Archive: February, 2011

Category management qualities

There’s a great article in Supply Management (“Divide and concur” 17 February 2011) about category management.  The article states that just 10% of companies considered their implementation of category management to be successful (Eric Evans & Associates). It goes on to clearly set out the difference between the skills required for category management and those used in “traditional” buying. In addition to good communication skill, commercial awareness and market intelligence, it states that category management requires:

  • Leadership to run cross functional projects
  • Change management to convince people of the need for change
  • Strategic vision to understand how the category management strategy aligns with the overall business goals

Unfortunately there are a lot of quotes that I’ve seen many times before such as “category management is more strategic and holistic than traditional buying”, that “more engagement from the business is required” and training is needed for buyers. There is, however, one quote that really stuck out. Rebecca Howard, associate director at ADR, says that category management means that you’ve got to “be really good with numbers” because it’s important “when it comes to cost analysis”. I think the importance of this is often overlooked and means that procurement doesn’t maximise its impact.

Category management is challenging and does require a lot from an individual. If, however, it is implemented effectively then it can drive the rest of the business. For me, this is the key to procurement getting representation at board level.

2011 is a good year for M&A and getting better

The FT reported (“Big merger sceptics ready for deal rush” 21 February 2011) that deal volumes so far this year are higher than last year ($99bn compared to $87bn) and that big investors are bracing themselves for a rush of mergers. The highest proportion of deals occurred in the energy and power industry (20%) followed by Financials (15%) and Materials (11%).

It also reported that a survey by KPMG based on the period from 2007 to mid 2009 showed that a third of takeovers (31%) boost the share price, a third (37%) have no effect and a third (32%) “ravage” value. KPMG’s global M&A predictor suggested demand for M&A is highest in the telecoms sector where forward price to earnings ratio has crept up and that the sector benefits from a net cash position. Another study by Towers Watson and Cass Business School shows that companies with a history of deal making outperform that market in the short and medium term. 

Once again, I think this highlights that M&A is a risky activity and that it is important to hire an experienced team.

Getting smarter about M&A

Anyone interested in business in general or M&A in particular should read the article in the HBR called The Big Idea: The New M&A Playbook by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck (March 2010). It contains a useful summary of some of the statistics around M&A such as companies spend more than $2 trillion on acquisitions every year and study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. It goes on to provide some analysis to explain the abysmal statistics. In short, the success or failure of an acquisition lies in the nuts and bolts of integration. What makes this article different from many others on the same subject is that it sets out a robust theory that identifies the causes of those successes and failures.

The authors identify two reasons to acquire a company. The first, most common one is to boost the company’s current performance either by helping it hold on to a premium position or to cut costs. The authors call this “leverage my business model” (LBM). For this kind of deal, CEOs are often unrealistic about how much of a boost to expect, pay too much for the acquisition, and don’t understand how to integrate it. This is where CHC can help. Apple’s $278 million purchase of chip designer P.A. Semi in 2008 is an example of just such an acquisition. Apple historically had procured its microprocessors from independent suppliers. But as competition with other mobile-device makers increased the competitive importance of battery life, it became difficult to optimise power consumption unless the processors were designed specifically for Apple’s products. This meant that to sustain its price premium, Apple needed to purchase the technology and talent to develop an in-house chip design capability—a move that made perfect sense.

The second, less familiar reason to acquire a company is to reinvent your business model and thereby fundamentally redirect the company. The authors call this “reinvent my business model” (RBM). Take, for example, information technology giant EMC’s acquisition of VMware, whose software enabled IT departments to run multiple “virtual servers” on a single machine, replacing server vendors’ pricey hardware solution with a lower-cost software one. Although this offering was disruptive to server vendors, it was complementary to EMC, giving the storage hardware vendor greater reach into its customers’ data rooms. When EMC acquired VMware, for $635 million in cash, VMware’s revenues were just $218 million. With a disruptive wind at its back, VMware’s growth exploded: Annual revenues reached $2.6 billion in 2010. Currently, EMC’s stake in VMware is worth more than $28 billion, a stunning 44-fold increase of its initial investment.

The poor success rate is borne out of the fact that executives often confuse the reasons for acquiring a company. As a result they pay too much and fail to integrate them properly.

 To read more, follow the link

CHC website is launched

The website was launched on 14 February 2011, and in the end, it felt very much like a labour of love. 

I would like to thank the following people: Andy from 146 Design for guiding a novice through the process of web design, Claire for deciphering my notes and writing the copy, Adrian for pointing out the areas that could be strengthen, Mat for making the best of a bad job and taking a decent photo and finally Fiona for developing the marketing strategy and providing constant support.