Owning a public company is an awesome responsibility.
Every day, the financial markets grade you against every other investment in the world. At its most basic level, the value of a share is whatever someone will pay for it. But the understanding, or hope, is that the purchase brings with it a greater future return –increasing your company’s market capitalization.
That, explains Geoffrey Moore, president and founder of The Chasm Group, is a lot to consider. Moore’s consulting practice focuses on helping high-tech companies achieve market leadership positions for their core products and services.
Here are a few of Moore’s ideas to help make your company more valuable to investors.
GAP vs. CAP
An increase in value, Moore says, is a function of your competitive advantage, the difference between what you offer and what your competitors offer. The distance from the competition, a concept Moore calls GAP, creates superior returns.
There is another factor, a key one that works into the fray. Moore calls this the Competitive Advantage Period. CAP is the time between when a company develops some advantage — a patent, market share leadership, brand affiliation — and the moment the competition catches up.
Investors focus on the CAP, Moore says. They believe future returns are best predicted by a company’s current competitive advantage.
Revenue: The good, the bad and the neutral
Some entrepreneurs make the mistake of thinking that any dollar is a good dollar. That is simply not the case.
Moore says you must make a distinction among good, neutral and bad revenue. He defines the three this way:
Good revenue comes with an increase in an organization’s competitive advantage. Not only does it bring in new business, it also transforms into ongoing business.
Neutral revenue doesn’t allow a company to gain GAP or CAP, but it doesn’t lose it, either. This might mean a company gets a purchase order from a new customer, but it’s only a one-time shot.
Bad revenue involves a deal that takes a company away from its area of expertise. It decreases competitive advantage. “Bad revenue actually sucks air out of your balloon,” Moore says.
Core vs. context
Every company has a variety of resources, some plentiful , others scarce. Plentiful resources include things like capital, software and outsource service providers. Scarce resources are items like time, talent and management attention.
The notion is to use the plentiful resources to make up for the scarce ones. Use capital to buy companies that are ahead of you in a certain area, Moore says. Or, let software take care of routine issues that occupy your talent. Outsource those tasks that take away from management focus.
Prioritize the scarce resources. These are what Moore calls a company’s core. Core gives a company its competitive advantage — its GAP and CAP. Differentiation is the key. This is where the scarce resources should be spent. This is where the future return comes from.
“The pleasure of working in core is its own reward,” Moore says.
The goal of context is to meet the market standard. Here, Moore says, differentiation is a mistake. This is where the plentiful resources need to be focused. “Context has no upside, but it has huge downside,” Moore says. “It’s a little bit like a down escalator that we’re trying to climb up.”
The problem is that when the competition catches up to your core, it becomes context. Companies should outsource their context so they can “insource” their core.
“Context is cholesterol,” he says. “It leads to stroke and eventually death.” How to reach: The Chasm Group, www.chasmgroup.com
Daniel G. Jacobs ([email protected]) is senior editor of SBN Magazine.
