November 2003

Survivor Strategies

One of the television networks recently ran a show chronicling what happened to Richard Hatch, the first winner of the Survivor series, and a handful of other instant celebrities from the recent reality TV craze. Seeing this makes one also wonder what happened to those technology-based companies that went public to great acclaim in the crazy years not too long before the equity markets collapsed.

Young public companies and mid and later stage private ones can learn from the strategies of their predecessors that survived and continue to grow despite having turned on the hot IPO klieg lights just before the circuits blew in most every industry.

The story line for these corporate survivors is more about proactively pursuing strategies to grow their businesses even in the face of a brutal economic downturn when all the world told them to cut costs, focus their sights, and hang tough with their winning technologies, business models and best customers.

Within Massachusetts, 26 companies went public between 1996 and 2000 that today have a market capitalization in excess of $130 million and an annual revenue run rate greater than $60 million. They span the information technology (14), communications (7) and life sciences (5) industries. For these companies as a group, they now average four and one half years since going public, $1.6 billion in market cap, $330 million in revenue, and a price to sales valuation of 5 to 1.

Proactively pursue growth in tough markets; don't just try to ride it out

The average stock for the companies in this group is up 200% in the 52 week period ending in late October. Business is clearly on the upswing for them despite the arguments of many that rising stock prices aren't evidence of an improving underlying economy. Roughly 70% of these companies are reporting sales increases, improved operating income and positive cash flow in the first three quarters of this year compared to the same period last year.

Clearly, this is a group of survivors and in some cases, thrivers. The five life sciences companies continued to grow at a booming pace in an industry that has never suffered, averaging even higher growth rates after 2000 than in the years before. On the other hand, performance of most of the information technology and telecom companies in this group swooned since the peak of the economy in 2000, their revenues just now beginning to turn up.

Seven of the young public companies, however, have come through the economic nuclear winter in those industries quite handsomely, having nearly regained or exceeded their 2000 or 2001 peak year revenue levels and also improving their operating income.

This diverse super seven includes three software companies focused in different parts of the industry, a marketing and technology services firm, a wireless telecom services business, a computer systems company, and a network equipment provider.

What explains the superior performance of these companies? None of them merely hunkered down during the recession, cutting costs and conserving cash while waiting for the toughest times to pass. All took proactive steps to expand their revenue base through at least one of the following means:

• Back-to-the-future repositioning – One of the super seven companies had originally grown by closely associating itself with the benefits brought by the Internet, another by depending heavily on customers in the then, sexy telecom industry. Both repositioned as these industries peaked to invite the old economy back into the mainstream of their business.
• Down-economy diversification – Despite the frequently heard mantra to "focus on your best customers" in a downturn, a couple of the super seven aggressively and successfully sought customers in industries and countries they hadn't sold to before as a core part of their growth strategy.
• Build-share line extension – Several of these companies made it a priority to broaden or fill holes in their offerings to meet more needs of their existing customers. In some cases, they developed an integrated solution, aiming to beat assemblages of best-in-class individual products from competitors.
• Gains and losses channel expansion – In a nod to both revenue and profit concerns, companies added both marketing and service channel partners, hoping to grow their product sales while sacrificing less profitable service revenues.

While these approaches are all tried and true growth strategies, they go against the common practice of shrinking rather than expanding the scope of the business in the depths of a recession. They make sense, however after considering the characteristics of each of the super seven's own businesses and markets.

Choosing among different growth strategy alternatives in a poor economy or in the improving one that we have now requires companies assess the answers to four basic groups of questions.

• Customers/Markets – What do customers need now and what will they need going forward? What market opportunities do those needs create? These types questions, too often answered with the perspective of past sales and customer meetings, need to be examined on prospective basis.
• Competitors – What are your competitors doing in the face of customer needs? Are they on track or heading off course? Is there an opportunity to exploit their weaknesses or strengths in the next 6 to 18 months? Game plans developed with full knowledge of your opponents are as important in business as they are in sports.
• Business Model – Where is our model sound and differentiated? Where is it weak? Can we better leverage parts of it, fill gaps, or eliminate activities to make ourselves stronger? The business model represents the fundamental architecture of your company and it must be regularly evaluated for structural integrity.
• Resource Strategy – What financial, management, and people levers can we pull to take advantage of opportunities identified in the questions above? How can we combine these in ways that enable us to act quickly, flexibly and cost efficiently? Growth plans for companies with limited resources must be both clever and realistic to be successful.

What these super seven survivors and their strategies show is that even young companies in uncertain economies can continue to grow by defining their own opportunities and proactively pursuing sound approaches that best fit their situation.