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Enterprise development
constitutes a primary corner stone of my practice, indeed has always been one of the
key reasons for its existence. My involvement in this area reflects the experience and
exposure I gained in this field with all previous employers, and of course, more recently
as the subject matter of the majority of my client engagements.
From the principal's perspective too, the fundamental importance of this subject can
hardly be overstated, a neglect in this respect directly endangering the viability and
financial health of the firm itself, its ability to generate sufficient cash to survive, the
tenability of its competitive position and thus its longevity.
What is more, relatively small adaptations tend to have an extremely strong multiplier
effect, substantially increasing the dangers of any lack of focus or even slightly
suboptimal decisions.
Last, but not least, the process is cyclical and iterative by nature, and therefore cannot
be concluded "once and for all". This is primarily caused by the strong external
influences (e.g. political, social, macro- economical, technological, related to
engineering, manufacturing, customer expectations, competition, supply and demand).
Any tactic based on "waiting till the dust has settled" thus is completely illusory, apart
from putting the continuity of the enterprise firmly in the hands of its more pro-active
competitors.
For the purpose of this discussion I define "enterprise development" as the
organisational, infrastructural and legal response to the requirements, opportunities
and threats imposed by its internal and external positioning.
Though the demarcations in reality lack the clarity of the below model, I nevertheless
believe it helps in getting a better understanding of the subject matter.
Growth, expansion
This seems to be the most natural and acclaimed phase in the corporate lifecycle.
"Growing the business" is seen as almost equivalent to "good entrepreneurship",
though I do not necessarily share that view. The possible justifications are manifold, but
usually centre around:
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increase of reach, be it geographical or in addressable market
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additional portfolio breadth or depth
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critical mass, i.e. the possibility to cost effectively enhance the manufacturing or
distribution process
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economies of scale, i.e. a more favourable ratio between direct and indirect cost
factors
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customer perception, becoming a more significant player, and thus building loyalty
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supply side economies
Contraction
Though commonly carrying a negative connotation (bad management, inferior
employment philosophy), in many cases this is purely lifecycle related and thus
unavoidable. Apart from really unplanned performance shortfalls, the underlying factors
can often be found in the realms of:
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market shrinkage, e.g. due to a change in customer focus or demand
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portfolio shifts within the company, making certain lines of business obsolete or
over-dimensioned
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the national or global business cycle, inducing over-capacity
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competitive pressure
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supply chain optimisation
Tuning
is the common denominator of all changes to optimise the organisational structure
without a direct expansion or contraction goal. The objective usually is to optimise the
organisational set-up and infrastructure, thus more closely matching the internal or
external requirements Typical objectives could be an optimisation of the cost structure,
a closer matching of resource supply and demand, a better utilisation of local skills, the
establishment or abandonment of a local presence (for tax, visibility or productivity
reasons).
Every living organisation needs a periodic review to determine if and which
improvements could be made that make it more effective.
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Expansion scenarios
Serve to further the growth and/or extend the reach of the enterprise. They cover a wide
range of possible approaches, with different degrees of organisational impact. As such,
the following compilation does not claim to be complete, but gives some examples,
including observations on applicability.
Channel development
A major factor determining the volume of business is the way the company engages its
end customer base, the sum total of its channels to market. Most start-ups initially
interact directly, through a sales person, with interested parties, though lately many
firms embrace the e-commerce vehicle from the beginning. However, a single
downstream pipe often is an impediment to growth. Examples of additional vehicles
are: e-commerce, distributors, volume resellers, value-added resellers, system vendors,
system integrators and online service providers. Priorities may be manifold, e.g.
additional geographic coverage, addressable market, better logistics, support, higher
visibility or credibility. Major considerations in opting for this route are the absence of
financial exposure, inherent flexibility and non exclusivity.
Partnerships and alliances
They form the next level of commitment: again, no change of ownership, but a much
closer and further reaching cooperation. Typically they contain an element of
exclusivity. In most cases they are and are intended to be very visible, which
presupposes continuity and a high level of trust and commitment on both sides. Specific
examples include agency agreements, local representation and bundling.
Organic growth
The traditional scenario consists of a gradual increase in business through hiring,
(re)skilling and the successive establishment of new locations. Its attractiveness lies in
the high degree of company internal control and the direct justification in line with
acknowledged requirements. Typical disadvantages are the possible shortage of
available skills on the market, the inherent difficulties penetrating new environments or
accommodating new departures and the slow response to immediate challenges and
opportunities. Furthermore, especially in traditional industrialised countries this
strategy entails substantial long term liabilities. Nevertheless, many deciders still see
this as the "default" scenario, the "golden standard" to which alternatives need to
measure up.
Joint ventures
They leave the company structures, including legal framework and ownership,
unchanged, but allow independent players to pool resources and capabilities for a
specific purpose. The main advantages are that burden and risks related to the
exploration of new departures can be shared, and that possibly a head start can be
achieved. On the other hand, control is limited, decision finding may be cumbersome,
the way forward is not always obvious, adverse image impacts cannot be excluded, and
there are hurdles against devolution, should that become advisable. As a consequence
JVs are seen as the strategy of choice in well defined niches, like research an
development or individual large projects.
Participations
They provide immediate access to and utilisation of an existing operation and resource
set, thus avoiding some pitfalls of organic growth. This is accomplished by the purchase
of a minority stake in another enterprise (majority deals are subsumed in the topic:
mergers and acquisitions). They typically are appropriate when the targeted candidate
requires additional equity financing, whilst its ownership has a ongoing interest in the
company's future. Access to additional skills and/or capacity at a cost far below their
replacement value (leverage of financial instruments) is a strong argument in favour for
the acquirer. But this may be offset by the absence of effective control. The vehicle
therefore is most commonly used by companies focusing on financial, rather than
operational performance (e.g. venture capital providers), and/or in situations where
there are several significant minority shareholders without an entrenched power base.
Mergers and acquisitions
Acquisitions or take-overs can be defined as the purchase of a majority stake or similar
title entailing over- all control in a target company. Whereas in most cases both
participants maintain their legal structures, the term "merger" is used when one entity
is or both are dissolved in the process (e.g. asset deal). The term also loosely refers to
transactions where both participants are roughly comparable in size or perceived
significance. It could be said that, whereas in the organic scenario growth potential is
"made", this alternative is to "buy" it with immediate effect. As such it allows for a kick-
start, a rapid response and recourse to scarce, not readily accessible skills, but at a
substantial one-off cost that cannot be spread out or temporised and mostly is very
difficult to reverse.
Acquisitions have been with us since the beginning of the industrial revolution, but have
become a dominant phenomenon since the 60s of the last century. Especially in the IT-
industry (with a small dip at the end of the dot.com bubble) they are seen as the
prevalent vehicle of enterprise development. Much of my involvement in growth
scenarios has been in the facilitation of such deals.
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Contraction scenarios
The objective, here, is to scale down all or part of the organisation in line with market
or company internal requirements and affordability. As stated before, the advisability of
contraction does not necessarily stem from wrong decisions in the past. In most cases it
simply serves to follow the cyclical pattern dictated by external factors, the shifts in
enterprise priorities, product lifecycles or manufacturing/supply chain innovations.
Furthermore it may very well be topical, contraction in one dimension being paired with
expansion in others.
Discontinuation or liquidation (of business lines, organisational entities or the
enterprise as a whole) is probably the most rigorous and dramatic example of
contraction, and also has the strongest connotation of mismanagement. In this case the
principal may even be outside the enterprise itself (e.g. curator, creditors conference,
receiver).
Restructuring or rightsizing refers to the need to adapt the operation to transient or
permanent shifts in demand or supply side economics, thus strengthening the
competitive position or improving financial performance. If performed periodically and
as part of a well considered business plan, this may very well point to management
strength, and often is rewarded as such by analysts and stakeholders.
In this case the divestments usually are topical, and have positive economic value,
contributing to operational cash flow. The implementation paths include
sell-offs, spin-
offs, management buy-outs and management buy-ins.
As always, the scope of my involvement is outlined in my brief and typically combines
activities in identifying take-up candidates, conducting or supporting negotiations,
closing transactions and reaching agreement with the social partners and/or regulatory
authorities, who seek the best possible safeguards for their specific audience.
Especially in countries with a strong consensus culture (e.g. Germany, Holland, France)
the latter aspects may even take precedence over the deal making side.
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Tuning scenarios
Whether organic growth or one of the acquisition models prevail as the preferred
evolution path, the results need to be reviewed and tuned periodically, with the goal of
improving and optimising organisational fit. Such (re)assessments should take place
often enough to avoid sizeable diseconomies, but should not succumb to actionism,
causing disruption, demotivation and instability. A prerequisite should always be that
the benefits clearly outweigh any additional burdens.
Some points to ponder:
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organisational fit (geographical, skills, customer nearness)
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legal structure
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economies of scale, critical mass, effectiveness, productivity
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core versus peripheral activities and the "new world" of outsourcing/outtasking
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optimal substitution between "make" and "buy".
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My Involvement
All enterprise development steps should be in accordance with or directly result from
senior leadership decisions. As they typically involve major change, most often with
legal implications, their implementation normally needs formal senior management or
board approval and sign-off. Within those constraints, however, there is substantial
delegation potential, either to the internal management structure or to a supporting
practice like mine. Scope stretches from very limited to virtually all encompassing.
Examples of activities the client may want to (partially) offload:
Search
The identification of suitable target companies to be addressed. Initial contacts may be
included in this stage.
Selection
The short listing and selection of candidates, with which discussions and/or
negotiations seem promising, and that are prepared to pursue the matter.
Negotiation
The process of achieving a common position on the content, scope, terms and
conditions of the agreement with one or more identified candidates, typically including
pricing, and mostly subject to discoveries made during "due diligence".
Stakeholder buy-in
Ownership of major steps in enterprise development can be with senior leadership or
with other stakeholders (e.g. shareholders, chairman, board of directors, or even
supervisory board, employee representation, trade unions). Optimally there is a
common understanding shared by all of them. But conflicts of interest may crop up as
well, even within one category. Not only do they need to be resolved before proceeding,
their visibility can also strongly demotivate the discussion partner. If only to avoid the
suspicion of undue pressure, my client, who could be representing any (subset) of these
drivers, may choose to delegate all or part of this essential (background) process.
Due diligence
Deals involving a change in or acquisition of ownership (be it partial or complete) are
usually conditional on the satisfactory conclusion of a due diligence process, in which
the candidate's operation is subject to a detailed scrutiny. Always a wise precaution,
due diligence usually is a compulsory corporate governance item for publicly listed
companies.
It covers topics such as a financial and performance assessment, solvability and cash
flow analysis, order and delivery pipeline, work in progress (including balance sheet
valuation), ongoing litigation if any, legal exposure, composition and quality of the
workforce, portfolio quality and fit, competitive positioning, valuation and pricing,
customer and ongoing contract base, organisational structure, and the assurance of
continuity, e.g. through earn-outs.
Apart from considerable "on board" expertise, a major task at this stage is the
orchestration and coordination of a number of content experts, each chartered to
provide a component of the effort.
Contract
If, after due diligence, a formal agreement to proceed is reached, this needs to be laid
down in a binding contract, holding the detail of all mutual obligations and
responsibilities and the roadmap for implementation. Contract quality is a cornerstone
in any deal. An essential component of the contract is the definition of the metrics and
measurements of success, which may very well be direct input to the staging and height
of payments to be made.
Implementation
Any deal is as good as its implementation. This stage tends to be the most disruptive
and even traumatic for all affected people and entities. Furthermore, it is the time to
test the assumptions underlying the agreement, to possibly adapt and optimise in
accordance with actual findings, to measure progress and success, to declare closure
when appropriate, and to derive any lessons for the future. In short "the proof of the
pudding is in the eating".
Mediation and arbitration
Inter company deals, even if documented in detail, have to be based on mutual trust.
Sometimes situations arise that are not explicitly foreseen in the contract, or where
"good commercial practice" or "fairness" deviate from the formal legal framework. Of
course, litigation is a feasible resolution path in such cases. But reverting to that option
tends to be lengthy, destroy mutual trust and put an end to common purpose, thus
obviating the very essence of the transaction. Parties may therefore prefer voluntary
mediation or arbitration. Independent of my level of involvement in the venture thus far,
they may elect (either by contract or ad hoc) to entrust this responsibility to my practice.
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1. About
