Strengths and Weaknesses
4. Threats
5. Acquisition Issues
6. Objectives
7. Communication
8. Monitoring Process

Integration Process – Option 2 – Full Strategic Plan – 3 Months

1. Situation Analysis
2. Strategy Formulation
3. Implementation

Some Case Studies

Wyeth: Traditional Pharma vs. Bio Tech

During the mid-1990’s WyethPharma developed a vision of the pharmaceutical industry, in their scenario they saw that traditional pharmaceutical development would not be as fertile for opportunities as a biotech approach which mimics what actually occurs in nature. Understanding that this technology would foster significant future growth, Wyeth faced the decision to build from scratch or buy. The Wyeth team decided that an acquisition would be faster than building from scratch and they acquired two companies: Genetics Institute and American Cyanamid (now Wyeth Biotech). Wyeth did not hesitate – they jumped in with both feet with a significant investment to fund these acquisitions. During this timeframe many other pharmaceutical companies dabbled in biotech but dabbling did not position these companies for success. A decade later Wyeth is still reaping the benefits of its investment decision – the biotech industry is blooming. Their success has led to their acquisition by Pfizer.

Some Insight into the Wyeth Integration Process¹

Wyeth used strengths and weaknesses analysis to help determine “best practices”. Often this analysis leads to the acquiring company bridging areas of weakness in the acquired company but not taking advantage of the strengths of the acquired company. WyethPharma saw that WyethBiotech needed to understand market needs and market niches early in the development life cycle to ensure that the resulting drugs would have commercial viability. This moved WyethBiotech from developing drugs looking for a problem to solve, to seeing a market need and solving it by developing a drug.

What was unusual is that WyethPharma identified some strengths within WyethBiotech that would help its traditional pharmaceutical business. It is unusual for an acquiring company to learn from its acquisition. WyethPharma made changes in two key areas:

Pay for performance culture

Flexible manufacturing: by focusing on using a small number of processes in the production of pharmaceuticals rather than a unique process for each drug.

So, during the implementation process it is important to understand the strengths and weaknesses that both parties (each party) bring(s) to the table and to capitalize on the strengths of each to develop “best practices” that are a combination of the best from both companies.

Pharmaceutical Company uses a Full Strategic Plan for Go/No Go Decision

Another pharmaceutical company was looking to buy its supplier of excipients. These are the compounds that allow for the time-release factor in drugs (e.g. your 24 hour tablets). The team wanted to develop a full understanding of the supplier’s business before making the final decision. So teams from both the acquiring firm and the targeted firm set forth to develop a strategic plan. Over the course of three months the two teams went through a strategic planning process including:

1. Situation Analysis
2. Strategy Formulation
3. Implementation

During the process, the acquiring team developed an in-depth understanding of the business including details about the markets served and the competitive environment. They also had a hand in developing and understanding the possible opportunities for the target company.

At the end of the process they decided to go ahead with the acquisition. Having the strategic plan in hand, they had an integration plan in place and they had developed a good working relationship with the target company senior management team. After finalizing the transaction the team kept the strategy on track through the monitoring process, ensuring a smooth transition.

¹”Wyeth’s Multibillion-dollar Biotech Bet”, by Elizabeth Svoboda, Fast Company, January 14, 2009

Denise Harrison is President & CEO at Strategic Planning and Execution, Spex, Inc. She can be reached at harrison@thestratplan.com

© Copyright 2015 by Center for Simplified Strategic Planning, Inc. Ann Arbor, MI — Reprint permission granted with full attribution.