Nurture an Early Market – Don’t Wait for a Financial Argument

It starts like this:  Sales sees the market opportunity first.  It is a sensible request from a growing client.  But no one else in the industry is doing it.   Sales approaches the Solutions group who points to Product Management who points to Marketing.  It’s not a lack of interest.  The entire company is deep into maintenance mode.  No one has the budget, the skills or the charter to investigate and validate adjacent markets. 

The Head of Marketing floats a few proposals, but none get company-wide support.  

Overtime, the nascent market that was identified by sales grows to a quantifiable size.  The company has waited too long and is missing the market.   Research firms are reporting growth projections and the CFO is able to detail a financial argument.  The urgency builds.   The fear of missing out empowers the CFO to acquire a target at extraordinarily high multiples.

However, the objective has changed.  This is no longer a market-building exercise, it is a financial transaction.   Once the deal is finalized, the job is considered complete.  But the likelihood the target acquisition will contribute real profits to the acquirer is unlikely. 

Most acquisitions lag considerably in profit contribution.  In fact, 70% of the acquisitions tracked by McKinsey & Company failed to achieve the expected revenue synergies [1]!  And, empirical evidence in public companies shows that 65% of acquisitions have destroyed more value than they create [2]. On average, the buyer pays a premium that equalsall of the value generated by the merger [3].  Known as a ‘winner’s curse’, buyers consistently overestimate the synergies and overpay [4].

Even though the company purchases revenue and customers, it cannot re-capture the value of growing a market itself.  Buying into the market late, the company has missed the stellar growth rates of a phase one market.  They have foregone all first mover advantages.   They have missed the opportunity to build a majority market share, erect barriers to entry and shape consumers’ buying preferences. Hesitating to enter the market, the company has also become less relevant to the early adopters in its client base.  Most times an acquisition strategy is a signal that the company does not have the internal market-seeking and market-building skills needed to thrive.

To many executives, the idea of waiting for definitive financial proof feels conservative.    But, in reality, this assumption puts the company’s profits, relevance and long term survival at risk. 

 Instead of nurturing early markets, the company overspends and under benefits.  It’s like missing the onramp to a highway only to buy a billboard to claim a presence on that road. 

Rather than nurture an early market, when a profitable leadership position could be forged, the company waits until a financial argument is decisive and moves too late.   By then, the market is in the second or third phase of development and the company is one of many fighting price wars and replacement sales.

Waiting for definitive financial proof may feel conservative but it puts the company’s profits, relevance and long term survival at risk.  It’s like missing the onramp to a highway only to buy a billboard to claim a presence on that road. 

Bring a new conversation to this year’s plan: Demonstrate the value of exploring adjacent markets in their formative stage.   Questions to ask include:

• Who holds the budget and responsibility to investigate adjacent markets and emerging markets? 
• Is there a framework to facilitate the funding, testing and validation of new initiatives?
• How can we benchmark the market share and profit contribution of organic growth versus growth through acquisitions? 

Marie Giangrande  

© 2016 Marie Giangrande, Point Blank Economics