Bingham Offers Market Strategy Advice (Bingham Offers Advice on How to Create Value Amongst Market Turmoil)

When considering market strategy for the capital markets, it is too easy to buy into the conventional wisdom that this is a terrible time to invest. The contrarian investor views the current market volatility as an opportunity for value creation through market strategy and rejects the generalized view that this is a period of value destruction. Investors and business owners should step back from the daily execution and take a similar view of their own market strategy.

There are numerous examples of astute investors taking a long-term view and focusing on the opportunities before them in terms of market strategy. Change is a constant feature in a market strategy economy; however, some periods of change like today are more rapid than others. As an example, witness the ramifications of the market strategy movement from circuit switched telephony to VoIP. The rapid expansion of broadband connections has completely upset the traditional underlying market strategy business model of cable and broadcast television. Large media companies are in a constant scramble to find the next market strategy revenue model as the viewers face expanded online entertainment choices such as YouTube and Hulu.

Market Strategy – Key Assumptions

Whether implicitly or explicitly, investors and business owners rely on key assumptions to determine their market strategy on a daily basis. Unfortunately, the most pernicious assumptions are implicit and we rely on them for market strategy. We almost never think to challenge them until the change becomes explicit. The current market volatility represents a massive repricing of asset values. This market strategy decision was predicated on key assumptions that in hindsight have proven to be incorrect. A case in point is the market strategy for structured-mortgage finance products that were premised on two key assumptions: home prices never go down and investment-grade mortgage securities never go into default.

Market Strategy - Capitalization

As Yogi Berra said, “Prediction is hard. Especially about the future.” This is a time when Bear Stearns, in a span of less than 90 days, saw its market capitalization fall from $20 billion to $1.5 billion. Motorola is spinning off its mobile phone business because it has been unable to duplicate the market strategy of the Razr. Telecom equipment providers are being marginalized by the market strategy and growth of hosted VoIP products. Some of these events may have been difficult to conceptualize just a few years ago, let alone predict; however, all resulted in part from not fully appreciating the subtle changes that gradually eroded the success of the respective business models.

Market Strategy – Near-Term Exit

For companies contemplating or refining a near-term exit market strategy, there’s an opportunity to think about how the pessimism in their own industry can be used to position their company for greater value creation at the time of a future exit. The first rule is: Don’t be a victim. Get rid of the emotion and take a hard look at the assumptions you have been relying upon for market strategy. This creates an excellent opportunity to take a critical look at your market strategy and identify means to grab additional market share, invest for the future and build value. Without sound market strategy, owners in periods of uncertainty may sacrifice long-term potential by making the wrong short-term decisions.

Market Strategy – An Inch Wide and a Mile Deep

When thinking about market strategy, identify the key value added that your company provides. This is not a long list, but a concise description of what you do and how you do it. Are you delivering this value consistently or are you distracted by expansion into other tangentially related businesses that detract from your true mission? Exceptional companies such as Google include in their market strategy to do a few key things very well. Make the focus of your market strategy efforts on being an inch wide and a mile deep. Too many companies use the reverse model in their market strategy of trying to be all things to all people. The results of this “mile wide and inch deep” market strategy is that the companies spread themselves too thin and fail to deliver compelling value to their customers.

Market Strategy – Key Questions

Once you have identified the key value added, the next step is to compile a detailed list of the implicit key assumptions you have been relying on for market strategy.

Bingham suggests companies ask themselves the following when determining market strategy:

- What is your position in the industry?

- Who are the key competitors?

- Have the future growth prospects changed?

- Are the barriers to entry still the same?

- What is your debt financing market strategy?

- What is your IP market strategy?

Determine whether the information being used to drive the market strategy today is empirical or anecdotal. Find the sources of information to test the assumptions you are using to build market strategy. Key sources of information for market strategy include customers, employees and industry data. Use the collected information to confirm the data for market strategy, and then use it to articulate the goals and refine your market strategy. In establishing the market strategy, focus on reducing abstract concepts to detailed, measurable data points that can track your company’s progress. Remember, this is not an annual exercise, but monthly or quarterly for a sound market strategy. Change is constant, so even after confirming the data and establishing goals for market strategy, you need a process for market strategy. It should include concrete steps to confirm the adequacy and relevancy of the information used in developing the market strategy key assumptions that underlie the projections.

Market Strategy – Benchmarks for Progress

In developing market strategy, create benchmarks to chart your company’s progress, focus on operating profitability. You are not adding value if you are selling products or services at inadequate margins. In the face of slowing or reduced growth, as part of market strategy, identify changes required to protect or enhance profit margins.

Aside from boosting productivity as part of market strategy, you need to undertake a rigorous analysis to assure that all of your customers are profitable and meeting established standards of profitability. Customers may appear profitable, but indirect costs can be eroding profitability. These can include excess returns, above average use of post-sale customer support functions and delinquent payments. There will be cases where, for market strategy reasons, you may elect to accept lower margins on key customers but make these conscious decisions.

Market Strategy – Margin and Retention

When analyzing per-customer profitability for market strategy, you need to look at both margins and retention of the customers. Factors that can impact customer satisfaction and eventually lead to a loss of customers often lurk just below the surface, and much like icebergs, they are not seen until it is too late to avoid a calamity. Customers can switch providers for a variety of reasons, not all of which are in your control. Focus your market strategy on the issues you can control by understanding industry trends that may be undermining the current market strategy. Continue to focus your market strategy on providing value to your customers, and don’t give them a reason to leave.

The sales cycle is not complete until the company collects the cash. In the face of constant pressure to generate revenue, the cash collection part of the market strategy sales cycle may not receive the right amount of attention. You know who your biggest customers are, but you need to find the right market strategy for extending credit and assuring you have liquidity to operate the business. Initially, this does not have to be an overly complex exercise. It can be as simple as calculating the average day’s sales outstanding for the company. Then on a dollar-down basis, determine the average day’s sales outstanding for your key customers. Look to further scrutinize those customers who are paying slower than the average customer. Understand what you can do to shorten the collection period. If the customer’s credit risk increased, what concrete actions can be taken to hedge your company’s exposure to this customer? Alternatively, the customer may be taking advantage of your less strenuous cash-management practices. If that is the case, start building into your market strategy incentives to counteract this behavior by increasing prices but offering discounts for prompt payment. It might not change the customer behavior, but it will increase your margins and, in effect, impose a surcharge if the customer elects to borrow from you instead of its bank.

Change is a constant in business. None of us are likely to achieve total dominion over change; however, companies can hope to achieve the insights needed to anticipate change through constant diligence and critical evaluation of new information. By anticipating and recognizing change, companies are best positioned to maximize opportunities in their industries.

John Bradley is president of Bingham Strategic Advisors, a subsidiary of Bingham McCutchen LLP. William Wilhelm is a telecommunications, media and technology partner in the Washington office of Bingham McCutchen.

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