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Developing Strategy with Business Leaders

"If you're completely close-minded and stick to your guns no matter what, then you're going to find yourself in trouble." - Michael McDonald

To be proactive in M&A, first, develop a strategy that will dictate how to approach any possible acquisition. In this interview, Michael McDonald, Director, Strategy at Koch Engineered Solutions, discusses how to develop strategy with business leaders.

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Michael McDonald

Episode Transcript

The Corporate Strategy

Individual business leaders will develop their strategies down to the product managers and such. It starts with the vision for the business.

Our leadership team helps develop that vision. One of the things that we will do is work with the business to try and understand and formulate a view of the world and where we think the world might be headed. And a strategy is ultimately an outcrop of that. How do we compete and drive profit in that world? 

My job really is to help the business and the business leaders think about their strategy and formulate it to challenge their thinking to push back on things that don't make sense, might make sense in their mind, bring that outside perspective in essence to take their thoughts and really upgrade them and challenge them and drive the strategy process within the business.

But it's the business owner, it's business leaders that own it. 

Mr. Koch, who's our CEO and one of our of largest shareholders, developed our management philosophy, and a key part of it is challenging, challenging our superiors. I ask people who work for me to challenge me and push me in. 

"You can have the smartest guy in the room, but he's going to be no match for 20 people working together. - Michael McDonald. "

Socializing the strategy with corporate development

We're part of the corporate development team, and I focus mostly on strategy and the 'point of view', which is thinking about the world. The team that reports to me does about half their time on M&A and half on strategy and point of view. My colleagues are on the M&A side, my boss does both, and we're interlinked.

"You can't spend a billion dollars buying another business without having some underlying strategy on how you drive value from that deal. Michael McDonald."

That's where the strategy comes in; it overlaps. So even though I'm not out there negotiating deals, we're working with the team presenting to Mr. Koch on whether we want to go ahead and spend his money. We're ingrained with that team. 

Formulating the M&A strategy

Strategy is all about driving profit. It's the way you're planning on trying to grow your profit. And there are two ways to do that. You can cut your costs or grow your top line, grow your business. And M&A is one of those levers that you can pull. 

It's around the capabilities. So if you have an existing business, you have a core set of capabilities. And when you want to move into a new area, we can try and build that capability ourselves, or we can buy it. It's probably a combination of both.

One of the better ways to think about M&A is you're acquiring a set of capabilities to drive value that can help you get into a new market. It can help you get into a new product line, a new technology can bring talent in that you didn't have before.  

And so, when I think about a strategy process and taking a business in a certain direction, it's missing certain capabilities because if it had those capabilities, it would already be in the acquisition that you wanted to take it too. And so, that's what you're trying to solve for us. How do we close the gap in capabilities we need to succeed? 

So let's take Coca-Cola for a second. And so, Coca-Cola says, okay, 'what is going to happen to beverages over the next twenty years?' And they're going to put in and say, 'Look, there's going to be dietary issues that come up. You have all these consumers in India and Africa and China who are making more money.

They will want to stop drinking water and drink, 'western drinks'. So they come up with this view of the world, then they'll just say, Hey, look, now we have this view, what is our vision? What do we want to be in this world? 

We want to sell Coca-Cola to everyone in the world, or we want to be the world's premier beverage company. And that's where their vision comes in. And again, this is all an iterative process. And so, say they want to be the premier beverage company in the world.

Not necessarily the best, Coca-Cola is the number one beverage. They want to be a company with a collection of beverages to be the world's beverage leader. That might be their vision. 

So then, they start to say, 'okay, for us to do that, let's understand where we are today. We're the number one seller of sugar-based sodas and diet sodas. But we have these gaps in these other areas. So let's start thinking about how do we go and fill those gaps

Maybe we go buy the local Kombucha brewery or a water company. So that's where that strategy comes in. It starts a well-informed view of the world.

It's not just a whiteboard session, and a lot of thought goes behind it. It's different thinking there because you develop the worldview, then you start thinking of your organization, 

  1. Where do you want to be? 
  2. How do we win? What does it take? 
  3. How do you fill in the gaps? What does it take?

And then how to do it? That's probably when you start identifying companies and things like that. 

You might be in an environment that's in decline. So using Coca-Cola again, they say, 'People aren't buying as many sugary drinks for dietary reasons.' So that's the world we're looking at. 

How do we win that world? 'Well, we want to be the last man standing. We need to be as lean as possible, and as efficient as possible. You see that in commodity markets. We want to be the low-cost provider because we want to be the last one standing.' That's where the cost-cutting side of things comes. Obviously, they're not mutually exclusive, you could do both. 

Getting Alignment with Business Unit Leaders

Each business leader is very different. They come at things differently, they think differently, and that's great. They've all been successful in their own certain ways. 

Number one is you have to gain their trust. You're there to help them drive their strategy, help them drive their business. You got to work with them. 

So I'm never going to go deliver them a PowerPoint and say this is what they're goint to do. It's sitting down with them, challenging them, and taking input to understand their business. 

I'll take them through the framework and take them through a strategy process that will be painful and arduous. 

I don't come up with anything. All I do is try and pull as much external information to challenge their thinking, get them to really think outside the box, and challenge their own business model and challenge their own legacy thinking. 

Sometimes you'll get a team that's closed off and it takes a lot more work, takes a lot more time and you need buy-in from everyone really to make it work. 

I used workshops a lot, and it brings everyone together. And what I've done in the past is I sometimes give them a case study and more likely just a team-building exercise, a paper exercise to make them think a little bit, but also make them a little bit more vulnerable.

So you start to build off of that and with the team, working directly with the team, and it's not a day process. It takes time and multiple meetings, and it takes multiple sessions. You leave, and you gather more information. You bring it back and it's iterative. And frankly, no two processes are the same.

You want to cater it to the business, cater to their personalities, and cater to what they're ultimately asking for. 

Challenges when implementing the strategy

It's the personalities in the room and the mental models that people bring to the table hands down. Everyone has biases and it's trying to break down those biases and get people to understand them. That's just the way the human mind works.

So there are too many variables and too much information out there. So our mind develops these mental models and these biases to cope with all the information available. It works well for the most part, but sometimes it can be impeded. 

You get mental models around certain markets. Koch had a mental model previously that it was uneconomic without subsidies. They don't necessarily want to get into a market where subsidies drive value.

But we challenge them, and the nice part is our management team is they're open to those challenges and they're humble enough to say, things have changed and our mental model no longer holds. 

Uncertainty vs Biases

There's always uncertainty in everything, and there's uncertainty in every deal and you need to understand that. And individuals are willing to accept different levels of uncertainty and different levels of risk.

When you go into a deal, at the very least, you should understand most most of the key risks that can really impact value. 

Culture is obviously a key risk and uncertainty. But in terms of biases, I think those present differently. I find biases tend to present more as a certainty. 'Hey, no one ever makes money in this region.' That's a mental model with a certain certainty around it which I would challenge. 

But coming around and saying, 'look, I'm not sure if we can break into this market.' It's more of an uncertainty. So it presents differently. 

You got to have the right people in the room. There's no doubt about it. The nice part about where I work, the team is that we challenge each other and we're there to challenge and we're open to that. And so, I'm open to someone saying, Hey, I think you might be thinking about this incorrectly.

That could be my own mental model and my biases. And so, that's part of it. If you have people in there who just are unwilling to accept challenges, then it's going to be very hard to break through. I've dealt with people like that. 

Sometimes you ask questions, I don't know if you've ever heard of the five whys. I think Toyota came up with it. The five whys is a really good way to get to someone starting to question it. But ultimately, the person themselves has to recognize that they have this bias. I'm not going to say I think they're biased.

They'll just dismiss it if they're not open to that. So it's ultimately pushing back. I've made many mistakes trying to get people to recognize biases and just doing it wrong. The best way to do it is to ask questions that get to the root.

In the end, that person might be correct. They've developed that mental model, that bias based on their experience. And it could be me that's incorrect, and I got to understand. 

Open-minded vs. Close-minded

I find that no one is a hundred percent closed off. People are always willing to rethink something else. 

It might be a lost cause, but most people are fairly open-minded. If they're presented with opposing information, they'll try and justify their existing position, or they'll rethink it a little bit. 

It's trying to break through and make people somewhat vulnerable in those strategy sessions. Get them to rethink things a little bit to challenge their biases, mental models, and thought processes. 

Every strategy session I do, our C-suite knows about it. They're aware of it, and they want to understand progress and such.

If we can't get through to a management team, then there's nothing I can do about it, we'll let the C-suite know, but I don't give up easily and will try to find different alternates.

Maybe it's me personally; maybe I rubbed them the wrong way. It could be me and maybe I'll send in one of my team members, and maybe they break through a little bit better, and maybe my approach isn't wrong or maybe I have the wrong opinion here, and maybe these guys are actually correct. There can be a lot of reasons that someone is nuts. In the end, they could still be correct. 

Where does strategy end

We'll go past the deal because when you develop a strategy and you say, look, we need this. If this is a new market, a capability, or a product or whatever, you have a reason for buying that business, which is some of the bets you're taking to acquire it.

But once you acquire it, you got to go execute. And you have this business that's sitting out there. And that business is people who are now part of our larger organization. We tend to be involved quite a bit post the deal.

When I do the M&A side, I tend to get to 60 days post-deal and hand it off to the integration teams. But the strategy tends to go past that and is quite involved in trying to help execute on those bets, trying to help execute on the synergies that we're developed to help the business set their own strategy.

And strategy never really ends. I think it's Disney that does this. You can actually look online and find their vision statements; they constantly change it because the world around them is changing. 

I tend to view an organization that creates a vision, creates a strategy, and doesn't deviate, or doesn't tweak it, or doesn't make improvements to it as being shortsighted.

If you're constantly changing, you're switching 180, that's a problem obviously. But as you're going down your pathways, you're learning more, you should be impacting what you're doing. That should inform, as you learn more, that should inform your decisions and your strategy, and your vision as you move forward in the pathway you're taking. 

You got to be open-minded, and you have to look at existing information that comes across your desk and recognize that this is a fundamentally different thing here. 

This is changing our viewpoint. I've seen companies make large acquisitions based on a certain viewpoint, and a disruptive technology comes out, and we missed it. We have to change course. So that's where that humility comes in and having to constantly look over your shoulder and be paranoid, if you will, and try and learn more.

If you're entirely close-minded and stick to your guns, no matter what, then you will find yourself in trouble. 

I don't think there are any set criteria to look at it every 18 months, but depending on the business, maybe you look at it much quicker.

Maybe you waited out a little bit longer and ask yourself what's changed in every two years or something. There's no real set timeframe in my mind. I think it's just up to the business. 

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