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 a strategic planning facilitator, I am in the room while hundreds of strategic decisions are made each year.  Naturally, entrepreneurs need to understand their environment in making fact-based decisions, a process made difficult when the political environment is tenuous and volatile.

With the advent of social media and real time information, the hype surrounding the presidential election is unlike any other we have experienced. Many industries are bracing for the implications of potential sea changes in policy. It is as if the country believes the outcome will provide two very different sets of market conditions.

Consider the business of gun manufacturing and gun retailing. Before the first presidential debate, Smith and Wesson increased its forecast, citing a 30% gain in volume out of fear that the President will restrict the purchase of guns in his second term[i].  Bass Pro Shops is preparing for a “ramp up” of gun sales going into the election (the law of unintended consequences is clearly at work).

For industries such as guns and ammo, health care and others, organizations engaging in strategic planning must consider multiple scenarios. In each scenario, the organization can map out a separate set of assumptions, regulatory and otherwise.  The key to useful scenario planning is considering numerous variables at once and then analyze the implications of how certain combination will impact industry demand, pricing power, etc.  Many organizations create multiple versions of budgets that reflect varying levels of demand.

In this particular election, there seems to be more angst about the regulatory environment as the current administration has exercised its will over numerous agencies through executive order.  While the current environment is something like a Sumo wrestling match, the fear is that the executive branch can change the dynamics of an industry with the stroke of pen.

The problem with all of this is that there is significant lag between the time that a President is elected and his policies are enacted.  The process for approving regulators on boards and commissions takes months (some are never filled at all).  Waiting for regulatory action can create a form of paralysis.

Some of our clients actively engage in advocacy measures that provide them greater access to information about pending legislation or shifts in regulations.  It is actually rare for small businesses to see an ROI in hiring lobbyists. However, having access to information about where the political winds are blowing can provide competitive advantage.  Involvement in trade associations and other industry groups is pivotial is seeing around the bend.

The business press is buzzing about the impending “The Fiscal Cliff”, painting a daunting picture of the tax increases slated to go into affect on midnight, January 1^st. Seemingly every year, our elected officials find a way to overt the latest disaster such as the perpetual raising of the debt ceiling.  It is like something from a Batman movie, where the hero pulls a rabbit out of his hat at the last minute. It appears as though there is no hero in this story, and tax rates for small business owners are certainly primed to be dramatically higher, regardless of the outcome of the election.

At year’s end, when the Budget Control Act and other legislation takes affect, it will bring about the[i]:

• End of various business tax breaks
• End of the temporary payroll tax
• Escalation of the alternative minimum tax
• Conversion of Qualified Dividends to Ordinary Income
• Escalation to marginal tax rates, capital gains, and gift taxes
• Imposition of various fees from the Patient Protection and Affordability Act (Obama Care)
• Automatic cuts to over 1,000 federal programs from defense to Medicare

In total, the estimate for “Taxmaggedon” (as some have put it) is a tax increase of more than $300 Billion, the largest in the history of the United States. To make matters worse, the federal government faces an unnerving choice; it must see through deficit reduction or renege on promises to pare debt. [ii] Failure to reduce the deficit could affect confidence in the U.S. government. Moody’s has indicated it could further cut its rating of U.S. debt if a budget compromise is not reached this year.  The Congressional Budget Office is predicting a recession in 2013 should the current slate of tax increases go into affect. What a tangled web we weave.

Even if Mitt Romney should win the so called “battle ground states”, his ability to reverse these trends will be limited. Either candidate would need to make last minute deals to keep the government operating, which will require negotiation on things such as taxes, military spending and Iran. My sense is the reason that Romney holds back on some details is he knows he will have to negotiate with the other side of the isle, and various deductions and” loopholes”  affecting small business owners will be subject to debate.  If Obama wins the election, he will be emboldened to preserve his tax policy, including higher marginal rates, and capital gains. Business owners are clearly on the wrong side of reform.

So it is time for us to face the reality that regardless of the outcome of the election, tax policy is going to look very different than it has in the past. While several economic indicators such as real estate demand have turned more positive of late, business owners will clearly have to earn more to keep less.

In particular, the net cost of capital will be higher, as new depreciation rates will apply, having a material affect on profit and tax liabilities.  It is said that higher tax rates restrict investment, but there is a flip side to the argument.  While one may not feel incented to invest, each incremental dollar of investment offsets earnings taxed at a higher rate.

Clearly entrepreneurs should be consulting with their advisors to consider any tax implications within their business and individual investments. There are many nuances and implications for estate planning, tax planning and the like.  This is a time when entrepreneurs have to be proactive and prepared.

Holy tax increase Batman! Where is Robin when you need him?

[ii] The Kiplinger Letter September 21^st, 2012

My Vistage chair’s favorite saying is that the “cobbler’s children have no shoes”.  This may be the case with many professional services firms who are in the business of advising others, but whose bloated organizations are incapable of change.  The failure of several multi-national law firms has brought the professional services partnership model to light.

A bi-product of the information age has been the dramatic expansion of professional services.  Mergers and acquisitions and complex regulations such as Sarbanes-Oxley drove activity for Big 4 accounting and prestigious law firms. In a market boom, top lawyers (such as intellectual capital attorneys) have fetched more than $500 per hour.

Yet such firms are under strenuous scrutiny and price pressure. Core clients including the Fortune 1000 and insurance companies demand that their advisors utilize junior level associates for mundane work.  Clients arbitrarily set prices for their attorneys by clipping their invoices much like insurance companies have set the price for physician fees.

As senior partners in such firms age, the massive payouts they have come to expect create a drain on the cash flow of their firms, thus inflating their overhead. The professional services partnership model is strained, and firms will have to adapt their business model to fit into a market unaccepting of fat.

Historically, partnerships were tightly run as to preserve work quality and promote specialized skills. Professional service firms are beginning to hire professional non-partner managers, operations experts and CFO’s, in an effort to run their firms more like businesses.  In particular, the partner driven approach to business development is flawed. For partners to win all the business but not stick around to execute the work can be unseemly to clients who have many choices.

Demand for professional services ebbs and flows with the economy and regulatory cycles. Some industries such as the practice of law, suffer overcapacity (the number of lawyers grew from 212,600 in 1950 to 1,225,000 in 2011)[i]. In accountancy, turnover of auditors is very high, and there is a dearth of experienced accounting professionals.

Physicians face other obstacles from health care reform, the advent of electronic medical records, and the resulting contracting of fees.  No business is consolidating more quickly than health care as physicians and hospitals vertically integrate in order to mitigate the pressure created within a market with spiraling costs. Yet the implications are the same, that medical offices will need to run with the efficiency and service attributes similar to those employed by retail stores.

It seems like the more money that is involved in an industry, the greater the resistance to change.  If you take the process for jury selection (for example), it is completely antiquated and does not create positive outcomes for the judicial system or for the jurors.  The practices are embedded so deeply they are difficult to alter.

It is not hard to see that these industries will have to evolve like others have in recent years.  Once any industry reaches a point of saturation, the innovation that occurs is in service delivery, and one would have to believe that professional service industries will be disrupted by new technologies and processes.  In the case of physicians, accountants and attorneys, the client experience is not all that it could be.  Such interactions usually occur because of some negative series of events.

So it is time for us service professionals to rethink our business models, best practices and methods for delivering value.  Professional service firms have to start to run like businesses. It is time for new shoes.

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.

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.