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A is for Alphabet and G is for Google. Are you a conglomerate too?

The biggest news in the tech sector is the change in structure of Google.  A new company called Alphabet which will act as a holding company where Larry Page is the CEO, Sundar Pichai is the CEO of Google as we normally know it. Google X, Nest and a whole bunch of interesting companies will be under the holding company of Alphabet.

Each company will have its own CEO and run it as its own business. This is the classic conglomerate. The behemoths which became big at the turn of the 20th century and over time the strategy of specialisation meant, spin-offs, sell-offs, divestures etc. Ofcourse, GE is the classic version of this.

In Asia, it is a common occurrence to see it. Whether Tata in India with its 100+ companies, or Samsung from ship building to smart phones. Entrepreneurial CEOs/Founders have always run them like that. Even the internet age Alibaba and Xaoimi are a conglomerate in a way.

Why are so many entrepreneurial CEOs going for this structure that most professional CEOs and strategy specialists have said it does not work? My take on this: because it gives them more entrepreneurial energy and continue to do what they do best.

Entrepreneurs are more makers in retrospect to  professional CEOs as managers. Makers need to continue to want to make things. They get bored when there is nothing new on the horizon. At the same time, some are good at nurturing other makers.

The conglomerate structure provides the opportunity to be entrepreneurial and nurture new talent.

Have a look at your organisation? How big are you? What areas do you play in? Which ones need a maker and which ones need a manager? What are the growth areas?

What can we learn from the makers? What structure suits best for you?

 

 

What’s your M&A Strategy

1+1

I have been spending a fair bit of time in the social sector in Australia talking to a lot of not-for-profits. The consistent thing I have heard from the CEOs is we are exploring “mergers”. I am actually surprised at the consistent tone of the mergers meme in this space.

The surprise is for a few reasons. One, that there is an inevitability about it. Two, that it will solve the problems.  For lots of reasons it makes sense to think about Mergers & Acquisitions (M&A). You get scale, you get reach, you are big enough to get the contracts from government. Possibly there will be operational savings but in a people business (in some cases its 80% costs) it will be about remodelling the top management and other operational level staff.

What is not clear to me is where does the advantages show up? How do we know that is the way to go? Is it due to government policies? Is it due to operating margins being thin? What is the minimum size of a NFP that is valid at scale? What does 1+1 equal to ?

Like innovation, M&A needs a strategy too. In the business world, it has not always worked out well. In Do Shareholders of Acquiring Firms Gain from Acquisitions? (NBER Working Paper No. 9523), co-authors Sara Moeller, Frederik Schlingemann, and Rene Stulz calculate that takeovers by large firms have destroyed $226 billion of shareholder wealth over 20 years. In contrast, small firms, defined as companies whose market capitalization is equivalent to the smallest 25 percent of companies listed on the NYSE in each year, created $8 billion of shareholder wealth through their transactions.

In Australia, according to research conducted by Indra Arunachalam, University of New England (2012), there has been increasing trend of consolidation especially in the Aged Care and Disability sector.

How do we avoid being on the biggest M&A disasters list?

Lets get back to basics here. Lets look at it from the lens of two organisations: Organisation 1, let’s call it M and and organisation 2, let’s call it A. M is interested in exploring a merger with A.

We start off with an initial assessment. “What’s your current business model?”

At Business Models Inc, we use the Business Model Canvas to articulate how an organisation creates, delivers and captures value. First, you would sketch out your current business model. Second, lets do an honest effort of understanding our strengths & weaknesses.

No.1, What’s your aspiration? What’s your ambition? 

Organisation M, What’s your current ambition and why can’t you reach that on your own? Same goes for Organisation A. Why can’t your reach that on your own? If you have answered No to that, what’s the aspiration of the overall entity going to be? Is that clear?

No. 2, Which areas will you continue to provide services and products?

Is this merger to create economies of scale: the biggest aged care provider? Or is this about economies of scope: we can use our marketing budget to reach a bigger audience?

Are we going to continue to be in all the places where we play right now? or are we going to stop in some places and double down on others? What happens when we get a new contract or grant?

Will the new partnership provide new areas to play in?

No. 3, What’s the killer value proposition for this merger?

How will this merger create the difference? Is it about internal efficiencies or external value? How will your client/customer/beneficiary be better off?

If I ask one of your homeless youth, what will they say will be the benefit?

No.4, What capabilities are you bringing to the table?

Is M & A here complementary or not? Are you both bringing in the same capabilities or different ones? Do you have a clear sense of your current business model strengths & weakness? How will the capabilities of the new entity look like? How will they create better lives?

No.5, What systems, governance and policies will be needed?

A new IT system that can’t be afforded by any one entity? Or is it about collaboration to create a new social enterprise? Is it about risk management?

At the fundamental level, it’s asking the basic questions: What’s your mission, who is the customer and what do they value? And how is this strategy going to deliver that?

The benefits of the merger should show up in the future business model after change management and added challenges, that is key.

To create your M&A plan, contact me.

 

Learning to fail ‘good for students’

Everyone wins a prize is a sure fire way to fail. Love this new way of teaching. Added benefit is through design thinking.

A school that sets up students for failure is challenging the “everyone wins a prize’’ approach linked by psychologists to rising rates of teenage depression.

St Paul’s School in Brisbane has a “design to fail’’ lab, where students build prototypes destined to fail and persevere with them until they succeed.

Students build, say, a poorly ­designed bridge or a chair likely to break then collaborate in teams to identify problems with the prototype and rectify them — no matter how many attempts it takes.

The Anglican school’s head of design learning, Tim Osborne, said the unorthodox approach helped make children more resilient. “Once you’re out in the real world, not everyone wins a prize,’’ he said yesterday.

“Young people today give up way too easily. There’s a generation of kids out there afraid of ­failure … Children need to learn that failing doesn’t equal failure.’’

How a charity made $3.3B, yes that’s the big billion

In 1999, The Cystic Fibrosis Foundation (CFF), frustrated by the slow pace of progress on finding a treatment for the disease, took a big risk and shifted its funding from academic labs to a for-profit drugmaker Vertex. CFF granted around $150 million in exchange for something unusual—a share of the royalties for any treatment Vertex’s research yielded. The research did yield something a highly effective drug called Kalydeco. This drug is quite lucrative as well, in late 2014 CFF sold its royalty rights to an investment company. For $3.3 billion

Fabulous. (h/t @ryanhubbard)

Impact Investing: A Profit with a difference

Dan Madahavan, CEO of Impact Investing Australia is this week’s changemakers on Probono News. My recent chat with Dan in Melbourne centered around exactly this and how there is a clear need to develop the market for impact investing. Dan’s a fantastic person to lead this space in Australia.

Lots more work to do. As Dan puts it: “It’s a three hour movie and we’re 10 minutes in.”

Explain why impact investing is important to someone who doesn’t know much about it.

There are two different narratives here. Investment by its very nature involves two parties, there’s someone who needs capital and there’s someone who has money that they’re willing to invest as capital.

The most powerful thing about impact investing at the moment is that those two stories are lining up.

On the story of a mission driven organisation, whether that be a social enterprise or a Not for Profit, traditionally the social services that we all expect and the social change that we would like to see, traditionally that has been funded by Government and philanthropy.

I think even though both of us have been in this game for a relatively short period of time, it’s pretty obvious that the demand for funding is far outstripping the supply of funding from those two sources, and that gap is growing wider.

So it forces us into a pretty difficult set of decisions. We either defund those things, so start cutting services that we believe should be there or start defunding change that we would like to see. That would be a pretty bad outcome.

We either increase the supply of funding, which practically means increasing taxes because philanthropy can’t carry the whole burden, and most people you ask would probably say that is a pretty bad outcome and most Governments don’t have a lot of appetite for that.

And then there’s a third option, really the only other option, we can look around at other pools of money and use that money. That’s where impact investing comes in. From a mission driven organisation perspective, how could you potentially use private capital to fund parts of your mission?

And I say parts because it’s not going to be relevant for everything, it’s not the answer for everything and it’s not going to fund everything. It’s one tool that can be used as an addition to Government funding and philanthropy. We’re not arguing that those two things should disappear, what we’re saying is that there may be instances where you can use private capital instead of or on top of Government funding or philanthropy.

Apple HR chief:

He’s lived it,” she says which makes him particularly supportive of “people who have differences. The thing about Tim is, he understands that differences make us better, make our products better.”

Sizing the market for NDIS

honzasoukup from Flickr

The National Disability Insurance Scheme in Australia is a new way to fund, provide support and enable people with disabilities to have a better life. This is a massive change to the sector and one in which there are multiple challenges from a political, governmental, organisational and individual point of view.

With bi-partisan support the political challenges are mostly gone for now. However, the governmental and other challenges remain.

For example, in SA the trail site for NDIS is focussed on children below 13 yrs. The idea is to test different cohorts in different parts of the country to test the model before you scale it.

One of the challenges is understanding the “size of the market” to figure out the scale of services and the cost of delivering them. The initial estimate in SA was 5000 kids for children below 13 years. This however, has not translated as planned. Right now the estimated demand is atleast double that at 10,000 kids.

In terms of the human angle, it is a troubling fact that there are 10,000 children who need care and the challenge for these families to provide care is tremendous. For the government, it doubles the pilot cost. For organisations, it changes the size of the market they have to serve. However, things are not so simple as there are bottlenecks in terms of processes to interview the children, assess them and then provide the right service.

So, why has this happened? For one, it is always hard to estimate the size of the market for any business. In cases where you can provide a better service than currently available; the the size of the market always increases. 

Remember when the iPhone was launched in 2007. The demand for a smartphone with a data connection was almost non-existent. However, the iPhone solved a need or want for customers that was not possible earlier or it did it better than other phones. And now, in Australia smartphones are a common occurrence and our monthly bills have gone from $30 a month to $100 a month.  How would you estimate the size of the market in this context? Its very hard. In fact, the biggest challenge for Apple in selling its iPhones is not knowing the size of the demand to produce enough of them because the size of the market is constantly increasing.

Now if you think about the NDIS market and zoom into the children below 13 years in SA, we have the same challenge.

I don’t have inside knowledge into how the initial numbers were crunched. Irrespective of the initial size of the market, it will increase for a few reasons.

1. Increased Knowledge: Lots of parents may not have accessed state services earlier. However, due to the increased knowledge of NDIS through the political campaign; more and more people know about the program. This in-turn means they will register for the pilot program. The campaign promised more services and more money which means demand will increase.

2. Better Services: Once organisations start to provide better services that information will flow and through word of mouth there will be more people wanting these services.

The challenge will be then in terms of who is eligible for government support and what kind of support. And what happens for the rest?

For organisations, if you can provide a better service your market will be bigger than now and you will have an opportunity to make more people’s lives better and build a sustainable business model.

I will not be surprised if there is increases in the size of the NDIS market across the country in the coming years.

What are your views on this? If you are interested to explore how this works for your organisation, do not hesitate to contact me.

The secret to building organisational capabilities

Bill Barnett:

Wrong answer: Organizational capabilities come from researching “best business practice.”  I often have executives come to Stanford thinking they will write down inert ideas told to them by professors. There can be some value in this exercise, but frankly you could parrot inert ideas more efficiently using information technology. Besides, everybody else can easily find out these inert ideas too. A list of best practices will not make you a great company, any more than finding a recipe will make you a great cook.
Right answer: Design your organization so that it develops new capabilities. We know that some companies learn much better than others. Make it your job, as a leader, to help your organization be better at learning. Structure your organization so that your people must engage with important, unsolved problems. Establish routines that allow for failure and reward those who try to discover – regardless of the ultimate outcome. Build a culture that values discovering over knowing, becoming over being. Lead by design, and don’t forget the secret: There is no secret.

IKEA is making 1000 house calls a year, how many are you?

kea is getting intimate with its customers.

To send the company back on a growth track, Ikea has plans to make 1,000 house calls a year at customers’ homes, poking through their cabinets, observing how their kids play and determining the biggest headaches people encounter when running their households.

[…]

“It’s not so much about the product, it’s about understanding how life is spent,” Ikea U.S. President Lars Petersson told USA TODAY. “To create Ikea to become the leader in life at home.”

From USA Today.

Using Brands for Social Impact

With increasing need to play in the social enterprise space or market based contexts like NDIS and CDC for Australian NFPs it is increasingly becoming important to focus on building brands.

This seems especially true in the social sector. “The term ‘brand’ is a bit dirty in this space,” explained a colleague of mine who runs a social enterprise. “Folks get nervous that we’re spending money superficially.” Insofar as it’s true, that outlook is unfortunate. With the swelling number of social impact organizations bringing vital products and services to market, brands are tools to drive impact. Trying to increase adoption of solar lanterns? Decrease open defecation? Broaden immunization coverage? Sell more disinfectant soap? Brands should be in the social sector—as they have long been in the private sector—a strategic asset to achieve preferred outcomes.

A recent experience for a client I am consulting for highlights the need.

Their current clients love them, especially the people who care for them. However, when asked which organisation they belong to they could not name it. They appreciate the work for Kathy Ireland but when asked where she is from there is brand recognition.

If social sector organisations need to continue to create value for their clients it is key to strategically focus on building brands.

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