Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Category: General Management

Does Your Company Have a Winning Culture?

I’ve been reading Bill and Dave (subtitled: How Hewlett and Packard built the World’s Greatest Company) by Michael Malone. He’s a great writer, and it’s an important business story; I heartily recommend it.

Being an ex-HPer, I have tremendous respect, bordering on reverence for the “HP Way”, which was the basis for the culture at Hewlett Packard for so many years. With the benefit of hindsight, it wasn’t perfect and there were definitely things I’d change. But you can’t argue with the results. Bill and Dave essentially founded Silicon Valley, and built an unbelievably successful company that grew like clockwork for nearly four decades. The HP Way is long gone and the company is nearly unrecognizable from the one I worked in. But to this day I don’t believe they’ve ever had a full year of negative profit results.

The term “Corporate Culture” has been defined many different ways by a lot of people, some of them so complex as to be unreadable. Here’s a definition that’s probably as good as most:

“The specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization.”

Maybe you have a better definition, but this one’s probably adequate for our discussion here.

Anyway, Malone’s book got me to thinking about corporate cultures at tech companies and their effect on a company’s performance. It’s something that I think is really undervalued in too many of today’s corporations. It’s often dismissed as a squishy, “soft” issue that’s unimportant to analytical senior managers.

Regardless of my HP bias, there have been a lot of very successful companies that have been built with very different cultures relative to HP’s in its heyday. One notable contrast would be IBM, a peer and competitor which as an east coast-based company had a much more traditional, hierarchical, button-down culture. But the IBM culture was revered as well, and the company was also wildly successful for a long period of time. As the saying goes, there’s more than one way to skin a cat (a very unfortunate idiom–who thought that one up?).

Cultures have been categorized many different ways including but not limited to “Work Hard, Play Hard Culture”, “Tough-Guy, Macho Culture”, “Process Culture”, “Bet-The-Company Culture”, and many more. In my mind, none of that matters much. What matters, in my opinion is does the culture drive positive results.

So you might surmise that the easiest way to define a great corporate culture is to look at financial results. That’s fine in the long run; with the benefit of hindsight, there probably is no better way to identify a great corporate culture than the decades of financial success such as HP and IBM enjoyed. But in the short run, financial results can be deceiving. It’s entirely possible to have a great short run of success even with a poisonous company culture.

So what’s the best way to measure whether you’ve built a great culture? The details vary at various successful software and hardware companies, but what are the common ingredients of a culture that sets the stage for long-term success? Here’s my shot at a list of the key attributes of winning corporate cultures:

Employees want to stay

For me, this may be the best gross indicator of a winning corporate culture. I know, you might say “That could means it’s a country club” with excellent compensation and low demands. But how often do you actually see that in a high performing company? Very seldom in my experience. In reality there is a great propensity for employees to take the view that “the grass is always greener”, and long to go somewhere else.

The best people rise to the top

This is another really key indicator of a company culture “clicking on all cylinders”. Particularly in larger organizations, political skills often are the dominant talent required to rise to the top of the org chart. There’s nothing wrong with this–it’s a skill set that’s very important to successfully influencing large, complex organizations and moving them in the right direction. The ability to connect with people and bring them to your position cannot be understated as a needed attribute of a corporate leader. But it’s important that these political skills are also paired with strong business savvy. The best leaders not only have the ability to “win the internal meeting”, but also the analytical and decision-making skills to drive the company to win in the marketplace. Sadly, all too often I’ve seen that those rising to the top are not exceptional in both these categories. A great corporate culture should facilitate the identification, retention and promotion of such well-rounded leaders.

Employees speak well of the company to outsiders

Everyone loves to bitch about their job and idiosyncrasies of where they work. But I find that in companies with the very best cultures, the word gets out about how great a place is to work, because great places to work are frankly, very rare. This means that you’ve created such a great environment that your employees brag about it to their friends and external colleagues, overcoming that very strong human propensity to view their jobs in a negative light.

Opinions flow freely without fear of retribution

This one probably isn’t a hard and fast rule. I’ve seen traditional hierarchical organizations that were very successful. In those instances, you tend to see opinions flow down from the top much more often than you see them flowing openly from below. But I believe in most successful “modern” corporation cultures, this is a pretty typical attribute.

Don’t have to overpay to attract talent

You might think of this one downstream result of positive vibe from the previous four categories. If you’ve created a fair, stimulating, challenging and comfortable work environment, you don’t have to work very hard to restock it with new employees. In many cases you won’t even have to look for them–they will find you. In companies with the very best cultures, outsiders practically beat down the door to get hired. That means your pay packages won’t need to “set the market”, they’ll just need to be “in the market” to attract great talent.

So that’s my list–what’s yours? What’s your view on which company has the finest corporate culture? Post a comment to expand the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on January 15, 2012
filed in Business Models, Corporate Strategy, General Management, Startup/Early Stage
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Extending Your Technology With Spinoff Products

Many software and hardware businesses, particularly smaller ones, are religiously focused on a specific vertical market. As well they should; focus is one of the most important attributes that can bring a business from startup to a strong growing business. This is often one of the key areas I concentrate on with many of my consulting clients. Many businesses just can’t turn down any sort of deal, no matter what the effect it has on their existing product development plans or other key corporate initiatives.

But there is another side to the focus issue. Many tech companies have developed excellent, mature technology bases at huge expense. If that basic technology has a horizontal appeal, it can be quite profitable to spend a modest amount of additional effort to bring that technology to other adjacent markets that the company is currently not serving.

Care needs to be taken, of course, to not spread your marketing efforts too thin. But if you’re smart about it your company can increase, sometimes dramatically, the return on its product development investments. Let’s take a look at a few potential tactics, all of which I’ve used successfully both at companies I’ve run and with consulting clients:

Customize your products for adjacent markets

As an example, maybe you have an ERP software package aimed at retail markets. It might be quite easy to customize the product for other inventory-oriented businesses, such as distribution or service/repair businesses. By doing this you’ve created a potentially large new revenue source, at a fraction what building that product from scratch might cost. The trick in this instance is often marketing the product–read below for a couple of ideas on how to accomplish that without doubling your marketing budget.

Private Label/OEM products

Private labeling or OEMing your product to another vendor can be an excellent way to extend your product development ROI. It might be as simple as partnering with a non-competitive vendor who takes your existing product “as is” or with minor modifications, as well as changing the product identity and labeling. The target partner would be a company very strong in a market segment that you aren’t successful in, have no interest in directly marketing in, or simply is beyond your resource level. If done well, this is a win-win for both companies. Your company gets additional revenues with little to no additional costs (“pure profit”), while your partner gains additional revenue in it’s target market–without any product development investment.

Integration & bundling with other products

One of the best things a software vendor is to create a “developer’s version” of it’s product, which essentially consists of creating APIs (application programming interface) to the software. This allows easy integration with complementary software applications and even hardware. Back when I was CEO of a mapping software company with limited resources, we created a developer’s version which enabled both integration and bundling with a number of complementary applications, notably in the real estate and CRM segments. Once again, this tactic required only modest product development investment and enabled us to draw revenue from a number of different markets. We would never have had the resources to pursue these markets if we tried to build a new product from scratch as a company would traditionally do.

Different price points

Using my favorite mapping software company example, we were often forced to think creatively to wring out as much revenue as we could out from our existing technology. One of the other tactics we used was “de-feature” our existing $99 high-end consumer application to create a $9.95 version, which we then sold through mass market retailers of all kinds. Not only did this create more revenue, but the high volume business also created a bunch of opportunities to upgrade these entry level customers to our higher-end core product. This is a strategy I’ve used many times; you almost can’t go wrong when creating a larger customer base for your technology. I use the simplistic phrase “the more you sell, the more you sell” to illustrate the advantages of this approach.

Business vs. consumer version

At that very same mapping software company we used one other great approach to extending your technology: creating a B2B version of our consumer product which was aimed at road warriors such as sales and service professionals (the converse works just as well). The B2B version had a few additional features and we sold it via different channels and strategic partners. It didn’t have the unit volume of the consumer version, but the margins were much higher.

So there are a few ideas on how to extend the use of your IP to increase your overall ROI. What are your ideas on creatively utilizing existing assets to create additional growth? Please post a comment with your own thoughts so we can all benefit.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on December 5, 2011
filed in B2C, Business Models, Corporate Strategy, Distribution Channels, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, enterprise software, hardware
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What’s Up With HP?

As regular readers will know, I am a Hewlett Packard alumnus and a longtime admirer of the company. I worked at HP in the eighties, and with hindsight it was one of the finest periods of my career. It was a GREAT place to work, as documented by books and case studies written about the company. My time there definitely had a major effect in shaping my management philosophies.

The more recent -periods at HP have seen a lot of change and a fair amount of turmoil not typical in the company’s first 60 years or so.

Let’s analyze some of the recent events and assess the overall strategic situation:

Firing of Leo Apotheker

What a disaster this was. To hire a new CEO with a major change in strategic direction in mind, then let him go in less than a year is not good. What isn’t known is was the new strategy totally conceived by Mr. Apotheker, or was he brought in to support a new strategy favored by the HP board. Either way, it’s an awful mess for such a major company, and the HP board has not distinguished itself in the last decade.

The new strategy itself while risky on the surface wasn’t the real problem, imo. The communication of the new direction was the real disaster, and smacked of incompetence. Don’t announce you’re “going to sell the business”–that does nothing for valuations. If you’re going to sell it, get on with it and sell it without premature public announcements. By most accounts Mr. Apotheker’s short reign was punctuated by missteps, retractions, chronically missing financial targets and general bumbling. My sources inside the company say that he had lost just about everyone’s confidence, from employees to shareholders to the board. It’s hard to say if that’s fair; new managers can be sabotaged by entrenched forces against change. And major changes were on the way. But the buck needs to stop with the CEO, and it certainly did in this case.

Planned Sale of the PC business

To be honest, I go back and forward on this one. Back in my HP days the PC business was a money-losing, also-ran business with tiny margins. The corporate line of thinking at the time was that HP HAD to be in the PC business, it was so central to everything else the company wanted to do, and the computing world revolved around PCs. I never bought it. In fact, the PC folks got in the way of many things we wanted to accomplish in the peripherals segment of the business, specifically connecting to and partnering with all the other PC makers.

The PC business remains a low margin one today, but one that HP has established a leading position in. I haven’t studied the balance sheet, but I doubt the PC business is so capital-intensive that it would prevent HP from having the money to adequately invest in a new direction. I don’t think selling it off is a stupid move, but announcing it as a first step seems extreme, and only served to make everyone involved nervous about what the future holds.

Eliminating the Tablets/WebOS

Another PR disaster and one that was totally avoidable. The problem was in buying Palm in the first place, and paying a billion dollars for a company that had almost completely failed in the marketplace. Then introducing a new line of tablet computers to great fanfare, almost immediately obsoleting them, and then announcing you’ll be making a few more because everyone love the fire-sale obsolescence pricing–it appeared that the left hand didn’t know what the right hand was doing.

By most accounts the WebOS is a nice piece of software. The problem is that this move was so very late to the game. If it had been done a few years earlier, it might have been a savvy deal, and allowed HP to make a major move into mobile devices with a differentiated product offering. But by the time of this acquisition, Palm was already discredited and Apple, Android and Blackberry had solidified the top leadership positions. And the price was completely ridiculous for as failed company. You can put this one on Mark Hurd, as it came on his watch.

Buying Autonomy

HP recently announced completion of the Autonomy acquisition, paying a dear price for this enterprise software company. Autonomy is a good acquisition if you’re intent on growing software as a share of revenue; the only issue is the price. It was very high, but one must remember that HP’s overall revenues are north of $125 BILLION. Autonomy adds less than $1B in revenue, which is a drop in the bucket relative to HP’s size. With a purchase price of over $10B, HP paid more than 11X revenues–pretty pricey even by today’s inflated SaaS valuations. Autonomy will have to be an exceptional growth in engine for this to pay off. Only time will tell.

Copying the IBM playbook

The IBM playbook was to sell off low margin, lower growth hardware business such as PCs (IBM sold its PC business to Lenovo, a shocking move at the time). Then focus on increasing software and services revenues relentlessly, for a long period of time. It’s worked extremely well for IBM, although I remember there were some tough times in the beginning. Would it work as well for HP, who appears interested in copying IBM’s strategy? I’m not a big fan of copying other company’s strategies, although on the surface the two companies are similar. The key to success or failure is usually execution in most cases of corporate strategy. Executing this strategy would also take a very long time to have an impact on HP’s financials. HP’s software share of total corporate revenue was less than 3% in 2010.  There are only so many $1B+ software companies out there. Most software acquisitions on their own will have a minimum effect on HP’s overall revenues, unless they went after one of the few industry giants–which would truly shock me.  HP has become strong in services after it’s acquisition of EDS in 2008, but is still much less prominent in services than IBM. So even with an aggressive acquisition program and strong organic growth, HP looks to be a hardware-dominated company for a long time in the future.

Meg Whitman appointed CEO

It’s hard to say what influence this will have on the corporate strategy. Ms. Whitman is a seasoned CEO who has been involved in great success, although one could argue that she was very fortunate to benefit from a snowball rolling downhill with Ebay. In addition, her background is heavily consumer products with almost nothing in the enterprise space, which is HP’s supposed new direction. HP’s business is only 25% consumer products, and if you eliminate the massive PC business, it becomes a whole lot less. I never underestimate smart people or their ability to adapt, and she definitely fits in the smart category. But experienced business people also tend to fall back on the comfort level of their past experience and what they understand best. It will be very interesting to watch as Ms. Whitman’s tenure evolves, especially how she affects the previously announced strategy.

What happens next?

I think that HP ends up keeping the PC business, while at least in the short term attempting to become more software and services intensive. You’ll see more software and services acquisitions. But I wouldn’t be surprised to see the flight away from consumer-oriented businesses to abate as long as Meg Whitman is CEO.

I also think that the original IBM-style strategy will be difficult–but not impossible–for HP to implement. For this approach to work, shareholders, employees and the board will all need to be very patient and supportive of the plan. Meg Whitman will really need to believe in it as well, and as discussed above, her background is far from a perfect fit for where they’re headed. My guess is that this strategy won’t be given enough rope for it to work and we’ll see another change of direction in the medium-term, but you never know. That’s what makes this kind of speculation so much fun!

What’s your take on the future direction of HP? Where are they headed, and does it end well or not?  I’m interested in your analysis of recent events at the company; post a comment to share your views and continue the discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

7 Comments by admin on October 17, 2011
filed in B2C, Business Models, Corporate Strategy, General Management, Mergers & Acquisitions, SaaS, enterprise software, hardware
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Health of the Tech Economy

I was reading an article recently about how the number of new tech startups in my local San Diego area has doubled, to 70 new companies, compared to the same quarter last year. More than half of those startups were in software, computer hardware or communications. The article included a number of other criteria useful in measuring the health of the local technology market.

The direction of these measuring criteria for technology market health was somewhat mixed: Local tech employment was up, patents up sharply and M&A activity was up as well. Total Venture Capital fundings, which is an extremely important factor in tech company formation, came in less than half the comparable quarter a year ago.

So are these results a good proxy for the state of the broader technology business overall? I think they represent a very good set of indicators. Let’s take a closer look at some of these factors in a broader geographic view, in addition to a couple of additional indicators that I’ve added to the mix:

TECH EMPLOYMENT

I’ve added tech employment as it’s obviously a very key indicator of the health of any sector. Challenger, Gray & Christmas stated that the number of planned layoffs in technology fields fell to just under 47,000 in 2010, the lowest yearly total for the sector since 2000. The firm says this signaled that technology is recovering more quickly from the economic downturn than employers in other sectors.

During the next 10 years, the tech sector is forecast to experience one of the fastest paces of job creation of any industry. There are many anecdotal reports of strong demand for tech talent, especially in the crucial Silicon Valley market. Nearly 150,000 tech jobs are expected to be added in the US in 2011, says Sophia Koropeckyj, an economist at Moody’s Analytics. In February, there were about 6.1 million tech jobs in the U.S., up 2.4 percent from a year ago.

Tech sector employment trends appear much more positive than in the overall economy.

VENTURE CAPITAL FUNDING

The estimated market value of venture capital-financed companies in the U.S. rose 19% in 2010’s fourth quarter and 23% for 2010, according to the Dow Jones U.S. Venture Capital Index. The bulk of this is technology, and past returns are a very good indicator of amount of VC capital that will be available going forward. When VC funds have good returns, more money pours into their new funds, creating greater amounts of capital available to new startups in the future.

CB Insights report on Venture Capital Fundings in Q1 2011 showed total invested capital rose to $7.5B, up from $6.5B in Q4 2010 and $5.9B in Q1 2010. While a bit choppy, the funding trend has been generally up since Q2 2009. Again, this is bullish for the tech sector, which relies more heavily than most industries sectors on VCs for capital formation. Venture capital is still harder to come by than before the recession. However, while still down significantly from the go-go days prior to the recession, Venture capital availability is still a positive indicator of the tech economy’s health going forward.

M&A

The best tech M&A data currently available is from the first quarter of this year, and it is very bullish indeed. Mergermarket’s report on global M&A activity, published in April 2011, paints a bullish picture for acquisition activity in the early part of this year. This report shows the total value of worldwide technology M&A deals rose to $27,872,000 in Q1 2011, up very strongly from $10,729,000 in Q1 2010, even though the total number of deals decreased by 3 in this period. The numbers for North America were comparable.

It should be noted that while Q1 2011 compared very well to the same quarter in 2010, in both North America and Worldwide the trend was down from Q4 2010. So while M&A activity has picked up very strongly since the recession officially ended, the short term trend of the last quarter wasn’t a positive indicator for the future. This means that M&A activity is a bit of a mixed bag with respect to measuring the health of the tech economy.

TECH CAPITAL SPENDING

Forrester Research predicts that IT spending will increase in 2011 by a healthy 7.5% in the US, and 7.1% worldwide.

InformationWeek conducted a survey which showed that 55% of information technology professionals said their companies will increase information technology spending in 2011, while only 19% expect it to fall and 26% expect it to remain unchanged.

“Technology executives clearly see a sustained recovery of relevant Products/Services and a strong appetite for technology-related purchases by U.S. companies and consumers, which helped raise the position of the U.S. market,” said Gary Matuszak, partner, global chair, and U.S. leader for KPMG’s technology practice. “Coupled with demand from emerging-market countries, this combined opportunity bodes well for the industry.”

Technology capital spending trends, particularly in the US, provide a positive sign for the health of the tech economy.

TECH STOCK MARKET VALUES

The Dow Jones US Technology Index is up almost 20% over the last 12 month period. Stock values are very volatile and are affected by many factors other than the overall health of the sector, particularly in the short term. But over time they are a very good indicator of the health of the sector.

What Does It All Mean?

The indicators that we’ve taken a look at offer a mixed bag of conflicting signals up and down. While it appears more of the signals are pointing up than down, we are in an economy with a lot of uncertainty, and no definitive direction that can be predicted with any confidence. However, the software and technology sector appears to be in much better shape in the near term than both the US and worldwide economies overall. Farther out, the prospects for the tech sector appear to be much more bullish, especially when considering very long-term timeframes such as the next decade. Every company needs to draw their own conclusions about the economic impact on their market segment and individual company prospects. But in a larger sense, the arrow for the tech economy is more likely point up than down. If I’m the CEO of a software or tech company, the overall tech economy would be a positive factor in my decision matrix going forward.

So where do you personally think we’re at? Have we recovered, in the process of recovering, or is the tech business still treading water or going backwards? Post a comment and let us know where your own company’s situation stands with respect to recovery and future prospects.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on July 17, 2011
filed in Corporate Strategy, Financing, General Management, Mergers & Acquisitions, market research
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The Rise and Fall of Novell

Once again one of the great brand names of High Tech has been prominently in the news, this one  for it’s demise as a standalone company. This time it’s Novell, Inc.  Attachmate announced that it had closed its purchase of Novell, which becomes a brand of Attachmate.  The price was $2.2B–not chicken feed, but much less than the promise held by this company in the distant past.

This company holds a special place in my memory. In the early 90’s the Novell name was synonymous with Networking. The company was a pioneer in Corporate Networking, and played a major role in helping to create this market as we now know it. When I entered this market in 1990, the company’s core product, NetWare, held a commanding 70%+ market share in the networking software space, which was already very large at the time, and growing at a rapid rate. It was in this environment that I began my first general management position, starting up a systems and network management software business. Netware being the dominant NOS at the time, I got a very close look at the company’s activities, and some of the decisions and events that began Novell’s long decline. Novell is still a $1B business, but in terms of power and prominence, they are a shadow of the company I kept a close eye on in the 90s. There’s been speculation that the company would be an acquisition candidate for some time, so the news isn’t a big surprise. But it’s a story which is a cautionary tale, and many lessons for tech company management teams that don’t want to “blow it”.

So what caused the unfortunate change in fortunes for this former industry high-roller?

It’s a familiar story, actually, especially for those of you who are regular readers. The Novell story is particularly interesting, because several factors, each one itself capable of wreaking havoc on a solid company, came together to put this company into a long nosedive.

MICROSOFT-ITIS

The first problem was what I call “Microsoft-itis”. Novell became very successful on the back of its flagship NetWare platform, which drew the attention of Microsoft. Microsoft tends to become unhappy when any other software company grows too big, too fast. The upstart is then viewed as a potential threat in Redmond, as well as the fact that the market this other company has helped grow now becomes large enough to be attractive to MS. So the first problem was getting in the gun sight of Microsoft. Now, it’s hard to blame the company for this, it’s more of a side effect of success. This situation has caused problems for many a company, and is enough unto itself to throw a large majority of companies off their game. To have Microsoft target you is quite disconcerting, and if you don’t make the right decisions, you may be in serious trouble. How a company reacts to this challenge is critical, and in truth, often life or death.

ARROGANCE

Unfortunately, in some cases, being targeted by Microsoft sometimes builds a company up in its own view. It’s almost a baptism into the big-time. Microsoft is worried about us; we’re a peer to them now! We must really be smart! This leads to a false sense of security about the company’s true position in the market, leading to the second factor which can bring a company down—Arrogance.

Novell had plenty of excuses to be arrogant, even without Microsoft’s attention. They were truly dominating the Network Operating System business. The brand was dominant, the product was good, and the worldwide distribution network of VARs and distributors was second to none. Sales people at Novell no longer had to sell—they took orders. That led to a need to keep the big ball fast growth rolling, even as the market matured and became quite large. Wall Street, you know. Novell became known as a company that pushed, rather than created via pull marketing. There were numerous channel-stuffing scandals, so sales people could make their quarterly numbers and max out their bonus. No matter, things were well in hand, Novell was on a roll.

The closest competitor at the time was Banyan, with their VINES operating system. Banyan had a nice niche in the largest, WAN oriented corporations, but was no threat to Novell’s dominance. There was also a fast growing peer-to-peer player, Artisoft, who had a nice niche in the entry level market. Again, Artisoft posed no serious threat. And then there was Microsoft, with its alliance on the LAN Manager NOS with 3Com. At the time, Microsoft’s distribution strategy was still to primarily be an OEM supplier, preferring to let others take the lead in bringing the product to the end user market. They had piggybacked the hardware vendors with DOS and the emerging Windows 3.0, and were attempting to use that strategy in the Networking market with 3Com as their main partner. 3Com at the time was a dominant networking hardware vendor. They also teamed with many suppliers of UNIX software to create private label versions of LAN Manager for each UNIX flavor—HP UX, for instance. There were about 17 other platform partners, as I recall. It looked like a formidable syndicate which could challenge Novell for market leadership.

However, like many early Microsoft entrées into new markets, the offering was a joke. LAN Manager ran on top of OS/2, which should tell you something about its lack of success, right there. Technically inferior, with too many players involved to advance and support it, LAN Manager never gained significant traction vs. Netware, even with huge amounts of money being poured into development and marketing. Major new releases would be announced, each which was supposed be the one to give Novell a run for its money. It became a running joke in the network business. At this point, Novell looked invincible.

LOSING FOCUS

Then the arrogance at Novell rose to new levels. Apparently thinking Microsoft couldn’t beat them at their own game, Ray Noorda and senior management at Novell decided to also take on Microsoft on their own turf. Not only that, but to compete across many, many categories. They decided they wanted to become the new Microsoft, and in doing so opened a multi-front war against a larger competitor, with far more resources (See Hitler opening up the Russian front in the War against the Allies).

Novell bought WordPerfect to compete with MS Word, Quattro Pro to compete with Excel, and announced a dizzying array of additional new initiatives. (See Netscape taking a similar approach in its heyday, as well as Google is now, as we speak—that ought to be interesting). No one, I repeat, NO ONE, has won a multi-front war with Microsoft. The people that have fended them off (which is a small list), when MS has put them in their headlights, have done so by sticking to their knitting, and playing by the rules of their own market segment. Intuit is a notable example, which was able to keep MS in a minor role in the Personal Financial software segment, by advancing and focusing on its own offerings and current market.

WHAT HAPPENED?

Well, many of you who have been in High Tech for a while probably already know the result. Microsoft finally split with 3COM, developed Windows NT, essentially building Networking into the Operating System. This finally began to hurt Netware, and although it wasn’t an immediate rout, over time NT became the clear winner. The terminator of Redmond can be knocked down, but they almost never give up—they just go deeper into their pockets, and keep on coming.

The acquisitions that Novell made were already second or third tier products, and their markets were outside of Novell’s core market and competency. Drained of resources and fighting losing battles on many fronts, Novell was soundly defeated, ultimately selling off many of its acquisitions, retrenching and changing their strategy—quite a few times over the years, I might add. They went into a long, slow decline, and once this begins at a large company, it’s very difficult to truly turn it around.

WHAT IF?

So what would have happened it Novell hadn’t reacted like Netscape later did, choosing to battle it out toe-to-toe with Microsoft, blinded in a fit of rage and bravado? What if they had followed a similar strategy to the one that Intuit took? What if they had marshaled their resources, and kept their focus on maintaining the lead they had in Network Operating Systems and related businesses—which were pretty big markets in their own right? Hindsight is always 20/20, but my guess is that they would have had a much better chance of continued success—and possibly avoided the headlines in the Trade Magazines of the last few weeks.

Have you seen similar missteps in your own companies or markets?—please post a comment below to share the insights.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

5 Comments by admin on May 3, 2011
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Operations, Software/Product Development, VARs, enterprise software

Choosing an Advisory Board for your Tech Company

Advisory Boards have become a very chic addition to software and hardware companies over the last 5 or 10 years. So what are the key criteria you should use in putting together an advisory board? Well examine this issue below.

Prior to the 5-10 year period mentioned above, it was rare to hear of a company that had an advisory board. What’s driven this trend? For public companies, it’s mostly because desirable advisers who formerly would have served as on the Board of Directors may shy away, as a result of additional potential liability in that role. For private companies, I believe it was the recognition that those filling private company board seats primarily are there because of ownership (VCs, local angels, founders etc.), and may not have all key domain or technology expertise important to the company at the board level.

As a result, advisory boards are very much in vogue, sometimes to great effect–but often not. I’d compare this phenomenon to strategic partnerships. In strategic partnering, you’ll see everything from deals that greatly benefit both companies, to others which start and end with a vague press release. Similarly, many companies seem to put together an advisory board just because it’s the “thing to do”. This is just a waste of time, of course. Like most anything, if you put little thought and effort into it, very little usually comes back.

Let’s take a look at some criteria that could be useful in putting together your particular group of advisers:

Domain or technology expertise

This may appear obvious, but I see a lot of advisers on boards that are there just because they know someone, or maybe possess specific expertise that just isn’t core to the company’s success. I believe it is very important to use your advisory board to fill holes in your management team’s knowledge or experience.

Access to capital

This is a common reason that CEO’s will recruit an advisory board member, especially in early stage companies where capital needs are a critical strategic topic. But I’m not sure that this is always the best use of an advisory board seat; unless raising capital will be almost a constant need. I prefer to fill advisory boards with more scarce talents specific to the company’s market and technology.

Access to distribution channels

Distribution access is another common motivation in seeking advisory board members. I believe this is a very legitimate goal for your board, especially if the adviser truly has special access, or if distribution expertise is a real weakness within the company.

Honest and straightforward counsel

It’s very important to attract experts who aren’t afraid to challenge the management team’s view of the world and “common business sense”. Of course as advisers they need to be tactful in how they convey their viewpoints. But “Yes Man” panel that makes senior management feel good is of no real use, and can even be harmful by reinforcing a false sense of reality.

Available bandwidth

I believe this is a criterion that is very critical, and is often overlooked. I see companies rejoice when they are able to convince a high profile, “heavy hitter” to join their advisory board. While the name may look great on a company backgrounder or on your website, the reality is often that their time is spread too thin to be of real benefit to you. So make sure that you have a frank discussion, and reach agreement on what level of involvement they can actually have with your company.

Motivation

This is the most important criterion of all, in my opinion. Probably also the one on this list that is used the least in considering potential advisers. It’s easy to get excited about someone that fits perfectly what you need on paper. But you will find many folks that are interested strictly from a self-promotion viewpoint. It’s exposure for them, and looks good on their resume. There’s nothing wrong with this, as long as it’s not the sole or primary motivator. Others may think it will help them in getting to use their services in the future. Or they may have some more sinister reason for getting close to your company. So make sure that the candidate’s reasons for engaging are above board, and that your interests align. I’m not trying to create paranoia in anyone’s mind. But I believe that the adviser’s motivation is the single greatest indicator of success or failure in this role. Don’t ignore it.

So there’s some basic advice to consider when putting together your software or hardware company advisory board. Many of you have done this as well. Post your own advice, successes or horror stories in the comment section below so we can expand this discussion interactively.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

2 Comments by admin on December 7, 2010
filed in Corporate Strategy, Distribution Channels, Financing, General Management, Startup/Early Stage, hardware
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Should Microsoft Break Up?

Once again there have been discussions in the press about breaking up Microsoft. Years ago it was the government pressing the issue because of Microsoft’s perceived monopolistic hold on a number of software markets. Now it’s being driven by shareholders, unhappy with the stock’s unimpressive performance over the last decade. MS management is not fond of the idea of being broken apart, as management’s tend to feel. Unless the CEO is a financial engineer by background, the management team generally has no interest in breaking up their kingdom. But is a breakup the best way to go in the long run for the company? Will MS shareholders be best served by such a strategy? Let’s go to some of the pros and cons.

Pro Breakup Arguments

A breakup could unlock value not reflected in the MS share price-

The share price has been roughly flat over the last eight years. This is for a company that still dominates many computer markets, and is enormously profitable. Something isn’t right. Some would say that some parts of this huge company are over shadowed by the dominant businesses, and therefore aren’t fully valued. Specifically, you could break out some fast growing businesses that might demand a higher multiple. Conversely some slow-growing, but large businesses which generate large amounts of cash flow could become great dividend payers, like the GM or AT&T of their golden years.

There are also some potential advantages not so obvious to financial engineers:

Smaller, less bureaucratic operating units

This is not to be underestimated in its power to unlock value and growth. Anyone who has ever worked in a large company, and then gone to a startup, can testify to what freedom from the corporate bureaucracy can bring. Everything happens faster, and innovation is unleashed. Thoughtful risk-taking is allowed, and hopefully encouraged. If you haven’t seen it, it’s hard to understand the huge change that can take place in employee attitudes and behavior when working is a more entrepreneurial environment.

Greater focus

Focus is one of the keys to most successful businesses, but is hard to quantify. When you are very large and feel the need to continue to grow, it’s easy to lose your way. Senior management has only so much bandwidth, and can have expertise in only so many areas. Once this bandwidth is exceeded or new business activity drifts into areas outside of core expertise, mistakes start to happen. When a business becomes too large and diverse the management almost always becomes sloppy, and sloppy wastes money and reduces profitability.

Greater ownership

If structured properly, folks usually feel greater ownership and work harder, knowing what they do might actually make a difference. Not to mention that they are more likely to be recognized and rewarded for their efforts which actually grow the business.

No Place to hide

This is true both for sub-par employees and poorly performing businesses. There are many places to hide in a bureaucracy. With large profits and so very many people, staff jobs abound without a clear need, and real jobs that need to be done are broken up into such small pieces that accountability for the bigger picture suffers. New business units can be run as money losers for years as pet projects of a senior executive. In a leaner, more focused organization, both these phenomenon tend to go away.

Con Breakup Arguments

Synergies

Many would say that you’d give up a lot of great synergies in any breakup. The Office business was built in large part on the shoulders of the Operating System business, as an example. And Microsoft has stayed very focused on software (with a few high profile exceptions like the X-Box), so many of the businesses do relate to each other in relevant ways.

Brand power

This may be the greatest argument, in my mind, against breaking up Microsoft. The power of the Microsoft brand is enormous; put the Microsoft name on any new software or computer-related product and, at a minimum, it becomes an immediate contender in it’s category. Many mediocre software products have become category leaders almost strictly due to the power of the Microsoft brand. In any breakup one of the companies would retain that brand, and the other progeny would certainly be large enough to establish strong brands quickly. But would it ever be the same?

Tradition

To some folks, it just wouldn’t feel right. This is Microsoft, after all. The alpha dogs of software. One of the great pioneers and dominant companies of American high tech. To some, it would be unthinkable to destroy such an American icon, like tearing down the Statue of Liberty.

This all comes down to preferences and judgment in the end. Some like scale and dominant brands like today’s Microsoft, others prefer the speed and flexibility that comes with smaller business units. Many believe that there is nothing like a dominant industry player to drive profits, while those with a contrary view would say that visibility of individual businesses and less bureaucracy lead to greater returns. In my opinion, every major corporation runs its course as a successful entity, eventually faltering under its own weight as it suffers the excesses of success. The trick is in knowing when this point comes–and it’s often not obvious, except in hindsight.

My view is that Microsoft has likely reached a point where a break up makes sense. You could segment MS into several still very strong separate compaies, which I believe would free them to focus on specific markets with much less bureaucratic drag. That’s my view–what’s yours?

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on November 29, 2010
filed in Business Models, Corporate Strategy, General Management, Mergers & Acquisitions, enterprise software
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Why is Intel Buying McAfee?

Intel’s $7.68B announced acquisition of McAfee raised more that a few eyebrows, both in the marketplace and on Wall Street. Does it make sense? It’s hard to say at this point. So much depends upon execution, as well as potential synergies seen by Intel’s management which may not be obvious to outsiders.

 The price is almost 4X McAfee’s most recent annual revenue. That’s very, very pricey in almost everyone’s view. I’ve read a number of columns by others which analyze this deal from various viewpoints.

 Let’s look at several potential rationales for this deal:

 Diversification into software and services

Intel can’t grow in PC semiconductors forever, and is very dependent on the semi business, which can be quite cyclical. Theoretically, attempting to grow by increasing software and services as a percentage of the business makes a lot of sense. But Intel hasn’t been very successful in the past in this very endeavor, which I’ll discuss more below.

 Technology synergies

Intel’s management has provided justification for this deal by talking about embedding security into its chips, as well as valuing highly McAfee’s embryonic security efforts in mobile devices and the cloud. I think these all have strategic merit–but are they worth anywhere near $7.68B?

 Cost synergies

While overlapping functions can lead to cost savings in many acquisitions, there are probably not a lot of costs to be taken out in this one. McAfee is a big company, in a different business than Intel’s core business. Sure, there may be some common functions like HR and finance that can be combined to some extent, but I don’t see cost savings to a material degree here.

 Use of cash flow

Intel generates a LOT of cash. They are one of the most successful tech companies of all times, and their PC processor business is nearly a monopoly, with terrific margins. So the cash is available, and it doesn’t make much sense to have it sitting in the bank earning 1%. THAT will kill your return on assets metric! It needs to be reinvested, or retuned to the shareholders…

 Growth

On the surface, buying a big software company could be a good growth strategy for Intel. Assuming as there is a good return on investment, then why not? It’s going to be hard for Intel to grow much farther in processors. About the only area big enough to make a big difference in their processor business is in mobile. This is a very competitive arena which they’ve failed miserably in to date.

 So that’s some of the reasons you might use to do a deal like this–but is that reality?

 The real reason deals like this happen

CASH: The biggest reason that this type of deal happens is because it can. In this particular case, tech companies like Intel want to be seen as growth companies. It seems to kill tech companies to pay their cash flow out in dividends. But once your company gets to a certain size, it’s hard to be a growth company. A lot of bad acquisitions happen in the process of trying to continue growth status past a reasonable point. But is this the best return on assets, or use of cash flow, for the stockholders?

 Why there is a good chance this acquisition won’t succeed

PRICE: Intel paid dearly for a very established security software player. They paid for the McAfee brand–but will they keep investing in it in the long run? History says that this business will eventually morph into “McAfee by Intel” and they “Intel Security Software”, if the business stays with Intel in the long run. Built into the price was also a large number of retail customers, a dealer and distribution network — but does Intel really want these things? If not, why pay for all of them?

 TECHNOLOGY: Listening to Intel, this seems to be a technology play–but McAfee is universally not considered to have the best technology in the space. They win to a great extent on brand and sheer market presence at this point–like many large companies. Since the price paid was very high–why not buy a smaller player with much better technology to integrate with silicon–for much less?

 CULTURAL FIT: Semiconductors and software are very different businesses. I’ve spent a lot of time in both. I have always said that the “Common Business Sense” that a management team falls back on when stressed, is a real problem when they are making decisions in an unfamiliar business. It doesn’t seem like brain surgery to manage a software business with a semi background, but there are subtle differences that tend to have massive consequences. Intel has bought a number of software businesses in the past–how many of them can you name? There is a reason for this, they tend to disappear in the large semiconductor bureaucracy and eventually wither away.

 Typical M&A ISSUES: Key McAfee personnel will have a tendency to “cash out” and leave after the acquisition. This is a normal issue in M&A, and when the acquirer is in a different space, this can be a particular problem. Possibly the fact that McAfee is already a large public company may reduce this issue. But if the real assets of a software company (the people) walk out the door, there isn’t much left for your $7.68B.

 In summary, I view this as a very questionable move by Intel. Intel has some very smart folks in management. Maybe they have some great strategic and tactical plans in mind, but if so, they’re keeping it all to themselves. For the stated reasons of embedding security in chips, mobile security and the cloud, they could have bought 2-3 innovative security software companies with bleeding edge technology–for a fraction of the price they’ll pay for McAfee. If this acquisition is to pay off, Intel will need to figure out how to leverage the McAfee brand, consumer franchise and distribution channels. I just don’t see this happening in the long run–I hope for Intel shareholders sake I’m wrong. Acquisitions are an area with room for a variety of opinions–what do you think?

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

5 Comments by admin on September 7, 2010
filed in Business Models, Corporate Strategy, General Management, Mergers & Acquisitions, enterprise software
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Starting and Growing a Software Company in a Difficult Fundraising Environment

Some would say that it’s ALWAYS a difficult time to raise funds for a startup company. In general, I’d agree. With the exception of a few brief moments, such as pre-Internet Bubble in the late 90’s where money was being thrown around like air, fundraising is hard. There are a few lucky folks that don’t sweat this startup task, like repeat entrepreneurs who hit it big the first time, or those with truly obvious ground-breaking IP. But for most it’s a grueling and soul-sucking necessity.

 Today fundraising for a startup company is tougher than every. The Venture Capital (VC) business is in disarray, with the number of active firms in the process of shrinking. The financial crisis and general economic malaise has made finding capital from nearly every source more difficult, from traditional banks to angel investors. So if you’re planning on starting a company today, it might be time to get creative.

 Most of the ideas presented here are applicable to any type of company. But for those smart about it, a software-based business is one that can be started and grown with minimal, or zero, outside capital. This has always been true in the software business, but a number of developments have made bootstrapping even a more realistic possibility today. You will need to accept upfront that it can be done, and structure everything you do with minimal financial resources in mind.

 Successfully bootstrapping is tough if you’re a first time entrepreneur, especially for those that have been working in large companies, with all the trapping that come with that. But embracing the proper attitude early on is essential if you’re going to have to bootstrap your company, at least in the beginning. Let’s examine some tactics that can increase the odds of startup success:

 Understand early-on the level of capital you’ll have available

This is crucial. Most get going on their business, moving ahead and worrying about funding once they have a business plan, prototype/beta, etc. Only then do they put together an investor pitch and think about how much money to raise. But it can be really helpful to have a realistic view as early as possible how much money will be available to you in the early days. No question this is hard to do and by definition the result will be inaccurate. In reality, a number of things will dictate how much money you’ll have available: Management team reputation and track record, investment contacts, dilution philosophy, local investment resources, business model, IP, etc. The key point here is to do your best to understand how much money you’ll realistically have available at startup and early on….

 Structure your business accordingly

….then design your business model to fit your prospective available funding. In reality, this rarely happens. Most design their business, and then try to raise money to fund it. As a result, for example, I see people start enterprise software companies, with complex products at high price points that demand a team of outside sales reps and field engineers with $150-250K comp plans. Most startups won’t be able to attract the funding to support this sales model. Or adopting a Software-as-a-Service (SaaS) approach, without planning for the added operational expenses required with a SaaS model, essentially taking on the role your clients IT department. If you can match your business model to your expected capital resources from the beginning, your chances of success go way up.

 Start while you’re still working

One of the best things a startup entrepreneur can do is to start working on your business while you still have a job. This is especially true of the technically-skilled software company founder. Many software companies have been started by a sole programmer, writing the initial product on his or her laptop while sitting at home in the kitchen. It’s one of the beauties of the software business; you can create a product with very little capital investment. Of course, care needs to be taken that you don’t use any of your employer’s resources or do anything on company time. Make sure that you aren’t violating any of agreements signed with your employer. But once you stop working to start up a new venture there’s no telling when your personal income will start flowing again. So do as much as you can, before cutting the cord with your steady income.

 Do it yourself and don’t be wasteful

Entrepreneurs often find that they can actually do things they never dreamed they could. When dealing with scarce capital, it’s critical to make sure that you actually NEED to pay someone else to accomplish a particular task before parting with your cash. This will lead to personally doing a lot of mundane activities that you don’t really want to do. But it’s important to take those duties on early on to conserve cash. Also try not to waste money on ANYTHING, not just labor. Count those paperclips! The corollary to this is when you really do need outside help, DON’T SKIMP and just do an unacceptable job internally. Bad marketing is an example of this for the technically-oriented founder. This can be truly penny wise and pound foolish, and can cost you much more money in the long run than you save in the short term. Recognize what skills you just don’t have that are absolutely critical to the business, and save money elsewhere so you can afford outside assistance in those crucial areas.

 Don’t reinvent the wheel

I referred earlier to it being easier than ever to build a software company with minimal capital. Development tools have matured to make development quicker than ever. Many target platforms have much less memory constraints, reducing the time needed to produce code that is extremely memory-efficient. There are many pre-built modules for standard functions available for a modest cost. Ten years ago it might have taken a half million dollars to build a quality website that you now can replicate for a few thousand dollars. As a software startup, make sure that you scour all pre-existing resources for things that you can use, before you build them yourself.

 Outsource and off-shore, if appropriate

Another area responsible for much lower costs in starting a software business is the potential for outsourcing/offshoring. This isn’t for every company or every situation, but where it makes sense, it can both reduce your costs significantly and expand the availability of critical development resources. While everyone would prefer the developers under their own roof, in many cases there just isn’t the right talent where the company is located–or the budget to fully staff with full-time, onsite employees.

 Don’t ignore international markets

A big area which most software companies ignore initially for their products is international sales. It’s natural to want to focus on your domestic market first. But doing this exclusively can cost you some excellent growth opportunities, even from the very beginning. This is particularly true for US-based companies. The US is the toughest market in the world. It’s the biggest, and the bulk of the software industry is located there (all looking at the US market first….). As a result, the competition is almost always less in non-US markets. So there is low hanging fruit to be had, plus you can partner in many markets with distribution partners whom have existing market presence, and can take on much of the marketing investment required to gain traction. All of this can mean an excellent return on a modest investment. Once you’ve invested so much to create valuable product IP (which is very “perishable”, by the way), don’t limit your return on that investment by focusing on a narrow geography, if at all possible.

 Don’t give up and enjoy the journey

Don’t ever give up prematurely. The most important thing is to keep grinding until you start to gain traction. Starting up and growing a software company is an exciting–and difficult–endeavor. Above all, I believe you need to be able to enjoy the journey, in addition to having your eye on the end prize–success. There will be difficult times where you need the willpower and stubbornness to push through. Often startup success is found by staying alive long enough for good fortune to find you.

 That’s my advice on starting up a software company and growing it in relatively tough times. Post a comment if you have your own experiences to add.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on August 8, 2010
filed in Business Models, Corporate Strategy, General Management, Startup/Early Stage, enterprise software
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Growing from a Startup to a Mid-Market Software or Hardware Company

Every stage of a company’s growth holds unique challenges. In my opinion, startup to about $2M in revenue for a software company, and startup to $10M for a hardware company is the hardest phase of all. But growing a business is almost always hard, and there are several natural revenue levels where companies tend to “get stuck”.

 As in the hardware/software contrast above, revenue levels for different business models can be quite different. So it’s hard to generalize strictly upon gross revenue levels. But undoubtedly there are stages that every company goes through (startup to profitability, profitability to stable small company, stable small company to midsized company, etc.) which represent points of inflection in terms of the way a company operates. For example, you need quite a bit more formal process to operate a large company than a very small one. The methods of capitalizing a large company are very different from a bootstrapped or VC-backed startup. There are many more possible examples; I’m sure you get the picture. For this article we’ll focus on growth into the Mid Market stage.

 First of all, there is no perfect definition of a “Mid-Market” company. People have defined it many different ways: by number of employees, revenue level and many other factors. For the purposes of this discussion, we’ll define a Mid Market company as one having between 100 and 999 employees. . Let’s take a look at some of the major changes required to successfully grow from a startup to a mid-market sized company:

Hiring

As a startup or smaller company, you’re often restricted by resource realities with respect to who you can hire. Startups are often forced to hire people with less direct experience than they’d like, and pay them less than the going rate in cash compensation. You often can’t fill every hole, even all the ones that you think are critical. People have to wear two or more hats, and the type of people you can attract might be those that really prefer the small company environment, or are dreaming big dreams based upon the stock options. In short, it’s continuous compromise. As you grow into the mid market you have more resources to pay market rates, and are generally more attractive to a larger pool of employee prospects.

 But please, be careful–just because you can hire differently, doesn’t mean you should. I’ve seen folks get drunk on hiring at this phase, and get loaded down with overhead that makes running the business to optimal profitability much harder. There is also a tendency to go after people with big, blue chip company resumes, which can be very dangerous. If these candidates don’t also have experience in smaller companies, you’re setting yourself up for a very premature and inappropriate culture change. It’s important to guard against building a big company bureaucracy in a middle market company.

 Business processes

Much like in hiring, there is often a tendency to want to add too much process, too soon. In fact, I believe this is the absolute biggest danger executive management needs to guard against during this transition. The CEO and senior team are usually very aware that the business is outgrowing its current level of checks, balances and controls. Inevitably there is a need for additional and more formal processes. The typical mistake I see is that instead of adding carefully and gradually, folks want to radically change the business overnight. The result is often a still-modest-sized business operating like one with 20,000 employees: Meaning operating VERYSLOWLY. Guard against this! Mid Market companies still need to rely on speed and agility to compete with the corporate giants, who have many more competitive advantages that you can’t yet replicate.

 Scope of target market

Around the mid market stage, a single-product or single market segment company may be running out of room to grow at the rates it has historically enjoyed. This is a day of reckoning and a danger point that stops many promising companies in their tracks. If you need to expand into new products or markets, make sure that you do so rationally. Don’t go out and acquire a company in a complete different business, because your investment banker thinks it’s undervalued and a great buy. Do “diversify” into “adjacent” markets, taking one of your existing technologies into a different market, or introducing a new technology or product category to your existing market segment.

 Capitalization

This is the stage where you absolutely need to hire a serious CFO with financial market savvy and connections. Many startups have someone with a CFO title whose background is really accounting and financial controls. Or possibly and outsourced, part-time CFO. This usually is fine up to this stage. But once you are talking about opening new offices, funding a new market focus or new line of product technology, the game has changed. The skill set of controlling the company’s simple expenses, dealing with angel and VC investors now becomes inadequate. The company needs someone that understands raising money in institutional financial markets, along with the contacts that go with that knowledge. Budgeting and controls will also start to become more decentralized, requiring a different financial management style, as the company continues to grow into the upper end of the mid market phase.

 Distribution and regional offices

As your business grows into new markets and product categories, your distribution system must often change and grow with it. This might be the time that you begin to open offices in all the key geographic markets of the world. But don’t do this “just because it’s time”. It should be done only for good business reasons, such as increasing marketing in countries where a distributor won’t or can’t do what’s necessary. It might also be the time that a single distribution channel business needs to become multi-channel. For example, a direct-only company adds retail or VAR channels. Again, avoid the temptation to do these types of things because your business has grown to a certain stage. It adds complexity and overhead to your business, so make sure there are sound business reasons for the change.

 Product Development

Moving to a different customer set or new base technology can have a profound effect on the product planning and development process. It is often at this stage that you must stop relying on a single set of market veterans or insiders, who have been successful in bringing out products due to deep, long-term domain knowledge in your original market/product focus. Now is often the time where there needs to be a bit more standardized product planning and development process, as you broaden both the number and scope of development projects.

 The bottom line is that as you grow out of the startup phase, the way your business operates necessarily will need to adjust to continue strong growth. The biggest danger here is trying to “get big” before your time. While the big blue chip companies are often envied, trying to duplicate their current mode of operation while you’re just entering the mid-market stage is probably the best way to ensure that your company will never reach that blue chip status. “Get big” in the way you operate cautiously–because once you’ve bureaucratized your business, it’s very difficult going back.

 That’s my take on going from a startup to mid-market. Share your own growth stories with us to start a discussion.

 Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on June 8, 2010
filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Operations, Startup/Early Stage
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