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?

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.

In my travels I have talked to many entrepreneurs who are standing pat, and waiting for the economy to start growing again. Our expectations may be somewhat distorted. Between 1991 and 2011, the U.S Gross National Product increased between 2-6% in every year (with the exception of 2009 and 2010)[i].  An economy growing at only 2% feels entirely inadequate, even though it presents a meager statistical difference from a booming economy, where we perceive consumers and businesses to be spending more freely.

Entrepreneurs tend to follow the business news with fascination, looking for any possible insight as to the pace of economic growth. Economic news has become a crutch; it is the rally cry when results are good, and the excuse when they disappoint. The opportunity is to create companies that are resilient and relevant, regardless of economic and industry conditions. In most businesses, the value proposition must be dynamic (and not static) because the status quo is an economy flattened like a pancake.  Most of the time, the benefits that won business 3 years ago, will not be the same ones that will resonate 3 years from now.

Clearly, some sectors of the economy (such as technology and finance) are heating up.  Yet, any objective view of the economy should temper enthusiasm. The European economy contracted in the last quarter, 25% of U.S. mortgages are still under water and depressed wages (and unemployment) hinder the middle class from participating in any recovery. We as business leaders can not act as victims to these circumstances.

Further, a single economic cycle is something of a misnomer.  Industry demand is affected by a myriad of factors including the economic cycle, monetary cycle, the industry life cycle and company life cycle.  Conflicting reports about the economy create confusion and fear, and much of our sentiment about the economy is irrational.

U.S. history is riddled with periods of growth and decline steered by the mood of the nation. After the panic and fear of the Great Depression, the U.S. settled into a period of profound optimism and growth. With scant warning, the JFK assignation inflicted a deep wound, a precursor to two decades of violence and the crisis in Iran.  On the heels of the U.S. Hockey Team Gold medal in 1980, Ronald Regan proclaimed it was “’morning in America”[ii]. In the ensuing decade, the Dow Jones Industrial Average increased by a value of 8 times. Our human tendency is to overact to stimuli in the form of euphoria or despair.

It is time for businesses to plan for growth independent of the momentum of the overall economy. In many sectors, the loss of pricing power, and margin erosion are not a result of the economic cycle. The confluence of Moore’s Law, globalization and hyper-competition has permanently altered the competitive landscape. Instead of waiting for a fundamental shift in the economy, entrepreneurs should recognize the structural changes in our economic ecosystem, and take advantage of them.

For example, a recent study suggests that the rate of change in technology is escalating faster than Moore’s Law (Gordon Moore’s theory that processing speed would double every two years while prices decline)[iii]. This trend has profound implications for markets, as the rate of technology change is directly linked to the race to the bottom (commoditization).  It is probable that pricing power will deteriorate further, requiring that companies fight to demonstrate their value and better leverage the technological advances that are changing the way we live and work.  “Big Data” will enable companies to mine data and integrate systems in ways that were inconceivable just 2-3 years ago.

The businesses that are succeeding today (clearly Vistage members are outpacing the market) are not satisfied with the status quo, and are retooling their value propositions. For companies who may have been spoiled by annual price increases in the past, growth will not come through traditional means. Companies will have to manufacture growth by taking share, doing something new, or acquiring businesses in other sectors. When revenue and margin are eroding, and there is not a clear strategic impetus to reverse the trend, it is incumbent on the entrepreneur to make bold moves.

These principles may sound familiar, but the economic malaise may provide newfound motivation for entrepreneurs to seek transformational investments.  The dilemma for many businesses is the specter of new investments into new products and services, not knowing how much demand there will be. Perhaps business owners can take solace in knowing that developing new business or attacking adjacent markets is enabled by lower marketing costs, and access to tools such as e-commerce.

While U.S. earnings are strong, public companies are clearly far more reliant on revenue and profit from their operations overseas. As they ran out of runway, many looked for new markets to exploit, and small companies will need to do the same.

Of course every business is different, some are still growing and others are looking for answers. Regardless of a company’s rate of growth, entrepreneurs should not just wait out a fundamental shift in the economy, because it may not come for many years. Be bold, the future of your business may rely on it.

We have all seen them: the caveman sales manager. They are Neanderthals, like something from a Geiko commercial. The old school sales manager comes from an age where business was primarily built from business relationships, long before the Internet and eThis and iThat.

While interpersonal relationships are still pivotal, they are simply not enough to sustain sales growth with key customers. Quality, price and other attributes are the cost of admission and sales organizations must have all of the tools necessary to compete in a brutally competitive environment.

The contemporary sales manager proactively manages a company’s value proposition, marketing, selling opportunities and pipeline. He (or she) knows how many “A” opportunities the organization has open, the average sales cycle and close rate. The caveman won’t even consider tracking such statistics. He either doesn’t know they exist, or thinks it will rob his salespeople of face time, where they will close the client.

The rules have clearly changed, and every dollar of marketing spent must be defended as companies expect to quantify their return on marketing investment.

Marketing itself is in the midst of a revolution, where activities can be fully integrated with the sales effort (marketing should enable greater sales productivity).

The advance of customer relationship management and salesforce automation tools have created a level of integration and productivity unseen by past generations. Within a standard CRM package, an organization can easily track and scorecard sales productivity, from sales calls to close rates. When combined with other data that allows more precise targeting, organizations can better clarify their audience, and make better investment decisions that will result in more revenue and profit.

For example, our firm assisted a company in the consumer electronics space to identify what products were being imported by major CPG (consumer package goods) manufacturers. Based on the market volume, category growth and geography of potential customers, the client was able to create a target reach sales segmentation strategy, organizing clients in their CRM as A, B, C, and D. The number of salespeople hired, the number of sales calls that were required, reporting and operational decisions such as cycle time were driven by the segmentation.

A direct marketing effort was coupled with the sales segmentation. Based on the schedule of sales solicitations, specific marketing pieces were sent to prospects, including new product introductions, invitations to trade shows, etc. The marketing plan was specifically written to improve the success of salespeople in specific niches at specific times.

The company’s incentive plan was built not only to reward sales and margin but also to reward activities that would present the organization in a particular light, and to drive volume to categories that were high margin. All activities and statistics were measured and tracked in the CRM, and promoted publicly for other salespeople to see.

Such integration and pipeline management has additional benefits. Operations managers who are informed about a company’s prospects can better manage inventory and capacity. Finance can make better decisions on investment of salespeople, marketing, and equipment.

The contemporary sales manager has another skill, he is a great leader. He understands developing others and giving them resources and time. Success is not defined only by a relationship he built 20 years ago, but by the ability of his organization to compete and provide customers with value added services and information. While he manages the pipeline, he does it as a coach and not as a dictator.

Make sure your sales manager is not a caveman.

I just recently wrote in this space about the housing market’s affect on our broader economy. It appears as if real estate is the Pareto principle at work. Five states (Arizona, California, Florida, Michigan and Nevada) have generated a shocking 46% of the nation’s foreclosures[i].

While there are a number of forces as work, there is one explicit predictor of foreclosure activity. States where judges must approve foreclosures in writing have 260% more activity than in other states.  As homeowners and banks wait for the government to take action, markets spiral downward, only diminishing the value of properties that have positive equity.

In the states where foreclosures are dealt with quickly, the market has already begun to turn.  Each of us can reach our own conclusions about the role of government (this is not the appropriate venue for such a debate).

The broader point is that the U.S. real estate market, like many other markets has vast regional differences and elements within it moving in different directions.  The concept of the “business cycle” is a bit of a misnomer. Traditional cycles have been disrupted and replaced with a series of variables that drive markets very quickly, sometimes without pretense or warning.

The events that created the recent housing bubble created the perfect storm.  The recovery will be another type of storm, with regions and even areas within regions recovering more quickly than others. We see similar phenomena in employment and growth in various industries.

It used to be that selecting the right industry was enough to ensure some level or prosperity. Today, entrepreneurs and investors need to find very specific opportunities and niches where growth and profit are plausible.

Like everything else, choose your real estate carefully.

I have been accused of being the eternal optimist. Guilty as charged. Our economy seems to have turned a corner; employment is gaining steam and the stock market is surging. Yet housing seems to be stuck in quicksand.

I am not here to dispense any investment advice, but instead want to pass on some observations on the plight of the U.S. housing market. While much is being made of the insolvency of European banks, we should be equally troubled by the assets held by the largest U.S. banks.

Consider the prospects of Bank of America. The bellwether financial institution required a government bail out, and an infusion by Warren Buffet after its prepackaged acquisition of Countrywide’s toxic assets. The bank holds a staggering $400 Billion+ in U.S. mortgage debt, a third of it in home equity lines of credit – the true villain in the U.S. real estate collapse.

According to B of A, 5% of its mortgage portfolio assets are “non-performing” or are in default.  Some have accused the bank of uneven accounting on its balance sheet.[i] Some estimates forecast as much as 39% of its portfolio having a combined loan to value rate below 100% (upside-down). It is expected that about a third of those mortgages could default, and that the banks losses for the average loan are far higher than 50%. Unlike past swings in the market, foreclosed homes have little retained value for the lender, and are boarded up or even torn down. JP Morgan, Citibank and Wells Fargo do not fair much better in terms of performing assets[ii].

Perhaps even more perplexing is weakness in the underlying real estate market.  Economist Paul Dales of Capital Economics suggests there is an excess inventory of more than 1 Million residential properties. Housing supply is somewhat stagnant. In Los Angeles for example inventory has gone down 1.65% through September but prices showed 0% change for the year[iii]. As a result, housing starts are projected at a tepid 620,000 for 2012 (according to Federal estimates)[iv]

Even though money is very cheap, many borrowers can’t qualify for a mortgage under the exacting standards being employed by banks. Under tight scrutiny by regulators, we are seeing the familiar rubber band effect as lenders have gone from one extreme to the other – lending to everybody with a pulse to rejecting buyers with cash and good credit scores.

Consumer behavior has also shifted. While lower than 2010, a whopping 17% of defaults are “strategic defaults” where borrowers can afford their monthly payment, but simply walk away.[v]

What is hurtful is not only the affect that the real estate market has on realtors, title companies and mortgage lenders; but the shadow economy it supports. Construction and subprime manufacturers of everything from lighting fixtures to lumber are suffering at the hands of weak U.S. housing demand.  The reality is that much of our economy’s GDP growth over the last two decades is a reflection of a false premise, that Americans can just pull money out of their homes on demand.

So as the housing market goes, so goes our economy. Forecasts of 2 and 3% growth rates are a direct result of consumer affluence being minimized by zero wage growth and declining property values.

While economists are cautiously optimistic about America’s future (as am I), we need to be cognizant that a further depression of the housing market could lead to the failure or bail out of U.S. banks which undoubtedly would reverse recent market gains and economic momentum.

And now for my very favorite quote of the year, offered by Nissan CEO Carlos Ghosn.  In reference to the Nissan Leaf, a zero emission vehicle, Ghosn said “this is the future, and everything else is going to look obsolete, like sending messages with pigeons”[i].

As Gnosh put it in an interview in Fast Company, “if you already have an emissions problem with 700 Million cars, what problems are you going to have with 2 Billion?”. In the case of Nissan, Ghosn is looking beyond the defined needs of customers and is anticipating the needs of the global market in a decade or more. It is not good enough to solve problems we can see, the strategist must seek to solve problems that are not readily apparent. To consider such scenarios, strategists must consider Social, Technological, Economic, Ecological and Political trends and consider how various combinations may change the landscape of an industry.

In my book and blog“ Intended Consequences”, I predicted remarkably volatile prices for fuel and the potential for oil to reach prices of far north of $100 a barrel. The predication which became an eventuality was based on an evaluation of “converging factors”, independent trends that combine to create a tipping point. The automobile industry is on the cusp of such a fundamental shift. Toyota has been selling the Prius since, 1997 but the initial curve for adoption was remarkably slow. What we see in evidence today are converging trends that will provide the impetus to create disruptive change in the form of rapid adoption of alternative vehicles:

Political: The U.S. government’s recent announcement of an agreement with thirteen automakers that will reset the Café fuel economy standards to require an average of 54.5 miles per gallon by 2025.[ii] The willingness of OEM’s (original equipment manufacturers), to work with the government in a race to dramatically improve fuel efficiency illustrates their understanding of radical changes in their operating environment.

Social: Shifting sensibilities towards sustainability will drive adoption. Electric cars are somewhat impractical for working people who may not have time to charge them (up to 8 hours) providing a leg up to hybrids.

Technology: The new Prius plug in will offer up to 87 miles to the gallon illustrating explosive improvement in battery technology. Many of the world’s top scientists are working on batteries that could expediently improve performance, size and cost.

Ecological: In Nissan’s case,  the rapid growth of highly polluted Asian markets is viewed as a driver for future demand. Recent disasters in the gulf and elsewhere have heightened awareness of the risks of oil exploration.

Economic: Americans are still fearful of OPEC’s influence and the ability of the cartel to manage worldwide oil prices. As battery prices decline, the value proposition of hybrids will only continue to improve, and the total cost of ownership for such vehicles will be drastically reduced.

Businesses are well advised to review such variables as to develop scenarios about their industry. It may not be possible to look into a magical crystal ball to predict the future, but careful study of trends provides us context on what products and services to develop in order to create disruption.

Many CEOs feel that they are the victims of a lackluster economy and a government that is ineffective at offering any meaningful stimulus. In fact, 79% of CEOs fear that the fundamentals of our sluggish economy will remain the same or get worse.[i]

Economists have long understood that our thinking about the economy is governed by emotion. U.S. history is riddled with periods of growth and decline steered by the mood of the nation.

My generation grew up with a relative level of stability. We are simply not accustomed to the notion of “economic uncertainty” and we are not very happy about it. As a result, we have the tendency to overreact to stimuli in the form of collective euphoria or collective despair. This emotional response explains the nature of bubbles, as we all race to adhere to the conventional wisdom of the moment.

Today’s wisdom is that we should be scared…about sluggish growth, high raw material prices, health care costs, China, the Federal deficit, taxation and lots of other things. You know our psyche is a bit fragile when people are worried about inflation and deflation at the same time.

Our thinking often crystallizes around “the economic cycle,” which is something of a misnomer. Every business participates in this broader cycle, as well as a monetary cycle, industry cycle and company life cycle. The economy itself is merely a component in a spider-web of stressors that can be triggered by a myriad of forces from around the world.

Our expectations seem unrealistic, framed during a time when banks over leveraged, real estate was overpriced and stock market multiples were in the stratosphere.

The reality is that our economy is still growing (although perhaps in tepid fashion). Forecasts are for GNP growth of 1-2% for the remainder of 2011. When our GNP is growing at 4% we are bulls, but at 2% we are bears.  This meager difference illustrates that our fear is based on perception and is somewhat irrational. It is like the fear of flying: one knows that statistically there is virtually zero chance of a crash, yet to some, the fear is quite real.

Perhaps what we really have to fear is fear itself.  We should not be scared of a 2% variance, we should embrace it. In many instances, it will be the confidence of the CEO that will drive the level of investment businesses make, which will in turn either be the impetus for growth or maintain mediocrity.

Of the CEOs recently surveyed, 41% believe that prices of their products or services will rise next year. The potential for rising raw material and energy prices in 2012 could actually be a boon to vendors who are posturing to raise prices.

It is time to reset expectations with our customers, vendors, employees and ourselves. Within this data, there is plenty of salt, but perhaps there are a few grains of sugar as well.

A good leader must exude confidence in his or her business every day. If you don’t see the value in your products and services, no one else will. When the competition is weak, it is time to attack. Let your competitors have the scarcity mindset, while you focus on the strategic gambits that will grow your business and create sustainable competitive advantage. We will get our 2% back some day—we just need to be a little patient.

[i] Vistage CEO Confidence Index