Hundreds of businesses are bought and sold everyday. Each “deal” is different. Every acquisition candidate needs to be systematically evaluated prior to purchase as to its existing competitiveness within their targeted markets to determine what strategic augmentations need to be made to maximize eventual return on investment. As a business buyer you will need to estimate anticipated financial return on your investment based on how the purchased company will improve its strategic competitiveness within its targeted markets or enter new markets after you purchase the company.
What Competitive Strategy Makes Sense?
There are four fundamental strategies to compete in any targeted market: A Product/Service Based Strategy: o Product/Service features and user benefits o Perceived buyer value o Technological or design advantages o Breadth of product line or service offerings 2. A Positioning Based Strategy: o Targeting specific user classifications o Product/Service pricing o Targeting specific product/ service applications o Positioning versus a specific competitor 3. A Manufacturing Based Strategy: o Cost reduction focused o Leveraging throughput and output flexibilities o Manufacturing customization capabilities o Unique manufacturing certifications 4. Distribution Based Strategy: o Local, regional, national, international distribution o Means of product/ service distribution and delivery o Inventory guarantees o Just-In-Time or product consignment methods 1.
Although any one or combination of these defined strategies may be used to improve future market competitiveness, another analysis needs to be made to define what company resources are available or will be needed to effectively implement any given strategy.
A qualitative and quantitative assessment needs to be made of the to-be-acquired company’s; financial resources, tangible and intellectual assets, talents or human resources, overall company core competencies and status of legally protected technologies or intellect. As the potential new owner of a business you need to weigh the acquisition candidate’s realistic ability to effectively compete within any given targeted market against the overall profit or revenue growth attractiveness of that same given target market. Prior to purchase, decisions must be made whether you will: 1) invest more $ to obtain growth, or 2) selectively invest, or 3) “harvest”, get what return you can and diversify into new product and market directions as quickly as possible. The matrix below best illustrates a potential business buyer’s strategic choices relative to growth of a future acquisition: OVERALL MARKET'S ATTRACTIVENESS HIGH MEDIUM LOW BUSINESS 1 1 HIGH ABILITY 2 TO 1 2 MEDIUM EFFECTIVELY 3 2 3 COMPETE LOW 3 1 = Invest for growth 2 = Selectively invest 3 = Harvest: no additional investment/diversify quickly Although this two dimension graphic may be insightful it needs additional dimensional influences of consideration; product/ service life cycles, breadth of geographic focus, level of competition, anticipated competitive response and expiration of protected technologies, to name a few characteristics.
The clear reality of buying a business is you always learn so much more about the company post purchase than you effectively could pre purchase. This practical uncertainty in buying a business must be offset with careful buyer due diligence, effective company resource definition and conservative resource allocation planning in advance of company purchase.
Also, pursuing a new market, either with new or existing products, can be fraught with major negative business consequences. The cost of making a wrong market choice decision can be significant. Actual capital outlays and realization of opportunity costs from NOT pursuing another “better” market alternative can be significant. The natural tendency for a new business owner to make changes in the company strategy must sometimes be delayed. Like in any viable business purchase due diligence process, whatever a potential business buyer can effectively do to define, analyze, quantify and realistically forecast future resource requirements for the bought company to grow, to meet ROI goals, in advance of purchase, is ideal. In reality it is far more effective to develop a strategic and resource allocation plan prior to acquisition, knowing that you will make changes to the plan post purchase, than to not plan at all!