I hope you have taken away from my last entry that strategic due diligence (SDD) is more than a mere market study. The following simulated Q&A will reinforce the point and provide additional examples.
Q: So, this is a glorified, deluxe market study ?
A: Not exactly. That would be too restrictive of a definition. You do need to look at the overall market trends in an SDD, but you have to specifically understand how and why your specific target might fare in your envisioned future. You must therefore make correct assumptions regarding 1) the market’s future and 2) the target’s ability to stay competitively positioned in that market.
Q: I get it. It simply means you have to specifically understand the target’s product line and how it compares to competitors’?
A: Well not quite. You still have to go deeper. You must determine how good the target’s products are in delivering the attributes that matter to its target customers. In other words, you have to understand why your target is not merely “good”, but “good where it matters”.
Q: Right. All you’re saying is that you have to understand how good your target is, compared to its competitors, at delivering product features that matter to customers…
A: Well, that would be relatively straightforward. Unfortunately, the challenging part is yet to come. Strategic due diligence requires you to read into the future. Its forces you to make a judgment call regarding how good the target will likely be at delivering current and future product attributes that its customers will likely want in the future. This is where the crystal ball part comes in. This is where you have to understand your target’s pipeline and R&D programs and product development capacities, and assess whether those will meet tomorrow’s needs as well as it has yesterday. All this while keeping in mind that
- in a profitable industry, somebody somewhere wants you dead
- abnormal profits generally get competed away
As you see, the “market study” part of strategic due diligence is an important one, but it does not in and of itself constitute a complete exercice. If you want to bet on the right racing team, you need to understand the race track, but you also need to understand what all your key competitors have under the hood (litteraly). That knowledge is not gained through market study. It is gained through applied competitive analysis.