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.

In my travels I routinely ask CEOs to identify their “Unique Selling Propositions”.  Most often, the response I hear is “superior customer service”. To provide extraordinary service may be germane to the value a company delivers to its customers, but isn’t unique or distinctive.  A well thought out USP must convey features that are inherent in a brand and distinguishable from the next.

The USP should feature unique capabilities and motivation for prospects to switch suppliers. In the manufacturing and distribution of tangible goods, companies are seeking out alliances with suppliers who can fill orders just in time, and may even expect their key suppliers to locate close to their facilities.

As it relates to service, a USP needs to translate into some specific benefit to customers, such as a faster cycle time, or higher fill rate.  To be courteous, timely, and responsive, is merely the cost of admission. If a company is unable to express a USP that clearly demonstrates its uniqueness, it is unlikely to maintain sustainable competitive advantage over time.

While customer service itself may be a poor USP, service model innovation can be a game changer. Consider the service innovation offered by the App Store (Apple) and The Application Exchange (SalesForce).  These sites were amongst the first to offer open source; affording users access to thousands of applications.  Ironically, Apple and Salesforce offer little or no service or support for these products.

In an age when commoditization is easy to come by, many companies have difficulty articulating the brand promise and the tangible benefits they provide. For every brand,  some effort should be made to create a business case or white paper that demonstrates tangible conclusions such as a total reduced cost of  ownership. Value is generally best articulated through raw numeric comparisons (such as ROI) when possible.

Perhaps in service businesses, tangible benefits are less absolute, making the USP dilemma even greater. A myriad of new tools allow companies to better illustrate their points of difference through flow charting and animation (like a comic strip).  Online video is practically free, and provides additional color and texture that is hard to capture in text alone.  Marketers can be both informative and whimsical when demonstrating how a product or process can be better, faster, cheaper, etc.

Of course it is one thing to know what your USP is, and another to leverage it effectively. Often sales teams do not utilize all of a company’s distinctive features to paint the USP.  For example, some companies invest heavily in training technical workers, often by 3^rd parties who certify them in a particular skill.  Such a differentiating feature may not be pointed out by inexperienced sales people.

So work on that USP, and make sure your business development team can articulate it clearly.

I am proud to have authored one of the top 10 most popular posts in the history of Executive Street: The 3 Stages of Innovation. In that post, I pointed out that various innovation strategies are directly correlated with industry stage. When it comes to innovation, timing is everything.

The other critical variable in continuous innovation is an entrepreneur’s tolerance for risk, which is often driven by a multitude of factors such as the profitability of the business, level of private equity investment, etc. What wagers to make and in what amounts could be the single most important decision a business owner makes.

In the 3 Stages article, I referenced three distinct innovation types: market disruption (white space), up-market disruption (service innovation) and low-end disruption (commoditization). Another spin on this theory was recently articulated in the Harvard Business Review (Managing Your Innovation Portolio-Nagji and Tuff May, 2012) who outlined the optimum innovation allocation strategy for established firms.

Naji and Tuff suggested that the most profitable of companies (according to two recent studies) allocate roughly 70% of resources to core businesses, 20% to adjacent businesses and 10% to disruptive innovation. This allocation is based on risk and reward: companies can realize the highest likelihood of ROI in the business they already know, can invest in short term growth in businesses directly adjacent, and invest for the future in white spaces.

The science employed in these studies would validate previous writings of Keith McFarland in the Breakthrough Company who maintained that many entrepreneurs are overly eager to expand into adjacencies (and disruptive innovation) when they sense they are running out of runway in their core business. There are many variables to consider, but as a general rule, it is easier to grow share from 20% to 40% in an existing business than to try to grow from zero to 20% share in a new market. Naturally, the amount of competition, channels of distribution and other factors can dramatically affect the impact of any innovation strategy.

The motivation of the entrepreneur can not be understated when considering risk tolerance. Some business leaders (such as those in technology or those that employ high levels of financial leverage), may be driven towards a higher appetite for risk (and resulting returns). In such cases, investment in core businesses could be significantly less (perhaps 40%-50%) while investment in new offerings and disruptive strategies are ratcheted up.

The chosen risk tolerance will dictate which innovation investments will be made. For example, to grow into white space may require hiring staff with specialized skills. To expand a core competency may require better systems, processes or command over raw materials, such as is often achieved in a vertical integration strategy.

It is important for management teams to consider these factors early on in the formation of strategy.

They taught us in business school to be attentive to the Pareto principle; also known as the 80/20 rule. Pareto states that 80% of outcomes are a result of 20% of causes, or more commonly in business, that 20% of customers drive 80% of volume. Larger competitors are governed by Pareto, and spend significant time, money and resources to capture market generated by the vital few.

The 80/20 rules assumes that a provider can leverage a higher return on investment by addressing behemoth customers who require fewer interactions at high volume. Such efficiency is intuitively satisfying to our management sensibilities.

One counter that can be employed by smaller competitors is to seize an underserved market often described as “the long tail”.[i] The Long Tail flips Pareto on its head, and suggests that money can be made from addressing the remaining market, made up by those who buy infrequently and in smaller increments. To serve such a market requires the provider to offer a wide offering.

The Long Tail concept has been an enabler to the e-commerce revolution. Amazon (for example) has proven that a provider can reach the mass-market one customer and one product at a time, which is quite different than the customer buying multiple products from a retailer in a single trip.

In B2B (business-to-business), the long tail may provide some respite from vicious competition. However, to compete in this space requires a mindset of low cost, operational efficiency and virtually no inventory. Numerous e-commerce sites utilize “pack-n-ship” methodologies, outsourcing the bulk of the manufacturing, distribution and transactions to others. To provide the wide breadth of offering through pack-n-ship requires an integrated logistics system.

As with many other things, technology is the great equalizer and can provide a solution for what would otherwise yield higher acquisition and distribution costs. Much of the premise of retail is the last mile of distribution, which dictates that the last mile is the most expensive (which is why products like food don’t fare well in e-commerce, as getting the product to the consumer is too costly). Certain products that are not too costly to ship fit within this strategy seamlessly.

To pursue the long tail requires a penchant for serving niches, and the unmet needs of buyers with unique tastes or buying patterns. The larger competitors will often ignore these markets as too costly or difficult.

So if you’re looking for a novel strategy with less competition, consider the long tail.

One must contemplate the distinction between branding and rebranding. Rebranding is often miscast as an exercise in repairing one’s reputation. Some rebranding efforts focus on mitigating a negative image (such as Philip Morris’s name change to Altria or AIG’s move of their advisory business to Sagepoint). Yet rebranding may also represent subtle changes in positioning, or the recasting of visual identify, such as Starbucks recent move to a more contemporary look.

If you’re thinking about rebranding your company, bear in the mind the following considerations:

Seek out simplification-Today’s rebranding efforts are often a function of providing clarity to the marketplace and removing brand confusion. Citi’s recent rebranding removed a single word (if the word bank is in your name, it may not be a bad idea to remove it). Our cluttered market values simplicity.

Leverage Social Media from the ground up- Within our firm, we recently rebuilt our website, refreshed our brand, and printed new business cards (including a QR code). All of our marketing includes embedded social media components, with the intent of driving traffic to our website where prospects can experience various multimedia tools that are featured online.

Use emotional triggers-Google famous Parisian Love ad (when an American finds love in Paris) is a classic example of using emotional messaging to capture the imagination of your audience. All marketing should utilize emotional triggers.

Enter new markets- Pabst Blue Ribbon, perceived as an also-ran in the U.S. rebranded in China as an ultra-premium American lager (PBR) and is selling for upwards of $44 a bottle (the Chinese may not have everything figured out).

Reshape perceptions about quality-Rebranding should not appear cosmetic or contrived. Harley Davidson’s slide in perceived quality in the 80’s was magnified by stiff competition from Japanese competitors.  The company’s drastic repositioning included a return to its core products and the formation of the Harley Owners Group (HOG’s),  which reestablished Harley a bad boy brand.

Identify unmet needs- Your offer may need to change as the utility of your product or the benefits that differentiate it may shift over time.  Marketers will often use a tag line when they wish to preserve their brand equity, and point out new features or benefits.

Use professionals- Rebranding can back fire when companies draw attention to their marketing.  Many smaller companies try to utilize self service template web sites and similar home grown tools that come off as……home grown. Marketing requires constant investment. Hire people who can assist you with both messaging and technology.

Understand the hard and soft costs- Change can be expensive, given the need to reprint, re-sign, change email addresses, etc. Consider all your hard and soft costs (including management team band) with as you refresh your brand.

Organizations often under appreciate the importance of branding. In this world of hyper-competition, the way you communicate the nuances of your brand are more important than ever.

There are many ingredients required to develop and execute a successful strategy; none more important than discipline. Disruptive innovations that reshape an industry are rare. Most innovation is incremental, and successful execution is a function of hard work, time and patience.

Jeff Bezos’s insight about selling books online (which resulted in the formation of Amazon) was conceived while he worked as an analyst at an investment bank. His conversion of strategy into tactics will go down in history, as Amazon took on all the best in retailing, seemingly overnight.

Bezos remains hungry and focused. Amazon’s top 5 managers meet every Tuesday for four hours to review and rebake strategy. Not once a year, not once a quarter – every Tuesday. Twice a year his team has a two day off-site to think about “big ideas” that may require 2-3 years to implement.

Alan Kay once said, “Perspective is worth 80 IQ points.”  Where the rubber meets the road in strategy is maintaining the right perspective – the intersection of strategic thinking and tactical execution.  Business owners can easily lose perspective when they spend too much time muddled in solving day to day operational problems.

To maintain strategic discipline:

Create a strategy committee, task force or executive management team (EMT).

Each member should have a role in strategy formation and implementation and be accountable for key initiatives of the company. Meet with the EMT monthly to review progress versus goals.

Engage mid-management in strategy formation and execution

Mid-managers are often insightful in identifying latent needs as they are often closer to the customer than their senior counterparts.  Many entrepreneurial companies lack management depth. They are well served to include mid-managers in executing strategy.  Provide learning opportunities for junior managers by delegating tasks for them to complete.

Hold your teams accountable

Results oriented organizations are built from the ground up to support execution, rigorously using scorecards that drill down to individual performance. Best-in-class organizations orchestrate goal setting for individuals that align with the broader goals of the organizations.

Include outside variables in your dashboard

While most successful companies measure internal activities, few score external variables. Seek out external metrics that may be predictive of future demand. Leverage the data to plan capacity, labor, facility expansion, procurement of equipment, etc.

Bezos said, “We are willing to plant seeds and wait a long time for them to turn into trees. Every new business we’ve ever engaged in has initially been seen as a distraction by people externally and sometimes even internally.”

Great strategies convert into initiatives that become the unifying vision of the strategically successful organization. Ideas that lack resources, energy and concentration are just a distraction.

I recently had a conversation with a CEO who was lamenting about the disparity between public company valuations and those of privately held concerns. As of July 2011, the S&P is trading at a multiple of 14, while private company multiples remain in the 5-6 range. Investors value public company access to capital, and scalability into large consumer markets.  Of the Top 10 U.S. companies by size, none are pure play B2B companies.

Small companies come in all forms; some compete with larger branded companies, and some market directly to them.  In the age of confluence, some do both. How can small companies survive in a land of giants?

The primary difference between Fortune 1000 companies and smaller ones is more fundamental than which markets they serve. Intel founder Geoffrey Moore makes a distinction about business architecture – the difference between “complex systems” and “volume operations”[i].

Many smaller B2B companies are built to support specialized and custom solutions, while most Fortune 500 companies are built from the ground up to serve the masses. While customization may command higher prices (per transaction) than generalization, high volume companies cross a threshold where their infrastructure promotes a lower cost per unit and the experience curve takes full affect. Thus, B2B companies face an inherent profitability disadvantage.

Where Microsoft offers its highly useful suite of Office products at around $400 per license, Apple’s B2C model (which is often utilized by small businesses and micro-businesses such as designers and the like) offers Pages and Numbers at $9.99 each. One offer is based on high intellectual capital value and the other on mass appeal and ease of use.

For smaller B2B companies to reach new levels of profitability, requires they find a path to scalability. Of course not every business wants to be big. Some entrepreneurs prefer a “family culture” and more tempered growth (with less risk).

One way to effect profitable volume is to find a balance, where products and services are “mass customized”. Mass customization is all the rage in consumer products where individuals can even build their own handbags and Nike basketball shoes to their specifications.

Smaller companies (B2B and B2C alike) should seek out solutions that allow for better utilization of existing solutions across more customers. In other words, the provider should not need to reinvent the wheel with each project. Often, optimizing margin requires leverage of a base product or service that can be replicated, at times with features configured to the customer’s individual needs. To configure from a menu of choices is considerably different than satisfying each specific whim, which may offer greater intimacy with the customer, but may also require the business to sacrifice profit. For every feature created for an individual customer, there is a resulting opportunity cost (time, money and energy that could be invested elsewhere).

The other requirement for getting big is a shift towards systems thinking, where management teams make decisions within the framework of their company’s capabilities. For a new initiative to succeed requires careful analysis of the resources required to implement it. The key for smaller companies who aspire to do business with larger ones it to utilize systems and processes consistent with the expectations of the customers they serve.

Competing against larger companies requires a unique mindset. Often small businesses use concepts like judo (where the larger opponents energy is often used against him) to beat the larger foe at the point of attack. Consider the depth and width of the market you want to serve, and scale your resources accordingly.

There is an old saying in poker; if you can’t see the sucker in the room…it is probably you.  The same can be said of advancements in technology. Forrester’s recently forecasted increases in IT spending of 8% in 2011 and 2012[i]. Recent M&A activity suggests the sector is heating up.

In many industries, market leaders create proprietary technologies and information systems that improve the customer experience directly or indirectly through information flow, efficiency, cycle time, etc.  At the current rate of change, a company either realizes a technological advantage, or is likely at a competitive disadvantage.

We have numerous clients who are either in the midst of ERP implementations, or considering similar upgrades to their systems. At some point the business owner must ask the strategic question; are our technology improvements truly game changers, or only an enhancement to existing ways of doing business?

More than 90% of ERP type systems are delivered late, and their implementations can be taxing to small and mid-market businesses. It is not difficult to spend $1 million+ (in hard and soft costs) in such systems, which is a drop in the bucket compared to the cost of disappointing customers due to errors or missed timelines.  If entrepreneurs are going to expend valuable resources (time and money) on technologies, they had better select the right ones, and prime their organization to implement them seamlessly.

I find there are often two extremes during such implementations.  In some companies, functional department heads (such as sales, engineering, design) lack experience in software integrations and do not become invested in the deliverables until it is too late. Other times, companies become so fascinated with perfection, they lose sight of the objective, and become paralyzed in analysis. If a company’s enterprise system becomes dated because of their inability to act, competitors can seize the upper hand.

If you are considering such upgrades to your technology, it is often sensible to take the aggressive but measured approach. In other words, the strategist is always looking to leverage technology that reshapes the customer experience, improves efficiency or reduces costs in some material way while simplifying or automating processes.  Such decisions should not be left to the technologists, but shared by the leadership team who must be equally responsible for selection, scoping and integration.  Failure is not an option as an unsuccessful project can put a company years behind.

Don’t be the sucker.

Being Opportunistic in a Volatile World

Last week my post drew considerable attention, perhaps because of its shock value at a time when the news was truly shocking. While the tsunami was a natural disaster, the response on the part of the Tokyo Electric Company was a human calamity. Lack of preparation will invariably lead to unintended consequences, if you are managing a nuclear power plant or any other business.

The reverse is also true. The entrepreneur capable of understanding seemingly unrelated external forces, and weaving them into a thoughtful strategy, will clearly realize strategic advantage. How might the strategist consider social, technological, economic, ecological and political factors to gain insight on how to take advantage of ever changing market conditions?

Scenario planning is a methodology whereby the entrepreneur considers converging factors that (in combination) creates a tipping point. Consider some of the following predictions, based on facts already in evidence today.

In the next decade, we are likely to see:

Predicative Modeling-Cloud computing enables the migration and cross-referencing of large institutional databases.  For example, actuaries, using sophisticated algorithms are able to model ailments based on lifestyle choices monitored in real time. They are able to calculate your risk of a heart attack based on which smoothie you tend to order at Jamba Juice, your frequency of exercise, prescriptions you use, etc. Offered as a benefit of a health care plan, the member is offered incentives to opt-in and receive preferential rates. Such tools slow down rampant health care inflation.

A Cashless Society-The majority of transactions amongst big banks are managed by exchanges where no money actually changes hands. Coins of small denomination are nearing extinction. Today, you can download an iPhone app that serves as a debit card, and can be swiped within Starbucks locations.  For most transactions, cash is already irrelevant.

Smart Infrastructure- Automobiles come preinstalled with all of the features of an iPad (the 2011 Hyundai Equus will come with one) and all the benefits of the internet. Smart grids control the flow of traffic, directing drivers to particular lanes at a given speed to optimize drive time and reduce accidents. Traffic signals are regulated based on traffic volume. Sensors predict bridge and rail failures.

Of course, rapid change will occur in every industry, and the strategist must weigh various opportunities based on an organization’s ability to take advantage of them. As a general rule, organizations should seek to achieve scale and reach within its core (at least 30% market share) before expanding into new endeavors. As Jim Collins points out in his sequel to Good to Great (How the Mighty Fall), many companies fail because of an “Undisciplined Pursuit of More”.  In their zeal for diversification they often leap too far from their core competency.

Each opportunity must be assessed within the context of the organization’s resources, bandwidth, and human capital.  For every opportunity there is a cost, and an opportunity cost. To pursue any new opportunity an organization must leverage resources which dilutes focus on the core business.  Choose your opportunities carefully.

This week, I want to expound on a series of unrelated events shaping our world:

Last year, a deluge of rain in Australia and Canada, and drought in Argentina and Russia sparked a worldwide rise in food prices.  On Dec. 17^th, after months of poor supply, Tunisian produce vendor Mohammed Bouazizi was mugged by police and then set himself on fire in protest.  Reaction to his plight set off a revolt in the Middle East. Beyond the radar to us overly indulgent Americans is that the world is on the verge of a global food shortage.

Ironically, the U.S. growers have reaped the rewards of higher prices for U.S crops and futures contracts. Wheat prices were up as much as 74%, (corn 87%[i]) and net farm income is up 20% this year. Demand is rising for dairy, meat and poultry to support a burgeoning global middle class.[ii] Spring planting of key crops will dictate food prices later in 2011 but farmers may be hesitant to plant in a period of high fuel and fertilizer costs.

While unrest continues throughout the Middle East, social states who provide strong entitlements such as UAB, Kuwait and Oman will likely not be threatened. Similar protests in oil rich Iran or Iraq would be more unsettling to world markets.

——————————————————————————————————–

As Motorola revealed its Xoom tablet this week, the Microsoft vs. Apple war took on a new dimension. The real war may be tablet vs. PC as a new generation of devices operating on Honeycomb-Android (Google) and other operating systems hit the market[iii].  Electronics makers are currently developing over 100 designs of new models, many of which sport more business friendly applications.

The second generation of iPads has been somewhat under wraps but is expected to be lighter, faster and include a camera and video conferencing capabilities. Apple’s advantage is its burgeoning iTunes and App Exchange platform.  Apple only spends about 7% of revenue on R&D, about half of what Google and Microsoft[iv] spend, providing a significant competitive advantage. I was in a meeting last week with 7 other people; everyone had a tablet.

Meanwhile, Microsoft (Office 365) and others are developing new Small Business Enterprise applications to better leverage the combination of mobile devices and low cost cloud computing options. The paradigm shift to storing all documents on the internet is emerging as a revolution coined as “cloud productivity.”

————————————————————————————————————–

Cisco’s new “telepresense” conferencing systems are all the rage, providing a far more realistic teleconference then the 1^st generation systems. With concerns over fuel costs and the environment, more companies may be moving towards adopting such technologies.

If you want to see an amazing video on future technologies, see “A Day Made of Glass…Made Possible by Corning” on YouTube.

—————————————————————————————————————

It is expected that the U.S. post office will eliminate Saturday delivery by the end of 2012.

_________________________________________________________

It is “hurry up and wait” for small businesses looking to minimize their insurance costs.  The health care bill requires that each state set up “health care exchanges” by 2014[v]. Most states are dragging their feet, and waiting to see what legal challenges emerge.  California has already pushed through legislation but other states are dragging behind.

It is expected that “exchanges” once enacted may actually bring about market conditions that will lower costs for small groups (in the neighborhood of 50 lives)  who will be better able to leverage buying power and have more predictable premiums. Let us pray.

[ii] The Kiplinger Letter Vol 88 No.

[iii] Motorola’s Xoom Starts Tablet Wars by Walter Mossberg WSJ 2/24/11

[iv] Mobile Wars Bloomberg Business Week 2/21/11

[v] The Kiplinger Letter Vol. 88, No. 7