Two golden questions

At EPIC, we have a purposefully focused coverage in Industrials but, nonetheless, work with a range of businesses across manufacturing, B2B distribution and B2B services. We are therefore always keen to try to find commonalities, enabling us to draw some threads across a diverse set of situations and share takeaways that inform our clients’ strategic thinking. 

A conversation with a financial sponsor who had recently acquired a business following a stalled process got us thinking about this again recently. In the sponsor’s view, the reason the process had stalled was that the business had been misdescribed: the sale process materials focused on the larger and more “glamorous” B2C business although it was, in fact, in the B2B segment where the company benefited from operating in an underserved, more complex market which was too niche for volume B2C competitors to focus on. In other words, in B2B the company solved both a customer problem (how to easily source low volume, high quality, bespoke product on an infrequent – but not one-off – basis) and had a right to win (a manufacturing and logistics set-up and sales force capable of serving this more bespoke market, as well as lower competition). This is where the value of the business lay. 

Seeing this clearly requires a combination of skills, but most importantly:

• first and foremost, the ability to step back and focus on the two golden questions – ‘what customer problems does the business solve’ and ‘why does it have a right to win?’
• second, validating that perspective through analysis and understanding how to take advantage of the market opportunity, including the investment and / or organisation changes required to sustain it.

We find it surprising how often the first question to an executive or business owner is “What does your business do?”. We prefer to start with the two golden questions, and every C-suite executive and owner should have convincing answers: understanding and debating them is key to optimising our advice.

The answers to these two questions should be central to the investment case and underpin the growth opportunity in any sale process. They should also be at the forefront of one’s mind in every strategic decision. We have seen countless examples where this has not been the case, with disastrous consequences. To name just a few:

• the distributor centralising DCs without investing appropriately in the necessary incremental logistics, only to lose customers as service levels were impacted: rapid stock availability was the customer need and had been the company’s comparative advantage;
• the contractor moving towards an outsourced labour model to enhance cost variability and scale, only to see a consequent increase in work in progress and reduction in cashflow as work completion or certification was delayed and clients moved to other self-delivery contractors: service quality and labour availability had been the key drivers of performance.

Even managers of businesses that have grown successfully can forget to frame their decisions in the simple but powerful lens of these two questions, particularly those who haven’t been exposed to external investors. Yet taking the business to the next level always necessitates having convincing answers these questions to guide employee focus, investment decisions and messaging to new investors.

Now you know what to expect us to ask you first when we meet. Feel free to get in touch to find out what we think the answers should be for a business you are close to.