Picking the Competition’s Brains for Deal Insight: If you’re not satisfied with traditional market and target studies to size up an acquisition, try going to competitors for the real skinny. It’s not off-the-wall if the right techniques are used.

Think about your previous market due diligence studies. Have they uncovered emerging markets and competitive blind spots? Have they strengthened your negotiating position and solidified your final investment or acquisition decision? Have they helped you preemptively identify new strategies that will increase the future value of your target company? If you answered “no,” it may be time to rethink how your market due diligence is conducted. For openers, you might think about going to your competitors to get the information you need. Out of the question? No, if the competition is approached in the right way. A surprising gold mine of information can be uncovered for the researcher willing to take the best shot. What’s wrong with traditional market due diligence? Typical market-based due diligence studies usually fall between two categories on opposite ends of the spectrum. At the high end of the spectrum, are the BAIN-style studies, which are thorough, strategically relevant, credible, and ultra-expensive. These high-horsepower studies are hard for most buyers to justify. Consequently, they tend to be reserved for megadeals and special circumstances. At the low end of the spectrum are “customer surveys,” administered with the help of professional market research firms or in-house research departments. These studies are really just customer satisfaction surveys relabeled as market due diligence studies. They are cheap, quick, and basically tell you whether customers are unhappy – not much more. Somewhere in the middle of the spectrum are former industry executives who are hired as consultants to perform market due diligence. These consultants are inexpensive and can quickly provide a historical perspective of the market and competitive situation. The downside is that virtually every former industry executive has entrenched biases and axes to grind; their personal history in the industry interferes with their objectivity. Another downside is that because they lack professional research skills, they tend to overrely on their previous experiences and limit additional research to interviewing “friends” in the industry. As a result, these market due diligence studies are often laced with blind spots because they are too reflective of the past. Each of the three approaches for conducting market due diligence have distinct strengths and weaknesses. Fortunately, an innovative fourth approach has emerged that combines many of the advantages and none of the disadvantages of the first three options. You can now attain market due diligence that yields BAIN-quality strategic insight plus unbiased industry executive perspectives at a greater speed and lower cost than typical customer satisfaction surveys, if you rethink how you conduct market due diligence. This requires buying into the radical, but surprisingly effective, research philosophy of “forget customers and listen to competitors.” Listening to competitors This is an admittedly counterintuitive philosophy that may not be appropriate for running a successful business in most instances. But in conducting market due diligence, it’s extraordinarily effective. The reality is that customers rarely understand the intricacies of their supplier’s market, competitive forces, and technological challenges. For instance, buying a gallon of milk doesn’t make someone an expert on the milk industry. Yet that is the implicit assumption of market due diligence studies that are based on customer surveys. Customer interviews rarely expose competitive threats or changing market dynamics – which is what market and competitive due diligence is really about. In contrast, executives at rival companies are extremely close to their businesses. Their livelihood depends on understanding customer preferences, market dynamics, competitive threats, and technological forces shaping the industry. So why not focus on learning from their observations and experiences? Imagine the keen insight you would gain by getting several executives from each of your competitors to candidly answer questions about the marketplace. These competitor interviews would produce considerably more insight than even the most exhaustive 500-customer survey. Most of us assume that competitors’ executives won’t share their market knowledge. And for the most part, an attempt to cold-call them with a telephone survey fails to generate meaningful results. However, there are four simple telephone interview techniques that will dramatically improve your odds of success. Secrets to interviewing competitors This isn’t as difficult as you might think. Seasoned executives who love their careers usually enjoy stimulating conversation about the industry. But there are four rules of thumb that maximize the likelihood of cooperation: Explain the scope and motivation of the call. Honestly explain the nature of the telephone call. You are researching the industry from a strategic perspective, looking at market dynamics, customer trends, emerging technologies, and competitive forces. Obviously, you can’t share the details of your m&a strategy but you can sidestep the issue by mentioning that you’re only doing some basic industry research – nothing more than just a reality check for reassurance. Let them know you are talking with executives from many competitors. If they know that you’re interviewing executives from other competitors, they will be intrigued and will want to learn what you’ve discovered. They will perceive you as a credible source of information. You can put them at ease by mentioning that you respect privacy and will never reveal “who said what.” Offer to share what you’ve learned in other conversations. The most effective way to encourage executives to cooperate is to make it worthwhile for them to talk with you. In other words, be willing to share information that you’ve learned in other conversations – but without revealing individual sources. Successful executives appreciate the value of good industry research and are usually willing to share their opinions with someone who can reciprocate. Start every conversation with some smart observations. Offer an observation that jump-starts a dialogue to pave the way for your questions. This also allows you to crosscheck and validate the facts. Get the interviewee’s reaction and encourage him or her to either dispute or confirm what you’ve heard from others. By mastering these four simple techniques, you will dramatically improve your chances for successfully engaging a competitor in a market due diligence interview. Experience has shown that there is everything to gain from this process. Once you’ve uncovered truly high-quality, affordable strategic insight from successful competitor-based interviews, you will never want to return to conventional market due diligence methods. Thomas Austin is Director of Research & Analysis at F2 Intelligence Group, a Minneapolis-based specialist in fast turnaround due diligence of markets, customers, technologies, and competitors.