Strategic due diligence (SDD) requires you to integrate multiple disciplines in order to craft a reasonable set of expectations about the target’s likely future. In this post, I wish to map out these core disciplines, as they will be referred to in many future posts.
- SDD requires microeconomic analysis to understand an industry-level set of supply and demand curves, to understand the industry-wide equilibrium pricing, and to understand the industry’s cyclicality and its correlation to the national and global economies
- It requires marketing research to have a better understanding of the current and future demand curve, and to understand how the underlying goods and services’ features will likely evolve. It requires you to have a clear understanding of the differences between TAM, SAM and SOM (total addressable market, served available market and share of market). These distinctions are critical for market sizing.
- It requires competitive analysis to have a better grasp of the different market participants making up the supply curve (as these collectively represent the target’s competitors!) Such rigorous analysis is also required if you want to better assess the depth and sustainability of the target’s “competitive advantage” (or competitive moat, has it’s often called in the fundamental analysis community).
- It requires strategic analysis. This is where business strategy and industry analysis tools come into play (the traditional strategy consultants’ matrices, Michael Porter’s 5-forces model, SWOT analysis, and many more which will be explored in future posts).
While the above list is not exhaustive, it provides an introductory look at the different “thinking hats” that must be worn during the strategic due diligence process.