M&A, Business Models and Ecosystems in the Software Industry

Karl´s blog

Posts tagged operations models
M&A digitization: comparing businesses of target and acquirer

Acquiring new business

These days, many corporates acquire other companies with new business models or are trying to integrate startups to extend the range of business models and to avoid disruption by other companies. But how do you analyze and compare businesses? Is a coarse analysis on the business model canvas sufficient to determine differences and derive activities for post merger integration? Are there any blind spots? Here are my thoughts:

Comparing businesses

In a holistic view three things describe their business of a company in a complete fashion. The strategy, the business model, and to be operational model.

The strategy defines strategic goals and measures. Strategic goals help to steer running the business, but some strategic goals also determine how to shape the business and how to create the operations for the business. I will discuss how to define and compare strategies in one of my upcoming posts, so let us focus on comparing business models and operational models.

Comparing business models

Using the Business Model Generation Methodology, you can compare two business models by comparing information from each of the model elements: value proposition,channels, customer segments, channels,revenue streams, key activities, key resources, key partners, cost structure. This gives you a set of differences on a type level, which is great. So, say, you find out that the channels are different, one is via a physical store, the other is via online store. Then you can think about leaving them separate or integrate both offerings. For department stores, we saw that combination of channels happening: buy in store, return online; buy online return in store; buy online, pick up in store.

Using the Business Model Generation methodology, you have to be aware that not only the degrees of freedom to build a business model can be the source of differentiation and disruption but also the degrees of freedom to build an operations model, which implements the business model. What is the difference? The business model is a type level model telling you what to do while the operations model is much more concrete model describing how you do it. For the department store example, the operations model would implement how you do online store ordering followed by in-store pick-up.

In addition, the strategic goals tell you how to shape the business model and the operational model. This relationship is not reflected in the Osterwalder model.

For more details on similarities of business models, please see my other blog post on elements and similarity of business and operations models

Detailing the operational model

To describe the operations model of the target and the acquirer we need details on the following core processes, their organizations and information systems:

  • Revenue generation and collection model or value to cash: how do we bring products to market via channels and how do we collect revenue.

  • Innovation processes: idea to customer value: how do we innovate.

  • Production operations model: supply chain to delivery.

  • Administration operations model: finance, controlling, facilities, HR and other administrative processes.

Keep in mind that the strategic goals and measures have to be applied to the operations model, since some of the goals help you decide how to structure the operations model. Just think about strategic goals “cost leadership” and “quality leadership”. These two goals might be operationalized by establishing operations that focus more on keeping cost low or on keeping quality as high as possible.

As we have shown here, bringing strategy, business model and operations models into one holistic model is a key ingredient for modeling a single business, but as well for comparing businesses while evaluating mergers and acquisitions. Stay tuned for more thought leadership - if you like, you can browse more thoughts on my blog page.

M&A thought leadership: Integration of new business models: dimensions of similarity

No matter if you integrate a target running a business model that is new to your company or if you want to disrupt your business model or if you ask intrapreneurs to come up with new business models; you will face one big issue: how to integrate the business model that is new to your company. So, “new” means that the acquirer is not capable of running the processes that support such business model (yet).

Business models and operations models

I would like to separate two dimensions here: business models and operations models. A business model tells which goods or services are provided by a company and how the company is compensated for the goods and services. It is a model on a type level, like a company running field service management solutions in the cloud for a monthly license fee. It already describes on a general level what a company is doing. On this level of granularity, companies can easily be similar.

A business model can be implemented in an operations model. The operations model shows how the business is run and how the resources of the business run the corresponding business processes in the company. This model is very concrete, detailed and more complex and involves resources running and used in the business processes like employees or application systems. On this level of granularity, it is harder to tell if two operations models are similar.

In the following, I would like to share insights from integration acquired software companies about the impact of the similarity on merger integrations.

Similarity of business models

The more similar business models are, the better the operations of these business models can be integrated. The operations might be similar; sales and accounting processes might only need small changes to be adapted. But there might be issues with overlaps in organizations.

For software companies, this means easier integration in development and support but also in administrative functions. So you should look for similarities and differences by listing/modeling the business models of target and acquirer already in due diligence.

In contrast, if business models are very different, this might pose a challenge for integration. You would have to decide if you want to continue the different business models and if so, changes needed to continue both business models have to be executed in merger integration. For merger integrations targeting absorption, this might mean that the acquiring organization would have to adapt to a diverging business model of the target.

Similarity of business models enables higher speed of integration: The more similar business models are, the better the operations of these business models can be integrated. This enables higher speed. The reverse is also true. If business models are significantly different, this might impose slower speed of integration.

Similarity of operations models

Operations models are implementing business models. How a business operates is a key thing to understand for integrating a business. The closer two operational models are, the easier it is to integrate both businesses with each other. You may use operations maturity models to determine the current and desired state of target and acquirer operations.

An example for similar operations models is having the same objectives for procurement at the acquirer and the target. If both companies look for maximum quality of supplies in procurement it might be a lot easier to integrate procurement processes, to align demands, to analyze and plan cost synergies.

Similarity of operations models enable higher speed of integration. How a business operates is a key thing to understand and to integrate a business. The closer the operational models of acquirer and target are, the higher the speed of integration can be. There also i a higher likelihood of economies of scale effects and cost synergies in such cases.

For more insights, please refer to the book "Mergers and Acquisitions in the software industry: Foundations of due diligence"