Rapid Advance

Mergers & Acquisitions, Partnerships, Restructurings, Turnarounds and Divestitures in High Technology David J. Litwiller

Copyright 2008 by David J. Litwiller. All rights reserved. Except as permitted under the U.S. Copyright Act of 1976, no part of this publication may be reproduced, distributed or transmitted in any form or by any means without prior written permission of the author.

Library of Congress Cataloging-in-Publication Data

For Cynthia, Kyla and Heather

Contents
Strategic Partnerships Small-Large Business Pairing Minority Equity Ownership Earn-Outs Joint Ventures Exit Provisions Mergers and Acquisitions Operational Success Catalytic Technology Overlap R&D Team Concerns Early-Stage Acquisitions Conflict Management 1 8 9 11 13 15 18 21 29 30 31 32

Staffing and Culture Quickly Turning Newcomers into Productive Employees Executive On-boarding Keeping New Employees Aligned

35 35 36 37

Market Targeting Maxim Segmentation Market Assessment Promoting Novel Technology Pace of Technology Adoption Improving Market Entry Decisions with Comparison Case Analysis Growth Strategies Attacking Established Markets Adoption Thresholds Trading-Off Among Development Time, Cost and Performance Breaking Juggernauts Expanding Share within Established Markets Pursuing Emerging Applications Addressing Fragmented Markets

39 39 39 41 44 46 48 50 53 54 55 57 59 60 61

Navigating Dynamic Markets Using Market Volatility to Build Share Leading Indicators of Slowing Demand Push Marketing Sustaining Push Marketing of Advanced Technology in Maturity Marketing Metrics v

65 65 71 73 74 75

Ecosystem Relationships Recruiting Partners Setting Interoperability Standards Industry Associations

79 79 80 90

Growing Sales Success Formula Variation First Customers Learn Quickly Staffing Diagnosing Trouble Scaling-Up Indirect Channel Sales Cross Selling Performance Metrics OEM Customers Customer Funded Development Good Practice Other Comments

91 91 93 93 93 94 94 96 97 97 100 100 101 103 103

Restructuring

105

Turnarounds

109

Divesting Decision to Dispose Objectives Process Preparation Sale Method Creating Competitive Auction Bidding Marketing and Appraisal Audience Collateral Documents Due Diligence Negotiating Signing to Closing Separation Timeline Communication Challenges and Advice Advisors vi

121 122 125 126 126 133 136 139 139 139 142 143 143 144 145 146 147 148

Bibliography

151

About the Author

155

vii

Introduction The speed and complexity of change in high technologys 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.

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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 theyre faster than the companys 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

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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

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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. Dont just talk to the top people. Get to know the second level people as well.

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 others processes, systems, workflows, organizational structure, priorities, and reward systems. The two sides cant 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

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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

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 isnt 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

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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

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.

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 players 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 havent merged, is unusual.

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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 targets 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

Choosing Equity Stakes in Technology Sourcing Relationships, Kale and Puranam, California Management Review, Spring 2004

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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.

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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 earnout 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 purchasers 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 assets 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 targets 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 coordinated operation. After amalgamation, it often becomes difficult to evaluate or even measure the acquired units stand-alone performance. Linking the contingent payout to actions beyond the target managements 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

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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 units 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 targets 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 purchasers convenience to pay out and part ways with the targets 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 targets 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,

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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 sides 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, earnouts 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.

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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, JVs can often be sequential investments, leading to future investments and outright buyout, as uncertainties diminish. In some ways, JVs are even more complex than acquisitions. JVs 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. JVs in contrast generate ongoing issues to be resolved among two or more parent companies regarding operations, management and governance. JVs are also complex to negotiate and operate because in many ways they are an unnatural business form: JVs require sharing, and most business strategy is about capturing. JVs 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, JVs commonly take twice

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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 JVs 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 theyre 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 JVs 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 frontend negotiations, consider that about 85% of JVs end in acquisition

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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 partys 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 JVs 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:

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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 isnt working.

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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.

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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

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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.

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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

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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 targets capacity to pursue high impact posttransaction opportunities. The key leverage areas are usually sales, technology, product development or operational efficiency. Generally, the liberated 20% of the targets 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 managements conviction to making the deal work, and finding opportunities in the combination worthy of setting aside pretransaction 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:

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Value Levers Know and agree upon the value drivers in the merger or acquisition. Rank them, and focus resources on the priorities. Dont 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 acquirers larger distribution channel have to be brought into synchronisation. Bandwidth mismatches create long response times, slowing integration and raising apprehensions about the acquisitions 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.

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Cultural Due Diligence Complete cultural due diligence immediately after the legal closing date. Cultural investigation usually competes with the need for confidentiality during pretransaction 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 posttransaction 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

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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 organizationwide 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 longrunning 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.

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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 theyve 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.

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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 underperformers 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

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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 companys 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, technologydriven 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 acquirers 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.

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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 acquirers. 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 isnt 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 cant 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

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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 cant communicate well enough or understand each others 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 acquirers 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 targets R&D group can be concerned about restrictions or obligations regarding their future activities. Both concerns should be explicitly answered. For the acquirers 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 acquirers R&D team. To intercept apprehensions among the targets 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 targets R&D group

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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. Startups 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, selfsufficiency, 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-ups 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.

High Tech Start Up, John Nesheim, The Free Press, NY, 2000

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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.

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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.

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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 sides 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.

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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 reinvent 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.

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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 persons 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

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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 arent 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 companys 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.

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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. Marketings role is to create a strong image of the organizations 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

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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 cant 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 costperformance 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 lowend 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.

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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 companys 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

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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

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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 enterprises 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 its 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.

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What does this all mean? In plain cautionary language, it means solve a generic problem, and really move with the technology. Dont just react to isolated hot buttons. And, dont 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. 2. 3. 4. 5. Complexity of adoption Trial-ability Compatibility with buyers values Relative quality advantage 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

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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 customers 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 customers 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 customers customers, if they are a significant piece of the puzzle to

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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

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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 theyre 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

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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, emotiondriven 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

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purchase decisions, develop suitable sales and support, and create or adapt complementary infrastructure. Precedents also highlight issues past suppliers overcame with internal obstacles scaling up: training staff, getting quality and service levels up, and, refining the enabling technology. Reference case analysis is most effective using multiple cases. One or two references are usually not enough. Too few examples can present an overly optimistic or negative picture. Generally, five to six cases gives enough variation to provide a good decision compass. More cases are desirable in concept, but there are diminishing returns to the extra effort. Five or six well selected cases tend to reveal the range of experiences past entrants had for time and cost to build a market position, attainable market share, as well as other outcome factors. To make the most of past ingress examples, they should be adapted to present circumstances. Changes arise from industry growth, maturity and evolving structure of the competitive environment. There are several predictors of success in market entry that help to condition past examples to present circumstances: Size of entry, relative to the minimum efficient scale at the time of jumping in Relatedness of market entered, compared to the suppliers incoming business Complementary assets on-hand, particularly marketing and distribution, but also technology and operations. Alternatively, looking at whether the product is a first or later generation one from the supplier infers much about the complementary assets on hand Order of entry. Initiators benefit from green field customer expectations, but lack supporting infrastructure. Later entrants need to battle incumbents, but have the benefit of riding the coattails of supporting infrastructure and customer behaviour created by earlier incomers

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Industry life-cycle, whether the industry is closer to the formative stages when entry is easier, or consolidation when it is more difficult Degree of innovation and foment in the target industry Regulatory barriers to adoption and any regulatory changes Not only do reference cases reduce bias and emotion, they cut down on politicking. They are especially helpful in multiple business unit company settings. In multi-business line enterprises, there can be several units competing for resources. The basis of investment comparison can be quite different among them, as competitive and operational circumstances vary. One of the easiest dimensions of business planning to overstate, to angle for better resource allocation, is revenue and market share targets for new development programmes. External precedents carefully translated to current conditions tend to better inform the likely speed of building a market position. Employing reference cases before committing resources to major market entry decisions is a potent way to counter politics and territorialism. This technique can prevent distortion when multiple players are competing for development resources. Growth Strategies There are three growth variables: technology, applications and customers (T, A, C). Each ranges continuously from old to new (0 to 1). The three dimensions define the space for expanding.

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0,0,0 Generate the natural growth possible with traditional technology, applications and customers. The market space, technology, and application criticality need a satisfactory trajectory. 0,0,1 Win new customers by taking market share from competitors. With old technology though, it is difficult without devolving to a price war, where margins for all competitors decline, yet often market shares do not change significantly as competitors match moves with the initiator. 0,1,0 Deliver a greater range of products and services to existing customers, leveraging relationships. It is most easily achieved with commodities. The challenge of this strategy in technologically differentiated spaces is to deliver solutions that are cohesive across a range of customers to retain operating leverage. Often this strategy requires extensive customisation of solutions for each customer. 0,1,1 Build a market for old technology in new applications, with new customers. It combines the challenges of the previous two strategies, and is usually demanding to execute. 1,0,0 Sell new technology to traditional customers and applications. It generally depends upon building customer acceptance for recurring technology replacement or complementary technologies. The supplier has to deliver a steady stream of new, desirable features and benefits. 1,0,1 Deliver new technology to new users, but in traditional applications. This is usually the way to build market share without descending into an undifferentiated price war. 1,1,0 Expand the range of technologies and application solutions supplied to existing customers. In markets where customer relationships take a long time to win, but are usually sustained for a similarly long time, leveraging customer relationships with new products and services is a common growth model. 1,1,1 A long shot. It admits that almost everything about the traditional business has to significantly change in order to grow. It abandons much of what has made the firm successful, and takes it into uncharted waters. This is risky and volatile. It is generally the domain of start-ups. The closest that established firms usually come is to reduce one dimension from entirely new, to an extension of traditional technology, customers or applications, to retain more of the existing strengths of the business as assets.

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By tailoring strategy to achieve the right balance of leverage, growth, challenge and risk, the optimal point on the continuum between old and new for each variable can be achieved. Risk is often the most difficult to objectively assess. Managerial intuition can be a poor predictor of success when an enterprise reaches outside of its traditional power zone. To gauge the probability of success, defined as generating returns above the cost of invested capital, there are two main variables: 1) strength of the business in its core market, and, 2) distance of the new line of business from the core. A clear market-share leader in its core market has about a 50% chance of success entering an immediately adjacent space. As the adjacency drops off, the success rate falls. There is roughly a 10% step-down as the technology goes from familiar to remote, 10% for applications, and 10% for customers. The outcome: Even a business with tremendous strength and scale in its core market needs to contemplate a probability of success of about 20% venturing into largely new territory on all three dimensions. Businesses with second-tier status in core markets are more challenged in outreach efforts. They do not have as much surplus capital, management bandwidth and resources in R&D, operations and market development to divert to new efforts. Secondary players in one market have about a 25% probability of success entering adjacent markets. The success likelihood drops by 5% steps as technology, applications and customers get more remote. At the outer extent, secondary players chance of success is about 10% venturing into entirely new areas. However, there is a prominent exception to these rates of achievement: dramatic cost reductions. This is where technology can be re-designed to sustain-ably reduce selling price by 3* to 10* versus alternatives. If substantial price compression can be achieved for a technology of proven utility, new applications and customer demand usually arise of sufficient strength to overcome competitive resistance. The probability of success reaching out to new applications and customers roughly doubles in the dramatic cost reduction instance compared to what it would otherwise be.

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Attacking Established Markets Going after established markets with replacement technology imposes specific performance demands which vary with circumstances. As a candidate selling environment, a replacement market offers proven demand, developed and demonstrated by predecessor technology. Especially when faced with high investment stakes, the risk of going after a latent market, or the time to develop it, is often unacceptable to stakeholders. Replacement markets are most important to target when the investment is large to make a technology commercially viable. Technology that is successfully chosen as a replacement can build large sales volume quickly. There are both opportunities and challenges distinctive to replacement markets. They both stem from the norms established by the incumbent. On the positive side, the ecosystem is known. The realm of certainty includes competition, customers, and user expectations. Thus, product definition for a replacement market can comprehensively define customer needs, specifications and optimal trade-offs. It is then relatively straightforward to be aggressive in the areas of a product that will give most impact. On the coins other side, the difficulty of replacement markets is the many established expectations in cost and performance of previous technologies, and conservatism among mainstream customers. Human nature is to be cautious of change when much is at stake. The customer does not easily give things up when moving from old to new technology. The status quo can be the biggest competitor. Often there are at least minor tradeoffs that the customer needs to make to adopt more advanced technology. There is some pain for customers making the shift, even if just the tradeoff that the new technology is not proven like the old. The hurdle of established expectations and patterns of behavior from the previous technology slows adoption of the insurgent. To maximize the probability of adoption and overcome the user risk premium, a successor technology should have evolved to provide convenience and

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beneficial attributes of the older technology, at the same time as delivering significant new benefits. Adoption Thresholds There are two adoption thresholds affecting replacement markets. One arises where a new technology provides a marginal performance advance. The other occurs if the technology provides an order of magnitude breakthrough. The requirements to trigger market uptake are different in these situations. Under the scenario of marginal performance advance, a reliably sustainable performance boost of at least 50% compared to a predecessor technology in at least one attribute of primary importance is usually required to provoke serious consideration of conversion. A lesser increment is usually deemed too small for users to justify incurring the cost and risk of utilizing something unproven. Furthermore, the 50% minimum boost must be coupled with at least some improvements in other primary attributes, virtually no degradation in primary attributes, and only minimal negatives, if any, in secondary characteristics. If related costs and inconvenience are minimally different from the incumbent technology, a 50% performance advance in a primary parameter from a new technology is usually sufficient to trigger adoption. The second selection situation requires a larger performance increment. It is where the customer will experience significant tradeoffs using new technology compared to the incumbent. An order-of-magnitude enhancement in at least one primary product attribute is typically required to achieve significant uptake. The dimensions of cost and convenience that can impose the trade-off include: price, performance, service, security of supply, and ease-of-use. The test of foreseeable success within this performance profile is whether the breakthrough is sufficient to create or carve-out a new usage model segment, despite shortcomings on some traditional measures. Anything less than a stunning breakthrough in one area that creates new ways of using the product, in the face of significant shortcomings in other attributes, usually leaves the bulk of the market with enough reason to avoid the new.

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Reluctance toward novel technology that imposes some set-backs can be deceptive at the outset. Prospective customers often express enthusiasm for innovation that offers advantages when asked at an early conversational stage. They may do so despite acknowledged weaknesses, since there is little tangible cost. Most people want to stimulate the availability of alternatives when they incur little expense. Early users may even jump on board, despite performance shortfalls, further building ill-fated belief in large-scale future selection. Adoption can stall with mainstream users because of shortfalls against the incumbent. Even with early encouraging signs of usage, the criteria for longer-term and larger success is to deliver benefits into customer hands that are game-changing positive in at least one major respect. This is the most reliable way to achieve significant, sustained adoption of breakthrough technology. Trading-Off Among Development Time, Cost and Performance Whether looking at the breakthrough or incremental advance condition when approaching a replacement market, both profiles of adoption success have a strong influence on R&D and product development choices. Exchanges between schedule, budget and performance fluctuate, adapting to new information during development. Sometimes R&D gets cut short and product ushered out to market. Often, development is hurried to the point performance declines appreciably compared with initial targets. When this happens, the product can be left in an infant state, short of the capability profile needed to unlock targeted user volumes. When development needs to be curtailed, it is better to narrow the initial application focus with a reduced configuration of product that still resoundingly meets the needs of a more select initial user base. In other words, under budgetary or schedule pressures, revisit the question, What is the minimum complexity product and service that we can productively sell that embodies our core technology and sustainable competitive differentiation? After accommodating performance as an onset condition of success in replacement markets, a second development issue is time. An agent of

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a new paradigm needs the will and the means to wait a considerable length of time for the market to start to transition, particularly if the product has appreciable shortcomings compared to established expectations. The issues for users and complementors associated with moving to a new technology, whether they are technical or business in nature, dampen the adoption rate of the successor. Frequently, transition times for new technologies are forecast aggressively, only to be extended as a conservative market waits to climb on board and competitors tune up their wares in response to the interlocutor. Customer and complementor thinking also mature during a gradual ramp-up period, potentially requiring newcomer product configuration iteration, if not enabling technology refinement. To crack the code to pull in the mainstream of targeted users, two to three full product development generations can be required. Significant adoption cannot be relied upon unless development capacity for three product iterations is available to achieve required levels of performance, and alignment of complementary products and services. The company offering replacement technology must have the ability to wait out a protracting delay, and keep up with evolving requirements to achieve sufficient product performance. A sputtering adoption pattern cannot be reliably overcome otherwise because of marketplace evolution. Another reason for hesitating early adoption of product and service is the impossibility of fully predicting peoples reactions when discussing the hypothetical. Even presenting a product that fully meets described requirements from earlier discussions with target users, deployment in a full range of real-world conditions exposes complexities that are difficult to identify beforehand. It takes time and development bandwidth to accommodate new findings. Without the resources to sustain a two to three generation development, the effort put into attempting to capture a market with new technology can be irretrievably lost - much work wasted for lack of will or means to do more. To get the best perspective on the delicate early days going to a replacement market with new technology, it is advisable to locate expertise on selling to the same market or a similar one with

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replacement technology. Experience illuminates surprise requirements and dynamics from past forays. The wisdom forged in prior participation highlights likely investments and navigation skills at a depth beyond what can be extracted or discerned from conversation with potential customers and partners. Every industry has its own set of norms and biases. There is always more to the requirements for the product and its support than are first evident. This is particularly true for mission critical and liability sensitive industries that have a big down side if the new technology fails to meet requirements. A seasoned inside view of going into the same market is valuable. Breaking Juggernauts The most difficult replacement challenge is displacing a juggernaut technology. It is one of such broad appeal to pervasively hold target markets. Dominant technologies have proven appeal for the preponderance of their audience. Many times, markets presently controlled by a limited number of suppliers or technological solutions are especially enticing to technology-centric new entrants. A commanding market position of present suppliers often means incumbents get by advancing the technology they offer to customers at a slower rate than would otherwise be the case. Over time, the technology gap grows between the level of performance and quality that is possible, and what is readily available to buyers. A technology-based new vendor to the application identifies the opportunity to exploit the gap, delivering more advanced technology to carve out a market position. While the entrepreneurial opening and end-customer impact may be real from a technological perspective, there are other acute forces to weigh in a balanced market entry decision. Distribution is often a powerful point of control, especially with physical products or ones intensive in hands-on service. Brand equity, customer relationships and other legacy assets can also be robust sustaining assets of a hegemony incumbent or oligopoly for an upstart to overcome.

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A strong majority of market power concentrated in one technology, product, supplier, or oligopoly usually means that the majority of user needs are economically met with existing products and technology. Left unsatisfied, there would be more fragmentation of suppliers and differing technological approaches to serving customers. The net result is that replacement market challenges for a newcomer are amplified under the juggernaut incumbency condition, because the needs of such a large swath of the target user base are being sufficiently met with a narrow range of product and services. For a prospective entrant, the bottom line is that virtually no performance or other product attribute compromises can be tolerated when an incumbent technology has such powerful advantages as to achieve 70% or greater market share. Basically, all benefits of the old must be preserved, and the markets significant concerns or costs with the old substantially improved. Such a stiff adoption threshold can come as a shock to companies from beginnings in niche markets. In more fragmented markets, a few significant benefits are often enough to develop sales volume, even with marginal tradeoffs compared to the technologies used in mainstream markets. The dissonance between niche experience and mainstream reality arises from growth of the business. The need for larger target markets to sustain growth at increased size brings companies with a legacy of supplying niche sectors face-to-face with the dynamics of breaking the hammer lock of a pervasive incumbent in a bigger, more homogeneous selling environment. Past experience in niche markets can be misguided to the success drivers in a larger, cohesive target industry. The goal of replacing a pervasive technology has particularly strong influence on product development program choices. The conventional pursuit of fast time-to-market is often wrong in the case of upstaging a juggernaut. Expedited development is especially dangerous if as a result product capability falls below that of the incumbent in some respects. The performance of challenger technology has to be without performance compromises compared to the incumbent, especially when the challenger technology requires rapid adoption. Shortcomings play to the incumbent. Deficiencies allow traditional

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suppliers to sow fear, uncertainty and doubt about the new player in the minds of customers and partners. Unlike more competitively diverse situations, time-to-market comes a more distant second as a development priority compared to performance when entering markets under the pervasive hold of an incumbent or oligopoly. Upstaging a stranglehold demands uncompromising performance compared to the incumbent and significant new benefits. The challenger can leave little reason for the market to retain the incumbent. The incumbent has the momentum of history, sufficient performance, and an arsenal of non-technological assets to influence the majority of the user base to maintain its position if there is any weakness or indecision about the successor candidate. Expanding Share within Established Markets There are a few ways to size up the risk and reward of a potential opportunity for expansion into proven, mature markets. These augment traditional strategic and marketing analysis: 1. The financing heuristic is: to gain a dollar of annual revenue in an established market requires investing one dollar in start-up, unless the attacker has significant leverage from incoming technology, market access, or operational skill, to reduce the scale of investment. 2. Pick fights carefully, and be sure to have the resources to stay in the fight until the end. To have to walk away part way through usually results in virtually no gain, significant unrecoverable costs, and potentially large opportunity cost. 3. A conventional requirement is to be able to achieve 15% to 25% market share to be able to stay in the ring with larger players. Smaller share risks failing to achieve critical mass and sufficient ecosystem influence. The goal should be to achieve #1 or a strong #2 position in any market. Profitability is the ultimate measure of success and staying power. Most industries exhibit the characteristic that more than 75% of the total profit pool is captured by the top two players.

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4. The IP barriers to entry for an established market may be unusually high, and must be assessed. IP barriers can rapidly undo an otherwise sound technology and marketing strategy for entering an established market. Pursuing Emerging Applications In contrast to a mature market, an emerging market has fewer expectations. Embryonic applications can adopt technology and products in a less refined state - particularly moving away from consumer applications toward more specialized scientific and industrial uses. Comparatively less consuming forays into emerging markets are possible than for an established one. Faster, lower cost probe-and-learn exercises can be carried out, allowing the supplier to more nimbly track the characteristically turbulent requirements of an emerging market. Formative environments favour the most agile businesses, which are usually the small ones. Furthermore, entering markets when they are new is critical for those companies that do not have the financing, personnel and technology to attack more mature markets and competitors. For the small firm, potential rewards in an emerging market are large if the concept catches on. But, the risk is also significant because requirements and the total value proposition that will unfold for customers are not entirely discernible. Furthermore, a long market maturation time opens the possibility of alternate technology being adopted, or underlying forces changing the emerging market as it develops, so that the potential opportunity can disappear or reform in an unexpected state. To give the best chance of success, the canon of establishing a new market is to remove the dominant constraints on adoption and growth. These can be enabling prices, technical performance, interoperability, or other characteristics of sufficient compulsion to trigger widespread adoption. Moreover, upstarts should focus as much as possible on

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system-level solutions, rather than components. Insurgents need to solve as much of the problem as they can. Component innovations are less successful than breakthroughs in system architecture, although system architecture breakthroughs can be embodied or controlled through suitable component products. Addressing Fragmented Markets The most cohesive market to pursue is a large one that can utilize a single product or a limited number of products. However, many high technology markets are fragmented, serving a range of applications and specifications. Whether a diversified market is the basis for an entire business, or path to extend an established business from a more consolidated historical core, there are several product- and technology-centric traits for winning in fragmented markets. The success factors arise out of respecting the relatively limited market size in a given time period for individual product offerings in a heterogeneous marketplace: Long Product Life Cycles. When a product is unlikely to have large usage volume in the short-term, it needs longevity to recoup development and introduction costs. Durable products often serve as components, and interface with the exterior world of the systems theyre embedded within. Taking the form of components enables deployment in many systems and usage models over time. Also, as boundary components they interact with physical properties and interfaces where throughput and accuracy requirements do not change as rapidly as many types of technologies. This way, system architectures can be updated, even if select enabling components do not need to advance as rapidly. Long-term relevance improves by defining capabilities with a scope of functionality and interfaces to allow re-use in multiple system platforms, applications, and product generations. Capacity for Product Life Cycle Extensions. Perpetuation is enhanced when products are designed to adapt over time to provide life-cycle extensions with low incremental development cost.

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Extended relevance measures include: performance enhancing tweaks, cost-reduced versions (through reduced configuration or screening); lower resource demands in the components operating environment; and, greater flexibility and tolerance to operating circumstances. Secure Long-Term Produce-ability. Long lived products underlying technology and manufacturing platforms need secure long-term availability, and adaptability to likely changes in performance or availability of contributing inputs. Barriers to Entry. As part of assuring a long-term payback, a wide ranging product portfolio is generally one needing significant trade secrecy or rare and proprietary resources that contribute to the enabling technology. The more imitation can be suppressed through trade secrecy protection of enabling IP and unique assets, the less competition develops with time, and the more likely that pricing power and profitability can hold up to achieve a strong return on investment. Also, the more customers rely on a range of parameters, rather than just one or a few, the less frequently a product can be upstaged on all fronts by competitors. A range of functions, applications and specifications helps to limit compatibility of alternative products, providing a competitive hurdle. Design Complexity. A related barrier to entry that helps to minimize low-cost competition is devising design methods that utilize a fair dose of art, and not just formula-driven science or an algorithm to reduce the functional concept to its final implementation. As design and implementation come to rely more on human expertise, and are less dictated by the design tools or libraries of standard contributing cells, the threat of low-cost competition diminishes. Furthermore, deep applications knowledge of system-level performance issues, and insights about the interfaces between the component and the system it contributes to, help lift the potential for innovation and defensibility. Barriers to Exit. Customer reliance upon proprietary development or usage tools for a component technology helps lock

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them in. Particularly in fragmented markets, where new usage situations arise regularly for components even with a single customer, attachment to unique support tools helps create binding power to keep competitors at bay. Proprietary adoption tools provide a barrier to displacement, especially by challengers that would attempt a commodity dumping strategy. Pricing Strength. Pricing and margins tend to hold up when the contribution of component technologies correlates strongly with end-system performance and differentiation. Low Cost Development and Production. To support the proliferation of designs, both development and production costs need to be held in check. A leading factor for suppressing design and production cost is to try to use low cost or depreciated capital assets. Also, significant platform commonality in design and production assist in rapid and cost-effective creation of derivative products. In the case of manufactured goods, low cost production usually also requires an ability to manufacture in a trailing-edge environment. The desirable twist on the overall theme of lagging manufacturing technology is to make a few selective areas of technology leadership from which to generate rare IP, defensibility, and product performance in the most leveraged and re-purposeable areas. As low cost development and production is attained, the business can try out a wider diversity of approaches to servicing target markets. The result is easier learning and adaptation to technology and market conditions, even to the extreme of trial-and-error approaches. Steadily Target New Applications. Efficient expansion of use, particularly to embryonic applications, starts with building blocks. When an application is new, it is difficult to know how customers are going to use a component or drive the volumes. A portfolio of enabling building blocks gets customers on board as a starting point, offering a horizontal technology engine that can be tailored to individual needs. IP and technological differentiation are then improved in specific areas most relevant to promising applications. Finally, more and more of the system concept is embodied in the

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component technology, consistent with the model for development and production cost to which the business adheres. Longevity, defensibility, and cost-effectiveness of development and production all help create an environment to succeed in fragmented marketplaces. The other element of winning in diversified industries is the financial monitoring and control one of cost accounting. With a large number of products and customers, the cost of developing, maintaining and supporting each can vary considerably. As well, each products cost can change significantly during its life-cycle because of volume, evolving usage modes, or changes in base technologies. With a large number of products and long life-cycles, product-level cost accounting is an essential navigating tool. Financial reporting with heterogeneous product lines needs to be able to track current costs realizing and sustaining each product, as well as supporting business processes and IT infrastructure for product- and customer-level profit and loss monitoring.

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Using Market Volatility to Build Share The most opportune time to build market share is in a general industry down cycle. During bad times, those that continue to invest in advancing technology, solutions, and market share do so when most competitors are in a predominantly defensive stance. Resistance is lower, and share can be gained faster. Opportunistic positioning generates superior growth during the next upswing. The dominant challenge of using market volatility to increase growth is structuring core capabilities and costs. The trick is to be able to sustain aggressive investments in the most leveraged and differentiating capabilities, even while the business is in a downswing. Consistency is important. It is very tough to build a technology company if every downdraft requires severe changes. The enterprise needs to be able to thrive through business cycles without setting aside the most important strategies. With suitably defined and managed core competencies, plus efficient outsourcing of non-core activities, targeted investment can more easily continue through difficult conditions. In a technology-driven business, continuing investment areas always include research, development and product engineering. Additional differentiating activities may also be included as core during a downturn, depending on the competitive character of the business. Higher margins than competitors from a technology- and marketleadership position also contribute to preserving spending flexibility. So does a hyper-competitive outlook and unwavering enthusiasm about the target market. These extinguish any sense of complacency, even when the near future looks rough, to keep up market- and technology-leadership. Technology leadership plays a role in another way to sustain investments in a downswing. Old technology typically takes

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disproportionately large blows during a slow-down. Customer purchases in times of trouble usually shift toward technology upgrades. Customers in difficult circumstances want to enhance positioning through improved performance and rapid payback with select technology advances. They generally will not pursue capacity expansions or other more brute force motivations in product or service purchases that might favour the old. During a downturn, technology leaders are most likely to preserve revenue, and thus enjoy simpler options for sustaining competitiveness-enhancing investment. The victors in downturns return to sound strategy, if they ever strayed. They rededicate themselves to the ways the company is unique, and how it can offer a value package that is distinct and sustainable. Peripheral activities of low strategic significance, which may have gone unnoticed during better times when growth and enthusiasm masked shortcomings, should be abandoned. A slowdown is when to make changes that would be difficult during better times. Across the board cuts are a sign of weak management and squandered opportunity. Cuts should be selective, removing the weak to protect the strategically strong, and move the company toward a more competitive, differentiated, and enduring position. As part of the return to strategic priorities, winners in downturns focus on core markets. Some would prefer to hedge bets in tough circumstances with typical diversification entering new businesses with little chance of achieving market leadership and efficiency, hoping that winners will offset losers. But, this type of diversification dilutes the company, and makes circumstances more volatile rather than less. Winners reinforce the primary business in downturns. Downturn opportunists buttress the core through internal investment, as well as with external acquisitions. Conventional wisdom is to forego acquisitions during general industry down-cycles, on the argument that they are risky because companies that are available and affordable are often in trouble, and could pull down an acquirer that itself may be in a fragile state. However, acquisitions that strengthen the main business (as opposed to ones that create inefficient, unfocused diversification) are an asset in a downturn. Downturn

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winners dont stop spending on acquisitions in a down-cycle; they spend on bargains to further reinforce the core business. There are several additional tactical considerations to help manage downswings to exploit subsequent upswings: Prepare Leading indicators of economic performance signal months ahead of time when it is becoming more likely that a marketplace will go soft. During the earliest stage when indicators signal potential trouble ahead, before a slowdown has materialized, is when much business damage often gets done. The usual forms of damage are misguided investments, hiring, ill-advised capital expenditures and inventory build-ups. These kinds of resource allocations should come under closer attention and conservation as warning signs suggest a softening outlook. Covet cash Cash is king. A business cannot go under if it has cash. The more cash it has, the more options it has. During tough times, cash may be tough to raise through debt or equity. Raise capital during good times, and exploit the balance sheet during bad times. The balance sheet is a reservoir that can be wrung-out during a downswing to release cash, from places like inventory. Attend to the balance sheet As the slowdown takes hold and trouble deepens, the more important it becomes to focus on the balance sheet. A cash flow driven turnaround is unlikely to work fast enough in circumstances so treacherous that the companys viability is at risk. Realizing value from current assets is often the best way to rescue the situation if difficulties become severe. Retain the resources to respond to the upturn when it comes This applies to people, physical assets and finances. The value of enduring the downturn comes during the subsequent upturn. The business needs to both reach the upturn, and exploit it, to capture the bounty of the downturns stress. Anticipate the severity of the downturn Gauging the appropriate resources to retain in a slowdown depends on the degree to which the industry became overstretched during the up-cycle. Shedding

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too many resources loses knowledge and assets unnecessarily. Parting ways with too few consumes precious cash with insufficient payback. Forecasting factors to consider about the likely depth and duration of a down-stroke include: Historical volatility and recovery time of end-markets Degree of growth and duration of the preceding expansion. Longer and larger expansions typically introduce greater intertwined excesses to work off before a consistent recovery can get underway The number of links in the market chain to ultimate customer demand. Each link offers a cascading amplification factor compared to real end demand that adds to the time for a correction to fully settle out The relative ease with which industry participants could access investment capital during recently departed good times, compared with average times. Sources of capital to consider include vendor financing, the state of private- and publiccapital markets, and cash generation of industry players. The more readily capital was available, the more overblown the good times likely were, and the longer things will take to unwind

Deepen relationships Take advantage of time moving a bit more slowly in a downturn. Use this time wisely. A slowdown is an opportunity for salespeople and executives to spend more time with the most active and promising customers and better understand them. Instead of the frenzy of filling orders of the upswing, the downswing is a more natural time to build lasting relationships. A similar argument applies to other supporting players in the eco-system, such as suppliers and complementors. Recruit Use the improved availability of high quality talent on the employment market in a slowdown to strengthen sales, engineering and management. It is much harder to find and attract the best executives, R&D staff, and salespeople when times are good. A

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better skill level can be brought into the business, and usually more economically, by bringing in key management and staff when times are slow. Consider leapfrogging a generation of technology, to get ahead of the competition. Skipping a generation of technology may seem counterintuitive. But, if the next generation of technology to be developed is projected to come to market at a time when few customers would be buying, skipping to the following generation can save significantly on total R&D expense. A technology generation leapfrogging tactic during tough times can put a business ahead of its peers at the end of a downturn, by delivering more advanced products when the market is vibrant, and lowering total R&D investment. Dont accept a downturn as fait accomplit. New applications and approaches can still drive growth, even in a down market. Look for incremental opportunities in products or technology with a rapid return on investment for users. Customer investments in difficult times often shift to items with the greatest certainty of fast payback. Instead of seeking disruptive technologies, especially those with untested usage models, customer priorities in tough market conditions often come back to products and services that quickly and clearly augment existing business models. Communicate more, especially with employees. Some executives would rather clam up when times are tough. But, if things are bad, employees know. Youre not making things any worse by going out and talking to them. A downturn is an opportunity to bond and create a sense of shared mission. A positive, clear mission in times of distress is a major advantage when rivals may be wavering. It is an antidote to fears among employees and partners that instils confidence and keeps the business moving forward. Sticking together in times of trouble galvanises the organization and makes it much stronger through future good times and bad.

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Treat business partners and vendors as team mates, striving for productivity gains. The conventional approach in a downturn is to demand price reductions from suppliers and partners. Yet, the value of a small price cut is often more than offset by reduced morale, co-operation and productivity from those partners in the future. A more valuable and enduring approach is to work with them in a down-cycle to gain efficiency, by eliminating duplicate operations, improving cycle times, lowering inventories, and improving forecasting, to generate costs savings that will be shared. Resist price erosion Be cautious about giving in to price reductions for bottom feeding customers. In weak conditions, some customers will increase the pressure on vendors to reduce prices. With an already weak order book, the financially pressed are most likely to succumb. However, reduced pricing expectations in the marketplace may be difficult to reverse during subsequent upturns, causing lasting erosion of margins. Re-focus on integrity in financial reporting and goals Up markets can cause companies to try to make good news appear even better in order to stand out. This is often done with creative financial reporting. Financial goals become partially decoupled from fundamental business performance. To put things back on track, poor financial results in an overall landscape of weak financial performance are the best conditions to make adjustments in goals and reporting to increase their integrity. High quality financial reporting and goals present a less distorted picture for managers and investors in the future, to clear up the way the business is viewed. If outright misstatement of financial performance is suspected, the most frequent culprits are revenue recognition and overstated assets. Typical revenue representation problems are premature or fictitious recognition. Asset overstatements often come from capitalizing items that should be expensed; overvaluing inventory, plant, equipment and other assets; and, under-representing allowances for receivables and warranty.

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Ability to consistently and advantageously exploit general industry downswings is a defining trait for companies that develop an enduring stakeholder image for being well managed. The aura of resiliency and opportunity becomes self-reinforcing as the company attracts stronger partners, and gains greater tolerance to setbacks than peers through the loyalty of employees, suppliers, and customers. Together, inspiring confidence in others along with flexibility to sustain competitiveness investments help exploit volatility to build market share and increase growth. For the strong, the worse the general market gets in the nearterm, the better it becomes later. The up cycle has its own challenges for executing properly, and maximizing growth. Down cycles though are more about strategy, alignment, and evaluating performance of the business in key areas. A down stroke is a time to plant the seeds of improvement. Areas to consider getting ahead in when time is moving more slowly include the product line, M&A, management and staff, business processes, and even the business model itself. The ultimate strategy for cyclical downturns is to use the downswing as the time to enter related, new markets. The down stroke is when entry barriers are lowest. In comparison, a new marketplace entrant during an upturn faces rising investment from competitors, rising production and R&D, human capital that is fully utilized and effectively not available, as well as overall prosperity from established firms. Despite the attraction of rising prices and demand during boom times, an upturn is the worst time to mount a challenge as an interlocutor. Downturns are when resources in talent and technology come available. General industry downdrafts provide the best resource leverage opportunities for firms that have the preparation, means, and timing to take advantage of them for entry. Leading Indicators of Slowing Demand For marketplaces that follow the broader economy, leading indicators of a coming slowdown include Treasury yield curve, oil prices, copper futures, and the stock prices of bell weather companies in the sector.

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An inverted yield curve, where short-term maturity Treasury notes bear higher yields than longer term ones (typically comparing two year vs. ten year), indicates an expectation of interest rate cuts to stimulate a slowing economy. Inversion is a rare condition. Under normal circumstances for major central bank Treasuries long maturity notes should bear higher rates than short term ones because of higher risk inherent over a longer period. Slackening oil prices frequently reflect in part an expectation of a slowing rate of growth in demand due to declining economic growth. Copper future prices. Copper is sometimes called the professor metal as it is used proportionally in the major sectors of the economy. Copper is more reflective than other commodity metals in this respect. Copper is used in residential, business, and government construction. It is employed in consumer and industrial products, both discretionary and capital equipment. Significant new supplies take years to develop. Major trends in the prices of copper futures tend to correlate with the outlook for the overall economy. Stock prices of bell weather companies tend to do a reasonable job of looking ahead three to six months.

Additional leading guidance arises from GDP. With the majority of GDP tied to consumer spending, measures of changing consumer spending are usually a vantage point for the broader economys outlook. Another forecasting tool is extended periods of slowing growth. Significant marketplace deterioration often follows a prelude stage with reduced rates of expansion, prior to more severe drops.

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Push Marketing A maturing technology-driven company needs a vehicle for customer testing of unproven, but potentially promising concepts. This preserves the ability to be creative in the marketplace, so that ideas are not prematurely and detrimentally frozen. Without the capability to prospect, the ability to sense what is possible is lost. Lacking capacity to test dreams, chances for creating sustained, dramatic growth diminish. Prospecting by pushing products into the selling arena is the marketing analogue of the long-term R&D function. It is where high-risk, often discontinuous, technology, product or market concept trial balloons can be dispatched. This is central to the ability to make hedge-bets on future tectonic shifts in the competitive environment, so that required changes in company direction can be established sufficiently ahead of time. When any technology, product or market concepts are radically different from established expectations, customer valuation of product characteristics cannot be entirely anticipated. The most meaningful market feedback can only be obtained when potential customers have gotten their hands on a real embodiment of the product concept, to evaluate it for themselves in their own circumstances. Substantial investments in the development of discontinuous technologies require a corresponding investment in advanced marketing activities. These span scoping-out of prospective markets, through concept-product definition, to customer evaluation management, and include budgeting for pricing, promotion, distribution, and service tests. The import of pushing products to the marketplace means a mechanism is required to stay in direct contact with the end market, even if this is not usually a prime consideration for day-to-day operations. Protecting IP is often a major concern when doing missionary marketing. In consumer markets, there may be little choice but to accept information leakage risk as the price of gaining user feedback because of the relatively large sample sizes required to gain a meaningful statistical sample. In industrial markets, smaller sample sizes afford greater opportunity to maintain confidentiality of

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advanced information. Provisions such as confidentiality agreements should be in place to provide some protection, but it is most important to work with trustworthy customers who value this access to early information, and feel a sense of obligation. Sustaining Push Marketing of Advanced Technology in Maturity Promoting ultra-advanced technology, defined as technology far beyond conventional usage, requires special considerations as the market is composed only of early adopters. It is also typically highly fragmented. Emerging marketplace customers will usually not have yet evolved to consistent requirements. In some cases, they are not even well considered. Performance needs, adoption patterns, sales volumes and overall probabilities of success are almost impossible to meaningfully predict. Market feedback information in such a landscape helps to test instincts and assumptions about the potential reward. This data about market acceptance of advanced technology also helps to identify both risk and opportunity that may not have been evident from cursory consideration. However, the speculative circumstance of ultra-advanced technology will almost always come down to a bold moment of vision, belief and commitment. To continue to grow and prosper in high technology, one must be able to accept such risks and move forward. This is not easy in growing organizations that naturally tend toward formal operating processes, and ever-more conservative attitudes about risk. A strictly analytical approach becomes debilitating. A risktaking attitude must be actively championed to retain the organizational mettle to bring advanced technologies to market in the face of significant risk. Analytical market assessment must be balanced with market- and technology-savvy insight, and the ability to act on well-founded intuition. The penultimate ingredient is to keep experiments efficient by being quick, cheap and learning fast. The minimum saleable form of product should go out to users as rapidly as possible, and evolve at high velocity.

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The ultimate success factor is to maintain discipline curtailing failures. Mainly, this comes down to steering ongoing investment away from projects that objectively are not gaining traction. Stop-loss thresholds from the outset help keep emotion and bias out of decisions about whether to continue investment in struggling efforts. Instinctively, the marketing department is not the source of some really innovative solution concepts. This is contrary to the structured approach to product definition and development that successful companies evolve to for much of their development activity. Engineering needs a strong voice in creating the most radical and innovative products, both product developers as well as manufacturing process people. Responding solely to customers diminishes competitive advantage since competitors can source the same information. Customers may be unwilling or unable to envision radically better ways of doing things. As part of the long term recipe for success, the most aggressive technologies and solution concepts build upon the discernable needs of the target market, as well as enthusiastic anticipation of future needs with technology push, to culminate in push marketing of ultra-advanced technology. Marketing Metrics Measures of marketing performance range from qualitative and subjective for the start-up, to statistical and psychometric for the established firm. Regardless of the companys state of development, there are several metrics that indicate marketing performance. These are defined below. Also described are select unintended consequences, to highlight typical concerns measuring marketing performance. Market Orientation Marketplace awareness is built into the business strategy and operating processes when evidenced by systematic collection, analysis, dissemination, and use of market information. Market Share

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Market share tends to correlate strongly with cash flow and profit. The unintended consequence is that overly competitive pursuit of market share can be counter-productive to profitable decision making. If market share is changing, answer the following questions to help guide marketing and overall strategic planning: When we win share, why do we win? When we lose share, why do we lose?

Customer Satisfaction Improved customer satisfaction generally leads to increased revenue and even larger profit expansion due to lowered marketing costs. Further benefit is usually due to high correlation between levels of customer satisfaction, and financial performance indicators like return on assets and return on equity. Satisfaction factors to survey typically include: Ease of doing business Compatibility of terms and conditions of license or sale Knowledge and capability of the sales force Responsiveness, defined as the times required to fill a customer request for quotation, order, or service Ease of implementation Functionality, utility, and performance of the product Confidence the vendor will provide sufficiently advanced technology in the future Quality of the product, support (technical, commercial, logistical) and documentation Price satisfaction Contentment with the vendors customer focus

Investigating these areas helps to understand what customers are doing and thinking. In particular, responses highlight changes in marketing strategy and tactics that will best drive revenue growth and profit. Organizing findings by customer size, customer position

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in the market web, application market, geography, and other delineations help to sharpen focus on performance areas that are going well, and others that are candidates for improvement. Surveys are part of assessing customer satisfaction, but rarely give all the data to fully read the situation. Customer visits complete the picture, and talking not just with customers in consistent or rising order patterns, but declining or defecting ones too. Visits help to understand what can be done better, and above all, to get a sense if each customer would recommend to a friend the products or services they are receiving. Willingness to refer to a friend is in many ways the ultimate test of customer satisfaction. An occasional issue with measuring customer satisfaction is the error of including outlier customers that are not consistent with the firms strategic outlook. In such cases, high satisfaction can be a sign of improperly invested resources. Customer satisfaction tracking should be viewed in the context of changes in target markets, before committing to actions aimed at improving satisfaction. Customer Loyalty Loyalty is usually monitored by tracking the following three measures: 1) Revenue generated in each time period 2) Cost of servicing and retaining in each time period 3) Length of retention These inputs help identify the most desirable customers, how well they are being engaged, and what it takes to hold onto them. Customer loyalty cost information in particular helps guide choices about increasing customer satisfaction. Cost awareness contributes to deciding if enhanced customer service standards will create enough switching or retention to justify higher expense.

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Brand Equity Strong brands allow firms to: charge price premiums over unbranded or poorly branded products; extend the companys business more easily into other product categories; and, reduce perceived risk for customers and partners, as well as employees and investors. Measuring brand equity shows how well the companys strategy, marketing activities and expenditures match awareness in the marketplace. Knowledge of brand strength and consistency helps determine the right amount of spending on promotions, and investments in other parts of the business, to meet brand strength objectives.

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Recruiting Partners Insurgent purveyors of new technology need to recruit partners which are integral to the market web of the old paradigm. Those players, who have large investments in the old standard, usually need to be convinced to adopt the new before a sweeping shift can take place. Demonstrated willingness to change by those with so much at stake in the old technology greatly facilitates market acceptance of the new. It is an endorsement that carries a lot of weight. Partners are best chosen that provide not only deployment know-how for the new, but also the ability to visibly and strongly penetrate the market. Lacking such influential partners, strong resistance to change can be expected from the mainstream of the target market, as well as impaired access to the more prominent distribution channels. The pitfall securing partners from the status quo is if their agenda is to nominally embrace the new technology to gain restricted access, and then nefariously use their position to hold it up to extend the previous state of competitive structure. Relationships need to be structured so that there are clear obligations and incentives to promote the new technology in a manner beneficial to both producer and the partner recruited from the old paradigm. With proper deal structuring, the risk and impact of hold-up can be minimized, to successfully engage with influential partners that come from the predecessor technology. A complementary technique to reduce partner hold-up risk is to work with the second or third place player from the old order. These participants have something to win by welcoming innovation to gain market share, where their achievements were limited in the previous competitive alignment. In contrast, the largest players have the most to lose if industry structure or competitive strength alters because of new technology. Nevertheless, there are rare cases when the largest player from the old order as a prospective partner will see the potential of the upcoming, embrace it and promote it. But, powerful vested

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interests often impair such a pure response from the market leader from the previous era. A strong number two or number three player often has better natural motivation to promote the new, while still having the competitive scale to be efficient and successful as a partner. Attracting partners and customers becomes easier after the breakthrough when influential lead users in the mainstream marketplace have adopted the new technology. At the breakout juncture, market push shifts toward market pull, when the followers jump on the bandwagon. Setting Interoperability Standards Most technology-based products and services do not exist in isolation. A given offering will usually need to interact with several related technologies as part of contributing effectively to a larger system or network. Interoperability standards help to manage complexity, communication, and technological change. 6 Defined interaction protocols assist in creating stability in technology-driven environments, accelerating development of new products among contributing players in an industry ecosystem. Most importantly, interoperability standards among adjacent system elements broaden the appeal of new technologies. Defined interaction protocols increase the rate of development of new applications, create flexibility, and improve the industrys ability to exploit priceperformance benefits. In contrast, a lack of standards keeps interoperability intensive in engineering resources, imposing high fixed costs. Defined interfaces and standards that create interoperability not only accelerate the adoption of new technologies; they expand the market and increase the chances for smaller firms to succeed. The importance of standards formation for accelerating and lowering the cost of deploying new technology makes it a significant issue for many high-tech companies, both small and large.

Whats Next for Google, Ferguson, MIT Technology Review, January 2005

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The challenge though for small companies in particular is they usually cannot independently define standards for a broad industry. Sometimes standardization is achieved through non-proprietary efforts managed by governments, standards bodies, or industry coalitions. If a company wants to be a leader defining the interoperability protocols for an industry, it will likely have to rely in part on the resources of others because of the size of the endeavour. The lead company must do just enough in development, applications engineering, production and marketing to attract desirable partners to do the rest. The way to do this is to provide persuasive financial opportunities for everyone. The trick, as the leading company that wants to retain control of the emerging industry, is to specify and maintain control over the central interfaces and standards that everyone else will adopt, yet provide ample opportunity for product differentiation by other players.7 Where the core technology depends on contributions from multiple players, success is much more likely with layering rather than merging of contributions. Layering retains a distinct identity to each donors piece, whereas merging does not. Merging technologies in multi-party protocols is difficult for several reasons: contributor ego that their way is best, responsibilities to different shareholders, struggles for power, and finite governance capabilities for the interoperability core. Layering, with effort on integration and ease of use of the core, is the more probable formula for multi-party transfusions to an interoperability body of technology. The winning formula for standard architectures is one that is proprietary at its core and difficult to clone, but also externally open. An interoperability protocol should provide publicly accessible interfaces upon which a variety of applications can be constructed, or uses implemented, by independent vendors and users. Defined interactions form the foundation for the activities of everyone else. In an environment of complex technologies, control of the interfaces allows the leading company to preserve the most desirable
7

Start-up, Jerry Kaplan, Penguin, 1995

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and profitable elements of the overall system for itself, as well as the option to generate licensing revenue from complementary players who adopt the standard. Success defining key interfaces and attracting partners provides the leading company a commanding position and usually also a substantial revenue stream. Control of the interfaces also gives the steering company significant influence over improvements and extensions, and has a large impact on future standards. The spoils in standards battles are usually large. They are typically winner-take-all, which means that they are almost always brutal. The more a market benefits from positive feedback based on network effects8 from adopting a standard, the harsher a standards fight usually becomes. 9 Highly networked industries frequently see the winning architectures market share reach above 70%, whereas 40% market share is a traditional heuristic for the leaders share in industries with only light network effects. Companies and business units that lose protocol battles in networked environments are more than twice as likely to fail as those that win. The process of re-forming around a different standard is difficult for a player committed to an alternate method. Standards battles are not for the faint of heart or wallet. To increase the chances of success promoting a standard, apply it in a way that gives users convenience, but allows component and system designers flexibility to create innovative designs. The model for an adoptable technical standard has three components. One is a workable kernel that people can easily add to. The second is a modular design so that people only need to understand the part that they want to work on. The third is a small, decisive team overseeing the standard to set guidelines and select the best ideas. Once all three elements are in place, vendors working with the standard can pursue best-of-breed solutions without having to assume responsibility for the entire solution investment.

Network effect describes the value of networking, and the importance of compatibility with the network, both growing as the number of users, available information, and services increase. 9 The Art of Standards Wars, Shapiro and Varian, California Management Review, Winter 1999

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Sincere focus on user convenience creates the environment for success when developing an interface standard. What users want is independence from, or transparency to, variables in the system. Attention to user amenity eases adoption and implementation of a standard. At the same time, vendors adopting an interoperability standard are often concerned that the marketplace will be turned into a commodity environment. They fear that low-cost suppliers will take away the market. Or, they dread the scenario that only the lowest common denominator of performance can be agreed upon in the standard. These commoditization concerns are valid only if the convention is defined poorly, in a way that limits the ability of vendors to innovate and maximize performance of their products. Well-defined specifications do not impose such restrictions. Thoughtful standards allow vendors to achieve high and differentiated levels of capability, so that the marketplace does not devolve prematurely to a commodity landscape, or suffer from restricted performance. Enduring conventions foster competition among vendors, driving progress based on compatibility. It is sometimes difficult to draw the line in technology standards between the common areas that are to be standardized, and the areas of proprietary innovation and competition. The challenge in distinguishing between the two usually climbs the earlier in its life cycle a technology concept or platform is when people try to define interfaces. If the common area becomes too large, there may not be enough room for different vendors to innovate. On the other hand, if the technology commons in the standard is too small, generating the entire solution remains intensive in engineering effort, and the efficiencies to be gained from interoperability weakened. Reaching an economically effective standard that people can comfortably settle on will be easier with firstly, a well-defined range of applications, and secondly, reasonable predictability of performance and likely future advancements of the technology at its heart. The more predictable the performance of the technology, the easier it becomes for people to be decisive about the applications and value of agreed upon interaction. When the target applications and economic

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compulsions from the protocol are clear, along with the opportunities and limitations of the enabling technology, it is much simpler to decide what should be in the technology commons, and what to reserve as areas of vendor innovation and competition. A technology that has evolved to a predictable trajectory of performance, along with a clear notion of target applications that share many common traits, help form the environment in which interfaces can be set to enhance innovation. To create longevity for an interoperation definition, exploit the likely advances of contributing technologies. The more a standard can evolve in tandem with improvements in surrounding technology, the larger a following it can develop. Consider the example of Ethernet. It was originally designed in 1973 to send data at three megabits per second, yet it has evolved to speeds beyond ten gigabits per second. The Ethernet protocol was created in a way that was able to take advantage of gains in computing power, keeping it relevant and strong by allowing it to move in step with related technology.10 Durability is also improved when a protocol does not presuppose aspects of interaction that are likely to evolve in unpredictable ways. Simplicity in the areas most likely to change keeps a standard flexible, to incorporate improvements without violating the fundamental design. Ethernet also serves as a model for adaptability. Part of Ethernets success is attributable to flexibility of transmission medium. The way Ethernet was defined did not depend on a particular transmission medium. From copper wire to fibre optic cable to wireless, Ethernet was able to adapt without reworking the core concept of the standard, creating sustainability and expanding appeal. Broadening the applicability of a standard helps small players in particular. The benefit of interoperability can be dramatic for them because it expands the accessible market. Interoperability is a threat however to some smaller players who rely on the inefficiencies of an amorphous market for much of their competitive advantage. The paradox for small players is that by designing in compliance with competitors products, business can be gained. The loss of business
10

Ethernet:The Big Three-O, The Economist, May 24th, 2003

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from adoption of open standards is typically more than offset by increased business from expansion of the overall industry, and access to customers that would otherwise fear unrecoverable investments in closed interfaces with a small player. Especially as an industry matures, the benefits of compatibility often overtake those of isolation. Participating in industry standardization efforts can expand the market for smaller companies, often dramatically. Furthermore, smaller players in an architecture convention formation effort who provide strong input to the standards creation benefit from disproportionately high levels of exposure, industry networking, and a levelled playing field with larger players. Small players usually have much more to gain than they have to lose by participating in a standards definition and implementation. The penetration and influence of a small player can magnify when larger players are slow initially to react to the coming demand for harmonization. The momentum of the status quo can lead entrenched players to scepticism about the timing and onset of a new interoperability requirement. Incumbents will often under-invest in developing capabilities with a new protocol, preferring a wait and see attitude toward smaller players. Analysis and decision mechanisms in large organizations can withhold action, until evidence is incontrovertible that a new technical framework is taking hold. When the power players do move, they tend to stampede to adopt the new. For the smaller player, the deficit of development effort by larger players in the early days of a new standard can spell opportunity. As the case for the new interoperability method becomes compelling, large players are often motivated to rapidly license or otherwise acquire enabling technology from smaller players if buy vs. make is superior. It often is at a late stage. The rush of majors to get on board can quickly build the newer companys business and marketplace presence after the initial period of hesitation abates. To make the most of a standards initiative, proponents need a critical mass of participants: a group with a shared view and resources to rapidly drive a new standard to a commanding market position. Participants to attract go beyond competitors. Necessary collaborators are complementors and customers especially large customers who

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can tip the balance with their purchase decisions. All of the constituencies of suppliers, complementors, competitors and customers can be partners in the dynamic to set interfaces. Markets are becoming increasingly networked as a result of globalization and communications technology. As networks strengthen in markets, interdependency between players grows. Decision making about new interoperability protocols becomes more interconnected. Each participant will switch to a new convention only when it believes others will do so too. Especially for small companies, partners need to be ambitiously recruited. Typically, the critical mass of industry participants consists of the players who in aggregate hold, or will hold, 50% of the market. For small companies, this is a critical threshold of participation because a standard is of little value until all of the necessary pieces are in place to deliver new convenience or capabilities to the end market. One of the positioning nuances for a smaller player building market presence is to deliver its offering as complementary, rather then competitive, to existing power players in the network. As larger players see themselves participating in the value of the new innovation, and generating increased returns from their existing infrastructure and investments, they are more likely to participate. Complementary product positioning to the incumbents in an interconnected marketplace will give the smaller player an easier path to a wider market. In contrast to a smaller player, a company with dominant market share is in a considerably different position where interoperability standards are concerned. The biggest vendor in an industry can usually impose standards on others. A disproportionately high number of smaller players will conform to align themselves with the leader to be part of the largest cohesive pool of business, and benefit from tag-along effects. Furthermore, for the largest player in an industry, the remaining business to be gained through open-ness is much smaller than for the small company case. A dominant company will generally gain the most business by defining standards that best suit its interests, and encouraging others to follow.

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Regardless of the promulgators size, to attract and then maintain attention from multiple players, speed counts. To assure relevance, standard writing needs to be much faster than the life cycle of the products employing it. Furthermore, fast design cycles and early deals with pivotal customers help build a market position for a new interoperability model quickly. Otherwise, the standardization push can languish, and risks then either factionalizing over time or becoming technologically outdated. To build an environment that fosters success, victory must be expected by participants and customers. Anticipation often has a significant self-fulfilling component. Aggressive marketing, early product announcements, prominent allies, and visible commitments to the technology all help to build expectations of success. An early air of success may be part illusion, but it is part fact as well in that it becomes self-reinforcing. To further increase the aura of success, and build confidence in a protocol, the standard-setting company or industry body needs to provide certification programs for third-party products. This is to assure conformance. Certification programs provide ongoing oversight and control, delivering reliability and sustainability. The specification of performance, and not just architecture, has a lot of influence on certifying conformance. Otherwise, important aspects of performance can be ambiguous or missed altogether, and harm the protocol effort. The way performance is specified can hide as much as it reveals. Usually when forging standards, as much time needs to be spent on what is specified and particularly how, as is spent on architecture. Another interoperability area that deserves attention is a non-technical one. There are legal aspects of standards formation related to competition law that formation participants need to respect. Protocols have to be constructed in a pro-competitive fashion, from the standpoint of customers.11 Members in a standard-setting organization
11

http://www.ftc.gov/speeches/other/standardsetting.htm

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bear responsibility for their conduct as it relates to industry competition and any anti-competitive behaviour. There are related legal issues surrounding individual intellectual property rights among participants that impact the protocol. Once a preliminary definition has crystallized, all participants should assert in writing the IP rights (IPR) they hold that affect the standard. Up-front display is important as there are significant precedents penalizing belated assertion of IPR in standards formation. Delayed IPR proclamation can be construed as an attempt to engage in an unfair method of competition or to monopolize a market. An IP representation step puts everyone on notice that promoting protected technology to the standard-setting body has to be with full disclosure. Where declarations indicate no IP conflicts, the adoption phase can commence with greater certainty that the standard will not be hijacked or ambushed by patent trolling. If there are IP rights that members hold relevant to the envisioned standard, determinations are then made about terms of that IPs use to adopters. Often, a pool of IP held by standard-setting participants can be created along with a universal licensing framework. The framework should include cost, as well as terms and conditions of licensure. With a licensing system in place for IP embodied in an interoperability standard, users can gain clearance with a minimum of time, expense, and uncertainty compared to negotiating with individual IP rights holders. Overall, when all is said and done with standards, what should never drop out of sight is that the difference between success and failure is the product. Standards initiatives dont create success, great products do. Product excellence sharply improves the chances of success setting the interoperability standard that others will adopt, to drive innovation, market adoption, and strategic influence. In summary, an enduring interoperability standard has six traits:12

12

Bob Metcalfe Interview, Electronic Engineering Times, November 14, 2005

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1) Wide industry involvement in formation and evolution 2) Implementations promote rivalry 3) Fierce competition among vendors, driving progress 4) Competition based on compatibility, so that buyers can choose vendors 5) Evolution based on market interaction, so the standard adapts rapidly 6) High premium on backward and forward compatibility

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Industry Associations Industry associations can be powerful bodies of change for the good. They are effective if nearly all significant players are members, and unanimously acknowledge at least one vital, ongoing issue requiring co-ordination. Typically, strong industry associations develop if most players strategically depend upon at least one joint effort, such as shared future generation R&D, building a suitable labour pool, political lobbying, mutually agreed-upon standards, or product launch timing. Without pressure for cohesion and synchronisation, industry associations lack a sufficient unifying influence. They then tend to be less focused, and attract lower calibre participants. Weaker industry associations often devolve to a support group for participants seeking to legitimise their importance, instead of fulfilling strategic objectives. Absent issues demanding cohesion of the majority of the industry, secondary benefits of association involvement will often be wrongly cited as primary motivations: overall industry promotion, investor relations, networking between complementary players, discussion of general industry trends, and competitive intelligence. These are all useful by-products of affiliation, but active and prominent association is only called for if the success of the industry depends upon inter-tuned activities. This attracts critical mass for the association to endure and grow. A participating company is then in a position to realize sustained strategic value and legitimacy from its involvement, and affect meaningful directions for the broader industry.

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Growing Sales

There is a preferred model for building the sales team, selling infrastructure, and increasing revenue in an early-stage technology company or a new line of business. The same lessons carry over to energizing sales in a recently augmented or renewed enterprise. An orderly sequence constructing the sales organization is one matched to the evolving maturity of technology, product and service delivery. Keeping sales personnel and process development in step with the rest of operations promotes spryness, while keeping costs to minimum efficient levels. Success Formula There is a turning point in expanding sales. It comes around ten million dollars in annual turnover. The challenges in sales before reaching ten million are distinct from the dominant pressures after. There is a kind of sound barrier to accelerating revenue around this threshold that sets the action framework. The most important practices for success differ on one side of the frontier from the other. The reason for the change in tone is that sales and the sales organization can only efficiently grow once the product and service offering has been refined to a point of repeatable deployment that resonates with leading customers. Prior to reaching the recurrence condition, the sales team needs to be small. It should be the VP of Sales, plus a staff of two or three. Learning and adapting take time. Constrained size keeps inertia down and flexibility high while the sales group hones in on what works best. The alternative of excess sales force investment at an early stage implies overconfidence in the business plan. People then wont experiment enough, nor evolve as rapidly as they otherwise would. Too much spending on a sales force at an early stage of company development isnt just wasteful, it can be self-inhibiting.

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As a case in point, there is a catalyst fallacy to resist. Some would try to advance the onset of significant revenue by overstaffing the sales group. Those so inclined usually believe that more feet on the street at an embryonic state will force revenue and business growth. Often this is done applying reference cases out of context, drawing analogy from other businesses at a rapid stage of post-$10 million growth where salesperson deployment can be a strong influence to drive revenue expansion. The pre-$10 million stage of business development is different. In pre-pubescent companies, applying more salespeople usually fails to yield more business because the success formula for recurring sales has not yet distilled. Surfeit sales bandwidth raises a cacophony of voices, making the winning selling formula harder to sort out. A lean sales group generates greater sales and growth at an early stage of company development. To crack the code of gaining customer traction at start-up, the VP of Sales needs to be a missionary. She needs to figure out the application markets of greatest relevance at the same time as developing sales tools and selling techniques that work best and can be taught to others. Sales activity in this early stage of development is largely direct, and highly consultative with customers. Inward, sales representatives need to build bridges across functions within their companies to meet customer needs. Success comes from solution selling and product morphing that responds to a limited number of vertical markets. Past ten million in yearly turnover, the character of growing changes. Different kinds of salespeople are efficacious. They systematize the selling process developed by the missionary, relying on a more predictable product and service delivery. Institutionalizing practices means creating methods that can easily be replicated, to support rapid scaling. Sales leaders operating beyond the ten million divide promote more structured sales activity, and adapt techniques to multiple channels including indirect.

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Variation The ten million dollar annual sales threshold for changing drivers in expanding sales is an approximation. In small markets, or fragmented ones, the threshold is often somewhat less where the sales growth dynamic changes from honing to repeat-and-go scaling. Whereas in large and homogeneous markets, zeroing-in can continue up to $20 million in annual revenue, or even beyond, before a confidently reproduce-able product and selling process is in hand. First Customers Early stage sales effort should focus on customers who are likely to buy themselves, and are also best positioned to influence the purchase decisions of others in the mass of the target market. At the same time, there is an artifice to be mindful of: the most motivated early customers are not necessarily the most persuasive among their peers. They may merely be curious or seeking notoriety. The alpha individuals that can move the mass of the buying herd need to be pinpointed and recruited as first users. Learn Quickly A prolonged stealth mode carries increasing risk of missing the mark of what paying customers will adopt quickly. Get trusted customer input early on evolving technology and product concepts helps stay on the mark. Also, marketing the minimum complexity product that gets the differentiating technology into a useable, billable form keeps feedback and learning quick. The advantages of secrecy diminish as the expected form of the product crystallizes. Learning and impact accelerate with speedy customer usage and rapid iteration.

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Staffing Customers want salespeople who understand their problems. These are representatives who can sell within the context of the customers vertical and business. A salesperson must be aware of the financial proposition and risk profile for commercialization to define the return on investment for the customer. However, sales staff needs to do this for the purchaser without getting too caught up in the innovation and underlying technology. Also, salespeople need credibility with the R&D staff in their companies, especially in the earliest days. The sales team needs to authoritatively relate customer needs to product and technology requirements that R&D will buy into. Diagnosing Trouble When sales are behind plan during the early days, it is important to isolate causality. The scapegoat for a shortfall is often the VP of Sales. However, the product, company, or marketplace may be the issue. One bad hire of a VP Sales may be a legitimate mistake. But, further churn of the senior sales executive is a classic sign of misreading shortcomings when a young business misses plan. Sometimes, the marketplace is the difficulty. It may not exist or doesnt care about the solution on offer. Market vibrancy and plausible demand are confirmed by seeing: Direct and recurring competitors in target accounts Steady flow of new customer requests for proposal Consistent customer usage scenarios Widespread awareness and clear articulation in the competitive environment of the companys position and offering

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Legitimate customer and partner activity. This is exhibited by significant resource investments on their part, preferably from larger incumbent players. The more exclusive are user and partner investments, the better In other cases of revenue weakness, the company itself may be the problem. Company capability is verified with: Energy and pace of change. When little changes from week to week and month to month, capabilities usually arent evolving fast enough Ability to stabilize the product to a repeatable, deployable form meeting customer expectations A common view among the Board of Directors, CEO and VP of Sales of how to build sales Consistent positioning, priorities and mission. Violent thrashing indicates compass failure. When flailing occurs, it may be that the companys technology and operations are more at fault for revenue underage, rather than the sales team All early stage technology companies iterate the product and value package as they hone in on their long-term vocation. The challenge is to identify if difficulties gaining revenue are part of natural evolution, or are more adverse reflections of operating in a market vacuum, problems in technology and operations, or sales management itself. The sales executive tends to be the culprit for underwhelming sales where: Input from the sales group toward defining and refining a resounding product and service package is scattered and does not converge quickly There is little evolving discipline in how to qualify leads and move a prospect to closing. Checklists arent used or dont improve.

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The art of the deal is seen as the whole formula for sales, rather than attempting to reduce routine aspects to a repeatable process, and use art to complete the skill mix Salespeople spend a lot of time on unlikely deals because theres no rigor about essential events to progress through. Sales cycles languish in good meetings that dont reach a sufficient transaction The pipeline is stagnant, where sales staff cant work on promising deals because they spend too much time on prospects that arent moving ahead Sales pipeline reviews are muddy, where colorful stories are associated with each prospect, but basic questions of where deals stand arent clearly answered and progress is ambiguous A high proportion of prospects sales staff expect to imminently close either evaporate or buy elsewhere at the last minute

Scaling-Up Get the selling process right in one big geographic region, with a familiar culture and purchasing profile, before transposing to other geographic markets. Layering major differences in distance, language, time zone, transaction terms, and culture upon an immature selling process detracts from getting to the right selling formula. However, there are exceptions to geographic focus in early sales effort: Where the sale is predominantly web-based Application-tailored product markets where the R&D challenges of straddling new uses may be far greater than extending a proven application winner to new geographies

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The product is a solution seeking a problem to solve. It has capability that has proven robust and deployable, but the best applications are not known, and a lot of possible applications need to be probed Indirect Channel Sales Most rapidly growing technology businesses will adopt a component of indirect distribution as they mature. Grafting a third party sales force as an indirect channel works best when the new salespeople are able to sell the added product or service to at least 33% of their existing customers and identical decision influencers. As the personto-person distance grows between existing product lines and new for target individuals salespeople communicate with, effectiveness splicing sales forces falls off rapidly. Above one-third overlap, the benefits of indirect sales will usually more than offset the communication and control overhead of making an indirect channel relationship work. Cross Selling In mergers, acquisitions and other strategic relationships, a common value driver is partners sales forces selling each others products and services, to expand market share and increase margins. Cross selling shares characteristics of indirect channel sales. Joint sales bring in additional management concerns because of lengthened communication pathways, decision authority, and potential for diminished accountability compared with a sales force of single pedigree and responsibility. Necessary conditions for sales force A to be confident selling business Bs products to their customers, and vice versa: Ability to maintain customer satisfaction, with demonstrated quality, reliability and delivery performance

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Cross sale customers receiving similar priority from businesses A and B, to protect customer relationships and ensure needs are met An up front map of future gains from cross selling, segmented by products, customers, applications, and geographic markets

There is a significant training component to effective cross selling: Education about the offerings, with hands-on experience Familiarity with sales tools and collateral Knowledge of how the other sales force and business works, including pathways for communication, decision authority, how performance is evaluated, reward systems, and incentives How to access R&D and other resources to facilitate information flow to customers

Expectations should be set for the activities of a sales force handling a new set of products: A defined portion of time to be spent cross selling, as compared to single business sales effort and account maintenance Identification of who is responsible for cross selling to existing accounts, and who is looking after it in new account development

Data sharing keeps two groups in sync as events progress: Frequent pipeline sharing and reviews. Face-to-face is best to build familiarity and trust Discourse about new prospects and their needs Account interaction logging in a joint database

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Discussion with product source businesses early in the selling cycle about negotiating posture on deals with exceptional pricing, terms or performance requirements Action item tracking and follow-up

Several metrics of performance help convey shared objectives in cross selling: Number of joint sales opportunities in the pipeline Proportion of revenue from cross sale accounts Market share gains Customer satisfaction, especially if there are a significant number of account responsibility changes as a result of organizing for cross selling

Compensation is a contributor to the right sales force conduct, but should not be relied upon as the sole impetus for sales force behavior in joint selling: A distinct portion of remuneration should be tied to cross results. Compensation moves away from a single revenue or margin target. Achieving full commission requires a contribution from cross sales, usually at least 10% of total formula weighting, as well as meeting an overall sales or profit goal Sales-linked compensation may need to extend to people beyond the sales force who have a large influence on cross selling account success, such as customer facing R&D staff

To make the most of cross selling, management should additionally be ready to tackle major instances of dysfunction rooted in territorialism, information hoarding and cultural aversion to change. Also, promoting success stories, especially those of sales staff who were initially skeptical, helps others to come on board.

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Performance Metrics In the early days, monitor the resources that go into closing each sale: money, time of key staff and management, and time on the calendar. Selling-cycle input data indicates the rate that sales can realistically grow from a small base. Account development evidence also illuminates which kinds of investments in staff, training, products or services will likely yield the best acceleration of revenue and market reach as the business develops. OEM Customers A desirable customer in many business-to-business industries is the original equipment manufacturer (OEM). The effort and expense of designing in the component product leads to significant follow-on revenues. A predictable relationship often follows, once order rates settle out. The first consideration when targeting OEMs is that they value five attributes of components above others: 1. 2. 3. 4. 5. Small size Low cost Performance Reliability Ease of integration

Widespread success in marketing to OEMs requires the presence of all five attributes at industry-leading levels. Otherwise, success selling to OEMs will usually be limited. Often, companies have a subset of these product attributes, and are successful in marketing to some early-adopter or small-volume OEMs. Seeing the virtue of reduced design-in support and service costs with such customers, they then pursue OEMs as a primary target market, only to

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become entangled in difficulties whose root cause resides in the missing links. Even with the right mix of product attributes, OEM markets are not for the faint of heart. Completing development of the component product only gets the vendor to the table. The ante is committing to a customers design cycle. Ultimate success is subject to customer risks in technology, product development, market development, financing, and political issues. Adding further volatility is isolation from the end customer. Launch and forecasting errors compound with each link in the market chain to the final buyer. Obtaining a large volume of OEM users is rarely a smooth journey until the customer base becomes broad in numbers, life-cycle stage, applications, and economic cycle diversification. It is a worthwhile endeavour under the right conditions, however, as the ultimate payoff can be significant. Customer Funded Development A R&D intensive business that has successfully established its reputation may either solicit or be approached by potential customers to take on commissioned, custom developments. If the company is in its early stages or thinly funded, the decision of whether to take on such a development may not be in question - it may be necessary for survival. However, if the company does not require development contract intake to survive, custom development is often a doubleedged sword. On the positive side, custom developments provide: Funding for engineering programs Extended core competencies New products and markets, albeit with possible exclusivity limitations

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Diversification of customer base

On the negative side, custom developments can: Defocus engineering manpower from strategic value- and technology-enhancing activities into peripheral activities when the scope of custom development extends significantly beyond the companys desired areas of expertise Burden staff with overhead activities, particularly in administratively intensive project areas such as military, government, or regulated medical technologies Run significantly over budget, since contracts can require unfamiliar program elements that are prone to cost estimating errors Incur opportunity costs and time-to-market penalties for the core business, reducing growth. Doing so can restrict access to capital and investor liquidity Create volatile cash flow and morale due to boom-bust characteristics, if the company is unable to find a steady flow of work. Custom development fits and starts are difficult to deal with, unless rapid growth in other areas reliably absorbs the employees formerly working on contract projects when they conclude

Exclusivity restrictions are often a tipping factor. Rapid growth potential improves if a company can steer clear of broad exclusivity conditions over core technology. A market-centered entity, behaving in a strategic manner must know what markets it wants to be in and which ones it does not. It has to own the technologies, other knowhow and market access rights to be a preferred vendor to its chosen applications. This way, customers seeking exclusivity will only have grounds for configuration-specific aspects, not for fundamental capabilities that are central to the companys access to broader target markets. The more complete the technology portfolio is at the point where exclusivity terms engage, the greater leverage the supplier can

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exert when doing custom development, and retain access to the larger marketplace. Good Practice Bring R&D in contact with strategic customers at pivotal moments. R&D engagement infuses customer needs into the culture of the business, and lowers internal barriers among functional groups that can otherwise grow. Furthermore, mandating that development staff take a role in account development during the early days helps keep the sales team lean when small size and agility are paramount. Other Comments A sale is not complete until the customer is satisfied and cash collected The outlook of a distribution channel is only a partial reflection of the marketplace. When seeking input on major strategy and investment decisions as the business grows, keep up direct contact with the end market The business value is enhanced when it can routinely generate quarterly and annual forecasts for revenue and profits, and then hit them. It is an institutional skill to create and meet projections, relying significantly on the sales force and processes. Accurate financial estimation takes time to learn, and is easiest to weave into the skill rubric of the enterprise if practiced and diffused as the business develops

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Restructuring

Restructuring realigns the organization to take advantage of growth opportunities that are underexploited in the current structure, or to defensively ward-off threats that the present configuration does not address well. Small structural change is sometimes known as patching, whereas large structural modification is usually defined as reorganization. Restructuring begins with a solid and articulated sense of target markets, product roadmaps, a revenue model, a strategy for getting to target markets, a shared vision for the degree of market- and technologyleadership to be attained, and a process for dynamic strategic repositioning. With a clear image of how the business is to function and compete in the future, the probability for restructuring success is markedly higher. To get buy-in when realigning the business, it is important to create a shared reality among senior management of how the business is to succeed in the future. Forming a base of support for significant change begins by meeting with top managers individually so they can communicate their views on a number of questions: What attributes should the business keep through the coming changes? What harm to the company do they foresee as a result of the restructuring? What should the new organizational structure achieve? What do they want from the top leadership through the realignment?

A published summary of findings from these meetings helps unify the company around new and renewed goals, creating coherence and urgency for the new configuration. Restructuring manipulates the organization through splits, additions, combinations, transfers and exits. The goal of redesign is to position resources with the right focus and size to address market opportunities.

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One challenge is to give prime growth opportunities organizational prominence comparable to larger traditional units. Smaller units often lack the resources and market position to exercise self-determination as effectively as larger groups, so adapted management systems may be appropriate. Product creation and market development responsibilities should usually reside within one unit. Otherwise there may be increased risk of a lack of individual responsibility and accountability for execution on the best opportunities. The size of small units should be set to balance motivation and agility with competitive scale, efficiency, and access to critical know-how. The right trade-off allows managers to attend to the demands of key customer segments, and to track rapidly changing markets and adapt business models, but without excessive overhead. Modularity abets restructuring along with consistency of metrics and compensation. Modularity means that there are well-defined interfaces between units, so they can be moved around the organization with relative ease. Consistent metrics and reward mechanisms provide similar ways to assess revenue, profit, customer satisfaction, and product development across the company. Disparity of metrics or compensation can erect barriers to movement that impede restructuring. However, no restructuring will be perfect. An organizational configuration can force some of the most important managerial ties, but not all of them in a dynamic, knowledge-based business. Work still needs to get done that does not flow naturally out of the formal hierarchy. Even with new relationships that are sympathetic to major business drivers, after a restructuring it can take months or even years for people to evolve into strong knowledge-generation and decision making relationships in the new system. Effectiveness and adaptability of major business processes often comes down to having people with a strong desire to collaborate and drive the business to new heights, without too much reliance on the drawn organizational chart. Individual interest in working together and succeeding collectively springs from personal outlook, culture and reward systems, rather than formal management reporting lines.

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Reconfiguring the formal structure is a straightforward, and at times blunt, instrument of change. A revised hierarchy can create new and more useful managerial ties. Restructuring desire needs to be tempered though with recognition that rapid adaptability is as much about peoples willingness to contribute to critical business objectives, regardless of formal reporting lines, than an optimal conceptual hierarchy. While not the whole puzzle, restructuring is important to obtaining scale, focus, authority, responsibility and co-operation.

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Turnarounds

Revamping requires personnel change at the top. When tectonic changes in corporate character and outlook are needed, the only course of action is to bring in a leadership team with significant new blood those who are not committed to old relationships and customs, but who do embody the new culture the business needs to assimilate to succeed. The reason for re-tooling the senior management group: Even when an executive who was in charge during a period of decline admits mistakes and embraces new ways, scepticism about the person from staff, customers and shareholders is natural and a liability. It is very difficult for an executive closely associated with past deterioration to ignite the organizational energy for radical change to flourish. Significant management turnover is required for deep change to take root. Putting leadership renewal in quantitative terms, in the biggest organizational shifts about 40% of the new management team should come from outside. In deep transformations, importing a strong minority of senior management strikes the optimal balance between fresh perspective while retaining accumulated knowledge of technology, products, operations, customers and markets. Both a new outlook and a realistic sense of how the business creates value and competes are needed to guide the business in new ways. Bringing in a significant minority of the management team from outside helps establish a new direction. The balance of transformational senior management with amassed knowledge of the business should be drawn from the ambitious younger set within the company who will replace their more senior predecessors who would have resisted change.13 In total, turning over 70% to 80% of senior management is common for major change to take root and thrive especially when a business has become set in its ways.
13

A fine line promoting from within at a time of major change is to be cautious about promoting people beyond their capabilities. Especially in crisis circumstances, within which many major organizational changes are conducted, people are often promoted beyond their abilities in order to plug holes, retain staff or bolster morale. People given elevated responsibilities need to be capable of carrying out those duties, to get the crisis over with as quickly as possible. Inappropriate promotions prolong and deepen the crisis, even though they may seem like an expedient way to improve matters in the short-term.

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Categorically, every member of the new leadership team must exemplify the desired culture of the future. Culture starts and ends with the CEO. Especially at times of upheaval, the CEO sets the tone for the behaviour that the company as a whole is to exhibit. The need for acknowledged leadership is at its zenith when trying to chart a new course, to overcome the remnants of previous visions, strategies and modes of operation. Cultural consistency in the words and actions of the CEO with what is being asked of the rest of the organization inspires everyone to take the business on a new heading. At times of profound change, the whole organization cannot be moved at once, and it is usually futile to try. Leverage is needed, and is achieved by building conviction to change in concentric rings emanating from the CEO through the company. Build manageable gearing ratios between layers of the business. Usually, a ratio between concentric rings of about 1:10 creates leverage, while preserving enough contact from one ring to the next to affect change. This method of concentric rings of interaction radiating out from the leader is typically the best way to achieve radical change at a reasonable pace. At the same time senior managers should increase contact with subordinates, and not just direct reports but second level reports as well. Interacting regularly in at least two levels of management keeps everyone on their toes, promotes transparent dialog, and ensures information is transmitted and received correctly. In a turnaround there is no room for information loss or delay. Impaired execution would otherwise result when the business can least afford it. To get change moving in the first place, the most creative people need to be encouraged to follow their instincts to a focused objective. Give them the freedom to pursue their passions. Corporate decline is reversed when people are empowered anew, so that secrecy is replaced with dialog, blame and mistrust with respect, turf protection with collaboration, inefficiency with productivity, and passivity with initiative. Senior management needs to actively intervene in each of these areas which affect the psychology of a turnaround. Otherwise, a dark vision of the future can become a self-fulfilling prophecy. Liberating talent to take

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radical new approaches is the way to break the cycle of decline and the culture of fear. Start the recovery by fostering new approaches at a cultural and leadership level. The staying power for renewal is drawn from a constructive basis for rebuilding the business. Setting a positive foundation requires coming to terms with the information, decision and execution failures of the previous mode of operation. Major situations of distress typically incubate over long periods of time. Warning signals go unnoticed, usually because of incomplete or erroneous information. Distress also builds up due to inappropriate assumptions among those in positions of power, or an unwillingness to ask tough questions. Further contributing to calamitous business circumstances are cultural biases against caution, and decision maker inability to place resources in areas that matter most to sustainable success. Over-optimism among executives, and, biases among culture, informational discovery and acceptance need to be first identified, then unwound and finally replaced. Once there is a new cultural awakening linked with attainable business objectives, and the supporting communication and decision frameworks are in place to sustain a recovery, then word needs to get out and stay out that the company is moving forward. This usually involves an aggressive PR campaign, as well as regularly announcing new products, services and other tangible signs of progress. A vigorous communication plan and attention to implementation detail reinforces the message that the ship has taken a new direction. A frequent challenge when leading major change is the need to forge a new mode of operation within the boundaries of existing resources. The model of epidemiology for unleashing radical change can be particularly helpful in the case of redirecting existing assets that are often invested in previous patterns of behaviour. The central idea is that once a critical mass of people has bought into a new modus operandi, the rest will follow relatively quickly. This is known as tipping point leadership.14

14

Tipping Point Leadership, Kim and Mauborgne, Harvard Business Review, April 2003

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Tipping point leadership can be boiled down to four main components: recognizing the need for change; identifying resources to invoke change; motivating people to desired ends; and, overcoming politics and countervailing factions. Impediments of the Mind The biggest struggle in initiating radical change is often getting people to agree on what the current problems are, their underlying causes, and the importance of rehabilitation. In corporate settings, a significant source of dispute in acknowledging problems is the use of statistics and select data sets. Individual measures of performance can hide as much as they reveal, so that one viewpoints evidence to support a thesis can be weakened or contradicted by a different set of data. Fact-based management is a desirable objective, but the complexities of the real world can be overwhelming. When statistics or specific data points do not provide an incontrovertible case for needed changes, it is necessary to force key managers face-to-face with the problems to overcome. When management is on the front lines, it is much harder for them to deny the need for change. Forcing executives to stare at uncomfortable realities spurs decisive change. Management engagement with difficulties fast tracks the emergence of a common viewpoint about what the problems are, usually about how to fix them, and the urgency to do so. Resources Limited resources in a situation needing major reform can slow or reduce the pace of progress. Limited bandwidth to pursue the new agenda can sometimes go so far as to constrain the business to the previous mode of operation. Sidestepping resource hurdles starts by prioritizing the areas most in need of change, and activities with the biggest payoff. With articulated priorities and payoffs in hand, a strong pragmatic basis exists for investment decisions. Liberate-able resources are the engine of reinvigoration when they can be efficiently applied to a new, high impact initiative. Get bandwidth by

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cutting back administrative overhead in low leverage areas. Another source of capacity is to help people to identify their own self-interest in longer-term gains returning from shouldering the load of near-term change. Individuals who know they will benefit from long-term improvements are likely to stretch themselves in the near-term, creating additional fuel to get new initiatives moving. Motivation It is not enough for employees to recognize what needs to be done. They also must want to do what is necessary to achieve radical change. Start with identifying the most influential people inside (or even outside) the organization. These are the people with the skills, connections, powers of persuasion and control of resources who will have a disproportionately large effect on whether the rest of the business will follow the new agenda. The few who can affect the many need to be identified and aggressively recruited to support and implement radical change. Even with leading influencers on board, an operating structure needs to be put in place to be sure that motivation for the right reforms takes root. One way to promote desired behaviour is to increase the accountability of managers and key staff for their actions in peer reviewed settings. Another way to drive people to a targeted end is to create a series of goals that are incrementally digestible. The importance of a series of goals becomes most important when the ultimate target is aggressive. Politics Organizations of appreciable size impose politics that can restrict the beneficial impact of a change initiative. Political impediments need to be actively identified and then combated. Unchecked, there are usually powerful vested interests that will resist reforms through plotting and intrigue. A leading antidote to counterproductive politics is to involve a senior, respected insider from the existing mode of operation who is prepared to support and work toward the new modus operandi. A respected and visible catalyst helps to silence critics early on. Insiders with deep

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knowledge of the organization also tend to know who is likely to fight new initiatives. Opposition to change can then be pinpointed and silenced. Furthermore, a change agent drawn from the existing way of doing things can usually contribute a lot by anticipating contradicting arguments from vested interests. Compelling counter arguments for change can then be more easily presented with indisputable facts and leadership by example. Encourage open discussions. Discouraging typical political manoeuvring tools of sidebar conversations and biased fact sets sends out the message that action is based on rigorous assessments, and open deliberation. Automated reporting of salient performance measures helps to monitor progress moving from old to new behaviours, where political interests might otherwise restrict information flow. Drawing on these four ideas of tipping point change leadership, and other models for altering behaviour in organizations, radical change follows similar implementation guidelines as mergers and acquisitions. The human dimension of dislocation and change breeding uncertainty and fear is largely the same in major change initiatives as in M&A. The apprehensions and doubts that naturally arise in corporate transformation should be actively overcome in the following ways: Value Drivers Know and agree upon the value drivers. Rank them, and focus resources on the priorities. Dont get bogged down in lowvalue activities. Areas to place attention during radical change usually include the supply chain (procurement), customer development, service delivery, and project management of primary competitiveness-enhancing activities. Keep an unwavering eye on crisp execution, and tight risk management. Know the Numbers Get a firm grip of the real size of the attainable marketplace and achievable pace of adoption. Often in distress situations a contributory factor is oversized expectations about the end market. This ballooning is often based on false economies, past glories, or sentiments about market size that are out of step with the real performance of current products. Frequent culprits in misestimation are beliefs that existing customers or contacts can be sold to, cross-sold to, or up-sold to, when the drivers behind customer

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purchasing may have significantly altered because of external or internal events. A forward-looking overview of markets, customers, purchasing motivation, purchasing power, profit pools and adoption time-scales at the outset of a transformation help to determine priorities, and set the right scale and objectives for the business. Development Performance If a radical change depends in part on developing and launching new products, come to terms with how well the business performs in conceiving, developing, and reaching profitable revenue generation with new products. In particular, identify areas where there are frequent surprises and delays, where concepts are not systematically reduced to predictable practice. If product-driven change is required, knowing what does and doesnt work in the way that new products are conceived, developed and launched helps to put the transformation on solid footing. Also important is to know where new technologies are called for and which skills to rapidly improve. Development and support resources can then be shifted to areas where a strong return on investment is likely. Debt Be careful about debt load if debt is required to help finance the rebuild. Debt becomes significant when it reaches more than 50% of the business equity. Taking on debt above this level needs to be based on strong cash flow and cash generation in select parts of the enterprise to service the debt, or on bricks and mortar assets to secure it. Otherwise, the debt can prove destructive, especially if the business encounters unexpected challenges. Some debt can leverage the assets of a business, to help fuel a turnaround. But, the amount of debt needs to be held in check or else the risk becomes unwieldy. Feedback Systematically monitor performance in the highest value areas, and apply corrective feedback. Increase management review frequency during times of trouble. Examination that would take place weekly under more stable conditions should become daily during a transformation. Monthly assessments in normal course behaviour transition to weekly. Increasing the rate of evaluation keeps attention up and deviations low. Performance monitoring may need to be carried out in a less scripted fashion during a recovery

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than normal times, so that administrative overhead does not eat into efficiency. Dismantle Impediments Remove bureaucracy that stifles initiative, and foster collaboration that leverages all assets to create a stronger business, in a sustainable manner. Keep customers at the centre of discussion. Energy Energize the workforce through leadership a compelling vision grounded in reality, and leading by example. Dont rely entirely on administrative moves such as slashing budgets or selling off assets. Method of Operation The method of operation of the new organization must be articulated during change planning. This is not a detail of implementation to be worked out after the changes are announced. When reworking communication and decision pathways, strive for simplification and clarity in reporting, objectives and knowledge access. Truth There is a fine line between truth and reconciliation. Speak to where the organization stands. Do it in a way that doesnt make people wrong, but at the same time does not leave them in denial about what really needs to change and how fast. Build Upon Strengths Reinforce the strengths upon which the rebuild of the business is based. Remind employees and partners about the assets the company has going for it, and provide clear evidence about how these are being strengthened through the transition. Change Quickly Make structural and directional changes within 90 days. Better yet is 30 days. The alternative of drawing a transformation out introduces more complexity than it overcomes. A gradual transition may seem like the way to avoid creating excessive fears. But, moving slowly only prolongs inevitable change issues, and they become more difficult when left until later. Fast implementation reduces anxiety and politicking. At the same time,

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one also needs to be realistic about the achievable pace of transformation, and ultimate limitations. A turnaround is much less likely to breed undermining cynicism and discouragement if it openly acknowledges the practical extent of what can be changed and by when. Fast, Flexible Teams Continually reorganizing is disruptive, especially for a troubled business. Redrawing the organizational chart is a blunt instrument of change and only marginally effective in isolation. Some restructuring may be essential to create more effective managerial ties. Senior managers should also augment the organizational chart with flexible working groups, and occasionally temporary ones, that open new relationships and ways of tackling problems. Management Priorities Plan for distraction among senior management during the transition period. Leading a major change is an all-consuming task. Leaders at times of upheaval need to be ready and able to put the business on their backs and carry it to higher ground. Senior managers leading major changes will not be able to place as much attention on routine matters while the transition is in full swing. Top executives will only get back to a routine that resembles the normal once the renewal has developed a momentum and positive energy of its own. Early Win Create at least one early win from the metamorphosis. A triumph provides a clear signal of merit to all stakeholders, quelling the inevitable residual elements of discord down the organization. This begins a virtuous cycle supporting the change. With clear goals and an early tangible success upon which to build, people spend more time looking toward the future than worrying about the past. Exploit Resonance Be sensitive to both external and internal rhythms. Capitalize on moments of opportunity and high morale. This is the best chance to overcome resistance to change and to set the agenda, rather than having to defensively respond to external events.

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Communicate Establish regular communication to stakeholders, especially customers and employees. Start immediately at the announcement of the new direction. Then repeat key messages frequently throughout the transformation. People need to be constantly reminded and reassured of the big picture as they face moments of intense localised stress during periods of upheaval. Audit Concerns Regularly audit the concerns of stakeholders. Communication is frequently a silent victim in turnaround efforts, concealing problems until it is too late. The concerns of stakeholders must be uncovered and acted upon. Of particular importance are employees, and the culture of the business. Communication issues or interpretation differences often engender culture difficulties. Cultural problems are like an insidious disease. They keep coming back unless they are persistently smothered, particularly when a company is recovering from a rough period. Regularly auditing concerns of staff and management gives early warning if a culture problem is coming out of remission, so that suitable treatment can be quickly dispatched. Customers Inform customers about how the transformed organization is protecting their interests. Plans and any changes should be regularly and consistently communicated. This includes dialog about products, service and delivery, availability, ordering processes, support, future collateral material, and, a clearly stated strategic direction for the new organization. Recognition Be generous with public recognition of those who exemplify desired behaviour, to reinforce many of the above ideas. Stroke the professionalism and capabilities of employees. Take every opportunity to commend their teamwork and progress, and promote these virtues as the reason for success achieving milestones on the companys new course.

Above all else during radical change, the first moments of the process are precious. This time is when the new management team can ask basic questions about what the business is doing and why, before becoming integrated into the culture. New managers entering a distressed business need to capitalize on their ability to disentangle impaired system

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dynamics, because they are not caught up in them. An incoming team can put a name and a handle to problems that have gone unexpressed. Questioning fundamentals at the beginning serves to expose deficiencies that may not be as apparent to those consumed in the business. However, the new leadership has only one kick at the can. Once the new leadership team becomes assimilated, fundamental questions become harder to ask. The valuable first moments of change are lost - often irretrievably. The dawn of a transformation is the best time to ask hard questions, and challenge fundamental assumptions about the business in need of radical change. Turning around a business is complexity exchange taking confusion and weakness priced at a discount, and later selling clarity with strength at a premium. It is not about finding something that no one has seen before. Rather, creativity at a transformation is about seeing the potential of a business that already exists, figuring out how to tap latent strength, and carrying out the plan.

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Divesting

Like pruning a plant to keep it in peak health, part of growing and prospering in business is to sell select pieces of the enterprise when conditions call for it. As a business expands and matures, parts can become long-term burdens due to changing competitive conditions and execution difficulties. Suspect circumstances include slow growth, low returns, too much volatility, loss of confidence from stakeholders, or ebb of strategic impact. Divesting is a tool for rapidly shaping enterprise stature to meet current and upcoming demands. Efficient resource allocation, including capital as well as attention of management and key staff, requires finding a permanent solution for low performance or oblique business areas. Extricable segments that cannot be remedied or reoriented in a timely manner, but have sufficient assets to be sale-able, are candidates to sell.15 The clearest candidates for disposal are parts of the enterprises which can have much greater value in the hands of another owner. Viable buyers are businesses that can achieve strategic acceleration using the assets of the target unit, and have the wherewithal to overcome the units weaknesses. For an enterprise new to selling business units, the willingness and capability to efficiently sell is a learned skill. By climbing this learning curve the business will gain the know-how for creating a ready market for business unit exchange as part of long-run efficiency. Divestiture skill is a component of the natural maturity for a business maintaining above-market rates of growth and financial performance.

15

Divestiture in this chapter refers to an outright sale of a division or substantial assets thereof, as compared to an equity carve-out, spin-off, split-off or tracking stock form of exit.

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Decision to Dispose Half the battle is the decision. Concluding to divest a candidate part of the business is difficult. But if the choice is made within a robust strategic and financial framework it will be much simpler to execute. There are typically several disposal decision impediments to surmount, starting with line managers. Operating management is often reluctant to give up. They fear loss of reputation or employment. Expressing diminished expectations can even be seen as treasonous in close-knit corporate cultures. As well, there is a gambler instinct. Many people are willing to commit resources to a desirable outcome, if an unlikely one, far beyond what the chance is really worth. Pragmatically, by the time a business units tangential nature or problems become acute, remedy from within is often too difficult and time consuming compared to better alternative resource uses. The reason to cut bait: the challenges of a struggling or misaligned unit are frequently the product of several kinds of partiality, especially with developmental technology businesses. A series of distorted information flows and decisions, often spanning years, lead to overcommitment. A sampling of the mlange of management obfuscations that lead to the need to unload: Bad original information, basing initial resource commitments on data that was wrong or improperly interpreted Confirmation bias, seeking out information that supports the original decision to invest and at the same time discounting contrary signals that arise Sunk cost fallacy, factoring in unrecoverable costs that have already been incurred in ongoing choices to press forward

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Anchoring, insufficiently adjusting initial estimates based on new, reliable and actionable facts Bipolarity, group decision making riskier than any member of the group would choose because of a safety-in-numbers kind of security impression Group think, reluctance of dissenting views to voice themselves for fear of alienation from the group These and other executive aberrations in the gathering and processing of information mean that some investments turn out to have been poor choices from the start. Other underperformers or misaligned pieces may have been valid resource deployments at an earlier time, but circumstances changed. Either way, in an enterprise with scale and diversity of business lines, there can be significant asset bases with unacceptable cost to keep, and significantly higher foreseeable value under new ownership. These are the systemic issues to keep at the fore when deciding to divest. There exist related immediate issues that can slow or confuse the decision to dispose of a unit. Defenders will typically point to optimistic anecdotes. Examples include an energetic launch event, quality estimates, production forecasts, or other points of reference to suggest the imminence of success. Such favorable instances may be true, but they represent low-cost expressions of future opportunity to preserve the status quo. Single experiences miss a lot of relevant information. The metrics to zero in on are: strategic misfit, weak demand, low or declining market share, poor or deteriorating financial returns, inexorable competition, low customer satisfaction, inability to develop product in a timely fashion with required cost-performance, loss of stakeholder confidence, and unpredictability. These measures of capability rely on larger data sets, with less selection bias than anecdotes. Broad indicators better inform the choice to dispose a line of business.

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One way to overcome management resistance to capitulate and divest poor performers and weakly fitting units is to use forcing criteria. These are quantitative guidelines that help surmount reluctance to admit failure, poor management and declining relevance. Targeting divestiture rates helps shift away from reactive disposal to more forward-looking. Disposal becomes a natural part of optimizing the shape of a multi-faceted business. Guidelines that help consider divestiture regularly: Aim to divest 7% per year. Misfit and severable parts of a business usually exist once a company has matured from hyper-growth toward industry rates of growth or lower. The presence of divestable laggards or outliers is common if the business has evolved to multiple operating sites, product lines, or technologies. A goal to divest 7% or so of the business per year keeps the prune-able in view. The 7% gauge can be applied to revenue, headcount, capital spending, R&D spending, or other quantitative attributes. No matter how it is applied, the 7% target drives people to routinely consider which significant parts of the enterprise have become the least productive and what to do about them. Target to dispose at 30% to 40% of the rate at which new business units are acquired or incubated. Once acquisitions or incubations of new, additional lines of business are a regular part of business activity, there is a significant rate of natural failure to confront. Sometimes it is the whole of something that was acquired or germinated that needs to go. Other times it is only a subset. In either case, parting ways with business units at 30%-40% of the rate at which they germinate or come on board keeps the failures and diverging parts moving out to more productive settings. Quantitative models help keep disposal on the agenda as a way to maintain fitness. However, the most powerful prompting to dispose or otherwise come to terms with poor or maladjusted performers is not quantitative. It is the penalty for falling behind; infection of the core business with undesirable attributes. When awkward parts of the business are retained at length, there is a strong tendency for their flaws to couple into the mainstream. Especially with weak units,

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distorted information analysis, decisions, and resource allocations become viral. Without a paced effort to divest poor and awkward elements, healthier and more promising parts of the enterprise can be damaged. Objectives There are a handful of interrelated objectives for business unit disposal. The weighting among factors depends on circumstances. The most prominent divesting objectives: 1. Increase shareholder value by better shaping the future business portfolio, and getting a higher price for the outgoing unit as a seller than as its owner 2. Enhance profitability 3. Focus management and emphasize core competencies Other common targets of disposal: Better competitive performance Raise cash or pay down debt Reduce risk Re-establish stakeholder confidence

There may be additional reasons to divest including regulatory or government intervention, motivation of staff and management, and, reducing inter-business unit competitive friction. Once motivated to dispose, there is a prominent goal when executing: minimize disruption to the remaining business. Distraction is reduced by divesting as quickly as possible. The benefit of speed applies both to the point in the life of the business unit, as well as rapidity after the sale process begins. Once indicators point to disposal, comebacks sufficient to reverse course are rare. Competitive crowding usually intensifies as time goes by, diminishing the units stature. An early, rapid sale will usually capture more value

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for the seller and other stakeholders in the unit compared with later, slower transfer. Process Upon establishing the objectives of disposal and reaching the decision to exit, there are a customary series of preparations and events to reach a sale. The main elements are: deciding which assets to include, assembling relevant descriptive data, selecting the right sale method for value and flexibility, creating marketing collateral documents, promoting the business to potential suitors, due diligence by suitors, bidding and sale negotiations, purchase contract signing, closing, and post-transaction separation. As a rule, the better the early elements of the divestiture process, the faster and smoother the sale. Preparation The components of a firm foundation for divestiture: Carve-Out Financial Statements These show historical and projected future financial performance of the business unit on a stand-alone basis. They include balance sheet, cash flow, and income statement. To rapidly value the business, suitors need an income statement of sufficient detail to show revenue, gross margin, EBITDA, EBIT, and net profit (NIAT). The balance sheet should show working capital and book value, with details on aging of accounts receivable, accounts payable, and depreciation policies. Employee headcount is also customarily noted as it is one of the most real-time measures of business size, especially for businesses that have not yet achieved selfsustaining cash flow. Financial statements are usually one of the most difficult items to prepare. They are a catch basin for differing viewpoints. Most complex to resolve are variations among the sellers management about where the business unit is going as well as the level of optimism

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and aggressiveness to be built into the divestiture marketing effort. Preparing the economic picture at the outset forces these decisions early, crystallizing the context for most of what follows. Readying the carve-out financial picture is tricky because it requires a range of assumptions about efficiencies for the unit on a stand-alone basis. Direct costs are relatively straightforward to determine, but historically shared costs with other business units of the seller require greater judgment to allocate. Where the inter-company cost allocations that envisioned suitors are expected to achieve vary widely from the sellers, a second set of carve-out financial statements are often helpful. These financial statements expressly exclude all inter-company allocated costs. Suitors can then analyze and insert their own cost and overhead estimates to model financial performance of the unit. For both kinds of carve-out presentation, it is conventional that the financials look back three years. Projections should go out at least one year in businesses that have not yet achieved predictive revenue levels. Forecasts should extend out as much as three years in businesses that have achieved a presaging trajectory. Making the financial projections conservative is the safe approach for reducing the risk of late-stage negative surprises in the sale process. Why? The consequences of up-side and down-side surprises as the disposal advances are not symmetrical. Underperformance for the unit late in the sale process compared with the plan published at the outset tends to slow the sale process, harm value, and even scare off suitors entirely. Buyers are nervous. Whereas, execution ahead of projection helps everyone get comfortable. Good news during diligence and negotiations builds a sense of trust. Credibility eases the sale and subsequent separation of the transferring unit. Above-plan performance affords the vendor late-stage flexibility negotiating and carrying out the final transaction. Over-performance is far easier to accept late in the sale trajectory than misses. A fast, organized disposal is facilitated with conservative

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financial forecasts that leave some room for good news to come out as the sale progresses. Growth Plan The build-up plan reconciles a cohesive growth story for the target business with internal evolution of technology, operations and market reach. At the same time, the outlook needs to be coherent with the external competitive environment. Most important is to challenge all forecast assumptions and rationalize them. Postulations underpinning the plan will be interrogated by suitors as part of due diligence. It is far better to know about, prepare for, and present key sensitivities in the business outlook, rather than having them come out as downstream surprises during suitor investigations. Internal Diligence The sellers staff briefly assumes the role of suitor and evaluates the outgoing business using an acquirers due diligence check-list. Sell-side diligence helps identify if there are significant deficiencies or disputes that can be remedied before marketing begins. Self-assessment should also seek out latent assets that can be monetized in a sale, such as tax-loss carry-forwards, R&D or manufacturing subsidies that may be available, as well as written-off equipment or inventory that may have value to a new owner. Internal diligence often enhances sale value. Self-appraisal can also guide the suitors to target, inform the marketing message to get the sale process underway, and indicate the probable shape of transaction. Future of Management and Key Staff Map the path of management and key staff in the target unit. Doing so reduces apprehensions about career at a time of business ownership and context uncertainty. Important staff and management are then more likely to remain through the sale. If the intention to sell the business will be announced before a final purchase agreement is reached with a buyer, retention incentives should be considered for high impact employees. This is stay-pay linked to remaining with the transferring business unit through the transaction. Retention incentives can also be attached to achieving important interim business objectives that are expected to facilitate the sale or enhance valuation.

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External Diligence Three external areas are surveyed: valuation comparables, marketplace, and outside constituencies touching the transferring unit. Valuation Comparables Reference transaction valuation multiples show the range of price points for similar sales and context for highand low-value deals. Comparable data helps show what prices may be achievable for the disposal, and the likely high leverage financial and situation factors. Valuations of public companies in similar lines of business should also be detailed for the same reasons. Multiples to review include enterprise value (EV) ones of EV/EBITDA, EV/EBIT, EV/NIAT and EV/Employee. Equity multiples of interest include Price/EBITDA, Price/EBIT, Price/NIAT, and Price/Book Value Marketplace forecasts and competitive outlook for the products and technologies of the target unit from respected research firms and investment analysts Analysis of the outside constituencies the unit impacts, to assess how they will view a sale, and ways to make the transaction productive for them Potential Buyers and Message The universe of plausible buyers is identified and the marketing story for the business developed that is most likely to attract interest. The pitch should make the case for how the unit for sale can build on potential buyers strengths, shore up their weaknesses, create future opportunities and defend against upcoming threats. The message should reinforce the way the transferring business can accelerate the engine of sustainable earnings growth for prospective new owners. Setting the messaging anatomy for maximum impact requires knowledge of likely investigators. Appraisers who will look at the unit need to be targeted, and with better aim than a mere sense of possible suitor industry sectors. Requisite targeting precision for the marketing disclosures is achieved starting with strategic analysis of specific candidate suitor businesses, as well as their tax and capital

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access issues. This reverse due diligence includes pinpointing the way the unit can add the most value to each potential buyer. When evaluating potential suitors, there is an important distinction between financial and strategic players, particularly when selling smaller asset bases or business units suffering from notable problem areas. A purchaser in the same or related industry has assets to assist the target unit. The strategic buyer will usually be less intimidated by the risk profile of operations. Purchasers in related lines of business can potentially also find economies of scale or scope within their incoming enterprise from which to gain efficiency with the new unit. Financial buyers do not usually have such flexibility. Financial suitors are more conservative and demanding in due diligence. Unaccustomed to the risk profile of business unit operations, they have few operating assets to contribute if post-transaction negatives surface. Strong competitive threats, light asset bases, limited revenue diversity, or history of failed financial buyouts in the sector tend to alarm suitors from capital markets. Financial players also typically have a shorter time frame for harvesting their investment. As a guideline, financial buyers will pay between three- and six-times EBITDA for a business. Financial buyers are also attracted to predictability, consistency of cash flow, and externally audited financial data for the unit. Conversely, strategic buyers are more likely to pay elevated valuations and be willing to acquire under more volatile conditions.

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Preferred Form of Sale The preferred structure of the sale is expressed. While there will be give and take over form during purchase negotiations, a clear sense of the breadth and structure of a favored transaction helps keep priorities clear as events unfold, including: Assets or equity Scope, describing what is in and out of the sale. This covers: technology, products, brands, licenses, market access, customer relationships, physical assets (real estate, buildings, equipment), IT, and, working capital Dual use technologies that will be kept by the seller and licensed to the buyer, or vice versa Buyers access to future technology upgrades and development resources from the seller, if there is integration of technologies between the sellers continuing activities and the transitioning business unit, or vice versa Transition services the seller would provide for a period posttransaction, such as treasury, accounts receivable collection, human resources management, or IT Indemnities Non-competition agreement Consideration and form, such as cash, other assets, shares, vendor financing in the form of a promissory note of future payment, or convertible debt instrument Contingent payments Residual equity stake Time scale for executing a transaction, and subsequent separation As well, tax, legal and employment matters can have a strong influence on the desired form of sale. Taken together, the preparations spanning carve-out financials to preferred form of sale set the stage for the marketing documents, as well as foretelling some of the more likely forms for the purchase contract. Further, these groundwork efforts also tend to highlight difficulties with the unit that can quickly be repaired or excised to enhance value and sale potential.

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A few considerations when laying the groundwork: Delicacy is required in the research phase. Digging too deeply into the operations of a business unit with information requests to its staff in advance of a sale announcement can set off apprehensions for employees that restructuring, sale, or closure may be pending. Another sensitive matter is contingent roadmaps for the sale effort. There are a lot of changes and possibilities that emerge as divesting efforts get rolling. The more volatile a units circumstances, the more agile disposal plans need to become. Identifying major decision forks before the sale gets underway helps protect management decision discipline within the seller as events unfold. Without a roadmap and contingency plans, surprises, especially negative ones, can trigger emotional decisions or an overemphasis on tactical stresses that are counterproductive to larger objectives. Usually, lapses involve changing decision criteria affecting the sale mid-course without a valid and objective reason. Prior scenario planning for the sale process mitigates management bias for the seller as conditions change. Contingent roadmaps project the major checkpoints anticipated during the marketing and sale effort. They identify the highest impact prospective internal and external events. The more probable alternate courses that would be followed are then described that would reduce uncertainty, advance upon targets or adopt new targets. These include landmarks such as completion of major R&D tasks, landing major customers, changes in suitor attributes, or competitive developments. Contingency preparedness requires knowledge of several values for the business unit on an ongoing basis during marketing and sale: Alternate buyer sale value, a quantity updated dynamically as suitors respond and drop out over the course of marketing and sale, less any expected restructuring cost obligations to achieve sale Keep value, its worth to the current owner including future infusions of capital

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Harvest value, the value to the current owner without any new infusions of capital Liquidation value, its worth under an orderly wind-down should a sale as a going concern not be concluded, and retention not be desirable These dynamic reference points are navigational aids for any sale. They are most important to keep in view for a unit on the boundary for whether to sell or shut, informing the walk away number for the dashboard. The decision about the best course of action for a business near the sale-shut dividing line is particularly sensitive to changes over the course of sale in development and operations, the competitive environment, and the market of candidate buyers. Sale Method There are three main business sale methods to select from: bilateral negotiating with a single suitor from the start; negotiating with a limited number of participants; and, managed auctioning with a large number of initial contacts to prospective buyers. There are benefits and trade-offs for each sale mechanism with respect to achieving maximum value, exit speed, confidentiality, business continuity and fallback options.

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In overview, the positives and hazards are: Bilateral sales can be targeted, with potential for quick exit, confidentiality and business continuity. However, one to one sales carry the risk of no a ready fallback option, and limited valuation leverage. Limited Number of Participant sale efforts can also be targeted, and reasonably quick. However, confidentiality can limit the pool of prospective buyers. Managed Auctions provide potential for maximum value and ready fallback options, but at the risk of business disruption from confidentiality loss.

A bilateral negotiation is most appropriate where the best suitor is obvious and unique. This is a buyer with the strategic outlook and financial resources that can readily offer a price with appropriate consideration above what other prospective suitors could likely muster, and better deal terms, conditions and speed. When a premier suitor can be identified, a one to one deal can usually be negotiated quickly and confidentially from the outset. A deterministic process reduces disruption for employees, customers and other stakeholders in the transferring business. Bilateral marketing and sale is usually best if a business unit is fragile and cannot tolerate the erosion that a period of uncertainty may trigger in terms of staff, intellectual property, customers or partner interest. The danger employing one to one negotiation from the start: should significant difficulties arise over the course of selling the business, there are no primed standby alternative buyers. Exit speed, valuation, and deal structure flexibility can suffer if negotiations bog down in one to one marketing and sale.

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At the other end of the spectrum of business sale types is a managed auction. This mechanism is best used when there are a wide range of possible buyers at the outset, but not a clear preferred suitor that can be relied upon to carry out a transaction. Auction is also appropriate when a defensible process is needed to achieve maximum value. An auction has a major advantage with ample contestants. With a sufficient number of plausible buyers informed about the assets, competitive bidding should induce offers at or near the maximum each suitor is willing to pay. Multiple offers also provide ready fallback options if discussions with any one suitor do not turn out. The down side of auctioning is the notification of pending sale to a large number of people. They also receive a description of the asset. Relatively open disclosure about the planned sale including financial and strategic details can harm the target business. Even with confidentiality agreements in place, word usually gets out once more than a handful of people know about an upcoming sale and the nature of the assets on offer. Depending upon the liquidity of the local employment market and substitutability for the business products or services, employees and customers can defect during the period of uncertainty. Depending upon the character of the asset to be disposed and the market it is being sold into, intermediate forms between 1:1 and managed auction are possible which will balance valuation, flexibility, fallback options, speed, confidentiality and business continuity. Circumstances may also warrant changing business sale methods mid course. Information about potential bidders arrives during marketing. Conditions of the business unit change. This knowledge can suggest shifting from a limited negotiation to a more broadly marketed and competitively bid sale if interest turns out to be higher than expected. Equally, buyer signals or unexpected fragilities with the business unit early in the process can indicate a move from a wider field toward limited or exclusive negotiations with greater rapidity than originally intended.

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In the normal course, however, without persuasive evidence to take a narrow approach, a tightly managed multiple bidder marketing and sale model is usually best.

Creating Competitive Auction Bidding

It is a statistical game to find the best buyer for a business unit in a managed auction. The dynamic is not a deterministic one. Many plausible acquirers need to be solicited. Not all that are contacted will be interested because of timing, financial, or strategic factors. Moreover, several motivated purchasers need to be ready to carry out a transaction in order to drive up valuation, and flexibility in deal terms and conditions for the seller. The implication is that a large number of prospective buyers with a strategic or financial interest in the asset must be contacted in order to create a competitive auction market. There is a high reduction ratio between initial outreaches and active pursuits, and further high compression to sale. The compression rate is especially high for smaller asset sales, those with transaction prices below $50 million where the target business may still be developmental or not yet have achieved competitive scale. The following shows guideline statistics for marketing and sale of a business with a transaction price up to $50 million. It indicates the size of the starting pipeline of participants, and yield from stage to stage moving through marketing and sale: The starting pipeline requires forty to fifty participants. These are plausible buyers identified during marketing preparations. They are contacted with an introductory memorandum and confidentiality agreement to sign back in order to get more detailed information about the asset The next stage is active appraisals, in which typically twenty of the initially solicited parties respond positively and enter into the confidentiality agreement. They then receive and go on to review the offering memorandum and other confidential information

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The following stage is active pursuits. Usually about five active appraisers will enter formal bids to become active suitors Among the tenders, there will typically be two suitable bids A pair of suitable bids leads normally yields one executed purchase

The fulcrum of the process is the number of formal bids. Five or more tenders are needed so that there is competition to drive up values and term flexibility for the seller. Volume creates alternatives for the vendor. With sufficient numbers, bidders are unlikely to identify all of the competitors before submitting offers. Generally, if there are fewer tenders than five there is significant risk the players will figure out who else is bidding, especially in networked industries, and be able to game their offers to the detriment of the seller. With five or more bids there is enough positive tension to provide satisfactory vendor choice. Among five formal bids, there will usually be at least two tenders acceptable for exclusive negotiations. The importance of having more than one suitable bid is to have a ready alternative if negotiations with the lead bidder get stuck or come apart. If there is only one acceptable bid, the next best available option is poor should purchase negotiations become distressed. Two or more palatable offers help the sellers end game dynamics during purchase negotiations. The takeaway message is this: forty or more plausible buyers need to be identified when preparing to market the business. Substantially fewer viable prospects call into question whether a competitive bidding process is the suitable way to divest. With initial outreach numbers significantly smaller than forty, a sale through a competitive bidding process may still be possible for a small business unit, but chance plays a larger role in the outcome rather than effort or planning. Valuation often drops. Statistical mechanics of competitive auctioning shift with larger assets, transactions above $50 million. The major difference when selling

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more substantial businesses is that the reduction ratio of participants is lower, especially during early stages of the process. With a larger transferring enterprise, fewer starting contacts are typically required to achieve competitive bidding and a successful transaction. The reason is that with a larger business in play, prospective suitors are easier to identify during sale preparations. Candidate buyers have more management depth and access to capital to carry out acquisitions. Moreover, the unit going on the block has greater infrastructure, competitive scale and certainty. The transferring business unit thus typically demands fewer resources of the new owner. More of the tenable initial buyers are likely to become active suitors. With a well selected group of initial contacts, large asset disposal can start with about 20 plausible buyers for initial outreach in order to achieve a sale with sufficient competition and choice for the seller. Another advantage in the sale of a larger business unit is the willingness of multiple suitors to compete at late stages of the sale process. With small unit sales, prospective buyers are less likely to spend the time and money in detailed late-stage due diligence unless they have a window of exclusive negotiation. In larger deals, the transaction values become high enough that suitors will more willingly invest in comprehensive due diligence and negotiation prior to obtaining exclusivity. Multiple bidding rounds become possible with bigger transactions. Instead of a single pass through the sequence of due diligence, bidding, suitor selection and purchase negotiations, there can be iteration, sometimes as much as three cycles. At each round, further disclosure is provided, followed by suitors refining their tender offers and essential terms of a deal. The field of suitors is narrowed at the end of each round based on value, terms and risks of their bids. The next then cycle begins. In multi-round bidding sequences the first round is customarily based on documentary due diligence, with subsequent rounds based on access to facilities, management, and increasingly sensitive customer, supplier and financial information. Letters-of-Intent become

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progressively more detailed at each round, advancing toward a final purchase agreement. Marketing and Appraisal The initial marketing effort builds upon a series of documents prepared by the seller. To construct disclosures to prospective buyers for maximum impact and efficient sale requires a clear sense of: 1) target audience; and, 2) how wide a net to cast among potential suitors at the outset.

Audience
With audience research and analysis in hand from the preparation stage, marketing documents are written. They are promotional pieces. They lay out the strategic rational for acquiring the assets through the eyes of the reader. The purpose of authoring to appeal to the perspective of a suitors strategy is so as to not merely rely on financial projections to convey the merit of the business. Promotional items make it easy for reviewers to see how the assets can deliver strategic impact and financial return to improve or defend their businesses.

Collateral Documents
With a grasp of the target audience, appropriate out-bound marketing messages, and, financial data, preparations then move to writing collateral documents. The main documents in order of delivery are the introductory memorandum, offering memorandum, and management presentation. Introductory Memorandum The teaser document is two pages or less. It is the first overture to potential suitors. This overview gives a brief profile of the target business: technology, products, markets,

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customers, operations, strategic impact, and, categories of beneficially impacted potential buyers. It is a non-confidential disclosure designed to interest initial contacts in what is going on the block, but without getting into extensive proprietary information. The teaser memorandum closes with an invitation to sign-back an accompanying confidentiality agreement to receive more detailed and proprietary business unit disclosure. Offering Memorandum The next document is much more revealing, the offering memorandum (OM). It is customarily 25 to 50 pages, providing the past and current overview of the business unit for sale. The prospectus is delivered in confidence. It provides articulation beyond what is in the public domain about the business finances, strategy, operations, technology, intellectual property, products, quality, partnerships, staffing and key individuals. The OM should present an impressive but credible picture of the business, laying out the major opportunities and benefits for potential acquirers. Management Presentation The third collateral instrument is the management presentation deck. It briefly recaps the OM, and customarily goes on to provide greater forward-looking emphasis, including longer-range financial projections. It also further explores future technology and market trends that can drive the business down the line. The presentation is usually 15 to 30 slides. In addition to its scripted content, the presentation allows suitors to meet and hear from management of the target unit, and participate in questions and answers. The management presentation thus provides not only greater dialog about the business outlook than the OM, but also a first hand impression of unit managements dedication, knowledge, intellect and communication skills. There are several supporting documents and assemblies of data to ready as well: Confidentiality Agreement The confidentiality agreement (CA) is alternatively referred to as a non-disclosure agreement. It describes both the seller and suitor obligations to protect sensitive information that flows in the course of due diligence, negotiation and integration planning. It also protects both should the transaction not be

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consummated, typically including IP provisions and non-solicitation of employees. For public companies, stand-still clauses may be included. As noted above, the CA accompanies the teaser memorandum to protect the OM and other disclosures. It is best if the CA is the same for all suitors, so that uniform rights and restrictions apply regardless of which party ultimately ends up as proprietor of the target unit. Bid Instructions An associated letter to ready during marketing preparations is one that lays out bidding instructions and timeline. The main elements of this correspondence are the disclosures to be accessed during investigation and bidding, the bid deadline, and the required elements of a valid tender. For multi-round auctions, an adapted instruction letter initiating each cycle describes the diligence and tender process. To define the scope of permitted investigations for the upcoming round, the instruction letter should foretell the information and management access to be provided during later investigation and bidding rounds. This way, suitors are less likely to prematurely jump ahead. Purchase Letter of Intent Commonly, there is another nonpromotional item to prepare at the same time as other collateral, a standard form purchase letter of intent (LOI). When the desired transaction structure is specific and known to the seller, issuing a standard form non-binding LOI describing the favored form helps qualify indicative offers for the business. To hone the diligence and negotiations to follow, the LOI should be sent accompanying the OM. Appraisers who tender are instructed to use the provided LOI as the basis of their offer, marking it up to reflect important differences in deal structure and terms for their candidacy. The benefit of a reference LOI is that it creates greater comparability among tenders. In addition to price as a decision tool for the seller, the further the LOI is altered by suitors, the more it loads down the real valuation and likelihood of successfully concluding a transaction. Using a reference LOI will pay off in more reliable bids and an easier path to the final purchase agreement.

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Data Room The data room provides full-length copies of articles, contracts, filings and financial statements describing all aspects of the business, including physical assets, leases, employees, suppliers, customers, partners, regulatory filings and certifications, IP, and licensing, among others. At the same time promotional documents are prepared, as well as LOI, CA, and bid instructions, so too should the data room. Concurrent assembly of the data room aids consistency among all disclosures. Data room disclosures frequently run to several thousand pages. They follow conventional multi-page checklists of items to be investigated. Frequently Asked Questions One last and useful document is frequently asked questions (FAQ). It is a living document that evolves through the course of marketing and sale. As investigator questions come up during appraisal and due diligence, answers should be logged in the FAQ when they contain information supplemental to the OM, presentation deck, and data room. Responses can then be provided to all investigators if appropriate, or the same answers re-used for similar questions that arise at a later time. Due Diligence Due diligence is a steady effort for both buyer and seller that starts at initial appraisal, and continues through pursuit, purchase negotiations and closing. The reputation of the due diligence stage is to expose concealed or under-represented weaknesses. For sure, identifying shortcomings or misrepresentations is part of due diligence. But, if due diligence is only viewed through the lens of avoiding negatives, opportunity is lost. Some also see due diligence for gaining information that will enhance leverage for subsequent negotiations. This too is a piece of what it can do. Avoiding mistakes and gaining advantage are part of the game, but the best use of due diligence by both sides is to build knowledge to optimize the shape of the transaction. Especially important is to itemize and characterize deal-stoppers and deal-shapers early during

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investigation and negotiations. These are must-have features of a deal, and the highest leverage points. When due diligence is used primarily to fine tune a mutually beneficial transaction, it contributes the most value to the sale. Negotiating Negotiations will start shortly after initial appraisal. Bargaining and accommodation becomes progressively more involved as disclosures become more revealing. Documentation to reflect the state of negotiations gets correspondingly more extensive, moving from LOI through draft purchase contracts, often in multiple steps of expansion and detail to reach a signed purchase agreement. Signing to Closing Between signing and closing is the time to prepare a detailed project plan and resource allocation for separation of the unit from the selling parent and integration into the buyer. In addition to project planning, the pre-closing period is used to settle the sellers inter-company accounts for products and services with the transferring unit. At this time, the buyer finalizes financing, if external financing or approval is needed. Both buyer and seller should also apply steady effort to any controllable factors that can reduce uncertainty and look-back adjustments. Just prior to closing, it is customary for representatives of the buyer and seller to conduct a joint verification walk-through of the assets. This confirms presence and expected condition of all assets, including facilities, equipment, and property.

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Also immediately prior to closing, if there have been significant changes in working capital compared to the time of due diligence, such as inventory, accounts receivable or accounts payable, there can be adjustments in deal price to reflect changes. Akin to working capital, the state of completion of R&D tasks and other achievement milestones are evaluated relative to those expected during negotiations. Pricing is similarly adapted for deviations in development or operations. Separation The separation and integration phase begins after closing when the unit is extricated from the seller and amalgamated with the buyer. This stage typically requires corporate and outside resources from the seller similar to those for an acquisition. Legal separation comes first, followed by de facto separation of interwoven processes and systems. For continuity with the representations and disclosures provided during marketing and purchase discussions, it is best if the same team carries out the disengagement and integration. These are the people who prepared disclosures, performed due diligence and conducted negotiations. Keeping the same people involved improves consistency, accountability and speed. During the separation interval, any required transitional services are provided from seller to buyer, such as, treasury, IT, human resource administration, or accounts receivable, in order to bridge the time interval after closing until purchaser business process integration is achieved.

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Timeline An orderly disposal that achieves high value takes a while. A typical divestiture timeline: Preparation usually takes four to six weeks, to create carve-out financial statements, conduct internal and external diligence, chart pathways for management and key staff, identify the sale team, and make repairs to any fix-able issues with governance, contracts and disputes The start generally requires two to three weeks, to author the OM and other collateral documents, contact prospective suitors, and execute the CA with respondents who wish to appraise the business unit Appraisal typically lasts three to four weeks, allowing appraisers to review the OM and any preliminary data room documents provided by the seller, as well as investigate the target units competitive environment Active pursuit often spans two to three weeks, to provide for offers to be received, initial term sheet negotiated, and best offer selected Final due diligence frequently requires six to eight weeks to complete investigations, negotiate a definitive purchase agreement, and work out the transaction schedule Closing can take place any time after the purchase agreement is executed. Sometimes the closing date is set based on achievement of operational milestones as a risk reduction measure, or synchronized to fiscal interval end dates to reduce accounting and audit overhead Separation follows, and can take from twelve to twenty-four weeks to disengage the target unit from the seller, integrate with the buyer, and provide transition services

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In total, four to six months typically elapse from the decision to divest until a definitive purchase agreement is reached. Separation after closing can take another three to six months. Sometimes, there is pressure to accelerate the disposal schedule. Often, overly aggressive timetables mean that preparations get rushed, and quality suffers. Suitor interest, negotiating leverage and deal complexity can all change unfavorably. When timelines get compressed, the expected outcome is diminished value. Communication There are Killer Ds that can undermine business unit sale among the sellers stakeholders: defeat, demoralization, dissension, disruption, defensiveness and division of loyalty. Confidentiality helps resist these forces, but is not always possible. When an upcoming disposal has been disclosed, steady communication to involved parties about the merits of the divestiture counts for a lot to hold the Ds at bay. For employees, the constructive message is that divestiture is not a sign of failure, but of strategic strength. It is a natural part of choosing evolution over continuity, to adapt at the speed of the competitive environment. Both the selling parent and the transferring unit can progress farther and faster than under the previous relationship. This success underlies career success for management and staff. Employees will also have concerns about continuation of employment, career prospects and stature, changes in compensation and culture, and, news about the sale effort as it progresses. Shareholders want to know how the sale will increase shareholder value by capitalizing a higher price as seller than owner, and, improve focus for the remaining business. Equally, shareholders want to minimize the risk of value loss as a result of the sale.

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Customers and partners want to know that their interests are being protected through the transition with the opportunity for both the seller and the transitioning unit to better pursue their goals. At the same time, customers and partners are usually concerned about potential changes in service levels and commitments. Suppliers seek information about continuation and expansion of revenue streams, as well as any changes in contractual terms, pricing, payment and creditworthiness. Additional constituencies to consider and interact with are media and regulators. Media are primarily interested with impacts on employees, customers, and community, as well as the buyers reputation. Regulators want to be notified of competitive implications, employment or other legal notices, and continued compliance with laws and regulations. Challenges and Advice Earlier is better in business unit disposal. One cannot time a sale perfectly, but it is usually better to sell before it is too late. Avoid reactionary selling when problems or differences have become severe It is easier to react to advances than trying to turn on potential buyers Start slow, and finish fast. Attention to detail at the front-end oils the wheels for the back-end, keeping erosion of the transferring unit to a minimum Deal with strategic issues first and practical concerns second, so the right influences shape decision frameworks and transaction structure Throughout, keep revisiting how the transferring business can be better under new ownership

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It is easy for effort to wane during disposal. Divesting is as complicated as acquiring, but those involved tend not to attack a sale with the same vigor because of a sense of failure. To counteract disappointment and its byproducts, the team involved in the transaction needs to be energized with regular communication about its merits The most significant issues will be unearthed by a good buyer during due diligence. Disposal isnt a means to conceal accumulated management missteps. Divesting can largely remove bad business unit strategy and execution from future concern for the sellers management, but not erase it from the sale process A reflex for some managers facing the need to divest a unit is to hedge, seeking to put the activity into a joint venture with one or more partners. A joint venture is rarely a good divestiture strategy, since the sellers management needs to be substantially rid of it for focus, profitability or other reasons. JVs are time consuming to initiate, and complex to operate. Nevertheless, there are cases where the seller can productively assume a JV stake in which the transitioning unit is contributed. In such instances, an important feature is normally to specify limited downstream resource demands from the seller by the JV. Participation in a JV with capped resource demands can furnish a low cost option on the upside potential of the transferring unit without imposing high downstream liabilities upon the seller Advisors In advance of marketing a business for sale, there is the question of whether to involve an investment banker or other similar transaction advisor. On the plus side, bankers add credibility and can help procedural discipline of the marketing and sale effort. They can also contribute a considerable amount of preparatory work such as writing the offering memorandum, financial modeling and reference transaction research, as well as providing advice and experience with financial, tax and legal issues. Bankers can provide expertise,

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perspective, and bandwidth. In some cases, involving bankers is obligatory if the sellers governance requires engaging an advisor. On the negative side, as domain specialization, risk, and technical sophistication increase in the assets to be sold, bankers have less value. Further, it can be difficult to attract the best bankers for transactions under $20 million, resulting in significant cost for questionable advisory talent as deal sizes go down. Use of boutique investment banks and domain specialists can help obtain better people on smaller deals.

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About the Author

Dave Litwiller is a senior executive in high technology, based in Waterloo, Ontario. His background is in wireless devices, precision electro-mechanics, semiconductors, electro-optics, MEMS, and biotech instrumentation. He serves as an advisor for various private corporations in matters of strategy, technology, and business development. Mr. Litwiller is a frequent speaker at technology start-up forums and executive conferences on business strategy.