There is one thing almost all entrepreneurs have in common; they want to grow.  They seem to have an insatiable appetite for more; more customers, more margin and more revenue.  The most fundamental of entrepreneurial questions is what business to be in, and expansion into new markets can reframe everything from branding to resource requirements.

Within our work (as strategists and facilitators of strategic planning retreats), clients often pre-determine the industry they are in based on some core competency. While the core business may be somewhat static, selecting what sectors and niches to focus on can be tricky.

While many business executives focus on the things they can be good at, the capabilities of the firm only tell half the story. One must also decipher what products and services customers will value. The question of market scope can be be best addressed through an assessment of “industry structure”. Industry structure demonstrates how a series of economic and technical  attributes determine the strength of an industry.[i] Ignoring industry structure is like standing in the ocean in high tide; one can attempt to swim with the current or against it.

Companies should seek to capitalize on favorable market forces and then align their capabilities to profit from the most attractive markets. Much has been written about the Five Forces model (originally authored by Michael Porter), but a contemporary view of the theory would suggest that entrepreneurs must consider the following:

1. Savvy customers have access to information, and hence more suppliers. They leverage the information to work suppliers against one another.  Customer’s buying power is promoting commoditization in most every industry. A world of reverse auctions and the like depress prices beyond fluctuations in economic conditions.
2. Suppliers have been chomping at the bit to raise prices (in a period of zero inflation). They must be more inventive in their approach in charging fees (such as airlines charging for baggage, and upgraded economy seats). For B2B companies, there must be a clear understanding of what services customers are willing to pay for, and which they will demand for free.
3. Low cost entrants will seek out business segments with low entry barriers and use price as a disrupter. With the development of e-businesses, virtual offices, outsourcing of customer service and production, competitors can emerge quickly.
4. Substitutes are adopted much faster than in the past. Within about a year, local storage was replaced by products such as Carbonite, which months later was made irrelevant by Dropbox and Evernote.  These products came to market with a price that can’t be beat – free.
5. Switching costs are low unless suppliers provide a barrier to exit, such as warranties, etc.  For example, auto manufacturers make special offers to induce existing leasing clients to stay in the fold.  Conversely, cell phone providers often provide lower prices to non-customers in an effort to make them switch, resulting in poor customer loyalty.

Every industry has a unique set of variables that synthesize these forces. Expansion is often necessary, but entering new markets should be approached with data, evaluation of the Five Forces and an abundance of caution.

All of this being said, executive teams should be purposeful about where their future growth will come from. It is overly convenient to believe that one’s existing market will continue to provide a satisfactory level of growth.

Let’s face it, most entrepreneurs are impatient and restless. Within the process of strategic planning, they tend to be dissatisfied with incremental improvements.  Most seek the Holy Grail through some form of market disruption that will provide  competitive advantage. Not every strategic plan will unearth the next iPad. Yet innovation can be manufactured, and provide a clear path for exponential growth.

There are four primary types of innovation a company can pursue:

1. Finance – Entire businesses are built on float and spreads etc. (such as American Express)
2. Process – Creating systems that streamline operations, reduce cost or offer customers an enhanced experience
3. Offering – Companies that develop unique product/design innovations or who offer comprehensive selection (one stop shopping)
4. Delivery – Companies with a unique distribution/come-to-market strategy (which is proliferating now as e-commerce reshapes many industries)

Timing is just as important in considering various innovation alternatives.  The effectiveness of certain strategies will vary dramatically based on industry stage.  When companies enter a white space with a product innovation, risk and return are high. Incumbents interested in volume will ignore such entrants pursuing niche markets[i].  When upstart Under Armour developed undergarments for football teams, they were largely ignored by larger apparel makers. Before Nike knew it, Under Armour was selling golf shirts at Dick’s Sporting Goods.

Once new products are accepted and a market is made, opportunities shift to service innovation.  The fro-yo craze (frozen yogurt) represents a current example of ingenious innovation (higher consumption coupled with lower labor costs).  Once the industry was established, the ingenuity offered was through service delivery (self-serve) as the product was framed in an entirely new context.

Another element the entrepreneur must consider is the organization’s risk tolerance and other factors that may motivate a management team. For example, a company with private equity investment may have additional burden and may be more inclined to take bigger risks; faster.

Companies can consider growth investment  in their core, adjacencies or in more transformational innovation[ii].  What is often counter-intuitive to entrepreneurs is that in most businesses, the next dollar of investment is more likely to provide an ROI when invested in the core business, than it would in disruptive innovation  (which has a much higher risk to fail). In order to optimize ROI and reduce risk, one potential strategy is to straddle your wagers across all three (core, adjacent, transformational) as each has a different risk profile and timeline.  While one could make incremental improvements to the core immediately, transformational innovations (such as an abrupt change to a business model) could take years to execute, and may require a separate LLC, management team and P&L.

Some companies are equipped to ignite and manage innovation and others think of innovation more casually. But to stimulate innovation in any systematic way requires a mindset and management structure that encourages investment. Many companies employ R&D specialists whose role is to develop new products and services. Many establish task forces to constantly consider new ideas and establish customer advisory boards to provide color on what shifts in a market may foster opportunity.

Continuous innovation does not happen on its own, it requires an enterprise wide commitment, investment and an appetite for change.  Do you have the will?

Smartphones and tablets have disrupted every industry, and we are moving towards a society where the vast majority of our tasks are completed on our devices. I have spoken with some entrepreneurs of the grey haired set that think they have a website and that they have the bases covered. Those who confuse a web strategy with a mobile strategy could be leaving money on the table.

Only 7% of teenagers check email every day. The technology that is the basis for communication in commerce is completely irrelevant to them. In the case of technology, there are entirely different populations: those who grew up with technology (under 40) and those who have adapted to it.

There is a revolution taking place where smartphone transactions are not only driving B2C, but will soon be crucial in B2B as well. Business to business users are utilizing their smartphones differently, accessing portals, ordering systems, etc. at home while watching TV, on airplanes and even in their automobiles. Smartphone purchases aren’t just for kids anymore.

The experience of a user on a smartphone or tablet is completely different than that of a website, and thus your web strategy must be built with mobile in mind. As the screen of a smartphone has a much smaller footprint than a PC, the information displayed should only be that which is most relevant.

In London, patrons use an app called Nearest Tube that allows one to find the closest subway station. The view of the user changes based on the angle in which the user is holding the phone. When pointed straight ahead, arrows guide the user (as in left or right) but when the phone is held downward, the user sees 4 arrows. When held up at a tower in the distance, the app indicates how many kilometers away it is. The use of apps in this way is an indication the traditional viewpoint of web applications does not apply directly to mobile technologies. That is web technology and viewability does not translate directly to mobile.

According to a study conducted by Comstore, one third of all searches today are on smart devices, and searches on devices are growing at 6-7 times the rate of PC’s. In other words, we are a year or two away from most internet activities being conducted on smartphones rather than on PC’s.

The proliferation of native applications reflects the poor user experience on websites. While not all businesses (especially B2B businesses) warrant the development of an app, they can take steps to integrate mobile into their marketing plans and optimize their websites to be device friendly.

Holy jobs report!

Not only did the U.S. economy generate 236,000 new jobs in February, sectors such as construction have found new found strength.  While many sectors have already recovered, construction (which added 48,000 jobs last month) and real estate have lagged behind[i]. The real estate shadow economy, driven by new home sales (or lack thereof) has been a drain on the broader based economy.

While one job report does not an economy make, other indicators provide some room for optimism.  The February Consumer Confidence Index (as published by The Conference Board) is at 70, up sharply from 58 in January.[ii] The most recent confidence survey conducted by Vistage and The Wall Street Journal found that 69% of CEOs (of small companies) believed revenues would increase in 2013. As of this writing, the Dow Jones Industrial Index is at an all time high.

While black and white economic trends may provide the greatest relief to our psyche, the confidence of investors to invest and consumers to spend are perhaps the most important variables as predictors of growth. The mood of the nation is the impetus to investment and spending. Our confidence is higher, even though consumers are facing relatively high fuel and food costs.

The Fed has indicated it will not raise rates as long as unemployment remains above 6.5%.  We may be in a unique window, where the economy is growing fast enough to induce confidence, investment and growth, but not heating up too fast to generate inflation. Any study of economic cycles tells that these conditions won’t last forever.

The most nimble of entrepreneurs know that leadership teams need to plan for the things they can control so they can react to the things that they cannot. Near term market conditions seem to be better than they have been in years, and entrepreneurial companies have the opportunity to lever their nimbleness for competitive advantage.

So it may be the time to consider investments that will position for growth. Some, bitten by the last recession will be less aggressive than they have been in the past. Many competitors are weakened. The strong will get stronger.

Sectors such as automotive, technology and health care are expected to lead the way. The uptick of U.S. manufacturing and technology are especially encouraging, as manufacturing has historically provided a base for jobs, and technology a springboard for innovation.  2013 could prove to be a better year than many expected.

Many entrepreneurial companies face challenges in calculating their true cost of doing business. The ability to overcome these challenges can create a significant competitive advantage.

We live in age of nickels and dimes.  Customers split hairs over price, and make purchasing decisions based on marginal differences in the way that their providers deliver products and services. Knowing true costs opens the door to making better decisions that impact the value proposition, pricing and other strategic considerations.

Most commonly, the problems with calculating costs stem from poorly integrated systems, and a lack of cost accounting. Gross margins are typically understood (by senior management) but overheads are allocated with a lack of specificity. They are applied evenly based on the volume of a category or division, even though there may be significant differences in corporate overheads from one to the next.  If the systems do not allow for true cost accounting, even true margins which reflect things like discounts and the like may not be accurate.

Problems can be exacerbated by an inherent lack of financial acumen. Non-financial managers need to be taught how profit is earned and how it is calculated.  That may not mean opening the books, but education at a gross margin level is critical for companies wishing to empower mid-management to make better decisions on their behalf.

There are two tools that we advocate clients use to better understand costs and their relationships to value:

Activity Based Costing - A well executed Activity Based Costing (ABC) analysis can yield meaningful results.  In an ABC, (often conducted by a CPA or consultant) the organization measures which of its activities are tied to specific products, segments or divisions.  This is painstaking work. For example, all corporate staff may be required to track their time for a fixed period (maybe 2-4 weeks) so that such allocations can be calculated. Once such costs are understood, a provider can make better decisions on where to reduce costs, what products and services to offer and what prices they SHOULD charge (which in some cases is very different than what the market will bear).

Value Chain Analysis - Value chain analysis breaks down the activities of a firm in its basic elements such as R&D, product development, product launch, etc. Then the value of these activities (as perceived by customers) is weighted against the ability of the firm and its competitors to deliver value. For example, customers may value warranties as a differentiator amongst companies. Some competitors (such as BMW or Hyundai) may excel in this area, which may be the source of some advantage, but what is critical is that the providers measure the perceived value of the feature vs. the incremental cost to provide it.

In a world where customer’s cost sensitivities are heightened, having a laser focus on costs allows the provider to manipulate its offering and prices to create the optimum perceived value.

As the business press is buzzing about companies bringing back call centers and other services to the U.S., businesses should be thoughtful about what services they outsource and which they keep close to the vest.  Much has been written about keeping within a company’s core competency, but this trend is waning as evidenced by the rebirth of vertical integration. As margins are squeezed, companies are looking to recapture profit upstream and downstream.

In assessing which services to keep in-house, entrepreneurs need to look past their core competencies, and to those functions that their customers deeply value.  In the case of a call center, it is not only the quality of the service that needs to be considered but also the relevance of it.  If the purpose of a call center is for upselling and counseling customers, it has more inherent value than one that replaces warrantied parts. In the case of the former, it may make more sense for the business to insource. Services that require some specialized knowledge (known as “tailored services”) may require more finesse and are appropriate for insourcing.

One must also weigh the strategic consequences of such decisions.  Will any short-term savings in costs (through outsourcing) be countered by any long-term ramifications?  Costs cannot be considered in a vacuum. Cost savings can only be considered relative to any price premium that can be realized through more meaningful customer touches and the like. A vast majority of the time, when a business outsources a function, it loses uniqueness (as any provider could do the same).

The topic of what is “core” and what is not is somewhat misunderstood. Many businesses have tried to boil core competencies down to the bare minimum under the premise that to do so improves execution.  The premise may be correct, but the question becomes, execution against what? If the core offering is perceived to be the same as all other competitors in a given market space, there is no competitive advantage. Competitive advantage is realized when the tailored services provided are the ones that most deeply resonate with a client.

Thus the outsourcing question must be considered in the overall ecosystem of the business. Business owners are always looking to optimize the deployment of their resources but such considerations need to be made within the context of what services deliver unique benefits.

Adapted from Understanding Michael Porter by Joan Magretta

Since Gartner introduced the “Hype Cycle” in 1995, technologists have been using it to evaluate emerging technologies.  Yet today, entrepreneurs can utilize the Hype Cycle principle more broadly to consider how technologies can combine within an organization’s ecosystem to foster competitive advantage.

The Hype Cycle has 5 phases; and it takes about 2 years for technologies to shift from one phase to the next:

Phase 1-The Technology Trigger

During the trigger phase there is significant media interest in a new technology. For internal systems, users fall in love with the perceived efficiencies or customer impacts. Current examples: Crowdsourcing, Big Data

Phase 2- The Peak of Inflated Expectations

In the second phase, users are unrealistic about the capabilities of a technology, how long it will take to implement and the return on investment.  Current Examples: 3D Printing, Private Cloud Computing

Phase 3 – The Trough of Disillusionment

In reaching the trough, users realize that technologies do not realize their potential, and become cynical about them. Current examples: Cloud Computing, Home Health Monitoring

Phase 4- The Slope of Enlightenment

During the next phase, users readjust their expectations so that they can realize more realistic outcomes and find more real world applications of various product features. Current examples: Mobile OTA Payments, Media Tablets

Phase 5- The Plateau of Productivity

Finally, when a technology is adopted, its bugs are repaired and users are trained. Over time, it becomes more stable and nuances are better understood.  Current examples:  Speech Recognition and Predictive Analysis

The promise of the Hype Cycle is to help executives filter through the noise and decipher which advances will be applicable to their businesses. The term “hype” is aptly titled given our nature (as entrepreneurs) to be intellectually curious about things that are not fully proven.  The theory of the hype cycle suggests that first mover advantage has a dreadful downside; those who implement technologies too quickly are apt to be disillusioned.  As the saying goes, “the devil is in the details.”

Our clients are constantly evaluating new tools, before they are fully understood.  Managers should be more thoughtful in vetting such opportunities and fully understanding their implications. Especially as companies move to a higher level of integration, they will be more selective on how they use technologies that must coexist with ERP systems and the like.

In evaluating a new technology, a sound cost-benefit analysis should be conducted by the managers who will use the product. The days of IT executing technology in a vacuum are over.

There are times when larger companies have a distinct competitive advantage as a function of their systems or scale. It is intuitive to entrepreneurs that their advantage is driven by their ability to adapt and drive innovation. Yet, on the path to innovation, the structure of a smaller company can be limiting.

What is true in all companies (large and small) is that they are typically organized in functional departments (such as accounting, engineering, and sales). It is the objective of each of these departments to create systems and processes that further the effectiveness of the status quo.  So how can you overcome these inherent limitations and be best-in-class in terms of innovation?

Clearly smaller businesses are more impacted by resource constraints than larger organizations that have entire departments dedicated to strategic planning, R&D and innovation.  Further; the strength of functional managers in solving operational problems can be a weakness when it comes to innovation. For example, a company may spend a year or more implementing lean manufacturing which may be game changing in terms of profitability but does not revolutionize the business or open it to new markets.

Recent articles written by Kotter, author of Leading Change, and Kahneman of Thinking Fast and Slow suggest that people and organizations have two parallel tracks of thinking: one that is left brain (logical and detail oriented) and right brain (more innovative and intuitive)[i].  Further, the structure of organizations puts these two tracks in conflict.  In other words, it is impractical to believe that people who are responsible for preserving a company’s existing competitive advantage are capable of leading the charge to reshape it.  The theory is not an indictment of the capabilities of managers, but of an environment where people are working at or above their capacity, and on many initiatives at once.

Kotter calls for companies to operate “two systems”, one building out the capabilities within the core business and another tasked with exploring external opportunities. For most entrepreneurial companies, it is all hands on deck in terms of growing the business within a core competency while satisfying customers and remaining profitable.

Thus, it is incumbent upon the entrepreneur to drive innovation and to be purposeful in doing so.  Such thinking only reinforces the need to have strong C-level management (such as COO’s and CFO’s) so that the CEO can lead forward thinking initiatives that transcend incremental improvements (such as implementing a CRM or ERP).

Another issue is brain trust (reinforcement of the need for peer groups.)  If you do not have innovators within your business, you may need to create a group of confidants and advisors who can assist with the formation of your strategy.

Once these resources are in place, the team responsible for innovation must have a forum for research, vetting new ideas and seeing through various opportunities so that they can be incorporated into the business.

It is that time of year when the prognosticators come out of the woodwork. Unfortunately, most are predicting a similar economic climate in 2013. Here are some things to look for in the year ahead:

Even if the President and Congress are able to solve the Fiscal Cliff debacle, the U.S. economy is predicted to stagnate with 1.5% annualized growth[i] in early 2013, expanding to 3% by the end of the year (which could drop dramatically if no fiscal compromise is reached). Inflation is hovering at a modest 2% and the Fed has indicated that it will not raise rates much above zero until unemployment reaches a target of 6.5%. While unemployment is expected to drop to 7.5%, it would take a small miracle to ease below 7% this year. U.S. exports are expected to rise 5%, assuming stability in currencies.

Contrary to unfounded perceptions, U.S. manufacturing has been relatively strong, contributing 75% of total GNP growth over the last two years. In the last two quarters, manufacturing has pulled back considerably, including particular weakness in defense and transportation equipment.[ii] Look for soft manufacturing job growth in 2013.

What they refer to as austerity in Europe is a “fiscal cliff” in the U.S. (we are such drama queens). If you think our taxes are high, compare with France where the leftist leanings have upper rates set at 75%[iii]. While much of the press has centered on Greece, Portugal and Spain, the weakness of the French could drive Europe further into the abyss. Further economic instability in the region is likely.

Mongolia will sport the world’s highest projected growth at 18%.[iv]: China’s growth has cooled of late but is expected to maintain at an 8% growth rate. China’s economy generates $6,900 per person (about a 7th of the U.S.) and inflation of 5%. China’s new communist administration is expected to make few policy changes.

World economies are forecast to grow as follows:

• North America 2.2%
• Western Europe .3%
• Latin America 3.9%
• Asia 6.4% (excluding Japan)

Select industries such as automobiles are surging. U.S. automakers sparked by the loss of automobiles in Hurricane Sandy, expect a spike of 7% increase in volume.

Energy is the wild card. A recent ruling that allows U.S. firms to export natural gas could open up the floodgates in a market depressed by oversupply. While world events and accidents may drive fluctuations in energy prices, the fundamentals are better than they have been in decades, as the U.S. moves toward greater energy independence.

Health Care will be 18% of U.S. GDP (by far the most of any nation in the world; Germany is second at 11%). Companies are already seeing unprecedented increases in their premiums. Many companies will opt out of nationalized health care and pay the penalties. Some employers (such as restaurants) will move employees to part time to reduce their health care burden.

IT services and consulting continue to expand as companies find ways to exploit the cloud. Global growth of software services is expected to double to 6%. Big Data will lead the way in terms of technology innovation as companies exploit relational databases (large databases that can talk to each other), and mine information differently.

Industries not expected to fare as well include media (still being commoditized by the internet), pharmaceuticals and mining. Some raw materials such as copper are still in demand and could spike further.

Happy New Year, sort of.

When considered as an industry sector, the internet contributes 4.7% to U.S. GNP. Some have characterized that as a big number, bigger than all of the spending of the Federal government combined.  Not to be a contrarian, but one could argue that 5% is a small number when you consider that the internet is still in its infancy.

It is time to change the narrative on technology. All successful businesses will ultimately become technology companies.  Failure to understand this context will be catastrophic to those who are asleep at the wheel as the next wave of computer technologies emerge. Conversely, technology has become the most effective lever for gaining competitive advantage.

Many entrepreneurs get caught up in the buzzwords: cloud, big data, take your pick. Some even ignore technology because of their lack of understanding. Most think of technology in incremental terms.  We look for ERP systems to inform us, and portals to improve the experience of our customers. My view is that thinking incrementally isn’t enough in today’s environment.

Today’s entrepreneur must harness the energy that technology offers us; to disrupt industries and make markets. While technology might be the great equalizer, it can also be the ultimate barrier to entry. It can cost millions to adhere to security and privacy standards required by large customers.  But these technologies are small ball, they keep competitors at bay, but do not reframe the conversation.

The most formidable technologies are yet to come. Large B2C companies like WalMart and Amazon are building sophisticated algorithms to predict consumer behavior, such as what utensil a housewife will buy next. What happens when B2B companies are able to predict client behavior with similar accuracy? These technologies already exist and “Big Data” will only further enable such inter-connectivity.  IT cannot just be the place where we figure out how to allow customers to order their products online.

While logistic engines and portals are somewhat known, the ability to analyze streams of data is spreading like wild fire. For example, social media tools provide the ability to calculate return on marketing investment unlike any of the marketing tools used by past generations. B2B is on the cusp of a new dawn, where business analytics will be so powerful, that winners and losers will be dictated by who has the best information.

One of the sea changes that will occur is that access to information will change the way we manage. Today, decisions are forced to the top because relatively few people in small companies have access to information . When the minions have the same information as senior management, they will make better fact based decisions.

It is time to set the information free. Data needs to be treated like a strategic asset, the fiber of intellectual capital.  It is not uncommon for our firm to have clients who spend 1-2% on technology and 8-10% on marketing.  As technology and marketing morph into one, and the cost of technology falls, companies will have to recalibrate how such investments drive profitability.

We will also have to change the way we think about how our employees use technology. In the old world, IT dictated what technology we would use. Today, the employees decide which tools they need and on what devices. They can download them for free from an app store of their choosing in real time. We cannot harness technology if we are restricting it.

Will you be participating in the next Revolution?