GUEST POST from Geoffrey A. Moore

Portfolio management is the most consequential and the most challenging element in strategic planning. There is typically a ton of data, but none of it can really speak to the host of underlying risks that underpin long-range investments in net new lines of business, ones that pay off primarily in the out years. The best one can do is leverage experience, frameworks, and pattern recognition to navigate what are inevitably uncharted waters. With that in mind, here are some things to keep in view.

1. Category Maturity Life Cycle: Tornadoes versus Main Street. Who doesn’t want a growth portfolio? To get one, however, means your enterprise must have meaningful plays in categories that are undergoing secular growth. Secular growth happens when net new budget is being created for a new purchase category across a broad spectrum of customers, a phase in technology adoption we have termed the tornado. Once the tornado has passed, the category will have an established place in these customers’ budgets going forward, a stage in the life cycle we call Main Street, one that is characterized by cyclical growth. Cyclical growth rewards inertial momentum, the goal being to leverage incumbency to grow wallet share more than market share. Secular growth rewards disruption, the goal being to displace an established profit pool by leveraging an emerging one. These dynamics transcend the efforts of most companies to influence (gorilla leaders being the exception), so assessing category power is first and foremost getting clarity on the hand you have been dealt. That will shape your ambitions for next year’s performance and set a baseline for future investment.
2. Valuation: Growth investors versus value investors. Both forms of growth, secular and cyclical, are valued by investors for their respective risk-adjusted returns, but in different ways for different reasons. Growth investors are looking for a big pop and are willing for you to take considerable risk to get it. Value investors by contrast seek predictably consistent performance—an earnings-oriented approach that outperforms bonds with a minimum of additional risk. Both groups discount the value of the other group’s approach which exposes the market cap of established enterprises to a “conglomerate discount,” a painful penalty given that their stock is the major currency that will fund any M&A. Managing for shareholder value, in other words, gets hung up on the question, which shareholders? The reality is that most publicly held companies have a mix across the board, so the salient issue to address is how much of our operating budget should we commit to the current year versus the out years? Having a principled discussion on this topic leading to a definitive commitment is essential to creating a coherent strategy.
3. Capital market status: PE-backed versus publicly held. Strategic planning in privately held enterprises is typically more straightforward because the board of directors representing the investing firms share a common approach to risk-adjusted returns. This is why when publicly held companies like Dell reach a crossroads that requires a patch of difficult sledding, they choose to take themselves private in order to accelerate their course corrections. The price to pay for this option is committing to operating principles, performance milestones, and a management discipline that meets the PE investors’ approval.
4. Leveraging M&A: Incubate before you commit. Pundits like to claim that most M&A transactions fail to deliver on their promise (although recent research puts the odds at closer to fifty-fifty). Some of the failures, however, are self-inflicted wounds that can be avoided by taking a multi-step approach. If your enterprise has a venture investment capability, taking positions in disruptive start-ups with observer rights is a good way to test the waters. In parallel, the goal is to incubate comparable initiatives internally and get them into the market as trial balloons. The difference between this and the early-stage venture model is that you cannot wait for these organic efforts to scale—it will simply take too long. So, you are not trying to win the game with your new offers, just learn it. Sooner or later, you will turn to M&A to acquire something of meaningful mass, the difference being, because you have spent the intervening time in the market competing, you will be a much more knowledgeable acquirer than you otherwise would be.
5. Synergy management: Year One is the one that matters most. Value-oriented M&A is intended to consolidate mature categories with cyclical growth. It is based on an inside-out approach to cost reduction focusing on eliminating duplicated functions, typically in the back office and the supply chain. Growth-oriented M&A, by contrast, takes an outside-in approach focusing on accelerating bookings and revenues through a series of go-to-market and customer success initiatives. When a smaller high-growth enterprise gets acquired by a larger, slower-growing one, the opportunity is to galvanize the latter’s existing customer base and ecosystem relationships, as well as its global sales and service footprint, to capture market share under highly favorable selling conditions. The trick is to do this quickly, while the iron is still hot, and that requires special incentives and strong management support to build trust between the old and new guards and to overcome the initial inertial resistance that accompanies any acquisition. In sum, what looks good on paper could very well be good in actual fact, but only after you execute Captain Picard’s famous dictum: Make it so!
6. M&A integration: Year Two is the one that matters most. If the first year is all about getting the go-to-market right as fast as possible, the second is about creating lasting relationships that will enable the two enterprises to operate as one. There are four areas of interest here—the product team, the sales team, the management team, and the culture overall—and each one calls for a slightly different approach. The single most important outcome is to keep the product talent in place—they have the keys to the new kingdom. The sales team can and normally should continue to function as an overlay during the second year, but in parallel a transition to an integrated organization must begin so that in Year Three the overlay is eliminated. The management team is a wild card. Despite all the best intentions on both sides of the table, including vesting incentives of various kinds, entrepreneurial CEOs rarely stay, nor should they. The skillset for disrupting does not translate well into the skillset for scaling and optimizing. This suggests that from the outset a leadership transition should be on the table, typically enlisting an up-and-coming executive from the acquiring enterprise to personally throw themselves into the gap and pull the two organizations together leveraging every talent and tool they have. Finally, large enterprises necessarily entail an enormous amount of process management, something that goes against the grain of entrepreneurial culture, so one needs to tread carefully here, with the understanding that long term there can only be one enterprise, and by virtue of its scale, it will be process-driven for much of its day-to-day work. To promise the acquired company anything else will only create disillusion and disintegration down the line.
7. Decision Time: To play or not to play. There is no formula for making transformational decisions, but there are some guidelines to keep in mind. The first is few, and far between. Transformations are disruptive to the core business that is funding your overall operation, and it takes time for everything to stabilize around a new portfolio. A second principle is existential threat. If the emerging category obsoletes a pillar of your core business, the way digital photography obsoleted film, the way that streaming is obsoleting conventional TV, then you must take action. Absent such a forcing function, a third principle to consider is value to the existing customer base, with the corollary of opportunity for our existing ecosystem. In other words, does the world want you to do this? Transformation takes a village, and it matters a great deal how much your constituencies will lean in to help you through it. Finally, when your competitors hear about this, will they smile and laugh, or will they say Oh sh*t! If the latter, it just puts icing on the cake.
8. Plan B: Leverage the updraft. The stars have to align to make any transformational portfolio play work, and sometimes they simply won’t. Plan B is to incorporate a portion of the tornado category into your existing portfolio as a supplement. Take Gen AI, for example. You don’t have to be in the category like Open AI or Anthropic to participate in the new spending. Virtually any enterprise application can benefit from a Gen AI bolt-on to improve the user experience or simplify the administrative one. Prior experiences with adding mobile applications and digital commerce to legacy systems have delivered similarly positive returns. You don’t have to be in the lead, but customers do want to see you are still in the game, and assuming you show up with a working product, they are more than happy to consume it.

That’s what I think. What do you think?

Image Credit: Pexels, Geoffrey Moore

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