Every business has at least one growth spurt left. And it shouldn’t feel like racing Usain Bolt after six hours at Cheesecake Factory. Most businesses immediately turn to the most obvious places: new products, services or markets. But these generate less enterprise value than customer experience, platforms, technologies, new business models, and superior service. Even existing assets can deliver more growth. Here’s how I approach helping companies find and deploy undervalued assets for growth – and examples of who’s done it well.
Stage 1: Introduction
When a new product or service is introduced – or in the first 3-5 years of any startup, there better not be any assets collecting dust. If there are, I’ll personally summon your Angel (investors) to downgrade your free organic kale chips to Pringles.
At some larger companies, there might be unused patents or trademarks. Monetizing these should be purely opportunistic. That means someone has to seek you out AND do all the work. Any new enterprise wasting time on marginal assets has to pay me upfront. That’s a bankruptcy dressed up like a business.
Stage 2: Growth
The growth stage is full of temptation, like George Alamuddin-Clooney at a Victoria’s Secret party. Growing companies are just starting to amass valuable assets – distribution channels, platforms, coveted customers…foosball tables. These are magnets for tempting partnership offers – to build new products or serve new segments. Most are a terrible idea. When existing markets are still under-penetrated and growth tops 20%, the business should be too lean for slack assets. It’s like telling ‘the birds and the bees’ to a six year old.
However, there are three exceptions to this rule:
Marketing & Distribution: Sometimes, it makes sense to use existing distribution channels to sell complementary products that deliver expected services. For example, I advised a major web host to add complementary security and e-commerce tools to meet the minimum expectations of customers and prospects – at least until they could build their own. That way, customers don’t leave for more full-service providers – or need to hunt for a patchwork of third-party tools.
The same goes for retail. Trader Joe’s sells 80% proprietary products and 20% branded. Why bother paying the premium? Some brands, like Fage Greek yogurt, have significant loyalty and shoppers expect to get it on their trip to a supermarket. Trader Joe’s needs it to be there to keep customers cheating on them with another supermarket. (Recently, they launched their own Greek yogurt. For now, they co-exist side by side. For now…)
Platforms/Technology: Apple iPads and Google Chromebooks would make luxurious sushi trays if not for apps and plugins. Despite significant growth, both companies managed to scrape a few shekels together for partner-driven platforms: app stores. Whenever a product or service can be massively enhanced by others, I say give them the keys – and a massage!
Brand: When no one knows your brand, no one wants to use it. But companies that rely on ecosystems of partners, aka networks, are different. They might want to play it loose with their brand and logos. Good examples are Amazon, Facebook and Twitter. At the height of their expansion, customers, partners, third party sellers, and every rapper sweating Kim Kardashian could plaster their logos everywhere – websites, marketing materials, commercials, even tattoos. All without a single call from some tightass at Facebook Brand Licensing. Why? Ecosystem brands need ubiquity and recognition. It’s a mini-miracle when you can get other businesses to do your brand marketing for you. The payment networks I’ve worked for – MasterCard and American Express – are no different. Any brand that relies on partners, merchants or “influencers” to consider just letting go
Stage 3: Maturity
Maturity in business isn’t all that different from maturity in life: You’re still popular, but everyone knows all your jokes. You’re everyone’s spouse and nobody’s muse. Everywhere you go, you’re expected to be. And, you better pick up the tab, lest anyone wonder what’s wrong.
The good news is every company at this stage harbors hordes of undervalued assets. But tread carefully. Most are still basking in the glory of well-earned glories. Though there are signs most of the heavy lifting is done. Operations run like German trains, but politics start seeping in. People defend budgets and headcounts, instead of conquering the next hill. Sometimes, there are no new hills. Those gaps in organizational purpose get filled with “off-sites”, “employee engagement” exercises, and consultants scribbling critical words like “critical” on whiteboards – or “innovation” or “platforms” or “strategic”.
So here’s where growth might be hiding critical at this “critical” stage:
Platforms & Technology: The charitable name for mature platforms is “legacy systems”. (From the agency that re-branded “old folks homes” as “assisted living communities.”) Legacy platforms often evolve into a complex patchwork of proprietary and third party software, loaded with customizations only a masochist could love. When I joined Citi in 2006, the company was still integrating acquisitions from the late 90’s! With new cloud platforms and API’s, I’m far more optimistic about finding diamonds in this mine.
Mobile networks like Sprint, Verizon and AT&T make a killing letting third-party Mobile Virtual Network Operators (MVNO’s like Ting, LycaMobile and Straight Talk) that run on their network. MVNO’s do the marketing and servicing, but get network access at bulk rates. These cheap, but slightly hobbled, services allow major networks to get customers in nooks and crannies they’d otherwise miss. And when any of them get very successful, they buy them, as T-Mobile did with MetroPCS and Sprint with Virgin Mobile.
Maybe the best example of platform monetization is Amazon Web Services, which was developed to run Amazon’s e-commerce site, but expanded to cloud hosting for others. Now, it’s a massive $5 Billion enterprise – the most profitable and fastest growing part or Amazon – with a suite of services for all kinds of companies and governments.
Marketing, Distribution & Traffic: My favorite Eureka! moments are finding a massive mailing list, hefty client portfolio, or loads of web/in-store traffic. But I’m not a fan of letting third parties have their way with these. I look for controlled ways to complement the existing business.
In brick and mortar, Best Buy is doing just that – capitalizing on in-store traffic and space to build stores within a store. Department stores have used mini ‘brand stores’ for ages – to my vengeful scorn.
On the web, Amazon Marketplace, Seamless food delivery, and AppSumo have mastered distribution. Their traffic and subscribers have become primary marketing channels for their business customers.
Operating Assets (equipment, inventory): Most mature companies have operations figured out. From sourcing direct inputs, like cocoa, to running a fleet of delivery vans like it’s SEAL Team 6. (PS – nothing good ever happened in a van. Buy a proper truck.)
I hesitate using operating assets for growth because it requires investing serious resources in what might be a side business. However, there are three scenarios that might make sense. All are variations on excess capacity:
- White labeling: On the flip side of Trader Joe’s private label empire is a horde of manufacturers willing to sell excess capacity and inventory at a discount with someone else’s label. In fact, a whole industry of food and beverage co-packers has emerged using just this model.
- Outlets: Outlet malls, Nordstrom Rack, and Gilt only exist to clear excess inventory…and in some cases, developed enough traffic to warrant new product lines.
- Service diversification: Companies like Uber now use their fleet to deliver food and other local items.
Brand: For every company making a killing extending its brand, there are five killing their brand by extending it. Like good looks, a great brand attracts more frogs than princes. Everyone wants to claim Apple as a client, or say they invested in Uber, or romanced Sophia Loren. (In all three cases, you don’t have to admit to when.)
The biggest challenge is clients not knowing where their brand can and can’t stretch. I’m writing a full piece on it. (Sign up for updates here.) Until then, consider this list of the top 30 brand licensors.
Remember the name Kathy Ireland? Aside from sharing my humble roots in modeling (feet, in my case), Kathy quietly built a $2B licensing empire. Yeah, that’s a “B”. You’ll find her name on clothing, furniture, missiles… Her brand monetization is mostly hands-free. By comparison, Marvel is hands-on with its licensing – developing content for its universe of characters. Others, like Jessica Alba, have operating roles at Honest companies they affiliate with.
Capital: I treat capital like garlic. It’s a great ingredient in pasta or stir fry, but a terrible main course. There’s a lot of capital propping up zombie products, ineffective campaigns, and bridges to nowhere. The best use of capital is acquiring capabilities. Unfortunately, few companies outside of tech, are very good at absorbing new capabilities – operationally or culturally. Google is among the best. Virtually all of its services, besides search, came from acquisitions. They even do a good job of integrating with their venture investments, like integrating Google Wallet and Maps with apps like Uber and Lyft.
There’s also been a huge spike in corporate venturing. In practice, the average fund lasts only a year. So it’s less a growth engine than a way to claim an airy slice of the startup bubble – and delay distributing stockpiled cash to shareholders.
Expertise & Data: By middle age, companies accumulate a wealth of wisdom. From retail queue management to driving web traffic to making the perfect growth chart, ahem. Sure, some of these should stay proprietary. But most expertise can be turned into training, subscriptions, or other services. At MasterCard, we accumulated deep expertise in card marketing, analytics, and loyalty. That was the foundation for two of my launches – SpendingPulse and Commerce Intelligence.
Ah, data… It’s the perennial tease. Everyone knows theirs is priceless but few have made fortunes with it. (Read my cryptically titled piece on the subject: Never Sell Data.)
Talent: At maturity, employees who get frustrated by the routine of a well-oiled machine start to leave. New prodigies opt for startups or growth stage companies. Some are overpaid to join, frustrating both them and the old faithful. A handful, identified as high potential, get to change jobs, geographies, or take on more responsibility.
What rarely happens is identifying narrow, unusual abilities – or even moments of brilliance – that defined the success of a given project or program. It could be design, operations, or finance. Every organization has exceptional individuals – or entire departments – you could build a great business around. Or, use to make an existing one shine. These gems are buried under piles of bureaucracy, cookie cutter expectations, and slabs of mahogany.
Here are three of the questions I ask executives to uncover hidden talent:
- What one thing made the difference in achieving [insert biggest achievement here]?
- What one thing would top customers say you’re known for?
- Who’s fought and lost a big political battle recently and what did they want to achieve?
Stage 4: Decline
Generally, three or more consecutive quarters of declining sales (or market share) are a problem. If it’s years, please drop your laptop or baby and call me – or a priest, immediately.
Even when resources get tight, there are glimmers of hope – a feature that got surprisingly good reviews, unexpected upticks in a new region, a promising new offering from a business partner or vendor. At this point, you start considering secondary assets beyond the core business. Some are better bets than others.
- Brand: At this point, new branded consumer opportunities become scarce. It gets much easier to move downstream than up, like what Macy’s is doing with its new Backstage discount stores.
- This is the best time to get creative with Marketing & Distribution. Any standout traffic numbers or customer lists are a great starting point. Look for deals with brands or products that can elevate slumping perceptions. Hello, Kylie Jenner… But some premier relationships or exclusives might be out of reach when a brand is considered a dinosaur.
- At this stage, focus on the back end. The best assets at this stage are often platforms, technologies and other operating assets. The question to ask is: would anyone else pay for this? If the voice in your head (likely not God) says ‘yes’ or ‘maybe’, it’s worth exploring.
- I’d never suggest that a growing or mature company in, say, enterprise software like Oracle, consider building an accounting, recruiting, or software development shop. However, a truly excellent business function – in the decline stage – must be considered. The best candidates are in companies that provide shared services to multiple business units. If you can do HR, IT, or finance for multiple business units, you can do it for third parties. One example is GE Capital, which provided financing for GE, then extended that capability to other companies and consumers…then made other boo-boos. Google it.
- Capital: When budgets are more Wendy’s than Jean Georges, it’s best to concentrate capital on a handful of high potential projects. To free up growth capital, deals like selling off undervalued buildings, inventory and land or outsourcing functional departments might make sense. This is a good time to say goodbye to corporate venturing or other experiments with long payback periods. Bury them with honor.
Gambling is not for you
Many powers diminish in decline, especially attracting talent and selling services or expertise.
- Talent – When the best and most ambitious have left, many of those remaining feel defeated – or worse, they’ve settled into a routine. It’s hard to pry young, urban creatives and techies away from hot industries for a struggling brand in the Toledo suburbs. The best option is to concentrate top talent on a handful of top growth initiatives. Small successes breed bigger ones and attract new talent.
- Expertise & Data –Who wants expertise from a company in decline? Consider the challenges Dell and HP faced in growing their professional services businesses. Now HP is spinning theirs off. A clean slate can help eliminate some bias.
How to Choose
Here’s a simple diagram of two simple questions to ask when looking for undervalued growth assets:
- How good are you at it? If the answer is ‘just OK’, it’s unlikely to be undervalued. But you need to look several layers deep – and use objective evidence to judge – customer reviews, sales inquiries, outside assessments, etc. There are nuggets of brilliance buried in many a failed venture.
- Does it fit our core mission? The only time to entertain non-core assets is in the decline stage.
Whatever’s left in the upper right hand box, prioritize based on size and err on the side of whatever is most core and most outstanding.