Rapid Advance - Mergers & Acquisitions, Partnerships, Restructurings, Turnarounds


Published on

A practitioner's guide to rapid development and re-development of fast growing technology businesses

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Rapid Advance - Mergers & Acquisitions, Partnerships, Restructurings, Turnarounds

  1. 1. Rapid AdvanceMergers & Acquisitions, Partnerships, Restructurings, Turnaroundsand Divestitures in High TechnologyDavid J. Litwiller
  2. 2. 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 inany form or by any means without prior written permission of the author.Library of Congress Cataloging-in-Publication Data
  3. 3. For Cynthia, Kyla and Heather
  4. 4. vContentsStrategic Partnerships 1Small-Large Business Pairing 8Minority Equity Ownership 9Earn-Outs 11Joint Ventures 13Exit Provisions 15Mergers and Acquisitions 18Operational Success 21Catalytic Technology Overlap 29R&D Team Concerns 30Early-Stage Acquisitions 31Conflict Management 32Staffing and Culture 35Quickly Turning Newcomers into Productive Employees 35Executive On-boarding 36Keeping New Employees Aligned 37Market Targeting 39Maxim 39Segmentation 39Market Assessment 41Promoting Novel Technology 44Pace of Technology Adoption 46Improving Market Entry Decisions with Comparison Case Analysis 48Growth Strategies 50Attacking Established Markets 53Adoption Thresholds 54Trading-Off Among Development Time, Cost and Performance 55Breaking Juggernauts 57Expanding Share within Established Markets 59Pursuing Emerging Applications 60Addressing Fragmented Markets 61Navigating Dynamic Markets 65Using Market Volatility to Build Share 65Leading Indicators of Slowing Demand 71Push Marketing 73Sustaining Push Marketing of Advanced Technology in Maturity 74Marketing Metrics 75
  5. 5. viEcosystem Relationships 79Recruiting Partners 79Setting Interoperability Standards 80Industry Associations 90Growing Sales 91Success Formula 91Variation 93First Customers 93Learn Quickly 93Staffing 94Diagnosing Trouble 94Scaling-Up 96Indirect Channel Sales 97Cross Selling 97Performance Metrics 100OEM Customers 100Customer Funded Development 101Good Practice 103Other Comments 103Restructuring 105Turnarounds 109Divesting 121Decision to Dispose 122Objectives 125Process 126Preparation 126Sale Method 133Creating Competitive Auction Bidding 136Marketing and Appraisal 139Audience 139Collateral Documents 139Due Diligence 142Negotiating 143Signing to Closing 143Separation 144Timeline 145Communication 146Challenges and Advice 147Advisors 148
  6. 6. viiBibliography 151About the Author 155
  7. 7. ixIntroductionThe speed and complexity of change in high technology’s businesslandscape requires rapid evolution. To enduringly thrive developing,producing and supporting technology-driven products and services, abusiness has to quickly advance. Capabilities and managerial focusconstantly adapt, sometimes tectonically.Mergers, Acquisitions, Partnerships, Restructurings, Turnarounds andDivestitures are essential tools for transforming a technology-basedenterprise with requisite speed and agility. The author presents acondensed guide to devising and implementing major businesschanges.Chapters also address strategic marketing, sales and ecosystemrelationships. New products, services and processes are the foundationof most partnerships and other types of business reconfigurations. Astrong grounding in marketing, sales and strategic linkages sets thestage for augmenting or refining a business. Moreover, significantexecutive ego and achievement pressures influence large businessmoves. Customer and partner rationale can be stretched to cementauthority for change. A back to basics view of the most influentialmarketing strategy, sales and external business network factors putsthe soundest footing under new business configurations.
  8. 8. 1Strategic PartnershipsThe principle objective of strategic alliances is access tocomplementary markets and technologies, much faster or with lowerrisk than otherwise possible. Greatest impetus to form affiliationsusually comes if development costs are rising quickly, particularlywhere they’re faster than the company’s rate of growth, and, productlife cycles are contracting.The benefits of strategic relationships include speeding developmenttime, reducing marketing and technical risk, attaining costcompetitiveness, acquiring individuals of rare talent or other valuableassets, and blocking competitors. Inexorable technology and marketchange makes strategic partnerships such as outsourcing, alliances,joint ventures and acquisitions increasingly important. Responding toa changing environment, partnerships can rapidly improve or defend tosustain and advance competitiveness.The complexity of strategic partnerships increases with the rate ofgrowth, heightening the importance of honouring conventionalwisdom 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 riskFulfilling these simultaneous elements of a productive linking requiresextensive relationship surveying and engineering.Partners see in each other the ability to access strategically vitalcapabilities in a harmonious manner that is not readily availableelsewhere. These rare capabilities need to provide mutual contribution
  9. 9. 2 Rapid Advancethat will be sustainable over the long-term. Joint dependence sets thestage for the other elements of a successful partnership. Bothorganizations need to feel that they have picked winner partners, andmutually work to make each other and the combination successful.The boundaries of partnership must be well defined, such as whether itis for a technology, product group, application sector or geographicmarket. Articulating limits for the relationship is usually crucial toachieving buy-in on both sides, and at several management levels.Defined boundaries also reduce the likelihood of migration intocompetitive positions.Partners must have similar objectives, shared vision and strategy, aswell as compatible cultures, values and personalities. These are thefoundation of success. They are fundamental to a workable pairing oftwo entities, yet also among the most difficult aspects of prospectivepartnerships to assess. Vision and culture embody many things, andone can never have complete information about another. Even when apartnership seems harmonious at one point in time, the subtleties ofdifferent history and personalities, as well as unforeseen future eventsmeans that there are many forces that can separate objectives.Communication, shared vision and common strategy keep outlooksaligned.Compatibility of culture, personality and values, as well as trust enabletwo other aspects of the pathway to success: a willingness to changethat 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 anysuccessful, sustainable relationship must be cemented in ways so thatwhen things get tough, neither party can easily walk away. Thisbegins with unwavering support at the outset from senior managementat both firms. Commitment paves the way for measures such asinvesting in each other, sharing development costs, and contractuallycommitting to supply and purchase terms. Prospective partners musthave comparable stakes in the success of the venture. Otherwise, amore traditional superior-subordinate relationship will arise from thedifferent importance each party places on the relationship, which will
  10. 10. Strategic Partnerships 3undermine effectiveness. Cross-commitment should not go so farhowever as to become a suicide pact. Some mutual barriers to exitfrom 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 havethe greatest chance for success if both parties are adaptable andinnovative in technology, products, markets, and business processes.Creating and then managing new products, services and processes isultimately what linking is about. Thus, innovation and flexibility areat the root of both companies’ abilities to make the relationship work.Organizations that innovate naturally, in both technology andprocesses, have improved chances of pairing, particularly as the degreeof departure from the familiar, the amount of co-operation, and levelof interaction all climb.Prospective partners must be pragmatic about the likely duration oftheir alliance based upon the rate of change of the underlyingtechnology and environmental conditions. If the rate of change is slow,association can typically last much longer than if the rate of change israpid. The overriding consideration is that the union can only be viableas long as the joint effort maintains leadership in technology, quality,and market access.Furthermore, partners need to trust each other. Reliance should besafeguarded through comprehensive mutual intellectual propertyagreements. An intellectual property protection framework allowsboth parties to be forthcoming with each other, delivering full andunencumbered disclosure about technology, markets, and othersensitive matters. Trust is the cornerstone of communication.Communication comes when the relationship is carried out with asingle team, carefully structured with players from both parties. Thecrux is to understand who the key people are, and how they fit into theresulting joint organization so that they can continue doing what they dowell. Take measures to ensure that the pivotal people remain with theintegrated team. Don’t just talk to the top people. Get to know thesecond level people as well.
  11. 11. 4 Rapid AdvanceThe skill is to figure out who are the most connected experts. They areoften not in the most prominent positions on a traditional organizationalchart. They are identified by asking a wide range of people whichcolleagues they consult most frequently, who they turn to for help, andwho boost their energy levels. This is how to get a sense of how workreally gets done among a group, to help identify talent, and nurture themost in-the-know employees. A single team of the brightest and bestamong the two groups is then more easily built.The unifying force of a single and consistent team, as well as channelsfor regular and open communication among them contribute to asuccessful co-operation. High bandwidth, low overheadcommunication channels vitally foster adaptability to prevail in achanging environment.Partners must also fairly share risk. Cross investment is onedimension, in both money and sweat equity. Partner firms need todevelop cross-functional capabilities, and be committed on both sidesto understanding each other’s processes, systems, workflows,organizational structure, priorities, and reward systems. The two sidescan’t just get familiar with each others’ products and technology.Knowing the way each other functions helps work get done acrossorganizational boundaries. Partners can then better make mutualobligations to specific business, technology, competitiveness, andquality milestones. Formal performance yard sticks help to signal forcorrective action as combined effort progresses. Up frontunderstandings and obligations diminish the likelihood for partners tosubjectively criticise each other, and maintains focus of both oncritical objectives.Among the most important characteristics of strategic partnerships isto deliver the whole product necessary to win market leadership. Whyis this so important? The reason is the largest and most profitablerevenue streams flow to market leaders, creating longevity of anattractive market position to retain priority attention from the coterie.Furthermore, with market leadership and the whole product, successbecomes more likely. This is because the fate of the initiative is thenlargely within the collaborators’ control, rather than a disproportionatedependence on outsiders who may be difficult to influence. Partners
  12. 12. Strategic Partnerships 5need to construct a relationship with market leadership and the wholeproduct as prime objectives.When formulating and operating a joint effort, partners sustain successby making required compromises in equal measure at the same time.Trade-offs by one should not be made in exchange for unspecifiedfuture considerations from the other. This leads to disappointedexpectations, and can undermine an otherwise sound co-operation.Investments by both partners throughout the alliance should bespecific 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 adefined avenue of redress for unforeseen issues that come up. Adissention work-out mechanism should be part of the up-frontpartnership agreement. After difficulty strikes, agreeing upon aresolution vehicle becomes significantly more difficult.Firms seeking competitive advantage through joint efforts can pursuedifferent levels of involvement. Strategic partnerships cover aspectrum from low to high co-operation and interaction: Purchase agreement, where even this basic level of partnership canbe complicated for strategically critical elements because ofexclusivity 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 AcquisitionConsidering this spectrum, lower co-operation and interactionalliances can often come together more quickly, as well as disband
  13. 13. 6 Rapid Advancemore easily when the basis for the alliance changes. Less involvedstructures also provide an easier environment in which to bring inmultiple partners. Higher co-operation and interaction alliancesshould be used as the scale of investment and cost of failure climb.Whatever legal form, and sharing of risk and reward, partnershipsbetween companies are like any other where the greater the interactionand co-operation, the more particular each company should be. Manypossibilities for joint ventures, mergers and acquisitions should beevaluated, but only a minority completed. The right ingredients andtiming are rare. Businesses must be particular when contemplatingprospective partnerships, especially as the relationship becomes moreinvolved.Characterizing a prospective partnership requires detailed duediligence. It is a significant part of obtaining reliable informationabout the quality of the assets on the other side. However, unlike theperceptions of some, the purpose of due diligence isn’t so one can findissues in order to negotiate better. Some jockeying goes on, butarming for negotiation is not the lasting value of due diligence. Thelarger and ongoing benefit that endures after the partnership goes intooperation is to identify issues so the relationship can be bettermanaged.To fully assess opportunity and risk factors, due diligence inevaluating 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
  14. 14. Strategic Partnerships 7Financial considerations should also be part of investigations forstrategic partnerships. However, a trait of relationships offering rareopportunity for dramatic growth is typically that financial profiles ofcurrent circumstances are of lesser importance than other due diligenceitems. 1This is because non-financial matters dominate jointinnovation capability and the capacity of joined organizations to createcompetitive advantage and sustained long-term increases inshareholder value.Nevertheless, financial due diligence should cover: Return on investment Earnings per share contribution Discounted cash flow: estimated future cash flows discounted backto present value Residual (terminal) value Free cash flow: earnings plus non-cash charges, less the capitalinvestment needed to maintain the business Economic value added: a combination of net profit and rate ofreturn, in a single statistic; net operating profit after tax, minus theweighted average cost of capitalMost of the preceding partnership discussion has been about formationand operation. However, cessation must also be considered. Sometake the view that cessation of a consociation is a sign of failure, as itis in marriage. But, in changing technology and market circumstances,an end is often a natural outcome, even with a short life span. Partnercompanies’ failure to plan for termination is more often the avoidableshortcoming. Greater time typically is invested in formative decisionsthan cessation. Management of partnering firms should consider how1The most common exception to a secondary role for near-term financialcircumstances is in acquisitions where the firm to be acquired is comparable in sizeor larger than the acquirer. In such cases, the acquirer may not have the financialresources to carry the target, should significant difficulties within the target businessarise post-transaction. If so, financial due diligence, particularly regarding margins,cash flow and net income becomes a chief due diligence and decision matter.
  15. 15. 8 Rapid Advanceto terminate the united effort, including buyout provisions, and theeffect on each of the parent companies.Small-Large Business PairingThere are special considerations for small firms. A common issue fora small organization seeking strategic partnership is that theprospective partner is much larger and better established. Thisincongruity presents some interesting challenges. Regardless of size,the bottom line remains that both see in each other the ability to accessstrategically vital capabilities in a harmonious manner which is notreadily available elsewhere, and a mutual significant ongoingcontribution. But, timing is significant, particularly for the largerpartner.Sizeable prospective partners generally are best approached in slowtimes. Overtures to larger partners during quieter times are importantwhen the initial business volume prospects from the collaboration arelow, as often happens while technology, product and marketdevelopment take place. Larger potential partners need to be solicitedwhen they will be more receptive to speculative ventures to fuelgrowth. This is when they have the best chance to see the need forsignificant innovation to propel future expansion and most likely totake an open-minded look at the potential of the smaller player’stechnology and capabilities.Partnerships of disproportionately sized companies also need tocontemplate an instability effect when considering interaction short ofmerger or acquisition. If the little company ends up being important tothe big one, the big company often cannot risk not owning the littleone. On the other hand, if the little company ends up beingunimportant to the big one, it will be cast-off, often badly wounded.The smaller company frequently needs to be willing to be absorbed orbe cast-off, as one of the costs of the partnership. Exclusivity andtake-over provisions are common requirements of a larger partner thatcan lead to the instability effect. Stable long-term co-existence fordisproportionately sized partners, who haven’t merged, is unusual.
  16. 16. Strategic Partnerships 9Partnerships of dissimilarly sized business also can undergo increasedrisk of “hold-up” compared to like-sized collaborating entities.Typically, one firm or the other makes investments specific to theparticular co-operative project, where those assets have limited valuein other uses. The gravity of sole-purpose investments is often muchgreater for the smaller firm. The mismatch of dependency and sunkcosts for the partners creates the possibility that the other firm willdelay, in terms of payment or other corresponding forms ofparticipation, in order to gain advantage, perpetuate the status quo, orrenegotiate the terms of the deal.2Managers need to assess hold-up hazards, and the effort necessary tomonitor and avert opportunistic behaviour. Determining risk, and theamount of work to avoid difficulty, requires a clear understanding ofrelationship-specific asset investments. Where the risk of hold-upwould otherwise be considerable, equity ownership by one firm inanother is often a vehicle for bringing alignment of interests,especially between disparately sized firms.Minority Equity OwnershipShort of complete ownership, partial equity participation by one firmin a (typically) smaller partner is one of the significant influence-orsthat partners have to help align objectives and incentives. The waypartial equity ownership helps is by giving the entity buying-in realskin in the game of the target’s business. It works best when thebuying-in party delivers a major piece of the puzzle that the investeecompany is missing, and when there is joint desire to work togetherrather than a forced marriage.Building on these elements of success, the degree of equity ownershipof one firm in another can be used to provide: Exclusivity and control2“Choosing Equity Stakes in Technology Sourcing Relationships,” Kale andPuranam, California Management Review, Spring 2004
  17. 17. 10 Rapid Advance Alignment of interests Inter-organizational co-ordination, including linking or regroupingactivities across organizational boundaries to share knowledge andcontrolAt the same time, the cost for one firm taking an equity stake inanother, especially a smaller firm, can be summarized as: Reduced entrepreneurial motivation for the staff and managementof the target, due to changed incentives and work conditions Commitment cost to a particular technology, in an environment ofuncertain viability for the technology Commitment cost to a particular marketplace approach when thereis volatility about the structure of the industry, the targetmarketplace, or demand for the technologyEquity ownership plays an important role accessing valuable resources,ensuring they remain unique and difficult to imitate. The benefits andcosts of equity participation for both sides can be assessed using theabove framework.As the benefits of equity ownership grow, and the costs decline, thedegree of equity ownership of one partnering business in anothershould increase.Where the benefits and costs do not point to a clear conclusion aboutequity participation, creative deal-structuring and post-transactionbusiness unit incentives are one way of reducing complexity.However, an unclear cost-benefit assessment of equity participation ismore often a signal that the partnership with an equity stake may notbe a good bet.
  18. 18. Strategic Partnerships 11Earn-OutsEquity participation often is suitable, but there is a valuation gapbetween buyer and seller. To bridge the separation, a contingentpayment is the typical contractual mechanism. This is a variablepayment tied to future performance of the acquired business. Itaddresses future business risk when exchanging significant ownership.In the technology arena earn-outs are common. Many companies aretargeted for equity investment or acquisition after they have createdvaluable technology, but before time has proven out that value in themarketplace through revenues and profits. The advantage of an earn-out is to create incentive within the acquired business for futureperformance. It is a way for the seller to obtain a higher price, as theyprove the market value in the future. As well, contingent paymentlowers the purchaser’s risk of overpaying, lessens the impact ofdifferences in information and outlook between purchaser and seller atthe time of the transaction, and provides credibility from the sellerabout the asset’s worth.At the same time, earn-outs carry challenges and unintendedconsequences. They can strain the new working relationship ifstructured improperly. One difficulty can be the incentive for thetarget’s management to maximize the payout formula at a definedmoment in time, which can be at odds with the better long-terminterest of the business. To create a more balanced view betweenshort- and long-range, graduated payments staged over the term of thevariable payment are usually better than one-time payment schemes.Another consideration with contingent payments in equity transactionsis if structural integration with the acquirer is necessary for co-ordinated operation. After amalgamation, it often becomes difficult toevaluate or even measure the acquired unit’s stand-alone performance.Linking the contingent payout to actions beyond the targetmanagement’s control introduces significant complexity whenoperational integration is foreseeable. Earn-outs are most successfulwhen the operating entity continues to be largely independent after theinvestment or acquisition. In particular, the budgets for marketing anddevelopment as well as distribution channel access should be
  19. 19. 12 Rapid Advancedefinitive. This way, both sides of the earn-out agreement havegreater assurance that the target entity will have the resources todeliver 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 unit’s incoming management forcontinuity or leadership, it can be better to replace the contingentpayment with a flat retention package. This is a fixed monetary sumthe target’s management receives for staying a certain period of timepost-transaction. To provide flexibility and buyer protection, the staticstay-pay incentive should include the option at the purchaser’sconvenience to pay out and part ways with the target’s management.A fixed fee mechanism gives the acquirer the latitude it needs to makestructural and management changes to achieve integration. Sometimes,the acquired management cannot break themselves of the habits ofindependence, and rebuff integration efforts. The difficulties mayeven be partly due to overreaching commitments of the acquirer duringsale negotiations about post-transaction independence. Howeverintegration friction arises, a flat retention incentive with a unilateralpay-out option for the acquirer reduces the risk of acquiring inexorablemanagement liabilities that impair co-ordination. In particular, a flatsum buy-out clause curtails the possibility of the acquirer being heldhostage by the target’s management about changes that ultimatelyinhibit the ability to make the equity partnership work.The pragmatic implication of these factors for an earn-out is that thetime frame should typically be no more than three years. Integrationbecomes more difficult to avoid the further into the future thecontingency term extends. At some point, operations will beintegrated, or set aside, and it will make sense to eliminate the troubleof earn-out calculations.Contingent payments are a constructive tool in equity purchase dealstructuring to align purchase value and incentives, but that utility haslimits. As a practical matter, they are best used when an acquirer andtarget have an incoming valuation for the acquired business that iswithin a factor of five of each other. If the valuation spread is larger,
  20. 20. Strategic Partnerships 13typically even an earn-out will not provide enough of a bridge in time,information and value to reach an agreement. At the other end ofvaluation difference, when the gap is small and valuations bypurchaser and target are within 20% of each other, usually it is betterto continue negotiating and arrive at a single monetary figure. Whenvaluations are this close, the negotiations and post-transaction controlrisk around a contingent payment mechanism can introduce morecomplexity than it eliminates. With a small valuation gap, it is usuallybetter for both sides to transact at a single final valuation withoutresorting to an earn-out.When earn-outs are used, they can be based on revenues, operatingincome, development goals or other factors. Definition andinterpretation issues can complicate earn-outs, so measurements andmilestones should be picked that are well defined and subject to littleinterpretation. Subjective or complex formulae muddy the waters.It is also important to uncover as much as possible about each side’srisk preference and motivations during negotiation, in order tostructure an earn-out that meets both parties’ objectives. Unspokenambitions behind equity participation or sale will complicate thecontingent payment, as well as the partnership.Earn-outs can be a good way to bridge a price gap between buyer andseller, when they cannot arrive at a single figure. But life is simpler ifthe transaction can be structured without a contingent payment. Everyavenue should be explored to reach a meeting of minds for valuationand future incentives without an earn-out, before entering into one.Nevertheless, under the right conditions of valuation gap, managerialcontrol, measurability and access to resources post-transaction, earn-outs can play a role aligning incentives and valuation.Joint VenturesAmong the range of partnership mechanisms, joint venture (JV)deserves special mention. As a definition, a JV is a company fundedby two or more partners, who then jointly share in its profits, losses,and management.
  21. 21. 14 Rapid AdvanceJoint ventures are typically used where:1. An opportunity is strategically imperative for the partners, but thecost or risk for either company to go it alone is prohibitive. Also,access to some foreign markets can mandate engaging a localpartner in a JV.2. Informational differences exist among prospective partners,especially major mismatches that depend on deep and often tacitknowledge which do not tend to be revealed well during duediligence. These forms of private information can arise frommarket knowledge, technology, or business processes. Operationof the JV provides a mechanism for assimilating information anddeveloping a shared outlook.3. The cost of collaboration over the near term is relatively small, anduncertainties or information transfer will be resolved over themedium term.Under these circumstances, JVs tend to align incentives withmanageable unintended consequences to form effective partnershipmechanisms. As time goes on, JV’s can often be sequentialinvestments, leading to future investments and outright buyout, asuncertainties diminish.In some ways, JV’s are even more complex than acquisitions. JV’scan bring in issues that never need to be addressed in an outrightbusiness purchase. In an acquisition, after the close there is a singleowner with full decision authority. JV’s in contrast generate ongoingissues to be resolved among two or more parent companies regardingoperations, management and governance. JV’s are also complex tonegotiate and operate because in many ways they are an unnaturalbusiness form: JV’s require sharing, and most business strategy isabout capturing.JV’s typically require a series of contracts to implement,contemplating many contingencies and conflicts that may arise, and amechanism to deal with them. As a result, JV’s commonly take twice
  22. 22. Strategic Partnerships 15as long as acquisitions to negotiate. Whereas acquisitions typicallytake three to six months to complete, six to twelve months can elapseinitiating a JV. The time commitment to enter a JV can come as ashock since some people envision a JV as a smaller deal than anacquisition. People are usually mistaken who expect comparativelyfaster deal structuring and implementation for JV’s than M&A.Considering operation, splits of ownership and control have a strongimpact on downstream roles and responsibilities for JV partneringcompanies: 50%/50% provides equal influence over management, operationsand governance, but at the price of perpetual negotiation amongparents. Asymmetrical ownership requires that the minority partner cedealmost all managerial and operational control. The test for aprospective minority partner is whether they’re ready to step aside. There are jurisdiction-specific thresholds of ownership and votingcontrol that dictate whether the owner companies need to report theperformance 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 ProvisionsMuch of the discussion about JV’s deals with formation, buttermination also needs attention. Joint ventures are usually transitorystructures, lasting six years as a broad average. With a relatively shortlife span, partners need clear agreement at the outset about how theend of the venture will be handled. A JV can come to an end when ithas achieved both parents’ objectives. It can also come to aconclusion because of poor performance or parent deadlock. Theparties to a joint effort need to consider termination during theformation of the venture.By way of motivation to consider completion of the JV during front-end negotiations, consider that about 85% of JV’s end in acquisition
  23. 23. 16 Rapid Advanceby one of the partners. To boot, there is even an operational andsuccess probability dividend for the JV from defining exit conditionsduring formation. It arises because absent an adequate separationagreement, the strains of operating the partnership with no viable wayout encourages each partner to appropriate as much value as possiblefrom the alliance. Aggressive partner behaviour sours relations andprovokes animosity. Under such dysfunction, performance diminishesand can even tip the JV into demise. Documented exit conditions fromthe outset reduce strain in the relationship of the JV and help it tosucceed.To put exit provisions in place, both sides need to express conditionsunder which it makes sense to divest their interest, or to terminate theventure, 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 disengagement2) Each party’s rights in a separation to assets, products, employeesand third party relationships such as suppliers, customers andpartners3) Articulation of the disengagement process, including strategicoptions, guidelines for creating the disengagement team, andtimelines4) Communication plan, embracing customers, employees, suppliers,partners, financial markets and other relevant constituenciesConsidering the first item, exit triggers, typical circumstances toprovoke the end of the JV include the inability of the alliance to meetcertain milestones, performance metrics or service levels. Otherdissolution conditions commonly used are breaches of contract terms,and, insolvency, change of control, or strategic re-direction of one ofthe partners. Completion of the JV’s objectives, or, sharply changedcompetitive 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:
  24. 24. Strategic Partnerships 17 Inventory of products, materials, equipment, IP, land, and facilities Revenue sharing, royalties, licensing, and options to buy or sellproducts and services in the future that were created within the JV Rights and obligations to fulfil contractual commitments from theJV, including to customers, suppliers, service providers, employeesand finance entitiesThese separation privileges should also aim to reach closure onliabilities for disengaging partners. Delineating entitlements andliabilities 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 toimplement its exit plan, as well as giving the JV the time it needs tomeet its obligations and stay competitive if it is to remain a goingconcern Formation of the core disengagement team. The team usuallyincludes members from the JV, as well as each corporate parent.Best disjoining results often come from assigning new personnelfrom the parent companies, apart from those that oversaw the JV, topromote impartiality in the separation team through the process TimelineThese items represent the broad elements of defining exit conditionsfor a JV that respects its likely transitory nature, as well as operationalbenefits of having clearly defined exit provisions.Since partner buyout is a common outcome, as a minimum endgameJV partners can use a nominal cost put option. It gives each party theright to sell their part of the business after an initial term for a nominalsum, so that they have a clear way out from a JV that isn’t working.
  25. 25. 18 Rapid AdvanceThe put option may also include a penalty clause for invoking the putprior to the expiration date of the initial term of the JV.For a structured buyout under stronger JV performance, there is oftenalso a call option in the form of a shotgun clause. This is where bothparties offer a price at which they will buy the whole business. Theparent that proposes the higher valuation tender wins. The other sidegets a payment for being bought-out that they should considerreasonable. As an alternative to a shotgun, especially when there arestrong ownership or parent resource disparities, each side can alsoarrange a fair market valuation, with a negotiated sale price, and anoption to go to arbitration to break negotiation deadlock.Detailing disengagement terms adds value to a JV. However, thecomplexity of separation scenarios highlights that joint ventures are acomplex tool for managing risks and rewards in a competitivelandscape. They are a powerful way to achieve business objectives.There are many situations where JVs are appropriate. But, the timeand difficulty initiating and operating a JV means that there should beample exploration of whether there is an alternative contractual way toget the same result, before deciding to enter into a JV.Mergers and AcquisitionsCompanies that sustain rapid growth generally achieve much of itorganically, but often augment internal activities with the highest form ofpartnership: mergers and acquisitions (M&A). M&A acumen isfrequently a key skill for high growth, technology-driven enterprises.
  26. 26. Strategic Partnerships 19The M&A motivation is that in a fast changing, technology drivenindustry, it is nearly impossible for an established company to fullydevelop and experiment with all of the technologies and business modelsthat will potentially affect the competitive landscape. Even if the moneycan be found to finance so much activity, the war for talent makes itpractically impossible to find enough skilled people. Externaltechnology development, business formation and Darwinian forces needto have room to play out. The winners can then be acquired.The need to rely in part on external means to achieve world-classproducts grows with increasing product complexity. M&A also becomesmore important with increasing specialization among industry players, ordecreasing product life cycles.M&A succeeds through innovation in technology, products andbusiness processes. But, the speed of innovation and adaptation isvastly different between organic development and M&A. Thedifference in speed, and the underlying power of change, is a crucialdistinction. In a technology-centric business, the time to moveorganically from idea, through product development, launch andmarketplace ramp-up to a point of significant positive top-line andbottom-line financial impact is typically three to six years. The timecan be a bit faster in some asset-light businesses, and stretchconsiderably longer in asset-intensive businesses such as large-scalecapital equipment and biotechnology. But, three to six years from ideato significant positive financial impact is the norm. The organicallygrowing business usually has three to six years to fully adapt andevolve for major initiatives.Contrast this with M&A. In M&A, integration needs to happen inthree to six months – remarkably faster. Some aspects of integrationtake longer, but substantial portions of activities need to merge thisquickly. The scope of interaction goes far beyond establishing astandardized accounting or enterprise resource planning system.Technology M&A usually has one to two quarters to developcollaborative programs. Unified projects span R&D, strategicmarketing, operations and management processes. M&A needsadaptation to happen across the business an order of magnitude fasterthan organic change. One can think of M&A like adding a high
  27. 27. 20 Rapid Advancecombustion substance such as nitrous oxide to the fuel stream of apiston engine. A suitably adaptable, conditioned system canconstructively harness the increased power from the higher energyinput, unlike a poorly designed or unprepared system that will rebel.The shock wave of innovation in M&A propagates through businessprocesses, products, and the culture of a company. M&A can makethe company move much faster, and productively so, but only with theright opportunities, attitudes, capabilities, and execution. Years oforganic technology and marketplace development can compress intojust a few months through M&A, but the force necessary to achievethis velocity of change deserves a lot of respect.The harsh reality of M&A is that by objective measures, a significantproportion fails to meet up-front expectations, even with the bestintentions and apparent fit of the partnering businesses at the outset.External and internal events in technology, markets, preferences, andkey personnel can present barriers to success. Management mustunderstand the typical sources of difficulty, and design the relationshipto counteract detrimental forces.First off, the core business of the acquirer has to be sound. If theacquirer gets into trouble during integration, the internal crisis distractsfrom making the acquisition work. Deals built on strength are farmore 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 probabilityof M&A success is difficult to define, in part because of differentmeasures of success.3A magnitude estimate is that only 30%- 50% ofmergers and acquisitions will create any net shareholder value for theacquiring company, let alone the competitive advantage expected atthe outset. Management faithfulness to the principles of soundstrategic alliances and attention to detail in execution can improve the3Value improvement measures for M&A transactions vary. Parameters thatcontribute to variation of valuation include short-run or long-term stockperformance; accounting measures of profit or efficiency; bidder and targetvaluation; market valuation, and others.
  28. 28. Strategic Partnerships 21odds considerably. The 30%-50% success check is the acid test whencontemplating partnership: The decision about entering into thearrangement needs to be based on the down-side scenario that it hasonly a 30%-50% chance of creating net value. Is the potentialstrategic benefit of the deal persuasive enough to go forward in theface of such risk, knowing the up-front and opportunity cost?The question of opportunity and risk pulls into focus the imperative forstrategic unions: They cannot just provide a framework for modestgrowth 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 isusually the only way that the potential payback can be justified againstsignificant risks. Moreover, addressable opportunities for superiorgrowth and industry influence in M&A are the wellspring ofstimulating activities and emotional resolve within staff to successfullyoperational-ize M&A.Operational SuccessThe best way to create energy and enthusiasm for M&A is toimmediately form a new product, service and process roadmap for thecombined business, leveraging the assets of both enterprises. Theroadmap needs to be formed without bias or prejudice. Pre-transactionnotions of how each business competed and differentiated need to bechecked at the door coming in. The post-transaction roadmap forproducts and services should be evaluated only for its impact foremployees, customers and shareholders. A compelling post-M&Aroadmap creates unique, new assets which draw heavily on the highestvalue, and most strategic capabilities of the incoming units. When thetwo business work to create compelling new product offerings in thisway, there is a lot for stakeholders to be excited about, making it easierto 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 positiveinteraction in a business combination. The general plan for how togain advantage needs to be matched with a path to integration withmainstream operations. This is the way to give intentions force, by
  29. 29. 22 Rapid Advancedescribing who is doing what and by when, as well as coming to termswith what other activities will assume lower priority to make room forthe high impact opportunities in the merger or acquisition. As thepeople and assets increase that can be readily re-deployed to takeadvantage of the opportunities in the transaction, the likelihood ofsuccess grows. Resource freedom gives executives the power toliberate latent value in the merger or acquisition post-transaction.A test of conviction and ability to exploit the highest impactopportunities in a transaction is the 20% rule. It says that in thehighest leverage area of integration, the acquirer needs to be able toliberate 20% of the target’s capacity to pursue high impact post-transaction opportunities. The key leverage areas are usually sales,technology, product development or operational efficiency. Generally,the liberated 20% of the target’s capacity is matched with at least thesame absolute level of resources from the acquirer, to collaborate withsufficient depth on both sides of the effort, and assimilate.The 20% rule is demanding. Few companies have 20% of any keyfunction underutilized. This degree of collaboration commitment testsmanagement’s conviction to making the deal work, and findingopportunities in the combination worthy of setting aside pre-transaction plans.As the level of liberate-able resources falls below 20%, the speed andimpact of a positive contribution diminishes. Delayed impact callsinto question the merit of the deal. Slow roll-out decreases thelikelihood of success, because change left until later is much harder toinitiate than change at the outset of the combination. Peopleacclimatise to an expectation of little rewiring that is usuallyunrealistic. Furthermore, the risk of delayed impact is compounded byincreased chance of unfavourable shifts in the competitive landscapeas the collaboration timeline extends. The 20% rule, and the impliedurgency and magnitude of integration, is one of many measures to helpassess M&A, and implement successfully.The challenges in M&A mean that not only must one observe thepreviously discussed considerations for strategic partnerships. Thereare a number of elements especially important in M&A:
  30. 30. Strategic Partnerships 23 Value Levers Know and agree upon the value drivers in the mergeror acquisition. Rank them, and focus resources on the priorities.Don’t get bogged down in low value activities. Feedback Systematically monitor performance achieving statedobjectives 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 combinedorganization must be articulated in detail during negotiation and duediligence. It is not a detail of implementation to be worked out afterthe deal closes. Decide which senior executives and key staff will bein which roles, including back-up choices for people who leave orturn down new assignments. Bandwidth Matching Match the inbound and outbound bandwidthfor communication and material flow through the two organizationsas quickly as possible. For example, the customer service responsecapacity for the target company whose products will be quicklymarketed through the acquirer’s larger distribution channel have tobe brought into synchronisation. Bandwidth mismatches create longresponse times, slowing integration and raising apprehensions aboutthe acquisition’s merit. Integrate Quickly Integrate in 90 days. Drawing integration outintroduces more complexity than it overcomes. Leaving an acquiredbusiness alone keeps people happy for six months at most. Agradual transition may seem like the way to avoid rocking the boat,but it only prolongs inevitable integration issues that become moredifficult when left until later. Few executives ever look back at amerger or acquisition and wish they had integrated slower.Integration should be driven with the same intensity as if thecompany were failing. The need for rapid integration means culturaldue diligence is a must, to ensure compatibility and the ability tocombine quickly.
  31. 31. 24 Rapid Advance Cultural Due Diligence Complete cultural due diligenceimmediately after the legal closing date. Cultural investigationusually competes with the need for confidentiality during pre-transaction due diligence. Often, only limited data points of culturaldiscovery are available until after the deal is announced. Even if aportion of cultural investigation with staff and partners must waituntil after the deal is unveiled, there should be prompt post-transaction investigation at multiple organizational levels andfunctions 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, businessunits 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 andexecutive egos of the two separate entities. As they diverge, thecomplexity, duration, and risk of integrating the two businesses growexponentially. The further apart they are, the tougher the earlydecisions become to quickly overcome differences in strategy andculture. Increasing size of the acquisition target also drivesintegration complexity up geometrically, similarly calling for earlystrong actions. Dedicated Team Plan for distraction of senior management duringthe merge. The intensive period of integration for a substantialmerger partner lasts six months or longer. To minimize the
  32. 32. Strategic Partnerships 25unproductive disruption to each business, there must be a dedicatedintegration team led by someone who is primarily focused on theintegration. The integration team needs to act quickly to smothercentrifugal forces among competing elements of the twoorganizations. The team also must rapidly establish organization-wide investment and operating policies, performance requirements,compensation structures, employment terms, and career developmentpaths 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 abusiness objective that neither business would have achieved alone.An early win provides a clear signal to all stakeholders of the meritof the acquisition. It also quells residual elements of discord downthe organizations that inevitably exists. An early win begins avirtuous cycle supporting the merger or acquisition, as peopleincreasingly believe in the merit of the transaction. Leader Selection When choosing executives to run the acquiredbusiness, balance the desire for organizational familiarity with theimportance of cultural consistency. One school of thought is that theexecutives running the acquired business should be those with longtenures in the target business. The argument is their familiarity andnetworks will overcome all else. The other school says that long-running executives of the acquired business will stick to old ways.This train of thought argues that newer people are more likely tohave the right outlook for change, and a new culture. Both ideashave merit. The best executives for an acquired business are thosewho strike the best available balance. On one side of the judgementis knowledge of the acquired organization, its industry, andemotional capital with the employees of the acquired business toinspire them to achieve objectives. The other side is respect for theacquirer, willingness to change, and enthusiasm to adopt the newculture. There is no one best extreme choice between an incumbentand a parachuted-in head for an acquired business. The decision isbased on the factors of organizational familiarity and culturalconsistency to guide the best selection for executives to run the targetbusiness.
  33. 33. 26 Rapid Advance Retention Incentives Develop a strategy for retaining keyexecutives and staff. This often includes a financial retention bonus,“stay pay,” for sticking through the merger period. This helpsemployees to look beyond the intense stress during integration. Theexpertise of these people is much more valuable than the technology,products, or market access that they’ve developed. Generally, anacquisition will struggle to succeed if they leave. Cultural Translation Create fluid communication and cohesion ofstrategies and cultures. Modern communication technology helpswith e-mail, videoconferencing, common electronic work surfaces,and low-cost telecommunications. But, there is no substitute forface-to-face contact. Early in the integration process an individual isneeded who can serve as a Rosetta Stone – someone to translate thetwo businesses’ processes and terminology. In smaller acquisitions,the interpreter can be a single person with deep history and expertisein the capabilities of the acquirer, who can act as an on-the-groundpresence at the target. In larger acquisitions, the Rosetta Stone needsto be a multi-person team with extensive knowledge of the cultureand competitively significant advantages of both the acquirer and thetarget. Whether an individual or a group, the interpreter body shouldcommence a development program to create the most rapidcommunication between businesses, and cohesion of strategies. Aninteractive development project early in the integration processforces people to work together, understand each other, and providesthe opportunity to draw upon each others’ strengths. Because of theintensity and complexity of communication carrying outcollaborative development programs, sustained meeting of minds ismore 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. Limitedcommunication conceals problems until it is too late. The concernsof stakeholders, especially customers, must be uncovered and actedupon.Customer satisfaction in the post-merger period is often one of themost telling leading indicators of long-term M&A success.
  34. 34. Strategic Partnerships 27Customer dissatisfaction manifests itself in higher customer carecosts, pricing and profit pressure, and even revenue losses fromdefections. Any of these setbacks can undermine the efficiencies andopportunities upon which the merger was based. Tracking customersatisfaction, maintaining a running dialog with large customersduring the post-acquisition period, and acting early upon causes ofany deterioration in customer satisfaction, all help to give thetransaction the best chances for success. Communicate Establish regular communication with stakeholders,especially customers and employees. They are usually tense when amerger or acquisition is unfolding. They all want to know what itmeans for them, and how the merger or acquisition alters theirprevious relationship. Start talking with stakeholders immediatelyafter announcing the acquisition, and repeat key messages frequentlythroughout the integration process. People need to be constantlyreminded and reassured of the big picture as they face moments ofintense localised stress during periods of transformation. Weeklyupdates are appropriate to communicate status, progress, and majordecisions. Customers Keep customers, especially key accounts, at the centre ofattention. Inform customers about how the combined organization isprotecting customers’ interests through the integration. Regularlyand 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 themessage out about the strategic direction for the new combinedorganization so customers can share the sense of excitement andopportunity in the transaction. Recognition Be generous with public recognition of those whoexemplify desired behaviour, to reinforce the strengths of thetransaction. In particular, pay attention to high output team players.At the same time, come to terms with renegades and under-performers that are a particular drag on M&A success. Best-of-Breed Practices An acquirer should adopt practices of theacquired firm that are superior, especially if the businesses are
  35. 35. 28 Rapid Advancecomparable in size. A best-of-breed approach retains accumulatedknowledge, which is a priority in M&A. It also shows respect forthe acquired firm. Adopting superior practices of the target helpsmorale among the employees of the acquired firm. It encouragesthe combined entity to adopt best practices. Furthermore, it makesit easier for people from the two businesses to work together downthe road.In the case where the target company bet one way on an issue, andthe acquirer another, management must handle matters carefully.Not-Invented-Here syndrome is alive and well in technologycompanies. The acquirer must make it part of the company’sculture to assume that the acquired firm may have superiorapproaches. Common Financial Metrics Similar measures of financial andoperational performance are a boundary condition to success, sothat strength and difficulty is viewed and communicated the sameway. Common terminology, formulae and timing of measurementas well as reporting all contribute to unifying financial evaluation.The bottom line in sustainable value creation is to keep objectives infocus, and to not lose track of them in the distraction of the day-to-dayissues that can otherwise consume a merger or acquisition.While most of the foregoing applies to all businesses, technology-driven or not, there is an additional success factor in high-technologyM&A. In high technology, one is often acquiring pivotal technologiesin an early form – the seeds of great things yet to come, rather than thefinal form. A core capability for an acquirer’s R&D becomesqualifying, assimilating, extending and refining new technologies.This is the way to realize burgeoning potential. The outlook ofongoing R&D shifts towards making things better, rather than as muchattention on breakthrough innovation. This is because some of thebreakthroughs will be brought in from outside, but all technologiesmust be effectively assimilated and product-ized to deliver the value oftechnology M&A.
  36. 36. Strategic Partnerships 29Catalytic Technology OverlapWhere technology is to be assimilated through M&A, the degree ofinnovation sought from the business combination post-transaction is amajor consideration. Technology may not be the motivator, even intechnology-based businesses. Examples of non-technical driversinclude gains in market share, market consolidation, sales forceefficiency, financial engineering, or financial opportunism. In suchcases, little new post-transaction technology is expected beyond whatthe two organizations would have achieved independently. Other dealsare about breaking into entirely new markets, with target technology oflittle overlap with the acquirer’s. These situations may also haveinconsequential need for technology collaboration post-transaction.Where partial technology overlap exists, the opportunities grow forincreased technical innovation from the marriage. Where generatingincreased post-transaction innovation is at a premium, the optimaldegree of overlap of the two businesses’ technologies is usually in therange between 15% and 40%.4Greater commonality isn’t necessarily better. Similar knowledgebeyond this range usually delivers few technology benefits. Withtechnology overlap greater than 40%, there is often too littledifferentiation of the R&D groups for them to respect the uniquetalents and perspectives of the other. The relationship frequentlybecomes overly competitive, with Not-Invented-Here syndrome andrestricted information flow as the R&D groups struggle to retainseparate identities and spirits of invention. Technologicalcollaboration becomes stifled where overlay of capabilities is too high.Even obvious efficiency gain opportunities through eliminating R&Dredundancy can prove difficult to realize because of territorialism in ahigh imbricate scenario. Moreover, with extensive technology overlap,even if people want to collaborate, they can’t effectively challengeeach other because their capabilities are so similar.At the other end of the technology commonality range, white spacedeals are difficult to make work. Weakly related technologies are4“Shopping for R&D,” Mary Kwak, MIT Sloan Management Review, Winter 2002
  37. 37. 30 Rapid Advanceoften not easy to absorb. The R&D domain knowledge, language,tools, and challenges are too different to effectively build upon eachother. Without a reasonable amount of technology overlap, peoplecan’t communicate well enough or understand each other’s issues insufficient depth to develop world class capabilities. A moderatedegree of common ground, usually 15% to 40% of pre-transactionskills and activities, provides optimal innovation stimulation whengrafting technologies in M&A.R&D Team ConcernsAnother technology-specific consideration in M&A is the concerns ofthe R&D groups. These groups need special attention as the life-bloodof the combined entity. During an acquisition, the acquirer’s R&Dgroup can be distressed that the decision was made to invest in anoutside company, rather than investing in their own R&D to developsimilar capabilities or grow into the same markets. At the same time,the target’s R&D group can be concerned about restrictions orobligations regarding their future activities. Both concerns should beexplicitly answered.For the acquirer’s R&D team, management should undertake a frankdialogue to address concerns. The discussion should articulate theneed to build a market position quickly, and also include any biases ofcapital markets or investors favouring acquisitions, IP issues,imperatives about overcoming competitive barriers, and other factorsencouraging acquisitions. The discourse should continue throughoutthe integration process. Management must explain and reinforce whyacquisition was a preferred and necessary route even if some elementsare uncomfortable for the acquirer’s R&D team.To intercept apprehensions among the target’s R&D group, the scopeof future R&D activities should be clearly spelled out during theintegration process. If changes in R&D activities are going to takeplace, it is better to get these out in the open. Better still is to discussthe positives, such as capabilities and reach of the combined businessthat the target business could not have attained as quickly. Whilesome R&D staff in the target may leave, uncertainty is worse. Clearexpectations communicated to everyone in the target’s R&D group
  38. 38. Strategic Partnerships 31reduce consternation. Transparent communication creates a positivefirst impression that the acquirer is honest and forthright, for lastingbenefit.Early-Stage AcquisitionsAn M&A situation that arises frequently in high technology is amature business acquires an early-stage one. There are three specialconsiderations 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 amountof resources that need to go into overdue managerial support. Start-ups are often for sale because the present management does nothave the depth to sustain-ably grow the business to satisfyinvestors. Second is whether the start-up is truly a business or just an excitingtechnology. Businesses have a clear path to profitability, self-sufficiency, and self-perpetuation. An interesting technology isnot enough. The third concern when acquiring early-stage companies is torespect the soul of a start-up. Early stage companies have culturesof intense spirit. Retaining core employees usually depends uponpreserving a similar culture. Starving the flame of passion andexpression is risky. Once the flame is gone, it is virtuallyimpossible to rekindle, and the value of the new enterprise cansharply decline.Acquisition success with early-stage companies increases when alarger acquirer is fully aware of a start-up’s management depth, itsstage of development along the road to becoming a true business, andthe culture and flexibility the start-up needs to retain to succeed atwhat it does and keep pivotal employees.5“High Tech Start Up,” John Nesheim, The Free Press, NY, 2000
  39. 39. 32 Rapid AdvanceConflict ManagementIn any strategic partnership, there will be conflict. The more involvedthe relationship, the greater the potential for complex disagreements.A fast-changing technology and competitive landscape adds fuel to thefire. As the degree of interaction in a partnership climbs, and the paceof environmental change increases, the more defined the conflictmanagement process should become.All conflict resolution has to be based on a shared decision framework,called the reference framework. This joint frame of referencedescribes how success will be measured together, the metrics to use,and the optimizing criteria for trade-offs when tensions or exclusivechoices arise.Certain types of conflict are to be avoided and suppressed, such asterritorialism, political gaming, and other manoeuvres not grounded inthe agreed-upon reference. Outright mistrust of a key player in thecollaboration is also something to promptly repair. However, not alldissidence is bad.Some rivalry in a joint effort is desirable and healthy, where the strain: Arises from new technologies, products, customer service deliverymethods, and business processes Takes advantage of the combined capabilities of both partneringbusinesses, in valuable and market-focused ways Comes from stretching the areas of interaction in ways difficult todo as independent companiesConflict fitting this description is to be discovered, created andembraced. Side-stepping such encounters are missed opportunities togain significant competitive advantage in a partnership.The way to put effort into healthy tensions, while dispatchingunproductive ones, is to have a defined conflict management process.
  40. 40. Strategic Partnerships 33There are two parts to conflict resolution: 1) managing flare-ups at thepoint of occurrence, and, 2) managing escalation. It is important tohave a process for addressing conflict at source, and governingescalation. Otherwise, a vicious cycle can take hold of ever-smallerissues being summarily referred further and further up the chain ofcommand of each partnering organization, undermining trust, creatinggrudges, and harming execution speed.To deal with friction at its source, have a transparent, widely-knownway that all players will deal with dissidence, and, force the discussionto centre on statistically significant data sets, and direct experiences,rather than anecdotes and second hand information. A method forhandling disagreements at source, as well as using facts and data, willbe much more effective than some common tonics like teamworktraining sessions, re-jigging incentive systems, or relying largely onchanging reporting lines. These measures of training, incentives andreporting can help to deal with collaboration discord to a degree, butthey are supporting elements rather than primary success factors ofmanaging conflict at its origin in a partnership. A protocol forhandling disputes at source is the most important way of productivelychannelling the energy of a disagreement.Have those at the conflict source apply a common set of trade-offcriteria to the decision at hand. Often, disagreements arise because ofdifferent priorities and interpretations of events by team players.Productivity will slide if people debate endlessly back and forth acrossthe table about preferred, competing outcomes. Rather, the samepeople need to have common criteria linked to the referenceframework, and apply it to the decision matter on the table. This way,people are using the same measure of success, in the same way, andcan better invest effort in designing a creative solution to the disputethat keeps it from being a zero sum game.Even with common criteria for decisions in place and combined effortto find solutions, some disagreements need to be escalated to moresenior management. When escalation happens, there should be jointadvance up the management chains in both partnering organizations.
  41. 41. 34 Rapid AdvanceFirstly, team players from both sides present disagreement together totheir bosses. A single voice helps team members clarify differences inperspective, language, information access, and strategic objectives.Forcing unified explanation of a mismatch often resolves difficulty onthe spot. Moreover, joint communication at escalation avoidssuspicion, surprises, and damaged personal relationships. Thesenegative outcomes are associated with unilateral communication andtransmission up one partnering business’ management chain, whendifferent messages are going up the other side’s hierarchy.Secondly, insist that a manager in one business resolves escalatedconflicts directly with her management counterpart in the otherbusiness. Sometimes a manager on one side or the other, receiving aconflict from subordinates, will attempt to resolve the situation quicklyand decisively by herself. Unilateral managerial responses like thiscarry significant downstream costs in a complex, interactingpartnership. Disputes need to be resolved bi-laterally, despite theimplied communication overhead.Pair-wise management interaction across partnering organizationalboundaries can feel cumbersome. But, collaborative resolution bymanagers overseeing a joint effort that has come under dispute is moreproductive over the long-term. Bi-lateral conflict elevation andresolution minimizes any sense that one side lost resolving an issue,keeping trust high, preventing turf battles, and preserving a healthierenvironment for future collaboration.A defined conflict management method increases the likelihood oflong-term success in a strategic partnership. What sometimes gets lostin the dynamic of making a partnership work is the disagreementsfrom differences in perspective, competencies, access to informationand strategic focus generate much of the value that can come fromcollaboration across business boundaries. The quest for too muchharmony can obstruct teamwork and competitive advantage. Whendifferent competencies and perspectives tackle a problem together, itgreatly increases the chances for a truly innovation solution to generateindustry-leading capabilities. Conflict is to be managed according toarticulated and communicated rules, but differences are not to beavoided altogether.
  42. 42. 35Staffing and CultureQuickly Turning Newcomers into Productive EmployeesRapid growth and internal change pushes managers to assimilate a lot ofnew employees. Roles and relationships evolve quickly when a businesstransitions. During periods of fast expansion, restructuring or turnover, itis not uncommon to have 30% or more of staff as newcomers each year.With long learning curves for new hires, especially highly skilledprofessional and executive positions, the productivity impact of rapidintegration is considerable.The most important aspect of rapid on-boarding in technology-drivenbusiness is to get people connected with, and contributing to, the rightinterpersonal networks. These are the communication pathways thatwill give people ongoing access to technical know-how, politicalinsight and cultural sensitivity. Make it plain to new staffers that theyare to ask questions with first projects, rather than letting pride orindependence get in the way. Recent additions should also beencouraged to undertake exploratory conversations with colleagues, tounderstand the assets and experience around them.The importance of environmental discovery: Without awareness andaccess to the assets around them, employees can be reluctant to exhibitignorance, and will forego asking questions. Employees can then re-invent solutions that already exist. Employees in a vacuum ofpersonal contacts may ask counsel of the first person they happened tomeet, when that person may only know a small part of the business.The goal of introductory activities is to wire people into interpersonalnetworks that build awareness of others’ skills and knowledge. Thosestrengths can then be tapped when new activities demand newinformation and perspectives. Initial tasks should be designed to getpeople interacting with those who have the cultural awareness, politicalacumen, and technical experience to help the recent addition makeefficient choices. New staff can then become rapidly productive, andable to take on more difficult tasks.
  43. 43. 36 Rapid AdvanceAt the same time, first assignments should be challenging. Some wouldprefer first tasks be simple and quickly achievable to build momentumwith success. However, experience often shows a challenging firstproject to be better for integration. A demonstrably demanding first taskhelps establish the right work habits and expectations. More importantlythough, the newcomer desire to prove oneself during a demanding firstproject helps to build respect among colleagues, creating regard for thenew person’s capabilities and embedding them in the communicationfabric of the business. Especially when a new team member bringssignificant incoming experience, expertise and industry contacts, the newideas and perspectives help make the business more innovative andcompetitive. Building a newcomers’ reputation creates a currency forthe 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 timethan traditional approaches to training and personnel integration. Whena new employee develops the right set of co-worker relationships, theyquickly have less need to approach management for advice andinformation.Executive On-boardingHelping a new executive successfully climb on board requires areas ofspecial emphasis, and some additional considerations, compared withstaff and junior management roles. Executives need a detailed plan forgetting up to speed, forging effective relationships, and accomplishingwhat is expected in their sphere of influence. It is best if this plan isformed prior to commencing employment. It also helps to have acommunication strategy and business plan in place on the first day.An incoming senior manager needs to work out which relationshipsmatter, both those whom she most needs to work with and impress, aswell as those who could undermine her. These relationships shouldcover not just the formal organizational chart and board of directors, butalso the power broker subset with outsized influence among those groups.Hostility to the incomer among existing management should beidentified, particularly among those passed over for the job that the new
  44. 44. Staffing and Culture 37executive is filling. People who were passed over that do not quicklydemonstrate enthusiasm and loyalty for the new leadership in the firstfew months need to be removed. New executives often move too slowlypruning insubordinates, and there is no time in most executive landingsfor distraction from disaffected staff.Turning to relationships, they should be fostered starting with initialmeetings and a schedule for follow-up sessions, as well as teamformation.Team coalescence, accomplishment and momentum for success areadvanced with a set of concrete projects. The programs should havespecific, achievable milestones, and the ability to achieve someunarguable victories. Projects with urgency and near-term measurabilitycreate on-going contact and collaboration for relationships and teams.Furthermore, achievement early on helps greatly to advance thecredibility of the new executive and motivation of her team.Keeping New Employees AlignedIt is great sport to scoff at the afflictions of large companies. But, rapidlygrowing businesses can quickly get big, especially when an increasinglylarge number and proportion of the employee base are new to theirpositions. A fast expanding business can start to bog down from cultureatrophy when there aren’t sufficient reference points to guide newcomersabout acceptable behaviour.Culture is the only way to bring harmonization to the thousands of smalldecisions that staff and managers make every day. A rapidly growingbusiness needs to work to impart the right culture lessons to rookies.New hire and new manager orientation needs to include lectures onproducts, markets, customers and operations. There should also behistory lessons from old-timers about the pivotal events and experiencesthat made the business what it is today. There should be seminars aboutthe company’s goals and its technology. A shared sense of history andmethod of competition help newcomers to be productive, and keep aquickly growing company on the right trajectory.
  45. 45. 39Market TargetingThe essence of marketing is to drive the business to commandingpositions in customer sectors where the achievement of corporateobjectives is likely. Those who enjoy sustained success have acommanding presence in specific segments. The primary differencebetween large and small companies is the size of those niches.Growing, successful companies are not just minor players in largemarkets; they are dominant players in specific sectors. Marketing’srole is to create a strong image of the organization’s prominence toidentified markets, and lead the company to those segments. Thisincludes bringing present and future requirements of customers intothe business.MaximFocus on specific markets – application, geography and customerpurchase behaviour. Failure to target squanders limited resources.Succeeding takes longer and is more complex than just about anyoneimagines at the outset. It is better to attend to one sector than it is tofragment effort trying to find the perfect market across many sectors.Concentrating resources provides greater cohesion of activity, betterapplication understanding, faster learning, closer customerrelationships, and a more secure position. In other words, it is toughfor a generalist to compete with a specialist. When one market hasbeen successfully attacked, then branch out to others.SegmentationFollowing from the importance of concentrating resources, nothingcan be managed if it is too big. Markets should be segmented into thelargest units of homogeneous key needs, decision processes, andbuying criteria, and, separated by heterogeneous ones. To be mostuseful, segments should be easily reached and served, sizeable enoughto justify a unique strategy, and distinctive in response profile.Segmentation improves executive attention, aiding recognition of
  46. 46. 40 Rapid Advanceopportunities and threats. It pushes management closer to customers,facilitating greater understanding of buyers’ needs. Engagementaccesses information critical to strategy formulation, and allowssmaller firms to compete with larger and better-established players.A less formal way of looking at this: Really understand what segmentwill be owned. An insurgent vendor needs to be best of breed in thatniche so that people will think of it when they buy. The size of the sectorhas to be large enough to provide sufficient market, but not so big thatcompetitors that can’t be handled will retain the upper hand.However, segments should never be viewed as intransigent. A beliefin static segments belies the nature of changing technology andmarkets, creating a false sense of security. Segmentation evolves withcompetitive conditions. The biggest threat is usually convergence ofpreviously distinct market segments, broken down by advancing cost-performance from technological advance.The best defence is offence. Always look for the rich part of themarket, mapping revenue and profit vs. performance by segment. Aimto provide performance from aggressive application of the latesttechnology that meets the needs of the majority of the market, at a costaffordable to most. An interesting perspective can be gained by askingwhat it would take to win the majority of buyers even withoutpromotional activities.The principal front to be wary of is the low end of the marketplace. Itis a frequent source of segment transgression. The pattern of the low-end is to regularly add features and performance of the high-end, yetmaintain traditional low price. There are few segments at thecommodity end of the market. Investment thresholds are much greaterthan in the high-end. The business model of the low-end is difficult toreplicate when those competitors leapfrog a higher-cost player. Thereason is momentum is difficult to re-build with a sizeableorganization and a higher-cost operating structure. It is best toroutinely purge assumptions based on segment history. Doing soconsiders segment definitions based upon the optimal performance ofavailable technology, customer preferences, and migration of bothtechnological and market factors.
  47. 47. Market Targeting 41For many companies in the premium performance space, segmentrenewal can be counterintuitive. They often started in high-end sectorswhere greater bootstrapping from high profit margins is possible.Success can seem to reinforce the merit of a high-end position, with littlefurther critical analysis. Whatever the historical reason for a premiumperformance position though, intense day-to-day activity of thoseimmersed in the high-end can occlude low-end forces.Market AssessmentMarket assessment looks at the company’s ability to createdifferentiation 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 similarrequirements Market maturity, and the need for innovation Market size and growth rate Accessibility of market chains and webs for supply anddistribution 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
  48. 48. 42 Rapid AdvanceThe outset assessment is followed by a Porter analysis of current andanticipated future competitive forces within the industry: Bargaining power of suppliers, based upon the number of suppliers,switching costs, threat of supplier forward integration, and thesignificance of the subject industry to that supplier group Negotiating power of customers: size and market share ofcustomers, 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 alldiminish Risk of substitute technologies creating radically different businessconditions Degree of rivalry among current competitors, which becomeshigher as the number of players increases, products becomeundifferentiated, industry growth decreases, and fixed costs rise Influence of complementary players and potential partners The evolution of the above factors over time, and whethercompetitive forces are moving toward or away from the companyPerspective on the last point, how the competitive landscape maychange over time, can be aided by locating where a market is in theindustrial innovation cycle. The process typically takes the followingform:A significant innovation starts the cycle, which isfollowed by a period of agitation where neithermanufacturers nor customers are sure what the productshould be. Standards are few, and both the old andvarious incarnations of the new compete. New entrantsabound, and competition increases. Incumbent players of
  49. 49. Market Targeting 43previous technology may have to unlearn what madethem successful in the past to continue competing.The fluid phase closes when a dominant design emerges.Competition becomes more intense. Product innovationyields to production and support process innovation.Capital investments increase to reduce costs and refineperformance. Consolidation takes place; the strongbecome stronger. An oligopoly emerges. If openstandards are adopted, then brand names, distribution andservice become critical.Subsequent discontinuous innovation will usually causeone of two outcomes. Small innovations, requiring mostof the capabilities of the preceding state of the industrytend to extend the state of oligopoly. Major departureson the other hand require the dominant players of thepreceding state to unlearn much of what they know.Former strengths can become burdens. Under the majordeparture condition, the innovation cycle begins again.Consideration for the state of the innovation cycle, as well as Porteranalysis, provides the foundation for a systematic assessment of theenterprise’s strengths, weaknesses, opportunities and threats in amarket. This looks at the present and into the future, to evaluatemarket attractiveness for entry. The life cycle framework helps todesign and execute strategy for exploiting innovation. Ultimately, thevalue of this effort is to help find one or two highly significant thingsin the competitive landscape that can be changed to favorably alter theenvironment.Market analysis thus forms the basis for it’s descendent of marketingstrategy. Marketing strategy in turn spawns plans in products, pricing,distribution, promotion and support, which themselves have lateralrelationships with other elements of corporate strategy fromtechnology, to operations and finance. A sound survey of availablemarket information, and analysis, builds strategy upon the strongestfooting possible to improve the probability of success.
  50. 50. 44 Rapid AdvanceWhat does this all mean? In plain cautionary language, it means solvea generic problem, and really move with the technology. Don’t justreact to isolated hot buttons. And, don’t fall in love with a technicalsolution concept isolated from a wider range of system technologyforces that may otherwise alter the identified opportunity before it canbe capitalized upon.Promoting Novel TechnologyNovel technology takes customers beyond their experiences andtraditional usage models. Marketing it holds several unique and subtlechallenges. Promoting novel technology is about describing itsbenefits in terms customers will understand, and then removing orminimizing real and perceived risks. This paves the way for rapidadoption.Innovation adoption rates and penetration are affected by fivecharacteristics that describe customer implications for the technology:1. Complexity of adoption2. Trial-ability3. Compatibility with buyers’ values4. Relative quality advantage5. Communicability of benefitsGenerally, innovation will only be adopted as fast and far as theweakest link allows. Marketing innovation requires the supplier tounderstand customer impacts of the technology, to build uponadvantages and overcome weaknesses.Above all else, customers do not want to make mistakes. They want tobe knowledgeable in their decisions, and proud of them. The noveltechnology promoter must help customers reach a state of confidentunderstanding.Customers move toward self-assured awareness in three distinctphases: education, confidence building, and finally sustained demandin the presence of mimicking products from competitors. The
  51. 51. Market Targeting 45sequence may iterate with different levels of management when theproduct is being sold to commercial or industrial customers, dependingon the scope of the change that the new technology introduces for theuser, and the size of the customer organization.Preparation to promote fresh technology begins by gaining knowledgeabout the customer’s entire usage process, both upstream anddownstream from the intended insertion point of the new product. Incomplex processes and systems, there may be many technical,operational, human, and marketing effects to understand and embracebefore marketing efforts can begin in earnest.After understanding customer implications, promotion goes intomotion with education. The objective should be to create ademonstration of capabilities that has a lot of intuitive and emotionalappeal, sometimes known as a “wow-factor” - a striking look or apreviously unattainable experience. A novel technology should notrely entirely on specifications.Teaching begins by filling in whatever gaps in customers’ experienceslimit appreciating the value of the new in their applications.Customers must be educated so that they can analyze the situation forthemselves and make an informed decision about adoption. Theyshould get to know the underlying science, capabilities, and limitations.Their goal is to understand how the product enables new capabilitiesand overcomes dominant issues with current technology, as well as thetradeoffs. A caution though is that a customer’s decision processneeds to be driven by the articulation of reality, rather than theexhortation of fear. Fear plays to the incumbent. By addressingopportunity and educating customers, they can then becomecomfortable with choosing to adopt the new.Where the value proposition is radically different from the familiarpast, education may additionally entail the understanding andacknowledgement of new metrics of performance. Potential buyerscan then come to appreciate for themselves the value of the new.Radically different technology may also require educating thecustomer’s customers, if they are a significant piece of the puzzle to
  52. 52. 46 Rapid Advancecreate demand for the new technology. Passively waiting for trickledown learning and feedback through a multi-link market chain retardswidespread adoption. Technology promoters undertake multi-pathdialog to understand the dynamic of the technology throughout themarket chain and evolve the product concept.After education, the ensuing step is to build confidence in thetechnology and its evolving maturity. Assurance is bolstered bydemonstrating customer satisfaction in all regards, and adoption orrecommendation by opinion leaders. The technology must be shownto equal or exceed established expectations from predecessortechnologies in critical respects. This step removes reasons why thecustomer would not want to adopt the new technology. Cost,reliability, ease of use, ease of interface, security of supply and safetyare all pivotal confidence concerns for customers contemplatingwidespread adoption.The final piece promoting novel technology takes place when themarket crowds with competitive offerings that mimic the performanceof the new. Specmanship and aggressive sales pitches by competitorsconfuse and frustrate users. Advocacy efforts should then focus onend-users of the technology, with a goal to rise above the confusingfuror in the eyes of customers to create market pull.Pace of Technology AdoptionOne of the difficult questions with marketing novel technology isprojecting the pace of adoption. As the time frame varies, the speed ofinvestment and the degree to which supporting infrastructure can bedeveloped both change considerably. A faster pace of marketpenetration calls for aggressive early investments, and increasingutilization of established infrastructure for production, support anddistribution. A slower pace of market penetration suggests a morecautious roll-out of investments while the technology is refined tomeet the needs of mainstream customers.Keeping a realistic expectation about the time scale of success helpsthe business to focus, and make better strategic and tactical plans.Decisions in step with the timing of implementation help to deploy
  53. 53. Market Targeting 47resources effectively. Where the time frame is longer, there are moreoptions to hold off on some commitments until later, when the marketand the industry will be more settled. Investments can be bettertargeted and less risky. Where the time frame is shorter, resourceshave to deploy more rapidly in order to secure competitive footing.Making sound investment decisions, including being comfortable withwhen to be aggressive and when to be more conservative, relies uponan 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 agreeableuser behaviour. The other major issue governing speed of take-up is thematurity of the incumbent functional satisfaction that the noveltechnology is intended to displace. Both of these factors have adisproportionately large contribution to the speed with which atechnology can move to significant market penetration.Once a technology begins to push existing infrastructure or channels tomarket in directions they’re not inclined to go, the time scale of adoptioncan easily stretch out by years. Or, if a technology requires changes inusers’ behaviour or attitudes toward acceptance that are untested andpotentially controversial, the time scale of success in marketing noveltechnologies can similarly expand.Rapid acceptance of novel technology generally comes about only inwell-developed industries with leverage of in-place infrastructure,business models and customer behaviour. Promoters of noveltechnologies should look for ways to transform their intended approachin order to make greater use of the industry assets already in place. Ittakes discipline to invest the intellectual energy into making most of theexisting ecosystem better. Confidence in the new technology leadsmanagers to think they can extensively re-write the existing basis ofcompetition 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 promotersof novel technology usually do well to consider that the time scale ofsuccess will likely stretch out. Significant new capabilities and attitudestake years to develop. Investment choices and management approaches