Sep 4, 2020 | Change, Innovation
Robust ecosystems have points of balance; change is incremental, competitive, and evolutionary, leading to a revised point of balance.
When a species becomes dominant, that dominance becomes the source of weakness over time, as evolution requires responses to changing circumstances. A dominating player in any system resists change, as that involves increased levels of short term risk, and dominating players are generally risk averse.
Occasionally, an unpredicted catalyst appears, throwing the rules against the wall. Established incumbents fail to evolve quickly enough to accommodate the changes and survive. This is as real a process in commercial life as it is in the natural world.
The introduction of rabbits and the cane toad into Australia’s ecosystems have had the same impact on the pre-existing status quo as has the evolution of the microchip has had on the commercial world. The microchip unleashed a series of innovations for which the pre-2000 economic ecosystem was unable to recover. The now dominating players were little more than single cell commercial organisms, and many did not exist, at the change of the centuries.
Commercial ecosystems are no different. There will be times of consolidation based on the strength of the balance sheet of the dominating players. This becomes the source of weakness as they become locked into the status quo which produced them.
It is pretty clear to me that there are 4 stages in the commercial development of a market:
- Start-up stage. One player emerges, that effectively redefines a market in some way, followed up quickly by a series of fast followers. This is normally generated by some sort of catalyst, unanticipated by market incumbents, and leads to what is seen at the time as unprecedented periods of growth. Think Ford, General Electric, and those around the move from the vacuum valve to the microchip, from Allan Turing during the war to Gordon Moore in 1965.
- Scaling stage. The new players fight for dominance, with most of them going to the wall, while a small number, scale and consolidate to a position of dominance, if not monopoly. Think social media, web browsers, mobile computing.
- Leverage for profit. The new ‘kings’ leverage their dominant position for maximum returns, optimising processes, and minimising risk in pursuit of profitability. Facebook, Google, Microsoft and Amazon are all following this pattern.
- The cycle repeats. A catalyst appears that changes the rules of the game, again. Some may survive in a different form, others will disappear.
This is a Darwinian process applied to our economic and commercial ecosystems. Charles Darwin’s much quoted musing in the header applies as much to commercial systems as it does to natural ones.
The speed of change, enabled by digital technology has concentrated the cycle time from decades to a few years, and now arguably, a few weeks. It took 30 years for the vacuum tube to morph into scalable microchips, a decade for the early versions of the net to enable distributed computing, and a couple of years for that to create a system that might support new communication tools. Then, Facebook created a new model that blitzed the competition and led to absolute domination of a new ecosystem. A similar story led to Amazon, and Google, while Microsoft, the monopoly operating system player of the 80’s and 90’s, threatened with anti-trust breakup, evolved with incredible speed and agility into something new.
In the last few months we have seen examples of businesses and institutions that have evolved at a pace unimaginable a year ago, to face the challenges of Covid.
It may be fanciful, but it seems to me that market dominance contains the seeds of the dominators own destruction. This is a pattern followed not just by companies from Wedgewood, the British East India Co, Ford, GE, Microsoft, but to countries. Rome, China, Britain, and dare I say it, the US, while China is rebounding.
I speculate that this is the result of the crushing of opposition, and resulting lack of ‘genetic’ diversity that occurs as short term risk is minimised while profitability is maximised. Lack of diversity in the commercial DNA leads to commercial vulnerability, just as in the natural world
Ford ‘invented’ the modern version of the production line, (the Venetians had it first in the 1500’s) but could only make one type of car, so GM ran over the top of them with choice. Kodak dominated photos, but they defined themselves in a particular way, and despite being the ones who invented the virus that would kill them, digital photography, they failed to evolve. Same story with Blockbuster. They absolutely dominated global video rental, defining themselves as video rental stores. The then CEO John Antioco put in place a strategy that anticipated the growth of subscription streaming services. Blockbuster even had the opportunity to buy Netfliks at a give-away price at the time. However, the board, dominated as it was by those whose sole interest was short term profitability, got rid of Antioco, and the strategy that may have saved them as a significant if not dominating player. They actively rejected the opportunity to evolve, signing their own death warrant.
On each occasion, in each domain, there has been some sort of catalyst that has led to the demise of the dominating enterprise.
It seems to me that this current Corona crisis is another such Darwinian catalyst?
We have already seen many businesses struggling, and many ‘hitting the wall’ and I suspect there will be many more, while some, mostly smaller and more agile businesses are doing very well. Question is, will a few of the dominating enterprises fail the test of rapid evolution, and disappear?
I am prepared to bet that many will, and be replaced by businesses we have not yet heard of, that are able to deploy digital tools in almost real time. Just look at the manner in which Zoom has been able to harness the opportunity, blowing away incumbents like Microsoft.
Aug 31, 2020 | Change, Management, Marketing
We are in uncertain times, and under those circumstances, perhaps counter intuitively, there are many opportunities for all forms of M&A activity.
For many owners of SME’s, this Covid crisis is the last straw.
You have worked hard for years to build a business, survived and prospered as technology has changed the competitive landscape, avoided the trap of not managing your cash well enough to cover the unanticipated, and survived the various financial meltdowns that have occurred.
Now you are ready to sell, as there is no way the kids want to work as hard, and thanklessly as they have seen you work, and the current uncertainty makes an easier life seem very attractive.
Following are 10 of the traps I have seen over the years, which have resulted in a seller obtaining less than a business may have been worth to a buyer.
Never forget the role that psychology plays in the process.
There are many financial and strategic due diligence boxes that will need to be ticked over the course of a successful transaction. However, the psychological drivers on both sides of the transaction will have a profound and often unrecognised role. From beginning to end, it is an all in negotiation, where skill and experience will play a huge role. This is a double edged sword, and can be made to work for you by judicious planning and execution of the sale process.
Appearing too keen to sell.
Once you appear really keen to sell, that influences the context of negotiations. Nothing is as obvious to a buyer as the desperation of a seller.
Not marketing and managing the selling process.
Marketing plays a decisive role in setting the context for a transaction. How many buyers you can interest, how you go about identifying and generating that interest, how you communicate with interested parties, what information you provide, and when, and how you conduct yourself. It will consume a lot of time and effort when done well, done poorly; you will ‘get done over’. Selling a business is no different to selling a piece of capital equipment, or a tub of yogurt, it is a process to which there is more than one party, with ranges of interests, drivers, motivations and resources available. Pretty obviously, the more keen and genuine buyers the better.
Having unrealistic price expectations.
Few will see the business as you do, and most owners of SME’s consider their emotional commitment over the years has a value. It may do, so long as it is reflected in the financial and strategic value to a buyer, but in itself, it has no value to a buyer. The manner in which the price is structured can vary enormously, from a ‘cash on the barrel’ agreement to swaps of shares, delayed payments, and work-outs dependent on future earnings. Each has their own set of challenges which need to be anticipated and factored into the calculations in a realistic manner. However, going into the process with unrealistic expectations can sour the well.
Poor anticipatory Due Diligence.
Any serious buyer will undertake a DD process, the depth and investment in this will be driven by the size of the transaction more than anything else. Making it simple for the buyer will be appreciated, and add to the trust they have in the forecasts you may make. Anticipating questions that may emerge during the process, and answering them before they are asked defuses them as a potential issue. Removing potential negatives before they become objections is sales 101. Never forget the rules of sales apply, so leverage them.
Ignoring the qualitative elements.
Can you work with these people? Are you prepared to have them take over the business, and its relationships you have nurtured? Do the emerging conditions of purchase cause you to lose sleep?. It may be that none of these apply, so you do not care. However, I have seen transactions turn sour at the last moment after considerable effort, just on the basis of personality, so consider it early and avoid the pain.
Risk assessments.
Every transaction has risks, covering them in an anticipatory DD process so you have the answers before the question is asked, is extraordinarily useful. A buyer will make their own assessments, but the better yours are, the more likely that any difficulties in the negotiation will be papered over. Selling any business is based on the assumptions that a buyer will make of the value that business will add to them. I.e, it is all about revenue and margins over time. The temptation of the seller will always be to beef up the forecasts, which is usually a mistake. Be realistic, but break the revenues down into its components and make assumptions at the more granular level. For example, costumer margins, the trends over time and the influences that adverse events have had. Any comprehensive buyer DD will ask the questions, so have the answers in a robust defensible form.
Understand the strategic value to every potential buyer.
Every buyer will be different, understanding the drivers of each is critical to maximising the price. Make your own assessment of what strategic value your business can add to theirs. This analysis is always way more than just a calculation of future cash flows, although that will always be the starting point. Items such as an assessment of the value of your brand to a buyer, the rate of customer churn, longevity of customer relationships based on barriers to entry and exit, recurring revenue vs ad hoc sales, and many others, will all add to the strategic value to a buyer. Each potential buyer will value these items differently, so developing a nuanced understanding of their business is an essential element of the sale process.
Avoiding the cost of good advice.
Professional advice can be expensive, and for an SME owner keen to maximise the dollars in their pocket, a seemingly avoidable expense. The problem is that selling a business can be a complex exercise, and is always more complex than it first seems. Having good accounting, legal and strategic advice is like any investment, it is made to either make or save money. In the case of the sale of a business, the objective is to maximise the sale price, and minimise the risk to the seller. Experienced buyers will often overwhelm a potential seller with documentation, questions, and promises which conceal the gaps and traps into which the unwary and poorly advised can easily fall.
No plan B.
Selling a business can be a lengthy and difficult process. Many spend time on the process that would be better spent managing the business they are setting out to sell, optimising the value that someone might pay for it. As a flip side of the same coin, many invest themselves in the sale process in the absence of a plan B. When a sale falls through, not only to they have to get back the running the business, they have to deal with the unfulfilled expectations of customers, employees, and yourself.
As a final point, when you get the unsolicited offers, do not invest too much time in considering them in the absence of a real demonstration of the intent of the hopeful buyer. There are many reasons for an unsolicited approach, and none have anything to do with maximising the value for you, as the seller.
Aug 5, 2020 | Change, Strategy
Everyone and his dog is making predictions about the shape of the economy, post corona, a state that is seemingly moving out of our grasp currently with the resurgence of the bug. The reality is that the cards have all been thrown in the air, never has the immediate future looked so uncertain. Therefore, why should I miss out on pontificating?
Friedrich Nietzsche seems to have got it right when he wrote: ‘What does not kill me makes me stronger’. I suspect he will be again proven correct, just bad luck for the dead.
The tone of the predictions made is usually reflective of the mouth from which it came, and the interest they have. However, the almost unanimous view is that we are in for a really tough time. Whether the recovery is ‘V’ shaped, ‘U’ shaped, or more like an ongoing ‘L’ only time will tell.
However, my money is on the ‘L’, with a few upticks in specific areas.
- Demand will be constrained, which will filter through the economy, resulting in sustained unemployment and underemployment, cycling back to lower demand.
- Supply will be constrained, as businesses disappear, their supply chains are disrupted, and manufacturing sovereignty takes front and centre, but is unable to fill the void. Therefore the gap between the rhetoric and the reality might be wider than we think at this point.
- Government policy changes will occur, but will they be the right ones and be sufficiently effective to make a real difference more than the immediate triage. Policies are fairly flexible, subject to quick change; entrenched modes of behaviour and belief are not so flexible. Therefore it may be that the short term measures do not stick after the initial pressure is removed, and policy drifts back to the pre-existing status quo. This would be an opportunity lost.
- The systemic shock to the financial system will be substantial. I am not an economist, but the butchers bill from this response to the virus will have to be paid. That payment will come through a reorientation of financial markets and tax regimes. With very low interest rates, there will be money looking for a home, but the system might be in some sort of semi catatonic state driven by uncertainty, and the chances of further rounds of infections that lead to subsequent close-downs. Household balance sheets will have been severely impacted as people have reached into reserves of all kinds to pay living expenses. The Australian house is the super fund of many older Australians, it is likely that the values will drop substantially in the face of low demand. This is concurrent, with their super balances from super fund investments, which have tanked. Older Australians will simply have to work longer to be able to retire, but there are no jobs for older workers.
- Tax relief except in specific cases such as the usurious payroll tax, will probably not be forthcoming, but fundamental changes in the tax system to reorient it towards greater equity and to plug the gaping holes is essential. The decade old Henry tax review should be dusted off and rethought for a start. Some real political backbone is required, but I suspect will remain missing.
- For a considerable time, it seems likely that the stock market will undervalue performance, reversing the trend of the last 20 years, where markets have overvalued stocks. This feeds into the social problems of how we look after in increasingly large and unhealthy cohort of ageing baby boomers and their parents, as their investment incomes are reduced.
- Business models will be transformed. Working remotely will become far more accepted as we simply do not revert to the commute mentality of pre-corona. This has all sorts of implications for CBD property, infrastructure development, and the way communities are run.
- Supply chains will become more transparent and collaborative, even amongst competitors, as it becomes obvious that agility above all else is necessary to maintain the flow through the whole system.
- Technology will get a shot in the arm, as innovation and tech always does in times of crisis. However, it will be technology emerging from the current pool of scientific knowledge, some of which may have been hiding on the shelf for some time. Original science that will deliver solutions to problems we may not yet have seen, will have to wait longer for the necessary funding. Meanwhile, our stocks of really smart, trained and funded scientists, capable of creating the science that will deliver the future will continue to diminish to close to extinction levels. This is despite government rhetoric, and some current reallocation of funds from humanities to STEM. It is a systemic challenge ignored for at least the last 30 years because it extends well beyond any election cycle.
What have I missed?
Jul 22, 2020 | Change, Leadership, Strategy
As we hesitantly, with stumbles, come out of this lockdown, we will see the landscape has changed. For some, it will be a land of opportunity, for others, a wasteland.
Rather than seeing it as a calamity, those who choose to see it as an opportunity, will be able to look and see that what has actually happened is that the lockdown has dramatically accelerated many trends that were already slowly impacting on our lives. They were all evident before to those who were looking, now they are in ample evidence to everyone who is not completely blind.
The more obvious ones, are:
‘Digitisation’.
So called digitisation has taken off, whatever digitisation means in your context. Suddenly ‘digital’ is the new normal. From remote control of factories to grannies interacting with their grandchildren via Zoom, nobody has been immune.
Remote work
Working from home, cafes, the car, has been developing for a decade. Suddenly, it has been accepted as an alternative to expensive office space in central locations. What will probably evolve is some combination of decentralised ‘meeting places’ and working from home, serviced offices, and cafes. The trend has been pushed along a decade in 5 months.
Retail delivery services.
Similarly have been pushed ahead a decade. Everything from the local restaurant to the supermarket, and department store now have to be geared up to deliver, or lose the sale. This will change the nature of retail from transactional to more ‘showrooming’, a trend harnessed by Apple a decade ago while everyone else was cutting retail prices and locations in order to save money. However, retail shop fronts will become more important than ever as a means to communicate with customers, rather than just being a point of sale.
The end of ‘purpose’ marketing.
The focus of marketing, at least by corporate marketers, will have pivoted from the banality of the ‘purpose driven’ marketing of the last few years. In the absence of a compelling idea, marketers deluded themselves that people really cared about their empty statements of ‘purpose’. Your potential and current customers will be demanding evidence that the statements carry weight in the behaviour of those seeking their money.
Politics.
Politicians have had a huge wakeup call. We voters really hate the division and spite of the practise of politics as usual pre corona. We long for some evidence that those elected to lead, actually do so, rather than just taking the trappings of office for their own benefits. The pressures on politicians and the political orthodoxy that has dominated to date will have to be revised. The basic assumptions about what services government provides, and from who and how, the necessary funds are raised to pay for them, have moved.
Not since 1939 have our politicians been confronted with the profoundly difficult choices that now face. I wonder if they are up to the challenge?
The economy.
The economy has suffered a major stroke, one for which substantial rehab over a long period will be required. It would be naive to believe it will recover to look much like the pre stroke version, but recover it will, over time. For those willing and able to push the boundaries, there will be opportunity everywhere, from the remaking of supply chains, to the potential of rebirth of sophisticated niche manufacturing, and new export markets. Digitisation of just about everything that has been accelerated massively, will demand investment and different business models and enterprise capabilities. These will offer great opportunity as well as what for many will be a terminal challenge. None of this will be easy, but it will happen.
As we ‘wake up’ from the corona coma, there will be an inclination to revert back to the known, and comfortable. Succumbing to that urge will be a mistake, as we have all been forced to move on, to push the edges of our comfort zones. The economic and social climate has changed dramatically, and those that seek the comfort of the Pre Corona status quo will find themselves isolated, and falling behind their competitors.
Picking your way through all this will take effort, experience and careful planning. When you need the injection of those skills, give me a call.
Jul 17, 2020 | Change, Strategy
‘Pivot’ has been the word of the year so far.
Cafes have ‘pivoted’ to takeaway, fitness centres ‘pivoted’ to on line classes, supermarkets ‘pivoted’ to home delivery, entertainers ‘pivoted’ to all sorts of variations of on line delivery, and so on.
Huge changes to the business models of many businesses amidst the chaos.
Now things are starting to go back to some sort of normal activity, although the signs of a re-emergence of the Bug are alarming.
The entrepreneurs amongst us are thinking about the bits of the emerged business models to keep, adjust, or throw away.
It seems that while there is a new normal emerging, for many the challenge is not to slip back into the old ways, but to see the coming months as the second start-up for their business.
It may have been forced on them, but there is silver in the cloud.
New business models, new relationships and types of relationship, a wider recognition that communication is the core of success, and that customers are looking for value from all sorts of new sources.
This coming period for most will be much more than just a re-opening, it will have many of the elements of a start-up. For others, it will be the sad walk to the under-taker. It is unlikely there will be too many businesses remaining unchanged.
Header photo credit: Peter Orr photography
Jul 15, 2020 | Change, Strategy
Crises always drive rapid change, and this Corona crisis will prove to be no different. Many enterprises will flounder and disappear, but others will emerge, not just to take the place of the dead, but to build value in different ways.
The law of diminishing returns that had held true for most of the 19th and 20th centuries turned around, beginning in the 1990’s with the flattening of productivity increases. Slowly, scale had become its own worst enemy, as it outgrew the ability of the corporate bureaucracies that evolved to operate productively.
Manufacturing became organisationally top heavy, and productivity improvement became very hard to extract in anything more than small steps.
Even harder to find is relative productivity improvement. When everyone is increasing productivity at around the same rate, along a predictable curve, there is no net competitive improvement.
We had the early stages of the digital revolution in the mid 1990’s, culminating in the enormous profits of the so called ‘unicorns’ that emerged in the early 2000’s. These defied the rules of diminishing returns, and grew on the back of network effects and negligible marginal costs. In the process, they made their owners multi billionaires and rock stars.
Perhaps we have reached a tipping point, where the dollars flowing from the digitisation of our lives is starting to reach its limits?
Despite the enormous wealth and power delivered by the digital platforms, they still supply only a small part of what we need, and do not supply any of the basics, food, shelter, or clothing. They just make these things easier to get, and sometimes cheaper.
However, the application of digital capability to the manufacturing processes that deliver the things we need to live, may be in the nascent stages of reversing some of those limitations of scale.
Over the last decade, most of the unicorn wannabee’s have floundered, with a few notable exceptions. Their market valuation tanked, and in the recent case of WeWork, blowing up in spectacular fashion. Meanwhile, the market value of manufacturing businesses, those that produce the things we need to live, have not been as affected. However, when compared to the valuations of the digital platforms, their performance looks tepid at best. This comparison has sucked the life out of manufacturing investment, as investors seek quick wins.
Productivity increases, soaring in the latter quarter of the 20th century have flattened out, despite the ubiquity of software.
It was not supposed to happen like this.
Partly this flattening is because the barriers to entry have been radically reduced, and in many cases, removed. Meanwhile the benefits have moved very slowly from the owners of the software to those that use it.
Our productivity will rise again, as digital tools are developed and deployed into the production of the physical things we need and want to live comfortable lives.
The future is digital, but the emphasis will be in different places.
The evidence is all around if we look.
Tesla is just a car, re-imagined with a digital heart, Apple became the most valuable company in the world by adding a physical retail arm to their digital portfolio, and Amazon purchased the physical supply chain of Whole foods for US$16.5 billion, and got their money back overnight with the increase in their stock value.
Locally, the response to the Corona bug in manufacturing forums has been all about the deploying of digital capability to the production of physical things. This is together with the recognition of the importance of a sovereign manufacturing capability.
We are, maybe, approaching a huge inflection point.
A few weeks ago, I watched the Prime Minister speak at the National Press Club. If even a modest part of the rhetoric converts into action, we will be better off. When talking about the technical education system, he used the same phrase several times: ‘Why pour more money into a dud system?’ This is an overt acknowledgement that the current system is absolutely broken, and needs to be fixed if manufacturing jobs, with the social stability they generate, are to re-emerge.
What do you think?
