J. Leslie Glick Ph.D. Independent Corporate Management Advisor

Adapting to Evolving Business Environments Is often Essential to Company Survival

Last year in GEN’s September 1 issue, I wrote about three outstanding biotech companies—Celgene, Genzyme, and Monsanto, that dramatically changed their business models and technological competencies in order to flourish in completely new businesses.  Here I will focus on more common, market-based challenges that may induce a company to change its business model, particularly as they apply to smaller privately held companies.

Every once in a while a company may alter its marketing focus because sales in its targeted market are substantially lower than projected and appear likely to remain flat over the long term, and because management anticipates a major opportunity elsewhere.  This change of focus would then result in the company retargeting its vertical and/or horizontal markets.

Vertical markets refer to specific consumer, industrial, government, and nonprofit sectors, e.g., supermarkets, banking, insurance, pharmaceutical manufacturing, municipalities, and trade associations.  Horizontal markets refer to needs, e.g., office supplies, smart phones and Internet access, common to users throughout different vertical markets.

However, to compete effectively in a given horizontal market may require a company to focus on just a few vertical markets, if not just one vertical market.  For example, a company marketing workflow management software will customize its marketing and sales strategies, based on whether the company is targeting utilities, school districts, law firms, real estate companies, manufacturers, etc.

Over the years I have worked with scores of companies, of which 15 to 20% have changed or tried to change their targeted markets, and of those companies embarking on such an undertaking, around 60% were successful. 

Sometimes I have witnessed mirror images of such change, such as an information technology (IT) company (Company A) marketing a software solution for years and then abandoning it and providing IT services initially to the same clientele before expanding its customer base.  In the meantime, a different IT company (Company B) that had been providing IT services for years subsequently developed and marketed novel software solutions, which it began selling to its customer base while exiting from its IT services business.  In both cases the IT companies remained in their vertical markets but replaced their horizontal markets.

Company A, which was thinly capitalized, left the software marketplace because its product was eventually superseded by more effective solutions marketed by much larger companies.  However, because of its highly skilled personnel, it was able to thrive by maintaining and repairing its customers’ servers, computers, and computer networks.  As for Company B, its initial software solution not only satisfied an unmet need, but it quickly evolved into a number of spin-off solutions that made the company more valuable than as a provider of IT services.

Similarly, in the biotech world, I have worked with companies whose market changes represented mirror images of each other.  Company C started out as a research services company, obtaining basic and applied biomedical research contracts from government and industry.  Over a period of time, while fulfilling those contracts, Company C developed various biomedical research products, which it gradually began to market to government, industry, and universities.  Eventually, the demand for these products was sufficiently large, that Company C decided to abandon its research services business, which while profitable was dependent upon a small group of customers.  In contrast, the research products business, which also became profitable, extended to a relatively large number of customers.

Company D underwent the reverse experience.  It had for years been profitably marketing biomedical research products to government, industrial, and university laboratories.  In the process of developing these products, the company had attracted innovative scientists who discovered new applications for these products.  The scientists then started to apply for government contracts to fund their research.  This effort became so successful, that Company D’s research services business extended to industry and rapidly outgrew its research products business.  As a result, the company gradually exited from the latter business.

Thus, Company C remained in its vertical markets, government and industry, added a new vertical market, universities, and replaced its horizontal market, biomedical research services with a related one biomedical research products.  On the flip side, Company D kept two of its vertical markets, government and industry, withdrew from its university vertical market, and changed its horizontal market from biomedical research products to biomedical research services.

A more dramatic example concerns two biotech companies whose market changes also represented mirror images of each other.  Company E had developed its own biotherapeutic, which turned out to be applicable for only a small population of patients.  However, before depleting its funds in trying to expand the use for this biotherapeutic, Company E decided to leverage its scientific expertise by commercializing biomedical research products that it had already developed in the course of creating the biotherapeutic.  As a result, Company E abandoned the biotherapeutic and established a viable business by selling its biomedical research products to academic, government, and corporate labs, thereby transforming its horizontal and vertical markets.

Company F, on the other hand, had for years been profitably marketing biomedical research products, but in something akin to a skunk works eventually began to develop a biotherapeutic.  As management and the board of directors became increasingly enthusiastic that its biotherapeutic would transform the company’s business strategy, Company F gradually withdrew from its research products business and in a series of offerings raised funds to finance the necessary R&D.  Eventually a biotherapeutic was approved by FDA but only for a very limited application, at which time Company F had exhausted almost all of the capital it had raised.  With little demand for the product and insufficient resources to market it, and because the company no longer marketed its former research products, the company’s revenues were practically nil.

Thus, the horizontal and vertical markets that Company E abandoned were the same horizontal and vertical markets that Company F entered, and the horizontal and vertical markets that Company E entered were the same horizontal and vertical markets that Company F abandoned.

So, to provide some Monday morning quarterbacking, Companies A and E saw the handwriting on the wall and survived by exploiting their technological strengths in order to change markets successfully. Companies B, C, and D succeeded because they gradually replaced their horizontal markets due to readily accessible opportunities in related markets.  As for Company F, it exited a going business before establishing that it could successfully commercialize a completely new, capital-intensive business.

The take-home message is clear.  Changing markets may be essential for a company’s survival, but survival will depend on identifying the full costs of conversion and determining whether those costs preclude any return on investment.  As usual, buyer beware.










































J. Leslie Glick, Ph.D. (jlglick@ix.netcom.com), is an independent corporate management advisor.

 

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