Consolidation-Endgame Curve Framework

Business Framework
Consolidation Endgame Curve
All industries consolidate and follow a similar course
through a 4 stage lifecycle. Using this framework, a
business can strengthen its consolidation strategies and
facilitate merger integrations. A niche player can also
determine the appropriate niche strategy to use and
when is the best time to be acquired. Every major
strategic and operational move should be evaluated with
regard to the industry’s stage in the Consolidation Curve.
BALANCEFOCUSSCALEOPENING
Avg.
Profitability
+ Std.
Dev.
Std.
– Dev.
Profitability drops to
lowest point in this
stage, because
consolidation is at its
highest velocity and
companies are
responded to
increased competition
with price reductions
We see the highest
profit margins (other
than the start of the
industry), as the
market giants have
already eliminated
most of the
competition
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3
Contents
• Overview
- Stages of Consolidation
- Growth Study Implications
- Key Takeaways
• Consolidation / Endgame Curve
- Market Consolidation
- Revenue Growth and Profitability
- Strategy and Operations
- Management and Organization
• Acquisition Targets
• Niche Strategies
- Case Examples
• US Airlines Case Example

5
The Consolidation Curve has 4 stages—Opening, Scale, Focus, and
finally, Balance & Alliance
Overview – Stages of Consolidation
In the final stage, industry titans dominate the landscape, controlling 70% of the market—any
number of businesses can occupy the remaining 30%.
Source: Winning the Merger Endgame, 2002
Stage IV
BALANCE & ALLIANCE
Stage III
FOCUS
Stage II
SCALE
Stage I
OPENING
DESCRIPTION
COMBINED
SHARE OF TOP
3 PLAYERS
 The industries operating in
the Opening stage include
newly deregulated
industries, startups, and
spin-off industries
 New industry catalysts can
include new technology,
new regulation, new ideas,
and new consumer needs
 There is little to no market
concentration at this point
 In the Scale stage, major
players begin to emerge
and size begins to
matter—these players take
the lead in consolidation
 Niche players begin to feel
pressure
 Concentration rates can
be as high as 45% in
some industries
 In the Focus stage,
successful players
continue to aggressively
outgrow competition
 These companies focus—
meaning they extend their
core business and
eliminate secondary
business units
 The supply and value
chains begin to be
streamlined
 In the final stage,
consolidation rates reach
90%, so a few players
dominate each industry at
this point
 Large companies form
alliances with each other,
as growth is challenging at
this stage
 Companies often look for
new Opening-stage
industries to expand into
41% 42% 50% 70%

7
For a business to survive through the industry’s evolution, it must acquire
or merge—it cannot solely rely on organic growth
Growth Strategy Implications

This is no optimal or maximum company size—to survive, company must just
continuously grow

Organic growth is not the route to successful growth—mergers are inevitable if a
business wants to outgrow its competition

There are few protectable niche markets—as all industries become global, niche players
will be consolidated during the Focus and Balance & Alliance stages
– There are successful niche strategies at various stages of the curve that companies
can adopt (more on this in the Niche Strategies section)
 Each stage implies specific strategic and operational imperatives

Learning how to successfully integrate an acquisition or merger partner is quickly
becoming a core competence of successful endgame players (i.e. a top 3 company)

Companies should strive to optimize their aggregate portfolio of subsidiaries and
business units across the different stages

A merger or acquisition should advance the resulting entity
along the curve
Aside: very few mergers between major
technology companies have resulted in
increased shareholder value and
improved customer relationships

9
Contents
• Overview
- Stages of Consolidation
- Growth Study Implications
- Key Takeaways
• Consolidation / Endgame Curve
- Market Consolidation
- Revenue Growth and Profitability
- Strategy and Operations
- Management and Organization
• Acquisition Targets
• Niche Strategies
- Case Examples
• US Airlines Case Example

11
Revenue growth remains relatively stable through the Consolidation Curve
Revenue Growth
Revenue growth is highest at the onset, as companies make territorial claims—in Scale,
revenues drop slightly due to consolidation, but stabilize again in the final two stages.
Source: Winning the Merger Endgame, 2002
Stage I
OPENING
Stage II
SCALE
Stage III
FOCUS
Stage IV
BALANCE & ALLIANCE
30%
0%
Revenue
Growth
20%
10%
Avg 10.5%
Avg 7.6%
Avg 8.8%
Avg 8.1%
Growth rate
spread

13
The operational focus and challenges change significantly from stage to
stage
Strategy and Operations
While technology can significantly streamline operations and reduce costs, poor post-
merger technology/system integration can become a company’s bane.
Stage I
OPENING
Stage II
SCALE
Stage III
FOCUS
Stage IV
BALANCE & ALLIANCE
 Product quality and
production is still in infancy
 Systems and formal
planning are minimal to
nonexistent
 At this point, the company’s
strategy is simply to survive
 The business is trying to
generate enough cash to
cover the demands
 Companies shift the focus
from product development
to financial ones (e.g.
optimizing capital structure,
financing growth)
 Product quality and
production have been
refined to confirm with
industry standards and
defined customer
expectations
 Systems and processes are
improved, but still lack the
capability of handling
significant growth—this
issue is exacerbated as
companies merge and
need to also merge
processes and IT systems
 Goal is now to maximize
operational efficiency
 Detailed operational and
strategic planning is
streamlined through the
course of this stage
 Cost reduction and
management initiatives are
pursued to manage
profitability and remain
competitive
 Systems are now fully built
out to accommodate
existing operations and
projected future growth
 There is a looming,
continued risk of
commoditization from
competitors
 For a successful top 3
player, continued
innovation is key
 Companies build out
budgets, strategic planning,
management best
practices, and cost systems
(as needed)
KEY
STRATEGIC AND
OPERATIONAL
TRAITS

15
Consolidation / Endgame Curve – Template
Bumper.
Stage I
OPENING
Stage II
SCALE
Stage III
FOCUS
Stage IV
BALANCE & ALLIANCE
100%
0%
Combined
Share of
Top 3
Players
Time

17
The Value-Building Growth Matrix is a great tool for identifying and
evaluating potential acquisition targets
Value-Building Growth Matrix
Source: The Value Growers, 2000
RevenueGrowth
Value Growth HighLow
Low
High
 Profit SeekersUnderperformers
Value GrowersSimple Growers
The Value-Building Growth (VBG)
Matrix is a useful tool for identifying
good acquisition targets.
Your vertical axis represents revenue
growth, where input data can be
collected from annual reports and SEC
filings. Your horizontal axis represents
value growth, where input data can be
collected from historical share price. For
both axes, the mid point represents the
industry average for that metric.
Plot the potential targets in the matrix.
Be sure to also take into consideration
the position of your own business.
The objective in any acquisition or
merger is for the resulting entity to
move closer to the top-right corner of
the VBG matrix.
The objective of any acquisition is to move closer to the top-right corner of the Value-
Building Growth Matrix.

19
Each quadrant of the VBG Matrix presents different key challenges
Value-Building Growth Matrix – Key Challenges
Source: The Value Growers, 2000
 Profit SeekersUnderperformers
CHALLENGES FOR
UNDERPERFORMERS
• How to restructure and
align both strategy and
operations?
CHALLENGES FOR
SIMPLE GROWERS
• How to increase value
creation?
• How to increase focus on
core activities and
competences?
CHALLENGES FOR PROFIT
SEEKERS
• How to break out of the
profit trap?
• How to capitalize on profit
gains already realized?
CHALLENGES FOR VALUE
GROWERS
• How to maintain stamina
in ―value-building‖
growth?
• How to prepare for next
growth step?
In assessing an acquisition target, it is important to understand the key challenges in
relation to the management team’s ability to combat these challenges.

21
Value-Building Growth Matrix – Template
RevenueGrowth
Value Growth HighLow
Low
High
Profit SeekersUnderperformers
X%
Y%

23
Nine proven niche strategies have been identified (after analyzing
600,000+ private companies)
Niche Strategies
Regional
• These companies have a solid understanding of customers in a clearly defined regional market
• Example: Local/regional breweries (e.g. Jever Pilsner)
NICHE STRATEGY DETAILS
Target Group
• These companies target certain customer segments and provide extensive personalized services
• Example: luxury hotel chains (e.g. Four Seasons, Ritz Carlton)
Product
• These companies excel at providing a specific product
• Example: CNN
Branding and Lifestyle
• These companies combine the strategies of Target Group and Product to create communities of
loyal customers who value the brand name
• Example: luxury companies (e.g. Porsche, Mont-Blanc)
Speed and Lightning-
Consolidation
• These companies grow very rapidly and cut out the market leaders (referred to as ―rabbits‖)
• Example: Internet startups (e.g. Facebook, Amazon)
Innovation
• These companies are able to constantly out innovate other companies to maintain their market
position
• Example: Apple, Logitech
Cooperation
• These are smaller companies that form alliances to compete against larger companies
• Example: airline alliances (e.g. Star Alliance), Ace Hardware
Market Splitting
• These companies identify weaknesses in the value chain and play in those areas
• Example: IBM, when it split the market by dividing its offerings for distinct markets
Counter
• These ―counter-niche‖ companies exploit the weaknesses or strengths of the industry leader
• Example: NetJets, Dell
Source: Beating the Global Consolidation Endgame, 2008

25
Rolls-Royce adopted the Product/Target Group strategy, launching a
luxury car at the end of the Opening stage
Niche Player Case Study – Rolls-Royce
Rolls-Royce adopted the correct niche strategy, but sold itself 40 years too late—for a
company following a niche strategy, cash-out value is a key performance indicator.
NICHE STRATEGY
Product/Target Group
 Rolls-Royce is a car
manufacturer founded in
1906 by Charles Stewart
Rolls and Frederick Henry
Royce
 It adopted a Product/Target
Group niche strategy, where
it produced cars exclusively
for the highest luxury class
DETAILS
• When Rolls-Royce entered the automotive industry, the market was already widespread—in
fact, the industry was just coming out of its Opening stage
• The strategy of both Product (cars) and Target Group (the wealthy) was an effective strategy
• For many decades, the Rolls-Royce was the vehicle of choice for the target customer
group—not only for royalty and popes, but also dictators and leaders of the underworld
• However, after WWII, many of society’s wealthy class was hit hard financially, and as a
result, so was Rolls-Royce
• Despite the reduction of its target market, Rolls-Royce stayed with its niche strategy and
ultimately went bankrupt in 1971
• In 1972, the company was nationalized
• In 2003, the brand was acquired by BMW
• BMW is a master of the product/target-group strategy and positioned the Rolls-Royce brand
for the wealthy
• All of the interior engineering of the vehicles were replaced with BMW technology

27
For a niche player, there is a time to fight and a time to sell
Niche Strategy Conclusions
Adopting the correct niche strategy is critical—90% of companies existent today
will not be around in 25 years.

If you are a niche player, be sure to adopt the appropriate strategy for the current stage
of your industry’s development

For every niche company, there is to a time to fight and there is time to sell—selling at
the wrong time can cost a lot of money
 If a niche company doesn’t sell, it must evolve its niche strategy
 For every global consolidator, there are thousands of acquisition opportunities
For a company following a niche
strategy, cash-out value should
be a key performance indicator

29
The US Airline Industry was deregulated in 1978—since then, we’ve seen a
rapid growth in new entrants, followed by consolidation
Consolidation / Endgame Curve – US Airline Industry
The airline industry has already been globalizing through global alliance partnerships—e.g.
Star Alliance, SkyTeam, and Oneworld.
Stage I
OPENING
Stage II
SCALE
Stage III
FOCUS
Stage IV
BALANCE & ALLIANCE
100%
0%
Combined
Share of
Top 3
Players
Time1978
American 13.8%
United 21.6%
Delta 12.3%
Northwest 2.7%
Continental 4.6%
1991
American 19.1%
United 17.0%
Delta 17.0%
Northwest 9.2%
Continental 9.1%
Southwest 3.4%
New airlines rapidly—by 1983,
there are 196 carriers
1993 2010
By 1993, 130 carriers remain—
airlines focus on innovation and
cost reduction programs (e.g.
employee ownership, ticketless
travel, loyalty programs,
corporate discounts/contracts)
American 19.7%
United 17.8%
Delta 17.3%
Northwest 9.4%
Continental 8.7%
Southwest 4.7%
United + 18.0%
Continental
Delta + 16.7%
Northwest
American 13.8%
Southwest 4.7%
By 2010, we see 2 big
mergers—Delta merges
with Northwest (2008),
United merges with
Continental (2010)
Source: Kellogg School of Management
US airline industry
is deregulated
in 1978

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