Saturday, October 20, 2007
Corporate Strategist, Plan Thyself (Part 3)
Once upon a time, there was a man who approached a football coach and said the following:
“I am a great football player. Look at all of my awards. Look at all of my trophies. I am recognized throughout the land as a great football player, and I would like to join your team.”
“Wonderful!,” replied the coach. “We have a shortage of good linesmen. Get out there onto the practice field with the other players. Get up on the line and show me what you’ve got.”
The man did as the coach asked. As it turns out, he performed terribly on the line. He was so weak relative to the player on the opposing side that he eventually had to be taken off the field on a stretcher.
As the stretcher was being taken off the field, the coach went up to the injured player and said, “I thought you said you were a great football player. You looked awful out there.”
The injured man replied, “I am a great football punter, not a linesman.”
Just because a person may be great at playing a particular position in football does not mean that they are great playing every position in football. Different positions require different skills and abilities. That is why football players tend to specialize at excellence in only a couple of similar areas.
As we saw in the story above, this man was well regarded as a punter and had lots of trophies for that skill. However, being a great punter does not provide the skills needed to be a great linesman. Rather than claiming to be a great football player, he should have limited his claim to being a great punter.
A similar situation often happens in the business world. A corporation has success in a particular area, and suddenly they declare themselves to be a great corporation. It may be that their success came in a narrow specialty. However, by classifying themselves as a great corporation, they may get the idea that their skills are broader than they really are.
As a result, the corporation may decide to tackle strategies where they have no right to be, much as that punter did. And, similar to the punter, the corporation may come out of the battle weak and on a stretcher.
This is the third in a series on building strategic plans for the role of the corporate headquarters. As we have seen in one of the prior blogs, corporate headquarters needs a strategy as much as its divisions. If the corporation headquarters does not have a definitive strategy for adding value to its divisions, then perhaps the divisions should be spun off and the corporation folded.
In the last blog, we looked at various ways a corporation can add value based on how much it gets involved in the activities of the divisions. In this blog, we will look at ways in which a corporation can specialize its skillset to help certain types of divisions. Much like a punter specializes in punting, a specialized corporation will build a particular type of portfolio—the types of divisions that benefit most from the corporation’s specialized skill.
To illustrate this point, we will look at the various lifecycle stages which a division goes through. These life stages go from new business incubation, through rapid growth, into maturity and then fall into decline. At each stage, a division has different success requirements. If a corporation can excel at building success for one of these life stages, then they can develop a corporate strategy of adding value for firms at that stage in their lifecycle. Then the corporate portfolio would specialize in being full of divisions at that particular life stage.
Listed below are six ways a corporation could specialize, depending on life stage of the divisions.
In this specialty, the corporation is skilled at envisioning what the Next Big Thing is going to be. This requires being able to examine the marketplace to see where demand is evolving to and where the holes are in currently meeting that demand. Then, once finding where that next great opportunity might be, the corporation is skilled at making the right initial investments to create or acquire what will evolve into that next big thing.
Once the company proves the inevitability of that next big thing, the corporation can cash in on the value added by selling the division at a huge multiple, or spinning it out into an IPO, or hold it for a longer term gain.
2) Venture Capitalist
This is the corporation which may not have the entrepreneurial skills to dream up the next big thing, but has the skills to recognize the next big thing when it is in its infancy. Often times, these new ventures are started by people who are skilled at visioning, but not skilled at running professional businesses. As a result, the venture capitalist type of corporation provides funding, nurturing and teaching, so that the young division can make the leap to the next level of development—becoming a stable business.
As with the entrepreneur/visionary corporation, most of the value is unlocked at the time that corporation cashes in their ownership position. The venture capitalist corporation can cash in on the value it adds by spinning out the venture into an IPO or by selling at an incredibly high multiple to a deep-pocketed firm.
3) Growth Funder
During the rapid growth phase of a division, they tend to consume a lot more capital than they provide. Eventually, the cash flow is expected to turn positive, but at this stage, the division is in need of funding. A growth funder corporation is skilled at understanding how to help divisions through this rapid growth phase. They have the resources and discipline to properly stage the funding of the growth. In addition, the corporation understands how to properly scale up the infrastructure to support the growth.
In general, the growth funder adds value to helping the division grow in a way that doesn’t overstress the young division’s capabilities. By giving it a strong operating infrastructure, the corporation enhances the likelihood that the growth will be successful and lead to profitable market leadership.
Once a firm reaches maturity, ultimate success shifts even more towards operating efficiency. “Operator” corporations are experts in understanding how to be a great and efficient operator. They know the tricks to squeeze out a little more in sales and a little less in costs. They mentor the firm and help it install the various procedures and investments needed to get to a higher level of performance.
Here, the value added by the corporation is relatively immediate. As the improvements to the operation improve the cash flow created, the stock multiple on that cash flow comes into play right away.
5) Turnaround Expert
Sometimes, companies fall from maturity into decline prematurely. A turnaround expert can breathe new life into the falling division and extend its useful life. Often times, large corporations who are not turnaround experts and prefer growth businesses will sell off these divisions relatively inexpensively. This is what is happening at a lot of the big consumer product companies these days, like Unilever and Proctor and Gamble. The turnaround expert can buy these established, but falling brands from companies such as these and get more life out of them, usually by unburdening them from the large infrastructure of the old corporation.
Whereas corporations who add value to early stage life cycles get most of the value out at the time they sell, for a turnaround expert, they establish a lot of the value in their ability to buy the brand inexpensively and then bring it back to former glory.
6) Bottom Feeder
This is the corporation who can find pockets of value in even the most distressed of organizations. Usually, bottom feeders get the assets at bargain basement prices. Then they redeploy the assets in a way that makes money. Maybe all they keep are the rights to some brand names that are moved to a more successful operating division. Or perhaps the only thing of value is the real estate, which is repurposed. As with the turnaround expert, much of the value added comes from buying well and then having a better idea of knowing what to do with what was bought.
If a corporation specializes in developing skills which add value in a particular way, then the corporation can have a strategy of building a portfolio of businesses which would benefit most from that specialized skill set.
In many of these instances, once the corporation adds its value to the division, it may be in the corporation’s best interest to divest of the division and find new ones to fix. Hence, the corporation becomes the constant, and the divisions are like raw materials to be manufactured into something better and then sold at a profit.