Observations on How Financial (PE) and Strategic (Corp Dev) Investors Consider Segmentation Opportunities Differently from One Another
Serving a wide-range of clients, one pattern that I have noticed is the degree to which the strongest Corp Dev groups (the “Strategics”) consider customer segments as a means for asset value creation – and do so in ways that outrun what many Private Equity firms consider.
The (best-in-class) Corp Dev groups bring greater focus to the topic (of customer and/ or user segments) in their provisional investment thesis and value gen plan, and they bring more pressing segmentation assignments for our diligence work.
I suspect this relative prowess derives from a few factors, one being the more opportunistic nature of a lot of financial investor activity and the pressure to moderate the energy spent examining the greater nuances of markets. But Strategics also typically have deep(er) experience in the market and a greater foundation to develop value gen ideas based on having more time looking at specific segments – the existence, scale, preferences, needs and behaviors.
What always strikes me is how, even in cases where Corp Dev deal team members have little to no direct experience with customers, Strategics can gain advantage with very few clues. A thoughtful sales and marketing leader – in a few short conversations – can seed ideas that prove to become significant opportunities. It’s a pretty fantastic point of leverage (the marketing insight prowess) and is a common core competency of many large enterprises. It’s a muscle that gets built as the result of participating in a market over the long term, battling for share, growth and price opportunities and keeping new entrants at bay.
Taking advantage of this is something that many strong Corp Dev functions have institutionalized as part of their standard process. But we realize, from witnessing these conversations, how often sound ideas come from simply having this theme on the agenda and driving conversation (and ultimately investigation) on it. And it’s a cheap source of value gen, and one that can be largely replicated by a PE outfit (if it’s on the agenda and part of standard work).
So, what exactly are we seeing as the difference between the two groups and what does it translate into?
In all stages of diligence, a strong Corp Dev team will often enter a process with an investment thesis (and a provisional value gen plan) that includes specific opportunities (supported by underlying details) to:
- Introduce enhanced value propositions (based on a strong understanding of customer behaviors and circumstances);
- Expand markets to specific new user groups;
- Introduce enhanced services to existing user groups (to grow market share or to grow share of wallet); and
- Address pricing opportunities in product lines, channels and end-user segments.
Impressively, the stronger Corp Dev teams not only bring a greater focus (on segmentation) to deals that fit an existing BU or platform, but they bring it to exercises that create entirely new platforms. Likewise, PE teams that bring more thoughtful customer segment value gen levers to the thesis are ones that:
- Consider it as part of the standard work for all deals;
- Conduct more early process market work; and
- Have senior team members who come from marketing or corp. strategy backgrounds
I am raising this value gen lever as it is a material one rooted in the premise of leverage – i.e., determining a way to generate more value from existing assets. Moreover, given the extent to which many PE firms seek to create value with new integrated platforms, examining the key segmentation themes can be a critical ingredient for success. And the great aspect of this lever is that it often only requires a small amount of up front resources and attention to surface meaning opportunities to increase an acquisitions performance and return.
Now, as we note on page one of our Diligence Matters™ toolkit, “every team applies its own special sauce – reflecting the philosophy, process, science and art that separates one investor from another”– so greater consideration of segmentation is not going to be part of every investors’ value gen plan.
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