Profit Maximization in Private Equity: The Power of Value-Driven Product Innovation

2021 was an exceptional year for private equity firms. But then came 2022, and PE firms saw a steep decline in deals, exits, and fundraising that has continued through this year. However, as with any downturn, current conditions open opportunities for more visionary firms. While some may choose to focus on cost savings and avoiding risks, others may see it as a time to boldly reassess their company’s position and strategize ways to grow and source deals away from competitors, eventually coming out of the downturn on the forward foot. This means the traditional approaches of “cost-cutting” or modifying structures at companies in a PE firm’s portfolio likely won’t be enough.

A focus needs to be put on more innovative approaches to value creation. 

One strategy that has often been overlooked, but has been steadily gaining traction, is reinvigorating the product development process. This is especially important after the last few years, where supply chain interruptions and labor challenges created strong headwinds to product innovation. New product development has suffered, especially Horizon 2 and 3 innovation – which can come with more risks, but can also be a true game-changer for a company and industry. As PE firms look to drive new growth and differentiate themselves from the competition, revitalizing product development efforts will be a key part of future strategies to create more value in portfolio companies.

Unlocking Growth Opportunities in the Product Pipeline

In the realm of new product development (NPD), the journey toward innovation and success can be as diverse as the companies doing the development. PE firms each grapple with unique challenges, requiring versatile approaches to product pipeline revitalization. At Sundberg-Ferar, we regularly collaborate with companies in this situation – from those who have goals of incrementally improving or refreshing their product portfolio, to those who want to completely re-envision their strategy and the role they can play in shaping the future industry landscape. We have a proven innovation process, established tools, and multi-functional talent to dig into these unknowns – both big and little. We’ve used them to empower Fortune 500s down to startups to uncover unmet needs, and identify high-potential innovation pathways and solutions.

User-Centric Perspective

Before getting into specific approaches to revitalizing a company’s NPD efforts and generating profit, it’s important to establish the mindset from which successful NPD stems and which forms the basis of all our work in this area at Sundberg-Ferar: That of a user-centric perspective.

At Sundberg-Ferar, we place significant emphasis on a stakeholder-centric approach, recognizing that it is a pivotal step in building confidence in product innovation, acquisition strategies and driving growth. Understanding the pulse of the market and the potential for innovation involves a direct and meaningful connection with the very individuals who drive it – the consumers and users themselves. 

To gain a comprehensive understanding of market opportunities, our team engages stakeholders through a variety of research approaches, tailored to our clients’ specific goals. This may be one-on-one interviews, focus groups, observational sessions, or even online surveys. As part of these research sessions, we focus on identifying and prioritizing stakeholders’ functional and emotional needs – many of which may be compensatory and unarticulated.

This stakeholder research also goes beyond just understanding existing needs, to anticipating future needs through layering future-focused trends into our research process. Knowing these needs could lead to identifying opportunities that might otherwise be overlooked, such as identifying companies that are on the path to groundbreaking product developments, disruptive technologies, or unique service offerings that could disrupt the market.

By placing humans at the heart of our process, we not only build confidence in acquisition strategies, but also help drive sustained growth through identifying products and services that resonate deeply with the market, both today and in the future.  

Portfolio Evaluation

One of the first approaches to revitalizing a company’s NPD efforts is to critique the current project pipeline, ensuring resources and efforts are being channeled into projects that hold the greatest potential for success and positive impact.

Sundberg-Ferar has a proven track record helping companies assess and prioritize ideas based on their ability to meet custom-selected criteria that align with the position and goals of that company, such as:

• Alignment with the goals, values, and resources specific to their business
• Ability to make a meaningful difference to their target customer
• Holds a unique and valuable place in the market
• Ability to make a positive impact on broader societies and environments

Through rigorous analysis and gathering of insights, we identify projects that may face challenges in meeting objectives or that lack the necessary product-market fit. Through removing such projects, we enable our partners to focus resources and talent on ventures that show the highest probability of success. The result is a streamlined and agile project pipeline that drives efficiency, fosters innovation, and ensures the allocation of resources to initiatives that will create substantial value for the firm and its stakeholders.

 Recently, Sundberg-Ferar partnered with company specializing in remote online education. This client had a significant number of products, both in their current portfolio as well as their R&D pipeline. Their goal was to refine and bolster their product offering to be more impactful in the market amid a new, post-COVID education landscape. 

At the outset, our team embarked on a thorough product assessment. This entailed compiling information about each product (existing and planned), including core objectives, the target customer, key competitors, and the essential enabling technologies. Armed with this information, we worked with the company to identify overlapping projects, streamline efforts, and eliminate duplicates that might hinder effectiveness.

Pipeline products were also mapped in terms of being a near-term, mid-term, or long-term offering, as well as the level of effort and investment required to bring each product to market. This nuanced approach allowed us to prioritize projects effectively and build a robust portfolio plan, encompassing quick wins and strategically planned long-term offerings to ensure our client’s enduring viability and success in the education landscape.

Designing for Value

Redesigning or re-engineering products to “design for value” can be an incremental, but impactful approach to new product development. The goal is to rethink current products in order to reach higher margins through cost reduction or even through pricing increases.

Our team of experts collaborates closely with partner companies to assess their current product offerings, identifying areas where optimization and innovation can produce significant value. By adopting a customer-centric perspective and diving deep into stakeholder insights, we aim to understand the true needs and desires of the target audience. Through this comprehensive understanding, we reshape product features, functionalities, and design elements, streamlining them to deliver exceptional value to users and broader stakeholders alike.

This “design for value” approach goes beyond mere enhancements, and allows PE firms to improve the value proposition of their portfolio companies’ products in a systematic and insights-driven manner. It ensures that product enhancements are aligned with market demands, increasing the likelihood of higher revenues and profitability for portfolio companies. This ultimately positions our clients for sustainable success, ensuring they remain at the forefront of their respective markets.

New Innovation Strategy

At the heart of revitalizing new product development lies the ability to leverage a comprehensive, end-to-end innovation strategy process that can lead to break-through design and innovation. This requires confidently transitioning from broad, open-ended questions, such as “what do new environmental regulations mean for the future of our industry?” or “how should an aging population help redefine the experience our product offers?” to well-defined innovation opportunity areas supported by families of solutions that tackle these challenges head-on.

Sundberg-Ferar specializes in taking a human-centered design approach to these challenges, guiding our clients through an immersive and transformative innovation strategy process we call GENESIS. Our expertise not only leads to tactical initiatives that strengthen the product pipeline, but also equips our clients’ teams with the capabilities and processes needed for continued innovative thinking into the future. 

A few years ago, SF worked with a client on a strategic initiative to grow one of their brands – which specialized in replacement plumbing hardware – into new, adjacent categories. Through exploring all potential opportunities, the team discovered the parent company had another division that created commercial grade chlorine for pools along with many other chemical and filtration solutions. The two divisions had no connection at the time, but the SF team saw an opportunity to combine their skills and target in-home clean water solutions.

 

Our research team conducted numerous interviews with experts and stakeholders to determine strengths and weakness of this potential market, as well as gain an understanding of consumers’ appetite for enhanced water solutions. Our design team then created a new brand around the large market opportunity that was uncovered, and designed potential products from laundry sinks, to enhanced under-sink filtration systems, to new enhanced therapy shower and bathroom hardware.

 

Finally, we collaborated with the client to connect the dots between the market volume opportunities and their internal technology readiness to create a 5-year plan to reach their volume targets.

 

This project found meaningful product opportunities that could improve the lives of consumers while also expanding our client’s market reach. At the same time, it brought meaningful opportunities to our client’s team members by expanding and maximizing their skills. The engineers found excitement in the challenge of capitalizing on untapped capabilities they already had. The marketing team saw new opportunities to grow outside of their current SKUs and tackle new segments, and management felt confident to make moves with evidence and not just hunches.

Our methodology begins by imagining all potential opportunity areas around a company’s goals. This naturally leads to questions that need to be explored, to vet these various opportunities. The team begins to answer these questions through thoughtful research, uncovering new industry trends, advancements in design and technology, and empathizing with stakeholders to understand needs, pain points, and aspirations. These valuable insights form the foundation for ideation and concept development. Through collaborative workshops and creative brainstorming sessions, we generate families of concepts that comprehensively address the identified opportunity areas. These concept families undergo rigorous evaluation, validation, and refinement, ensuring their alignment with business goals and market demands. Those concepts that offer the most promise and opportunity – both near-term and long-term – develop into an innovation roadmap, helping provide a strategic vision and a sense of direction for the company’s future innovation efforts.

By involving stakeholders at every stage, we foster a sense of ownership and commitment to the roadmap of innovation initiatives as well as to the innovation process overall. This equips the company both with a guide to sustainable growth, as well as the skills, mindsets, and culture needed to see it through to future success.

Essential to the GENSIS process are several integrated workshop sessions, which bring people together into a collaborative environment, fueled by inspirational insights, to ignite ideas and forge impactful solutions. If your company doesn’t have the bandwidth or need for a full innovation strategy experience, the same energy and game changing solutions can come from one of our Ignition CoLAB sessions – a collaborative way of approaching your teams’ toughest problems, focused around a central workshop session. If you need to inspire a fresh stack of ideas, or need help figuring out which ideas to tackle next, these sessions are a way of bringing inspiration, focus, and clarity to help your team take the right next step and design meaningful solutions.

Development and Realization of Roadmap Projects

A key outcome of an innovation strategy process, and of NPD in general, is being able to successfully develop a concept into a product ready for production. Sundberg-Ferar’s experienced and cross-functional team can help support, guide, or fully lead this process.

Although each tactical product development project is unique, we generally start by aligning on objectives and measures of success. Our team of researchers works to understand target stakeholders’ unmet wants and needs, while at the same time exploring the market landscape and future-focused trends that will impact the direction the market is headed. These insights help fuel concept ideation among a cross-functional team of designers, engineers, researchers, and strategists to meet the ideals of users and the market. Concepts are iteratively developed through stakeholder feedback, followed by refinement phases, until the team is confidently ready to move top concepts forward into prototype development and fabrication.

By providing robust design, engineering, and research support, we enable portfolio companies to actualize their innovation initiatives with precision, fostering value creation, and bolstering their competitive edge in the market.

Building Confidence in Acquisition Targets

For PE firms, taking a holistic approach to value creation begins with the critical task of identifying and evaluating potential acquisition targets. While we know that most PE firms are equipped with teams that are already analyzing market trends, growth prospects, regulatory environments, and competitive landscapes to identify targets, Sundberg-Ferar can add a unique POV through its human-centered perspective.

Envisioning the Future

An essential component in identifying where to focus, is being able to envision where consumer energy and the market in general is headed into the future. By analyzing the forces and trends that are shaping our world, we can gain an understanding of where exceptional opportunities may exist, as well as spot the potential for risks. 

Sundberg-Ferar specializes in tracking and curating a library of macro trends, looking across a holistic range of influences that impact our world, including:

• Social trends that focus on demographic and behavioral shifts, helping us understand the consumers of the future
• Technology trends that identify upcoming advancements and applications of technology, across areas such as connectivity, energy, and materials
• Environmental trends that look at developments in knowledge, attitudes, and approaches related to companies’ and products’ lifecycle impact on the environment and societies
• Industry trends that track changes within specific industries related to manufacturing, supply chain, costs, and consumer purchasing behaviors and preferences
• Government trends that focus on shifts in policies, regulations, international relations, and labor laws

Understanding these trends and the interrelationships among them helps to assess the potential for growth in various industries, understand competitive dynamics, and foresee potential threats. 

Expert Validation

Another approach SF takes to building confidence in an acquisition strategy is to engage with subject matter experts (SMEs), to vet hypotheses about where the market is headed, and understand potential challenges that may not be apparent through traditional due diligence. We work with our clients to identify individuals who have deep expertise related to the goals at hand – that may be industry analysts, former executives in the field, or even academics. The aim is to ensure we are including a diverse set of perspectives, bringing a mix of knowledge related to the target industry or specific company of interest.

During these interviews, points of discussion are tailored to the acquisition strategy, the industry in question, and the individual SME’s background and expertise. Topics that are explored may include the SME’s perspective on market trends, competitive dynamics, regulatory considerations, growth opportunities, operational challenges, and industry-specific nuances.

Sundberg-Ferar can help empower your value creation

Focusing on developing new and innovative products and services presents many compelling benefits for private equity firms, fundamentally transforming their investment landscape. From seizing incremental opportunities for growth, to becoming experts at strategic innovation processes, moving to a position of advancing value creation can set your firm up for sustainable long-term growth and market differentiation.

As new product development and innovation becomes a core strategic initiative at your company, it will foster a culture of innovation internally and at your portfolio companies, inspiring teams to think creatively and collaborate seamlessly. By cultivating this type of environment, your organization will have the ability to enhance employee engagement, attract top talent, and ensure the organization remains at the forefront of industry advancements.

If your team is ready to unlock its full value creation potential, Sundberg-Ferar can help. We’ll help you lay the groundwork for enduring success, gaining a competitive edge, and setting a course for sustained growth in the dynamic and ever-changing business landscape.

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