There is an increased demand for simultaneous innovation and cost reduction

Traditional product and service development tends to miss the boat. Cost-plus pricing is no longer possible and even when it comes to value based pricing there typically needs to be a substantial element of cost reduction involved. New products and services need to be developed with simultaneous focus on value, cost and innovation, and these need to be accounted for across the lifecycle.

While approaches such as target costing, value engineering, and more holistically, Design-to-Cost (DTC) have been around already for decades, it is surprising how little attention they are getting in everyday product and service development work. This is even more surprising given that some strategy books, such as Blue Ocean Strategy (by Kim and Mauborgne, 2005), have more recently repackaged this thinking into messages relevant to top management. Solve the customers’ problem in a completely new way, so that they get more value while you deliver the solution for less cost is the basic element for competitive advantage.  Addressing this puzzle requires broad-based insight and innovation.

Design-to-Cost offers a framework for profitable customer focused innovation

Design-to-Cost, or DTC as we shall call it, switches the thinking immediately to allowed cost (or target cost). Once the allowed cost is known for something of certain value (usefulness), the task is then to find a way to design the delivery of this value so that the target cost is not exceeded (thus leaving room for some profit). Obviously neither step is easy – understanding what something is allowed to cost is challenging by itself, not to speak of finding a way to deliver at that cost! Further, the objective for this type of exercise is often not evolutionary, but rather revolutionary – a major breakthrough is sought. This implies that the target cost often is several ten percent below currently known levels, making the design element substantial.

While this article does not seek to give a comprehensive view of all the available tools used in a DTC process (there is a reference list at the end for this purpose), it is useful to provide a basic overview of the general approach. The principal element is that DTC starts from defining the allowed cost for something, based on what the customer is willing to pay and how much profit is sought. The challenge is then to find a way to deliver the solution (product or service with a certain value to the customer) at this cost. This is obviously quite the opposite from traditional cost-plus (design product, determine cost, set price); in DTC customers are involved before anything else is done, and they set the (target) price. Another key element is that both the cost and value are addressed holistically, that is, the entire value chain (for example, design, sourcing, manufacturing, logistics, service, recycling) and life cycle are analyzed. For this to be possible, the process leverages cross-functional teams so that the big picture is seen clearly. DTC is quite a resource and analysis heavy approach, and front-loaded, as it mobilizes a lot of people early on. Indeed, to achieve the target cost it is usually necessary to design (or re-engineer) the product (or service), the manufacturing process and the delivery and service processes. In DTC, this all happens simultaneously. Everything affects everything, and the approach tries to create an environment with enough cognitive capacity to address these connections. The actual work can involve a range of analytical tools and approaches, and usually includes workshops and even a war-room for the team. However, the rationale in putting all these resources to the task up front is that in most cases 70-90% of the costs are committed at the design stage. Thus, although DTC can be perceived as resource heavy up front, the cost of these resources is abysmal compared to the cost savings that can be achieved.

Case examples: From automotive engines to offshore wind farms

DTC has been applied to a range of cases, from automotive engines to offshore wind farm turn-key delivery and O&M (operations and maintenance). Consider the case of automotive engines; this element is typically a considerable cost driver for automakers, and requires specialized plants and tools. A lot of expensive precision components are required, and many parts are made by complicated manufacturing processes including casting, machining and special surface treatments. The engine also has a big impact on the value perceived by the car buyer; higher performance has traditionally received a higher price. In the automotive industry, features, performance and value are quite well known. Car manufacturers have a long experience and lots of data regarding the customer behavior and preferences. Expected price levels and value can be estimated quite accurately. In this case, the challenge is not so much to achieve a target cost, but rather overcoming the boundary conditions set by a very complicated and asset intensive manufacturing process. In some cases also conservatism limits new solutions. It took a long time for high performance engine manufacturers to accept that for example the inlet manifold can be made of other materials than casted metal, despite the significant cost savings potential. In the case of automotive engines, taking a full value chain perspective, and perhaps more importantly, a lifecycle view, has opened up new ways of designing a cost effective yet high performing solutions.

While automotive industry is the traditional home for DTC efforts, the approach can also be applied in new environments. Consider the case of Baltic offshore wind farms. Offshore wind farms, based on the experiences from the North Sea, are notoriously expensive and require some of the most advanced technology for all phases across logistics, installation, operations, maintenance and decommissioning. While the countries around the North Sea have chosen to address these issues with higher tariffs and subsidies, the Baltic Sea countries have been more conservative. Here the tariffs are lower, and many people perceive the tariffs to be so low that offshore wind farms are not economically feasible. Indeed such arguments have a solid foundation, given that the Baltic Sea suffers from severe ice conditions and requires a faster installation process due to the very short installation window (a few summer months). However, looking carefully at the engineering challenge there are also benefits in this environment; winds are less fierce, waves are smaller, the water less salty and depths more moderate than in the North Sea. Another interesting feature, especially for Finland, is that the tariff structure chosen defines the price for wind energy quite clearly. Given that a DTC effort addressing the turnkey delivery and lifecycle operations of a complete wind farm requires both wind farm owners/developers and suppliers to participate, this is a big benefit. All participants can see the value creation of the wind farm (given a certain average wind speed), and thus defining a target cost is quite easy. The revenue is known, and each of the parties can see the costs involved; the process of cost determination can thus be made transparent and reliable. This opens up the opportunity for both the customer and the supplier to sit down and work together on the DTC challenge. Such a DTC effort has recently been completed, and it resulted in cost savings on the order of 25% from initial estimates.

The next step: Take the challenge with an open mind

The need to provide more value for less cost affects all industries in today’s global marketplace. Industries are being redefined, value chains are merging and disintegrating at an increasing pace, and products are morphing into ecosystem-driven service experiences. As companies seek for entries into new markets, for ways to strengthen their competitive advantage, and for developing completely new value proposals to their customers, they increasingly need a holistic and customer-driven approach for offering and new business development. The message of this article is that there are good tools available, but that they may need to be applied in somewhat novel ways. The matter is not about reinventing the wheel, rather knowing what is out there and applying this to the issue at hand.

The world of the business builder is increasingly becoming that of an engineer – leveraging powerful tools that have been proven time and again, but finding new ways of using those tools, and most importantly attacking new problems. DTC is one of those tools, and it can be very powerful as we seek to find new ways to deliver value and creating novel sources of competitive advantage.

References

Design-to-cost is a well proven methodology. There are several good books for design-to-cost, target costing and value engineering. Below we list some references related to this topic.

Ansari, Bell, Target costing, Consortium for Advanced Industrial Manufacturing (1997).
Cooper, Slagmulder, Target costing and value engineering, Productivity Press (1997).
Kaufman, Value engineering for the practitioner, North Carolina State University (1985).
Monden, Cost reduction systems, Productivity Press (1995).
Shillito, De Marle, Value – its measurement, design & management, John Wiley & Sons (1992).
Shook, Toyota’s secret: The A3 report, MIT Sloan Management Review, Vol. 50, No. 4, 30-33, Summer 2009.
Monden, Toyota Production System, Institute of Industrial Engineers (1983).
Kim, Mauborgne, Blue Ocean Strategy, Harvard Business School Press (2005).

Per Stenius, per.stenius[at]reddal.com

Increasing competition, regulation and information technology drive requirements up for a company’s finance function

In today’s fast-changing world, the requirements for a company’s finance function have significantly grown. A growing number of companies are facing tough competition already in the early stages of their lifecycle. As competition becomes more diverse, the geographical scope broader, and information technology more sophisticated, navigating in this environment calls for deeper understanding of a company’s strongholds, and planning and monitoring operations on more granular level than earlier. A solid fact-based understanding of the company’s financial performance is crucial for good decision-making.

In several small and medium-sized enterprises the primary task of a finance function has been to manage basic transactional tasks like financial accounting, invoicing and payments. However, to respond to the changing environment, finance functions are expected to evolve from accounting masters to business partners, providing decision support and control to guide company operations, and, further, to value managers driving the company’s value creation initiatives across businesses and functions. This evolution together with increasingly complicated reporting standards is changing the way finance functions and roles are organized. Increasing requirements for each role lead to specialization and fragmentation of the finance function but also put pressure on competence development and recruiting to meet future needs.

Publicly-listed companies have addressed the changing environment and expectations by organizing finance along specialty areas like accounting, controlling and treasury, and rotating people between functions and roles. Nonetheless, even in the big companies, there are few examples of managing company’s value creation initiatives systematically across businesses and functions. Few companies are able to follow up the business impact of the portfolio of strategic initiatives centrally to support decision-making and prioritize investments in a fact-based manner, usually running them in multiple functions independent of each other and without proper coordination. Those that are measuring value creation initiatives have introduced new governance models like fixed program management offices coordinating all ongoing strategic initiatives.

SMEs face challenges similar to publicly-listed companies but cannot afford building internal teams of expertise

Whereas publicly-listed companies can afford building teams of expertise and specific governance models, for small and medium-sized enterprises (SMEs) they are usually overly complex and costly. As a result they tend to focus on fulfilling regulated activities such as accounting while overlooking more value-adding activities or performing them through interplay between the CEO and the accounting manager. As these persons have several and usually time-consuming other responsibilities as well, there is a possibility that decision-making is compromised or the company becomes subject to undue risks. In our experience, there are three key benefits of an advanced finance function that tackle areas too often neglected, significantly improving an SME’s chances for growth and scalability:

• Improved understanding of profitability: Often a major problem even in larger companies, there is a lack of real understanding of the profitability of different products, customers or even entire business areas. This lack of detailed cost accounting leads to non-fact-based decision-making. As the contribution of the different ventures to the company’s bottom line is unclear, companies are unable to allocate resources efficiently and manage their business portfolio, eliminating unprofitable ventures and nurturing profitable ones.

• Better risk management: It is uncommon in SMEs to monitor cash flow systematically or proactively find ways to optimize the cash cycle by for example managing inbound and outbound payment terms, inventory levels, and pricing and discounts. A cash flow problem is often discovered far too late, when a liquidity issue occurs. Simple measures and proper business control can have an important impact. One SME, for example, hadn’t followed up its purchase contracts for a couple of years, despite running a growing and profitable business. Through simple cost monitoring, the company was able to gain significant savings by renegotiating the agreements

• Opportunities for strategic finance: Due to lack of resources, many investment and growth-related decisions in SMEs are done without comprehensive analyses of the different strategic alternatives. A developed finance function supports finding the best initiatives, the proper financing for them and can even be helpful in finding opportunities for inorganic growth.

Many of the benefits of putting more emphasis on finance functions are usually hard to measure, decreasing the willingness to invest in them. There are often, however, some low-hanging fruits the company is not aware of before an analysis is performed that provide rapid and tangible business impact as soon as the discovered opportunity is captured. For example, analyzing true product profitability for the first time often significantly challenges existing strategies and their key assumptions.

Some activities in advanced finance functions are needed more infrequently than others and therefore building in-house competencies may not be feasible since hiring a capable person is a big, inflexible and risky investment for many small companies. SMEs need to look at new ways to build required competencies.

Finding more flexible ways to build professional financial management competencies to support an SME’s growth journey

To determine competency requirements, an SME needs to understand its development stage and underlying strategy and value-creation drivers. To overcome these challenges a three-step approach may prove useful:

1. Understand the company’s long-term ambition, strategy and value drivers.

2. Derive financial management competencies from the strategy in each development stage, and evaluate their importance to strategy execution.

3. Define a roadmap to proactively acquire these competencies in each stage through recruitment, collaboration or outsourcing.

Competency development needs are tightly linked to the company’s strategy and it is therefore useful to reflect them through strategy. For smaller companies organizing the basic finance processes may already prove a big task, and therefore utilizing for example incubators, investors or partners can be helpful. After the basic processes have been defined, a company may consider outsourcing general accounting and other transactional activities and focus on more value-adding activities like financing, business control and pricing. Business and cash flow forecasting, for example, are critical tasks for every company but especially for start-ups with less stable cash flows.

After setting up the foundation, the company’s strategy comes more into play. When the company’s strategy is based on aggressive growth, the role of the finance function needs to focus on the financing of growth initiatives, international financing and credit management, taxation, setting controls to manage profitability and working capital (avoiding the “growth trap”), and developing value-adding business models and pricing. On the other hand, in case of a turn-around, the finance function needs to forecast business and cash flow intimately, pinpoint main profit drivers and steer decision-making through them. Detailed understanding of the balance sheet and major cost items is needed to manage the company’s cash flows. When driving profitability improvements, CFOs need to understand the company’s processes to be able to pinpoint inefficiencies, while thorough understanding of product and customer profitability may give new perspectives on profitability losses.

These competencies are far from accounting and therefore usually unavailable in-house. At the same time, they may not be needed regularly and therefore hiring a full-time financial management employee may become too expensive. SMEs need to find more flexible ways to build these competencies. Incubators, investors, business angels or external partners can provide a way to utilize these competencies when needed. Medium-sized companies might also consider sharing an employee with some of their partners, or outsourcing it from a service provider.

At its best, a finance function is far from pure administration and drives the company’s performance. This is important not only to the company itself but the whole Finnish economy that is driven by the growth of companies from 10 to 100M€ in revenue. Through prioritizing and driving value creation initiatives, the finance function can become a core strategic asset for a small and medium-sized enterprise as well.

Teemu Rautiainen
teemu.rautiainen[at]reddal.com

To understand how Korean companies drive their growth, Reddal traveled to this rapidly developing country and visited multiple companies in October 2011. The objective was to understand how Korean management thinks about strategy and how they translate their ambition into execution. We also wanted to compare the Korean approach to that used by Western companies to see whether there are any significant differences.

A rapidly growing economy

South Korea has for decades been one of the fastest growing economies in the world. During most of the 80s and 90s South Korea’s GDP growth rate was 2-3x that of Finland’s. Although in the 00s the difference has gotten smaller, South Korea has still managed to maintain a clear lead, also through the last years. This may be somewhat surprising given the Koreans’ propensity to high financial leverage, which makes them vulnerable for financial crises. Despite high exposure to debt, South Korea has clearly beaten Finland in the 2008-2010 crisis years according to the World Bank.

The two countries are in many respects very different. While Finland has managed a social policy that avoids excessive capital concentration, South Korea has pushed the dials very much in the opposite direction. Capital concentration and strong lead families are the norm, and their connection to the government very tight. Income ratios between the highest and lowest earners also differ markedly between the two countries. Yet there are also similarities. Strong owner-families have not completely disappeared from Finland, as witnessed by companies such as Kemira and Kone. Both countries have strong industrial footholds in machinery manufacturing and telecom. Granted, in telecom Finland now seems to be losing its edge, partially due to the strong onslaught of Korean companies such as Samsung. Similarly, in shipbuilding Koreans have achieved world dominance, while Finland has lost its position. Korean STX now runs the major Finnish shipyards in Helsinki, Turku and Rauma.

The starting point: State a compelling vision and set ambitious targets

Traveling across South Korea and visiting both large and small companies, we had ample opportunity to study the Korean approach to strategy.  What becomes evident immediately, both when talking to executives as well as employees of Korean companies, is the emphasis on a bold vision for future prosperity. This applies both to politics as well as business: when the Koreans elect their President, one of the first tasks of the new leader is to present a five year plan for the nation, outlining how the country will drive its growth and development. The large chaebols (conglomerates) then adapt to this plan, securing that their activities are aligned with the nation’s ambition. The Chairman of a major company often details the vision in a new year’s letter to the employees, outlining the key areas and activities the company needs to focus on. When a big revision is due, the new vision is published in a big celebratory event and widely shared across the group. This whole approach contrasts sharply with Finnish companies, where vision and mission statements certainly do exist, but where their role is often reduced to impersonal marketing slogans. In Korean companies, the vision is bold, linked to the leaders and taken seriously. When people look for jobs, a key consideration is the credibility of a company’s vision and its implications for long term prosperity.

In Korean companies the vision not only defines key focus areas, it also sets some very ambitious growth targets. Often these targets are on the order of 4-5x current revenue within the next ten years. It does not seem to matter if current revenue is 1B€, 10B€ or 100B€, the factor 4-5x seems to be quite universal, indicating an insatiable hunger for growth. Setting the target high seems typical for the Koreans, and it is also reflected in the incentive systems companies use. Expectations to exceed the (already ambitious) targets are the norm; just reaching 100% is not enough. The difference to Finnish major companies is quite clear, as their growth targets usually are more moderate with factors around 2x growth within ten years. More importantly, Finnish companies seem to stop around 10B€ revenue, with only a handful companies having ever crossed this barrier.

The high ambition of Korean companies may partly be driven by their intense internal rivalry. In almost every sector the large Korean chaebols are competing fiercely against each other. The competition continues further back in the value chain as suppliers often link to specific chaebols quite tightly. New companies appear rapidly, so that ultra-competition appears even in new business areas. Often the sources for new companies are the chaebol networks themselves, which spawn SME companies to serve the larger conglomerate. Again, the Finnish economy is quite different – major companies rarely compete in any significant degree with each other. Rather they have evolved into leadership within their own focus area (which unfortunately in many cases is quite narrow). In addition, the Finnish major companies are regrettably passive in new venture creation.

Implementation secured by detailed execution plans and incentives

As described above, the Korean strategy process evolves along the steps of defining the vision (publicly signed off by the Chairman), setting very ambitious overall targets, disseminating the targets for the units and aligning incentive systems with targets. This seems to be followed by quite detailed execution planning (sometimes in the form of very specific action lists that are followed up rigorously at monthly intervals). Interestingly enough, while the process seeks to look at long-term growth, the execution plans and incentive systems ensure managers cannot relax in their day-to-day operation. Also, while on the corporate level growth can be driven by major acquisitions with substantial leverage components, operative management on the business unit level must often demonstrate self-funded growth (similar to the typical mantra of “profitable growth”, or “kannattava kasvu” often heard in Finnish companies).

Hierarchy and democracy mixed

The Korean strategy process reflects the paternalistic culture of the nation, where respect for the elder runs high. The leader is considered responsible for his employees, like a father is responsible for his family. Contrast this with the strategy process of many Finnish major companies, where leadership teams debate strategy and potential actions, and where employee “buy-in” is required before execution can commence. This often results in a sluggish process, which at times focuses on areas less relevant. While there certainly are many benefits of dialogue and debate in the strategy process, sometimes lack of vision and strong leadership can cause the entire process to fail.

It should be emphasized that while Korean culture from the outside appears very hierarchical, there in fact exists a considerable amount of debate within the company. Leaders listen to their subordinates and often ask for their opinions. Yet, once the decision time comes, the leader steps up and takes his role fully. In this respect successful Korean companies seem to have been able to combine strong leadership and vision with a democratic process that involves front line staff, thus securing the execution of agreed tasks. This approach is perhaps not very surprising, given South Korea’s history and especially its on-going military engagement with North Korea. There are certainly militaristic elements in the Korean way of conducting strategy and execution, and the active involvement of front line staff to gather the best possible intelligence to a given problem fits in this picture quite well.

Finnish companies display some similarities to the non-hierarchical debate described above. However, given the lack of strong vision and ambition, it seems Finnish companies cannot leverage this capability fully.

Comprehensive analysis versus business insight

One apparent flaw in the Korean strategy process is the reduced emphasis on extensive strategic analyses, at least when comparing to the Western style of detailed analysis at the start of most strategy efforts. However, it may also be that the emphasis on a top-down vision allows Korean companies to focus their analytical efforts on those areas that matter most. For certain, they seem to put considerable emphasis on financial analyses of the practical implications of executing the strategy. At the same time, a caveat in the Western process is that extensive analysis up front may lead to “analysis-paralysis”, leaving behind very little conclusions and focus and even less innovative thinking. In this respect, developing a long term vision and storyline up front and using that to focus the strategy process may be the more effective approach. A top-down approach requires senior management to leverage their business acumen from the start, and then having their ideas tested by more detailed analyses. It also gives more room for innovation and novel approaches.

Entrepreneurship is a key component in the overall approach

The strategy process by itself is probably not the key when comparing the growth of Korean companies with their Finnish and Western counterparts. An interesting aspect of even very large Korean companies is that senior management team members can at times be very entrepreneurial, encouraging the establishment and building of new business units, and giving these units time to build their position. This combined with an often quite keen understanding of the business dynamics and active internal debate across hierarchical layers, provides a fertile management culture for growth. A related aspect of the Korean management culture is fast decision making. While the emphasis for long-term vision certainly dominates, rapid changes, opportunistic plays and intuitive decision-making are quite frequent. Again, similarly to their ability to balance hierarchy with informal discussion, the Koreans seem to balance long and short term actions in order to maximize growth.

Learnings from the Korean vision-driven approach could help Western companies grow

Korean companies clearly emphasize strong leadership and long-term vision much more than their Finnish and Western counterparts. Koreans manage to do this without sacrificing internal debate and analytics, or becoming sluggish in their decision-making. Due to a culture of intense rivalry, Korean companies come across more growth hungry and less risk-averse, often employing a very high degree of leverage (ratios of 90% are quite common). Korean culture includes a heavy dose of entrepreneurial attitude and quick decisions when opportunities arise, supporting a continuous aggressive search for growth in current and new markets. This attitude differs markedly from the more cautious and analytical approach of many major Finnish corporations, and so do the results – Korean companies are posting impressive growth numbers while the Finnish economy is somewhat stagnated. For sure the Korean companies also have their challenges; the surrounding countries are increasingly challenging Korea, and within the country opposition to the high income differentials and preferential treatment of the large chaebols is increasing. In addition, the Koreans are quite nationalistic, at times depending too much on Korean staff, thus making it difficult for them to benefit from the global talent pool.

Finns cannot directly copy the Korean model, nor will Finland’s economic structure lend itself to the Korean highly leveraged approach. Korea has a larger domestic market, and it is also a nation at war. On the other hand, just like their Finnish counterparts, major Korean corporations derive a majority of their revenue from exports. There are many areas where Finnish and Western management teams can learn from the Koreans, in particular when it comes to a solid long-term vision, a healthy appetite for growth, strong performance culture, and entrepreneurial attitude. Capturing these lessons could be quite valuable to secure growth and future prosperity!

We would like to express our gratitude and appreciation to the companies we met with for the writing of this article, and to the Korean and Finnish executives who contributed with their comments and input.

Per Stenius, per.stenius[at]reddal.com

A democracy characterized by a coordinated drive for growth

South Korea has been one of the fastest growing economies in the world since the 1950s. It possesses a large domestic market with a population of 50 million and is close to the bigger Asian markets of China and Japan. As opposed to China, South Korea is a developed democracy that offers a less risky business environment for those looking to enter the Asian market. On the other hand, the country is somewhat more dynamic than Japan and has a more entrepreneurial and aggressive corporate culture.

The South Korean democratic model operates under a two-party system, characterized by efficient decision-making. Internal feuds within parties are rare, presumably because of the Korean way of respecting the decisions of superiors. Still, Koreans are not afraid of entering vigorous debate, as witnessed by quite fierce discussions in the parliament and the frequent demonstrations. While debating is commonplace, once decisions are made, implementation tends to follow swiftly, ending discussions.

The nation gives the impression of being steered from the top down in an efficient way that an outsider could easily deem as post-militaristic. When the President is elected, he sets an ambitious five-year vision for the country. The plan of the current President, Lee Myung-bak, is known as 747: 7% annual growth, 40000USD GDP per capita and raising South Korea to the 7th largest economy in the world. Additionally, the president has set Green Growth as the new national development paradigm with the aim of turning the nation into a global leader in green technology.

The chaebols, large Korean conglomerates, support the execution of the national vision by setting their own growth targets accordingly. For example, following President Lee, Samsung has announced an ambition to be number one in solar energy by 2015 and is investing $20 billion in new innovation in solar cells, rechargeable cells for hybrid electric cars and LED technology; Daewoo has built the world’s largest tidal power plants on the South Korean coastline, and both STX and Hyundai are investing heavily in solar and wind power around the world.

Culture of ‘han’ pushing the nation ever higher

South Korea is not a low-cost labor country, especially if compared to countries such as China, Vietnam or Thailand. Although wages are still low outside the biggest cities, and for low skill jobs, higher level jobs have salaries comparable to Western standards. Thus for companies looking at South Korea as a potential operations base,  the main benefits lie in its ambitious and educated workforce, and a strong working culture, rather than just labor cost arbitrage.

Koreans possess a remarkably ambitious mindset. Having a high-reaching long-term target is of great importance in Korean culture, reflected not only in national and corporate target setting but on all levels of society. Koreans use the word ’han’ to describe this urge to overcome obstacles and injustices suffered, reaching out for victory. Unlike its Finnish counterpart ‘sisu’, ‘han’ is not just mere perseverance but includes the element of pursuing greatness.  This culture of ambition is visible everywhere: in working culture, education as well as everyday life. It comes as no surprise that Koreans work more hours per capita than any other OECD nation.

Furthermore, based on OECD statistics, Koreans have one of the highest levels of education in the world. A vast majority of family income is typically spent on ensuring the best possible education for the children. Ambition is also visible in educational institutions. Many top Korean universities communicate bold visions, such as becoming one of the top universities in global rankings or having a large number of graduates continuing their studies in Ivy League universities. The universities also actively pursue exchange programs with foreign universities, ensuring knowledge transfer.

Great investments in education and an ambitious hard-working population have been vital in the country’s growth. South Korea’s real GDP grew from 2.7 billion USD in the 1960s to over one trillion in the 2000s. The country has also continued its growth in the last few years, despite the financial crises. Unlike Finland, South Korea only suffered a minor dip in 2008-2010 and has since resumed its previous growth path.

Chaebols, culture and language creating high barriers to entry

The large chaebols contribute to most of the GDP growth of the country. They are very tightly linked to the government, partly owing to the country’s history. This coupled with the fact that the conglomerates compete fiercely both among themselves as well as with any foreign entrants, has made it difficult for big foreign companies to enter the South Korean market. As an example, Nokia failed in its Korean market entry efforts due to government intervention and competition from LG Electronics and Samsung, according to a 2003 study conducted at the University of Tennessee.

Another challenge for foreign companies lies in attracting the best people. Most Koreans still see the large chaebols as the most attractive employers.  Among Korean university graduates, chaebols are seen as the most respected places to work in the society, offering high wages and a lifelong career path. In Korean culture, respect of authority, seniority, and dedication to one’s job are central. Employees are motivated and encouraged to pursue long careers in the same organization. The employees of the chaebols execute the corporate vision by aligning their own ambitious targets with those of the company. A new entry-level recruit at a major chaebol spends the first work weeks planning his own vision for his career development. The new employee is then assigned a mentor whom he meets on a monthly basis to revisit his career progress vis-à-vis the set out goals.

Operating in South Korea can also be a challenge due to the country’s business culture. The widely encountered sense of nationalism extends beyond job selection. A foreign company may have trouble finding clients; South Korean major corporations often prefer local production and Korean suppliers.  For a country dominated by a large number of international conglomerates, the business environment has surprisingly little cultural diversity. Knowledge of the Korean language is a requirement for a foreign market entrant as Korean is still the main business language. Furthermore, the society is very networked and knowing the right people is essential to build business relationships. Thus both language and cultural barriers are high.

Demographic trends, free-trade agreements and student exchange increasing openness

The South Korean economy has recently started to show signs of internationalization, opening up possibilities for foreign companies. One reason is demographics; the population is aging and the workforce is shrinking. At current fertility rates, each generation is roughly 40% smaller than the previous one. South Korea will have to open its doors to foreign workforce and business to be able to maintain its prosperity as its domestic demand decreases.

During 2011, South Korea has signed important free-trade agreements (FTAs) with both the U.S. and the EU, opening up new opportunities for international commerce. The FTA with the U.S., signed in November 2011, will remove tariffs on 95% of the goods within five years. The FTA with the EU has been provisionally applied since July 2011. Estimates of its impact on export levels are as much as 30-40 billion euros bilaterally. However, there is a risk that the opportunities offered by the FTAs, while aggressively utilized by Korean companies, are not equally leveraged by Western players due to the perceived soft barriers such as language and culture. Understanding South Korea better, and seeing how it is developing is crucial for bilateral success.

The South Korean internationalization trend is further emphasized by the growing number of young Koreans studying abroad. English language education is deemed very important in today’s South Korea and many Koreans spend extended periods abroad to hone their English skills. There are currently more than 100 000 Korean students in U.S. universities, making Korea the top student-sending country in the world. This is lowering the language barrier and opening new opportunities for foreign companies seeking multi-language employees.

Younger Koreans have also learned the benefits of an international environment and are not protectionists to the extent of the generations before them. While the economy has developed thanks to the prevalence of the chaebols, admiration for them is decreasing; the benefits of the chaebols to the economy and the job market are being questioned more and more. Koreans, particularly those who have spent time abroad, often have new, less conventional ideas about their employment prospects. The large chaebols only employ 10 % of the population. At the same time, 40% of university students remain unemployed four months after graduation, according to a study conducted in August 2011. While landing a job in a prestigious chaebol is still the ultimate goal for young graduates, a small but growing number of them are now looking for employment in the startup sector, or starting their own companies. These entrepreneurs rebel against traditional values in this country where job title is the main metric for success. The new generation is also increasingly adopting a more Western work culture. Many tend to value a more balanced work life, instead of the long hours employees put in at the chaebols.

Opportunities exist but require a solid entry strategy and understanding of the market

Chaebols dominate the South Korean business environment and direct competition with them is challenging. A market entrant could, however, prosper by targeting a niche that is too specialized for the big chaebols to enter, either directly or through their supplier network. Recent developments in the country’s rising IT-startup sector may also open up new opportunities for foreign companies interested in entering the South Korean market.

Chaebols use generic suppliers in areas where they cannot obtain economies of scale, and a player entering such a specialized market could fly under the conglomerates’ radar or even be seen as a crucial partner. Typically such a niche is highly specialized, and the volumes are not big enough to mandate serving only one chaebol. As an example of a successful market entry using this strategy, consider a Finnish company in the construction sector. It entered a niche market where volume was too small to attract chaebol entry and where developing a product from scratch would have been too time consuming. The market was further boosted due to a new government five year plan. The company has managed to build a significant market position, serving several major chaebols, by offering a top-quality product and serving Korean customers while paying attention to the local cultural requirements.

Local manufacturing content also plays a big role, both for government procurement and major chaebols tightly linked to the government. Leveraging this, a Finnish industrial equipment manufacturer has succeeded in penetrating the South Korean market by acquiring local production facilities and developing the manufacturing process to world-class (partly by learning from top chaebols in the auto industry). Today, the company is in a position to provide their high-quality equipment to multiple conglomerates across several market sectors. The production facility also serves as a global production base for this specific product category, indicating that despite the somewhat higher labor cost, the Korean plant has managed to reach a cost competitive position even on a global level. Success for this company builds on systematic development of a world class production process, bringing top quality products to the market and working close in a mutually beneficial approach with major chaebols.

In the IT-sector, the emergence of the Android and iPhone mobile platforms constitutes a revolution that has opened up new opportunities for startup ventures to flourish. While previously tightly controlled by the chaebols, the ecosystems these new operating systems offer provide easy market access to independent innovative players. This has lead to multiple new local IT companies emerging, now followed by the entry of venture capital players seeking to reinforce the trend. A foreign IT-startup in South Korea could benefit from the large domestic market and the ongoing start-up boom. This sector does not (at least yet) suffer from hyper-competition, partially due to the fairly limited history of startup entrepreneurship in South Korea. The local market is very advanced with South Koreans actively using their mobile devices for gaming, social networking, and anything else application developers can offer. Although Nokia failed in its Korean market entry, Finnish Rovio with its Angry Birds game is today well known among Koreans. The telecom, wireless broadband, cable and IT-infrastructure in South Korea are also highly developed. Today South Korea has the third highest Internet penetration in the world and ranks at the top in Asia.

Recruiting and marketing processes are crucial in the initial phase

The nature of the South Korean business environment makes recruiting the right people an essential factor of a successful market entry. The best Korean employees are unlikely to apply for work with an unknown foreign company lacking brand and credibility. On the other hand, the business culture depends highly on personal relationships, making it a difficult market unless the company has a top-notch staff accustomed to the local business culture and with the right networks in place.

Consider the case of a Finnish industrial goods company. A market opportunity was seen for its products, but setting up a sales office took much longer than expected, mainly due to staffing difficulties. After a great deal of challenges, a senior manager willing to work for the relatively unknown company was found.  Unfortunately, the manager was “too senior” to drive crucial early stage frontline sales work, and evidently also lacked any real access to key decision makers. Finnish mid-level management was sent over to push the local operations forward, but has so far been unable to change the situation markedly as they do not have the required networks.

Successful recruiting requires developing a strong company brand and word of mouth, so that one is able to compete with the better-known local players. The company’s vision for the future must be credible; often marketing messages have to be tailored to meet the unique characteristics of the South Korean business environment. Topping this off by offering a better work-life balance can switch the recruiting advantage to the foreign company. A Finnish company that succeeded in setting up its South Korean sales company found an entrepreneurial sales manager in his mid-30s with solid international experience and good knowledge of the Korean market. The manager preferred employment in an international company due to the better working culture and saw the opportunity to build his own career in the company. The company had a good reputation, world class products, and focused on markets where demand was building up yet no chaebols or their suppliers operated. In addition, Finnish senior management members had spent considerable time in Asia, and understood the unique characteristics of the market.

South Korea offers interesting learning opportunities and a gateway to larger Asia

South Korea remains relatively unknown to foreign companies and its potential is perhaps too often neglected. Granted, this country represents a fairly closed economy, and due to language and cultural barriers it is a hard one to enter. Nevertheless, the unique characteristics of this market offers the courageous entrant interesting learning opportunities, and a gateway to the larger Asian markets. Success will require careful attention to efficiency and quality, as well as recruiting, marketing and brand building (often through informal networks), and further obstacles are likely to be found on the way. For those who survive the entry, the reward lies in working with one of the most dynamic economies in the world, having access to a highly educated, hard working and ambitious staff, and collaborating with some of the largest and fastest growing global corporations.

Henry Beniard, henry.beniard[at]reddal.com
Per Stenius, per.stenius[at]reddal.com

Our next newsletter will be out June 15th. Stay tuned.

Issue 07 (Apr 06, 2012)
– Design-to-Cost and Developing financial management in SMEs (en/fi)
Issue 06 (Dec 30, 2011)
– South Korea – the business environment and the way Koreans do strategy (en/fi)
Issue 05 (Oct 03, 2011)
– Corporate culture transformation and linking it to strategy (en)
Issue 04 (Jun 21, 2011)
– ICT investments, bolt-on acquisitions and foreign subsidiary turn-around (en/fi)
Issue 03 (Apr 01, 2011)
– Finnish growth companies and the process of growing, some research (en/fi)
Issue 02 (Nov 05, 2010)
– Three articles about growth and the pain that goes into creating it (en/fi)
Issue 01 (Jun 19, 2010)
– How crossing the billion euro revenue level changes the management team (en/fi)

One might have a long debate about which comes first, strategy or culture. Some argue strategy should be built on the underlying culture and strengths, whereas others maintain that strategy must be responsive to the changes in the environment, and thus, a new strategy may require fundamental internal changes. Both sides have a point – on the one hand changing culture is a big task that takes years, whereas a new strategy can be developed in as little as 3-6 months. On the other hand, drastic changes in the environment may require a whole new way of thinking, inevitably forcing the corporation to change its culture in order to deploy a new strategy.

In the last year or so we have participated in several efforts where corporate culture has been one of the centerpieces. In this short article, we try to illuminate some of the findings that we have gathered along the way.

Corporate culture drives performance, development and retention

Anybody researching the topic of corporate culture will find a plethora of frameworks, articles and analyses in management literature. The topic has been reviewed by multiple authors, each one presenting their perspective on how to best address the issue of culture performance, development and transformation. However, quite often the frameworks appear either overly complicated and therefore not very useful, or overly simplistic and therefore self-evident. One thing is clear, however; corporate culture is a fuzzy topic, and should one attempt to change it, especially in a global corporation, one is in for a long and rocky road.

While corporate culture is indeed a tricky subject, it seems quite clear that a “good” culture is crucial when it comes to people performance, development and retention, and thus, also company performance. We use “good” in quotation marks to emphasize that one size does not fit all – there are multiple approaches that all can lead to success. An interesting example is recent research (see Michel et al., Administrative Science Quarterly, 52 2007: 507-557) on cognitive uncertainty. In this article the authors compared two investment banks, one which employed a culture of cognitive certainty (specialization, guidelines, clear roles and responsibilities, experts) and the other which employed the extreme of cognitive uncertainty (very little specialization, no guidelines, fuzzy and changing roles and responsibilities, generalists). The result was that although the cultures of these businesses were diametrically different, their performance was not. Granted, the pros and cons of each model differed, as thus did their strategy, but both companies were able to compete in the same marketplace quite successfully.

It seems, then, that a specific culture cannot be defined as “the best choice” for companies competing in a specific market. However, what does make a difference is how solid and generally deployed the culture is, or in other words how “honest” the culture is across the corporation. By this we refer to a culture where people across the company share the values, general ways of working, and goals, and where different people understand and respect the role and contribution of others. Such thinking is well known in military circles; Ernesto Che Guevara, who was a prolific writer about how to succeed in guerrilla warfare, emphasized in his books that a strong underlying culture and a shared set of values and purpose were the key for any military operation. With this, a small troop could upset an enemy that was far stronger in both number of soldiers and assets.

Discussing values is only a first step; a change in behavior is required across all layers

When senior management sees that the company culture needs to change, they typically start off with an exercise on values. Using modern tools such as social media and extensive workshops, an all-encompassing debate can be initiated and deployed over thousands of employees worldwide in a matter of months. The essence in this process is the dialogue that takes place both face-to-face in joint sessions (often mixing participants), as well as through interactive media reflecting on the synthesized results from various sessions. Some key ingredients in such a process are extensive management involvement and participation, as well as an (often fairly small) core group leading and guiding the effort.

Consider this disguised example that illustrates this type of “value definition exercise” and the steps that followed in a time-span of roughly 18 months: A large global industrial corporation felt that their environment and strategy had changed so much, that a redefinition of their corporate culture was needed. Initially they started with a kick-off at one of their international conferences, where employees and employee representatives were strongly present. This was followed by several tens of focus-group interviews assembled across and throughout the organization, where key themes for future success, from a corporate culture perspective, were explored. Each interview was on the order of 2-3 hours, with multiple participants in each session. The focus group sessions were followed by workshops across all regions and units of the organization, building on a simple three-step agenda: (1) What are your own values, (2) what ways of working are crucial, based on the corporation’s new vision and strategy, and (3) comparing these two, what stands out as common denominators and what values can we distill from this. In parallel with these workshops, a global intranet site was operated, where results were synthesized and debated, and keywords were distilled. The process lead to a new set of values, which eventually were ratified and deployed. In parallel with the deployment, internal debate was focused on how the values should be reflected in everyday behavior, and in particular, in behavioral changes (structured along “what should we do more, what should we keep, what should we do less or discard”). The process has now evolved to the next phase, where the corporation is using a similar process to discuss and define what kind of leadership is needed to achieve an environment that fulfills the values and sought-after behavior in practice.

This example illustrates how the initial value definition exercise is merely a first step, and that the real substance of the process comes about when values are transformed into behavior and leadership models. By combining these into a coherent set of principles, widely deployed and accepted in the organization, a coherent – “honest” – culture can start to emerge. An illustration of how far this needs to be taken comes from another global industrial corporation: The CEO and now chairman has for years had a habit of writing and updating a booklet on the values of their corporation, and how they guide the behavior and decisions made in the daily work on different levels of the organization. This booklet gives straightforward practical images and guidelines on what the values and culture mean, when fully executed. By sharing such “stories”, and following up that staff across all levels live up to the examples set, a strong culture has been built. A key ingredient is also that performance evaluation criteria and incentives reflect these principles, and that performance evaluation is conducted with a 360 view, including superiors, peers, subordinates and collaborators to obtain a complete assessment.

Culture transformation is a multi-year journey which must be systematically driven forward

Achieving a fundamental change is in culture in a multinational corporation is typically estimated to take five to seven years. However, already in 2-3 years change can be perceived, and its positive impact on execution becomes evident. In order to guide the process, it is therefore important that management both realizes that the journey will take significant time (and thus, rapid changes are not possible – the direction must be maintained quite steady), but also that progress must be continuously monitored and measured, adjusting and intervening as needed. Culture, just like strategy, becomes then a dynamic thing which is developed based on a longer term vision while continuously adjusted and corrected to ensure best fit and impact.

Per Stenius, per.stenius[at]reddal.com

Keskisuurten yritysten tulisi varmistaa, että yrityksen kasvukulttuuri on vahvalla pohjalla, eikä se ole pelkästään toimitusjohtajavetoista. Toimitusjohtaja ei pysty yksin viemään koko yritystä eteenpäin ja joskus toimitusjohtaja voi olla myös pullonkaulana, mikäli uskallusta kasvuun ei ole riittävästi. Jos yritys ei ole kokonaisuutena kasvuhakuinen, on yrityksen riskinä jäädä ennemmin tai myöhemmin isompien pelaajien alle.Tämän lisäksi tärkeitä lähtövaatimuksia kasvukulttuurin luomiselle ovat strategiatyö, raportointi- ja tavoitteenasetantakulttuuri, sekä tähän perustuvat johdon ja henkilöstön kannustinjärjestelmät. Kasvukulttuurin olemassaolo vaatii myös, että oikeat henkilöt ovat oikeissa rooleissaan ja organisaatiorakenteet kykenevät kasvattamaan tulevia johtajia.

Kasvukulttuurin luominen vaatii johtoryhmän, strategiatyön ja raportoinnin kehittämistä

Yrityksen alkuvaiheessa kasvu on enemmän tai vähemmän toimitusjohtajavetoista, mutta pidempiaikaisen kasvun varmistamiseksi koko yritys on saatava innostettua tavoittelemaan parempia tuloksia. Paikalleen jämähtäneessä yrityksessä kasvukulttuurin muutos lähtee johtoryhmästä, jossa jokaisella jäsenellä on omat selkeät vahvuusalueensa. Tyypillisesti yrityksen alkuvaiheessa kaikki avainhenkilöt hoitavat useampia vastuualueita, mutta sellainen malli saavuttaa rajansa nopeasti.

Vahvan johtoryhmän rakentaminen vaatii, että toimitusjohtaja luopuu osittain vallastaan ja antaa selkeällä tehtäväjaolla muille johtoryhmäläisille omat vastuualueensa ja puitteet vahvemman johtoroolin ottamiseksi organisaatiossa. Tehtävien tulee vastata kunkin vahvuusalueita ja joskus voi olla tarpeen myös lisäresurssin palkkaaminen. Yrityksen pitkäaikaisen kasvun varmistamiseksi on kuitenkin syytä varmistaa edellytykset henkilöstön kehittymiselle ja uraetenemiselle, jotta organisaatio voi kasvattaa omat johtajansa. Yhtenä perusedellytyksenä on suoritusten arvioimisprosessin luominen, jossa henkilökunta ja etenkin avainhenkilöt saavat palautetta niin esimiehiltään, alaisiltaan kun vertaisiltaankin.

Kun vastuu alkaa jakautua useamman henkilön välillä, on yrityksen varmistettava, että tiedon jakaminen ei muodostu kasvun pullonkaulaksi. Tehokkaalla tiedonjaolla varmistetaan, että parhaat käytännöt omaksutaan koko yrityksessä ja yritys kulkee samaan suuntaan. Perustasolla tiedon jakaminen lähtee liikkeelle johtoryhmän ja funktioiden omista viikkopalavereista, joissa käydään läpi uusimmat ideat toiminnan kehittämiseksi sekä seurataan tavoitteiden täyttymistä.

Johtoryhmätyöskentelyn kehittäminen alkaa strategian luomisesta, jotta kaikille osa-alueille muodostuu selkeät suuntaviivat ja tavoitteet. Toiminnanohjausta helpottavat mittaristot ja yhdenmukaiset seurantatavat tekevät tavoitteenseurannasta systemaattista. Seurannan tärkein rooli on ongelma- ja kehityskohtien tunnistaminen, jotta niihin voidaan reagoida tarvittavin toimenpitein. Yhdenmukaistamalla henkilöstön ja johdon kannustinjärjestelmät strategisten tavoitteiden kanssa edesautetaan näiden tavoitteiden toteutumista.

Kulttuurimuutos on pitkäaikainen prosessi, jonka on seurattava yrityksen kasvuvaiheita

Vaikka PK-yrityksen pitääkin kasvaessaan muuttaa toimintatapojaan entistä lähemmäksi suuryrityksiä, on samalla varmistettava, että muutosta ei yritetä tehdä liian nopeasti. Suuryritysten käyttämät prosessit ovat usein niin raskaita, että niiden kopioiminen suoraan PK-yritykseen voi pahimmillaan tuhota yrityksen kannattavuuden ja joustavuuden.

PK-firmat nojaavat yleensä vahvasti henkilösuhteisiin, eikä yrityksen kulttuurimuutosta voikaan ulkoistaa kokonaan erilliselle toimijalle. Muutosagenttina toimiminen sisäisen henkilön asemassa voi olla kuitenkin olla myös haastellista, mikäli ympäristö on politisoitunut tai urautunut tiettyihin rooleihin ja toimintamalleihin. Kasvu-uralla säilyminen edellyttää kuitenkin tämän henkilösidonnaisuuden purkamista. Monesti kulttuurin uudistaminen vaatii tuoreita näkemyksiä ryhmän ulkopuolelta. Uuden tai ulkopuolisen henkilön on kuitenkin ansaittava luottamuksensa tekemällä tiivisti töitä koko organisaation kanssa, jotta voi edesauttaa kasvukulttuurin kehittymistä organisaatiossa sisältä käsin. Kuten sanottu, kulttuurin muuttaminen on pitkäaikaista työtä joka vaatii aikaa.

Mikäli yritys onnistuu kasvukulttuurin luomisessa, yrityksestä tulee houkuttelevampi niin omistajien kuin työntekijöidenkin kannalta. Kunnianhimoiseen yritykseen on helpompi houkutella huippuosaamista ja vanhoista työntekijöistäkin saadaan enemmän irti, kun yritykseen luodaan uutta dynamiikkaa kasvukulttuurin kautta. Toimintapojen jatkuva kehittäminen ja kehityskulttuuri tekee työstä merkityksellistä ja motivaatiota työn tekemiseen, kun muutosta tapahtuu. On siis selvää, että onnistunut kulttuurimuutos näkyy ennemmin tai myöhemmin myös parantuneena arvonluontina.

Paavo Räisänen, paavo.raisanen[at]reddal.com
Henry Beniard, henry.beniard[at]reddal.com

Bolt-ons – small focused acquisitions that fit directly into the acquirer’s existing platform

While large M&As are often complex and effortful, a “bolt-on” acquisition typically adds to only one dimension of the acquirer’s business. Bolt-ons add a missing item that can be easily “bolted” on to the acquirer’s existing business. Thus the existing business becomes stronger as it can leverage the existing assets more efficiently with the bolt-on element. Typical examples of bolt-ons are technology, brand, trademark, or product expansion acquisitions targeting to expand the offering portfolio and realize cost synergies through a common platform. Technology or skill development that aims to improve competitiveness through creating a more comprehensive, solution-type offering can be done through a bolt-on acquisition. Similarly, a value chain expansion acquisition can be considered as a bolt-on if, for example, a certain component manufacturer or technology is acquired to enhance the existing business. Due to the relatively small size of the bolt on acquisitions, integration can be done relatively fast, providing a rapid market entry, product line extension or capability development in comparison to organic development.

The Finnish technology company Outotec has actively pursued a strategy of acquiring small advanced technology companies, which it then has attached to its overall technology portfolio and distribution machinery for broader market access. A recent example is Outotec’s acquisition of Larox, a Finland-based filtration company. The acquisition allowed Outotec to broaden its offering portfolio and fill a gap in it.

Brand and trademark acquisitions are also typical examples of bolt-ons that allow the acquirer to generate additional sales and gross margin with low additional overhead. Thus, they are attractive means for achieving growth and profitability improvement via economies of scale in logistics and manufacturing. For example, Altia, a Nordic alcoholic beverage manufacturer and distributor, has added new brands to its portfolio including Grönsteds and Renault cognac brands in 2009 and 2010 respectively. Similar expansion strategies have been successfully utilized by other alcoholic beverage companies such as SAB Miller and Diageo.

Success in bolt-on acquisitions requires understanding the existing business platform, its gaps, and how the bolt-on target fits in as a value driver

In addition to cost synergies driven by lower cost of goods sold and overhead utilization or reduction, a key value driver in bolt-on deals is often boosting sales of the acquired business through wider sales and distribution network of the larger company acquiring it.

Since the acquiring company is larger than the target it can utilize its larger purchasing power in materials and services purchased. Substituting the supply contracts of the acquired company with the acquirer’s contracts may create value significantly. The more there is overlap on the supply side, the larger the potential synergies. In general, even small decreases in gross margin may create a significant boost in profitability, making supply side synergies the premier value driver. Thus, the value creation is most certain when the acquirer has strong negotiation power towards its material or component suppliers. However, as supply side synergies are fairly easy to assess, sellers tend to include them in their valuation of the business to begin with.

Improvements of capacity utilization at own production and logistics operations are another value lever related to bolt-ons especially in cases where a series of bolt-on acquisitions is done. Often “variable” production costs are not variable at least when considering incremental changes in volumes. The production and logistics volumes of small bolt-on acquisition may be added to the production platform with no extra headcount or investments.

While synergies can be significant and seem obvious, a common pitfall is to overestimate them. Normally, the acquired company is relatively small with low overheads. Thus, even a large relative cut from the overheads may be irrelevant when considered in absolute numbers. In technology bolt-ons, difficulties arise when the acquired company has its own production facilities which differ significantly from the acquirer’s facilities.  This is often the case when a company is acquired for its novel technology that broadens acquirer’s offering, but current production capacity cannot be utilized in full by the acquirer. In this type of case, a joint venture or another form of collaboration with the target company may be more beneficial.

For bolt-on deals, sales increases are generated by cross- and/or up-selling opportunities. When companies have different customer bases there is an opportunity for cross-selling; the acquirer may start offering the new product to its existing customers or its own products to the acquired customers. In the case of up-selling the acquirer can bundle the new product with its existing products to increase their sales. Large IT-companies such as IBM have performed a number of acquisitions over the years where the rationale has been to distribute the target company’s technology or complete product through their global distribution channels extremely fast and with significantly smaller investments than by establishing own sales and distribution operations. Cross- and up-selling opportunities are intuitively appealing concepts for rationalizing an acquisition. The problem with this is that cross- and up-selling are more uncertain than cost-side synergies and are typically overestimated. Before actually starting the sales operation you can only speculate on how the customers really react to the addition in the product portfolio whereas cost-side synergies can be verified before the acquisition.

A systematic program-based approach to grow through bolt-on acquisitions supports value creation for the long term

Although assessing the overall rationale and synergies for bolt-on deals should be more straightforward and accurate than for larger transformational acquisitions, the typical pitfalls in overestimating synergies and cross- and up-sell opportunities still exist; paying too much because of “deal fever”, and lack of focus on long term value creation. A key difficulty in value creation is the value appropriation between the buyer and the seller. When seller can assess the synergies and revenue effects easily, it may include them in the valuation increasing the asked price for the company and its assets. Value creation as such does not diminish, but the seller gets a larger share.

While individual M&A deals are difficult to plan ex ante, a program-type approach provides potentially a better result than focusing on single targets when it comes to bolt-on opportunities. The first step is to understand the ambition and direction of the company, and what gaps in, for example, the technology, or the offering the company has to fulfill to reach its ambition. The second step is to develop an understanding on which gaps can be filled with M&A and which need to be filled organically through internal development. This includes assessment of potential product and service offering additions, assessment of make or buy decisions, and mapping of potential acquisition targets to fill the gaps in offering.

When the view on potential acquisition targets is created, one can generate an overall roadmap based on potential structural options. This allows the buyer to build scenarios on how the sequence and targets of bolt-on acquisitions can vary to best suit the company’s targets. In addition, this allows following up the identified targets, and approaching them in a systematic way when the time is right. The program based approach leaves more time for strategic consideration, and planning of alternative scenarios than exploring mere individual opportunities. If cases are assessed individually on ad-hoc basis, the strategic focus may be lost and the acquirer may end-up paying too much as the target evaluation is done in a hurry. Often, when additional options are not in sight, the management is struck with deal fever causing it to overlook important aspects and drive blindly towards the acquisition.

The execution of an M&A program requires competence in pre-deal and post-deal M&A which may not exist in a company that has done business building primarily by organic means. Some companies have built ”M&A factory” units to professionally manage the M&A process. This type of in-house competence should be considered especially when a series of bolt-on acquisitions is planned. Finally, while bolt-ons are relatively small, one should not overlook the importance of a well planned and executed post merger integration (PMI). To ensure a successful integration, the integration process should begin already before the actual deal is closed.

Samppa Sipilä, samppa.sipila
Ilkka Kaikkonen, ilkka.kaikkonen
Ilkka Anttila, ilkka.anttila

The importance, complexity, and costs of ICT infrastructure keeps growing

As ICT applications have been evolving over the past several years, their scope has been expanding and an increasing number of integration points have been created between different systems. While the ICT utilization has spread to almost every imaginable area, it has also evolved to very complex environment, where information systems are very much interdependent and cross organizational and process boundaries. A change anywhere in applications, data and connectivity can have drastic consequences. Complexity continues to increase through mobility and collaboration needs.

Alongside increasing integration needs, technology and business models are going through continuous development cycles, increasing the technical complexity cycle by cycle. There is a pressure to increase spending on ICT just to keep up with competition, never mind creating competitive advantage. As ICT utilization has already covered the obvious and high value adding areas, the existing infrastructure is so heavy that even simple small scale features added on top of it tend to have a more than marginal effect on resources needed for development and maintenance. Some of the technological ICT innovations are even providing added value to ICT-industry alone, rather than focusing on adding value to the end-user organization.

In the light of increasing expenditure levels and complexity, we need more transparent ways to ensure that real value-add is achieved. There are numerous examples of ICT projects overrunning budgets and timelines, without bringing expected results. This has turned the focus on project and program management. Unfortunately this is only a partial answer – necessary but not adequate. In addition to managing technical execution of ICT projects and services, we need a new approach for managing the achievements and results. ICT investments and services should be viewed from a true business benefit perspective. This can be achieved through rigorous application of portfolio management tools and processes, which are well known from business strategy.

ICT investments and expenditures are often wasted since their impact is not explicitly defined and understood

Corporate management has difficulties in understanding the true value of ICT investments and application running costs. This is because ICT governance typically focuses on cost control and customer satisfaction, and complex and interrelated mechanisms to business impacts are not defined nor understood. Targets set for ICT projects and services are often internally focused, for example budgets, performance metrics and timelines. ICT projects are considered to be successful when they are executed within time and budgets and provide planned deliverables. When projects are accepted, there might be a business case describing the targeted benefits, but the practice of verifying the validity of assumptions and monitoring business case realization is not done.

Usually business benefits are described as potential savings, performance improvements or indirect benefits. Now, consider a case of an ICT investment projecting a productivity gain-percentage for the personnel: Even though the number is easily turned to value, the concrete value creation logic remains unclear. Will there be less people, more work or some other work? The actual definitions of how the benefits will come about and who is accountable are missing. This leads to a situation where non-biased project prioritization cannot be done when needed since the business benefits are unclear.

Even if the value creation logic of the ICT projects is clear, changes in the business fundamentals do not impact priorities and resource allocations fast enough. As an example, typical practice in product development is to kill development projects not delivering in time or not keeping within resource plans. It is a regular practice to ramp down non-productive services and discontinue obsolete and loss creating products in order to ensure optimal resource usage. Similar systematic practice in ICT operations is not used. In ICT, regular practice is to go ask for more resources and time with explanations of changed scope and unexpected circumstances.

To ensure ICT value creation, the overall investment and execution process should be continuously managed and linked to the business decisions

A successful ICT project portfolio management practice must focus on three key issues:

1. Define clear business impact and real value targets for the ICT portfolio
2. Define metrics for measuring the ICT portfolio performance
3. Implement a continuous portfolio management process linked to other business planning

The ICT projects and services portfolio must have explicit and transparent metrics, a defined logic and a target for business impact. Clear and explicit definitions are important to make projects and services with different nature comparable. This is done by linking them to corporate level targets. They can be balance sheet and profit and loss statement items, balanced scorecard items, certain business capabilities or strategy items.

Single portfolio items also need individual metrics for performance tracking. Metrics are related to cost control, forecasting accuracy, unit and maintenance costs and operational efficiency like response times, trouble tickets solved, application and feature development throughput and created value-add. These item specific metrics should reflect the performance dimension in focus.  The business cases and their value creation logic should also be continuously monitored.

In order to maintain the visibility and transparency of the ICT portfolio, there has to be a continuous portfolio management process in place. It must be linked to other business planning cycles and practices like strategy planning, short term planning and budgeting.  A key prerequisite for the process to work is a single set of agreed criteria for resource prioritization and allocation. These criteria should be selected in a way that ensures that both the time perspective and dependencies are managed. The criteria selection should be based on corporate level target setting and priorities.

When the prioritization criteria are clearly set, resource and budget allocation becomes a practicality rather than a battlefield. By agreeing upon and systematically applying common metrics and criteria, the service and project portfolio can be managed as a single entity.

Running the process with accurate data enables us to separate three categories in ICT portfolio. The first category is things that have to be done, from legal, fiscal or operative perspective. They should be provided with efficiency and low overall cost. The second category is things that generate value. We should identify those with the best payback, ROI, etc. and they must have the priority over the others.  The third category is simply the things we should get rid of. Continuous portfolio management practice is a tool that helps to balance these three categories and ensure that ICT investments create the planned and expected value.

Matti Juvonen, matti.juvonen
Paavo Räisänen, paavo.raisanen

Pienet yritykset kasvavat kotimarkkinoilla niche-asemaansa hyödyntäen

Yritysten kasvu nollasta kymmenen miljoonan euron liikevaihtoluokkaan tapahtuu tyypillisesti kasvattamalla markkinaosuutta orgaanisesti kotimarkkinoilla, tai muutamassa poikkeustapauksessa ottamalla merkittävä markkinaosuus globaaleilla markkinoilla hyvin kapealla teknologia-alueella. Tekemässämme kyselytutkimuksessa vain 30% nopeasti kasvaneista pienyrityksistä oli laajentunut ulkomaille ja yritysostoja oli puolestaan käyttänyt 25% kasvuyrityksistä. Menestyvät pienyritykset pyrkivät löytämään oman nichensä ja voittamaan suuryritykset joustavuuden ja innovaatioiden avulla sekä teknologiamurroksia hyödyntämällä. Toisaalta juuri tästä syystä ne usein jäävät keihäänkärjiksi, joiden kohtalo – ja usein myös tavoite – on tulla isompien toimesta ostetuksi.

Alun kasvuvaiheissa yritysten rakenteissa tapahtuu suuria muutoksia – alun omistajavetoisesta start-upista on muuntauduttava kohti oikeaa yritystä, jossa kaikki langat eivät ole enää yksissä käsissä. Toimitusjohtajan tulisi kyetä luovuttamaan valtaa ja vastuuta eteenpäin, mutta sitä varten tulee olla luotettava ja toimiva johtoryhmä, jolle vastuuta antaa, sekä mittarit joilla seurata vastuun kantamista. Osaavan työvoiman löytäminen onkin ollut tutkimuksemme mukaan suurin haaste pienille kasvuyrityksille.

Rekrytoinnin lisäksi pienyritykset ovat kokeneet rahoituksen hankkimisen kasvua hidastavaksi tekijäksi. Tässä vaiheessa ulkopuolista pääomaa pitäisi hankkia tyypillisesti omistajan lähipiiristä, bisnesenkeleiltä ja venture capital –yrityksiltä. Koska Suomi on enemmän tai vähemmän pääomaköyhä maa, eivät raha ja ideat aina kohtaa.

Esimerkkeinä nopeasti kymmenen miljoonan rajapyykin ylittäneistä ja sen jälkeenkin kasvuaan jatkaneista yrityksistä voidaan mainita kierrätysyritys Eurajoen Romu ja peliyhtiö Rovio. Molemmissa tapauksissa markkinafokus on ollut tarkkaan rajattu nopean kasvun hallitsemiseksi: Eurajoen Romulla rajaus on ollut yhdessä tuotantoprosessissa ja osittain maantieteellisesti kun taas Rovio keskittyi aluksi globaalilla markkinalla yhteen peliin ja yhteen päätelaitteeseen.

Keskisuuret kiihdyttävät kasvuaan lähimarkkinoilla markkina- tai teknologiamurrosten ja yritysostojen avulla

Kuten aikaisemmassa kirjoituksessamme esittelimme, suomalaisyritysten kasvu on ollut nopeinta liikevaihtoluokassa kymmenestä sataan miljoonaa euroa. Tämän kasvuvaiheen aikana yritykset jatkavat aikaisemmin löytämänsä nichen ja/tai markkina-/ teknologiamurroksen hyödyntämistä kopioimalla liiketoimintamallinsa uusille alueille. Yritysostojen tekeminen (50% vastaajista) yleistyy huomattavasti tässä vaiheessa, kun yritys on saanut toimintamallinsa kuntoon ja alkaa sulauttaa siihen pienempiä kilpailijoita tai täydentäviä ratkaisuja tarjoavia yrityksiä.

Kuitenkin vielä tässäkin vaiheessa yritykset pitäytyvät tyypillisesti lähimarkkinoilla, jotta kasvu ulkomaille ja sen tuomat haasteet olisivat helpommin hallittavissa. Osittain yritysostojen ja osittain kasvun aiheuttamana yrityksen rakenteet muuttuvat oleellisesti, koska yksittäisten asiantuntijoiden sijaan on laitettava paikalleen funktionaalinen organisaatio, joka mahdollistaa skaalautumisen. Ulkoistusmallien yleistyessä, etenkin tieto- ja taloushallinnon osalta, tukiorganisaatioista ei synny enää niin raskaita kuin ennen, vaan yritykset pystyvät keskittymään entistä enemmän ydintoimintoihinsa ja niiden kehittämiseen.

Mikäli tämä kasvuvaihe halutaan toteuttaa nopeasti, on tyypillistä, että ulkopuolista pääomaa haetaan pääomasijoittajalta. Tyyppiesimerkki tämän kasvuvaiheen nopeasti ylittäneestä yrityksestä on Pretax, joka on kasvanut taloushallinnon toimialamurrosta hyödyntäen niin kotimaassa kuin Pohjois-Euroopassakin orgaanisesti ja yritysostoja systemaattisesti hyödyntäen. Esimerkkinä teknologiamurrosta hyödyntäneestä nopeasta kasvajasta on myös Verkkokauppa.com ja systemaattisten yritysostojen avulla ovat puolestaan kasvaneet aikaisemmin fragmentoituneita toimialoja konsolidoineet Ramirent ja Mehiläinen.

Pienet pörssikokoluokan yritykset laajentavat tarjoamaansa ja menevät globaaleille markkinoille

Kasvu sadan miljoonan euron liikevaihtoluokasta yli miljardiin on tyypillisesti ollut huomattavasti edellistä kasvuaskelta vaikeampaa suomalaisyrityksille. Jos edellisessä vaiheessa pystyi vielä pysymään lähimarkkinoilla, on yrityksen tyypillisesti mentävä globaaleille markkinoille viimeistään tässä vaiheessa. Samaan aikaan yritysten on myös laajennettava tarjoamaansa entisestään joko uusiin tuoteryhmiin tai laajentumalla arvoketjussa (tyypillisesti palveluihin). Yritysostoja aletaan käyttää tässä vaiheessa entistä useampaan tarkoitukseen: uusien innovaatioiden ostamiseen, markkinaosuuden kasvattamiseen tai maantieteelliseen laajentumiseen.

Tämän toteuttamiseksi aikaisemmin luotujen funktionaalisten- ja maaorganisaatioiden päälle on luotava uusia liiketoimintayksikköjä, joilla on riittävästi tilaa ja vapautta kasvaa. Monessa tapauksessa tämä tarkoittaa jonkuntyyppiseen matriisiorganisaatioon siirtymistä.  Mikäli tähän kasvuvaiheeseen tarvitaan ulkopuolista pääomaa, olisi rahoitusta haettava joko suurilta pääomasijoittajilta (joita ei Suomesta juurikaan löydy) tai pörssistä. Uusia pörssilistautumisia ja osakeanteja on Suomessa kuitenkin hälyttävän vähän, mikä kertoo siitä, että harvassa suomalaisyrityksessä sekä johto että omistajat haluaisivat ottaa yhtä aikaa riskejä ja panostaa kasvuun lyhyen aikavälin tuottojen ja osinkojen kustannuksella. Onneksi myös menestystarinoita kuitenkin löytyy. Hyvä esimerkki tämän kasvuvaiheen nopeasti ohittaneesta suomalaisyrityksestä on Konecranes, joka on jatkanut strategiaansa systemaattisesti ja kasvattanut markkinaosuuttaan globaaleilla markkinoilla niin orgaanisesti kuin yritysostojenkin avulla.

Kasvu kymmenen miljardin kokoluokkaan vaatii suuren markkinan

Maantieteellinen laajentuminen oli oleellinen osa edellistä kasvuvaiheetta, mutta harva markkina on edes globaalisti niin iso, että siellä riittäisi tilaa kasvaa yli kymmenen miljardin kokoluokkaan. Tyypillisesti tällaisia markkinoita löytyy lähinnä kuluttajaliiketoiminnasta ja prosessiteollisuudesta. Monet isot suomalaisyritykset ovat jo markkinajohtajia omilla (B2B) toimialoillaan, vaikka ne eivät ole vielä lähelläkään kymmenen miljardin rajapyykkiä.

Mikäli yritys haluaa kasvaa yli kymmenen miljardin kokoluokkaan B2B-liiketoiminnassa, täytyy sen mennä mukaan entistä useammalle toimialalle tai laajentua oman alansa järjestelmä-/ratkaisutoimittajaksi, mikä tapahtuu tyypillisesti tässä vaiheessa yritysostojen avulla. Ostokohteet voivat olla joko pieniä innovatiivisia yrityksiä, huoltoon keskittyviä paikallisia yrityksiä, tai toimialan rakennemuutoksiin tähtääviä fuusioita. Jos yritys toimii liian pienillä markkinoilla, on sen rakenteen mentävä ennen pitkään kohti divisioonarakennetta/monialayhtiötä (Metso, GE). Tällaisessa mallissa yhtiön skaalautuminen ja hallitseminen tulee luonnollisesti vaikeammaksi eikä kasvu ole yhtä nopeaa kuin parhaissa B2C-esimerkeissä.

Kuluttajaliiketoiminnassa kehittyy useammin ja nopeammin niin isoja markkinoita, että yritys pystyy kasvamaan niissä yli kymmenen miljardin kokoluokkaan (Nokia, Google). Toisaalta tämä ei myöskään vaadi aina täysin uutta markkinaa, vaan skaalautuminen voi onnistua nopeasti myös uudella, kilpailijoista erottuvalla konseptilla (Ikea, Apple). Lisäksi isoja yrityksiä löytyy palvelusektorilta, jossa on konsolidoitu lähimaiden johtavia yrityksiä suuremmiksi kokonaisuuksiksi (Nordea, TeliaSonera). Vaikka integraatioprosessit ovat näissä tapauksissa vaikeita, on isompaa kokonaisuutta helpompi lähteä viemään lähialueen ulkopuolelle, kuten TeliaSoneran esimerkki on osoittanut.

Ylläolevat esimerkit kuvaavat hyvin sitä, miten monivaiheinen matka start-upista monikansalliseksi yritykseksi on. Vaikka moni yritys ei olekaan pystynyt tekemään koko tätä matkaa viimeisen kolmenkymmenen vuoden sisällä, löytyy joukosta positiivisia esimerkkejä kaikkiin kokoluokkiin. Esimerkeistä löytyy lupaavia alkuja (Rovio, Golla), parissa kymmenessä vuodessa nollasta pitkälle päässeitä (Vacon, F-Secure, Pretax) ja yritysjärjestelyjen jälkeen uuden kasvuvaihteen löytäneitä (Kone, Outotec, TeliaSonera). Jatkossakin on tärkeää, että koko tämä putki toimii, minkä vuoksi erikokoisten yritysten tulisi oppia toisiltaan ja löytää omaan elinkaarenvaiheeseensa sopivat kasvumekanismit.

Paavo Räisänen, paavo.raisanen