“Innovation is the specific instrument of entrepreneurship, the act that endows resources with a new capacity to create wealth.” -Peter Drucker
“The only worse design than a pie chart is several of them.” -Edward Tufte
One of my favorite hobbies is oversimplifying the world, and I’ve decided to share my latest instance. Two very different kinds of thinkers exist; I call them Pie Charts and Venn Diagrams. How are they alike, how do they differ, and which one is your default thought process?
A Pie Chart is useful for gaining perspective on the distribution of a resource. It shows the relative percentage that each portion of a finite thing is allotted within the whole. While it can identify how large an opportunity is today relative to other parts, the universe could change tomorrow, e.g., the size of the pie may increase or diminish.
A Venn Diagram illustrates how two or more things are related. Are they separate? Do they overlap? If they overlap, then to what extent? The Diagram evolves as the size of each circle changes, as the degree to which they overlap grows or diminishes, or as a new circle is introduced.
How does using a Pie Chart versus a Venn Diagrams influence our imagination?
Pie Chart thinking constrains your vision to that which already exists. An everyday example is seen in political economics. Portraying the U.S. economy as a zero sum game (i.e. a pie chart) manipulates us into focusing on how someone is taking our piece of the scarce resources that constitute the pie. In business, the outcome of Pie Chart thinking is usually suboptimal. For example, when a company’s only growth option is “more of the same” or “sell harder,” a Pie Chart mindset is behind it.
Remember “think out of the box”? A Pie Chart is the box outside of which we need to think all the time, not just during brainstorming sessions at offsite retreats. Venn Diagram thinking enables you to break out of the box by forcing you to consider which of several circles you will include. The size of each circle is unbounded, and the overlap between them is dynamic. Venn Diagram thinking empowers us to envision how we can grow the pie, while Pie Chart thinking inhibits innovation by limiting our consideration of alternatives.
Understanding the difference between these two modes of thought elevates our vision. Consider the effect of Pie Chart thinking versus Venn Diagram thinking on what we choose to emphasize, on the perspective we bring, and on the outcome we experience:
Pie Charts emphasize how two things are different; Venn Diagrams encourage a search for synergy. Pie Charts constrain us to a finite perspective; Venn Diagrams encourage us to include more factors. Pie Charts divide the whole into its constituent parts; Venn Diagrams influence us to identify common interests and create unity.
How can we apply this heightened vision to lead our companies more effectively? Here are a few examples:
- Organizational Dynamics: Root out instances of narrow, self-interested departmental silos (Pie Chart) and replace them with improved collaboration and common commitment (Venn Diagram).
- Product Management: Notice when product managers focus very narrowly on their own product lines (Pie Chart) and encourage them to see consider whether the combination of their products with additional products and services can accelerate growth (Venn Diagram).
- Strategic Partnerships: When a manager is at an impasse trying to grow the business using available resources (Pie Chart), identify a compelling reason that a partnering company would share needed resources (Venn Diagram).
Although I’m not a professional futurist, it’s hard not to notice commonalities found within hundreds of conversations with diverse teams and individuals who are busy defining new businesses. Five interrelated trends seem to be rapidly changing the face of business by disrupting existing models:
Deepening Technology Dependence – Such an obvious observation certainly won’t garner me any futurist credentials. This reliance first began decades ago with large enterprises, but now even the smallest incorporate multiple forms of technology to increase their efficiency and effectiveness. As technology consumption increases among small companies, their influence on the evolution of new technologies will continue to increase.
Ubiquity and Mobility Enabling Distributed Operations – This second trend may be having the most profound impact. If you’re seeking an opportunity to form a new business, simply examine businesses that remain highly centralized and ask, “What if we broke this into parts that communicated with each other and were accessible by mobile devices?” You’ll find that opportunities abound in industries as diverse as utilities, healthcare, and manufacturing.
Loosely Coupled Systems – The decades-long conflict over the efficiency of deeply integrated systems versus the flexibility of modular systems is over, and the winner is… both. Distribution of function across reusable modules delivers economies of reuse. Loosely coupled systems employ web-based connection mechanisms that allow rapid communication while avoiding dependencies that often slow development.
Discovering Trusted Vendors – Large enterprises have maintained their dominance for decades because of their reach across diverse geographies and economic domains. Better solutions from smaller companies have eventually been acquired by companies could successfully sell into the huge bases of customers who’d grown to trust them. Finding a trusted vendor now has evolved into searching the world for products and services that match our requirements, and trust can be built based on massive and readily available customer ratings.
Increasing Irrelevance of Centralized IT – While a highly respected friend’s belief that IT groups will disappear may be overstated, The centralized IT group’s impact on business priorities will continue to diminish. Technology has become so central to distributed business units that they risk falling behind competitors if they wait for or look for direction from IT. The issue is too central to their success to delegate it.
These trends and their effects are intertwined, reinforcing, and multiplicative. Awareness of them provides a context for both evaluating new business initiatives and estimating the life expectancy of existing enterprises.
If you liked Part 1 of our guest post on The American CEO (“2014 Issues for a 2016 Exit”), you don’t want to miss the exciting climax in Part 2. Feel free to post comments – The American CEO does respond!
The best time to evaluate the direction of your business is while it is thriving. I’m currently rethinking 20/20 Outlook’s strategic positioning, and it’s focused on creating breakout strategies.
What are breakout strategies?
The work “breakout” implies constraints. Most companies fail early, a precious few like Amazon, Google, and Facebook rise meteorically, and the remainder become “established” businesses. These established companies often hit a plateau in their growth, resulting in flattened revenue and profit. At that point, it’s common to find a CEO frustrated by a period of constrained growth and experiencing the “CEO dilemma.”
Breaking out of a growth plateau implies change. Most CEOs are visionary, so it’s their business vision that defines targeted outcomes for the company. The CEO’s vision may point the company toward an inspiring destination, yet without clear strategies, employees may be clueless about how to get there, or even worse, may waste resources by taking conflicting routes.
Maybe the CEO’s vision is unrealistic given a changing market environment that he/she fails to recognize. Maybe good strategies are hampered by bad or non-existent external communication. Maybe the company hasn’t learned to properly leverage relationships with other companies in order to expand their offerings, open new markets, or gain access to a broader prospect base.
In every instance, breakout thinking is needed to create breakout strategies that:
- provide a deep understanding of the market situation,
- develop a clear picture of the competitive landscape, and
- provide credible data on which to base plans
- give a clear rationale for action from which detailed department plans will flow,
- lead the company to an optimal return on investment of its finite resources
- last but not least, create energy and enthusiasm.
Truly visionary CEOs sense when an outside catalyst can challenge the status quo and illuminate new possibilities, then they act decisively to introduce change that leads to breakout strategies.
In companies who have plateaued, the leader may be absorbed with urgent matters like managing finances and addressing operational issues, while neglecting less urgent but critically important issues. In our work advising CEOs, five common “non-urgent” factors repeatedly arise that can hinder or accelerate growth.
Take a few minutes to think about where your company stands on these 5 issues:
- Clarify (who are we, and what sets us apart?) A shared understanding of purpose and unique assets increases efficiency. With a crystal-clear picture of who the company targets, what problems the company uniquely addresses, and other elements of strategic positioning, managers and employees can act faster while reducing the number of meetings and emails; in short, more gets accomplished.
- Comprehend (what direction will lead to increased value?) Finding the right direction in a complex and competitive market accelerates growth. By comprehending the needs of potential acquirers, acquisitions, and partners, you can identify and target those market segments with the highest growth potential.
- Communicate (what key messages will attract prospects?) In an interconnected world filled with noise, every business needs a brand that associates the company with its unique qualities. Identifying key messages that flow from the strategic positioning and repeating them frequently will reinforce existing customer relationships and open new ones.
- Connect (which relationships will help increase our reach?) Too often CEOs have been burned by partnerships that fail due to poor planning, unrealistic expectations, and unmonitored execution. Self-fueling partnerships with potential acquirers and industry leaders drive new revenue through access to new markets, extended geographies, enhanced product and service offerings, and staff augmentation.
- Convince (how can we improve sales execution?) Too often significant time is wasted on non-buyers. Eliminating them early through rigorous qualifying saves time and money. Based on clear positioning, high potential markets, strong messaging, and self-fueling partnerships, the right qualifying questions lead to rapid elimination of “no’s” and enable a focus on “maybes” – real prospects.
Obviously, other important factors (e.g., operational excellence, product and service strategy, customer relationship management) impact success, but less obvious, non-urgent issues are often the root cause of stagnation. Dealing with them may be the shortest path to getting your company unstuck.
In a post called “Chief Marketing Obstacles: The Treacherous Trail to CMO Success” in Texas Enterprise, the authors did a marvelous job of laying out the challenges that chief marketing officers face in gaining the management clout needed to operate effectively. In responding to the article, I noted how the CMO can fill the gaps that exist in the organization.
For me, filling gaps has been a recurring theme for years. After taking my first management job in software development with absolutely no training, my psychology education helped me observe the group’s interactions and notice what was required for success. It became obvious that I needed to fill any missing gaps in the group’s combined competencies if we were to be as successful as possible. Whenever possible, the gap filler was me.
I noticed an interesting parallel after moving into product management. When the goal is to contribute a “whole product” solution, it can require capabilities outside an organization’s ability to deliver. Options for filling the gap include staff training, contract or consulting help, or partnering with another organization to acquire the needed product capabilities or features.
As I climbed the ranks and handled senior management positions in several functional areas, that early observation about filling the gaps proved to be valuable once again. Given a finite amount of people in any organization I managed, competency gaps had to be filled without additional headcount. Options included staff training, contract or consulting help, or partnering with another organization, yet the one always available was… me. If it were possible for me to learn the needed skills, then we had the resources to achieve our objectives.
If you manage a company or part of it, it’s good to keep in mind your responsibility to deliver a “whole product” and consider all the options available to fill the gaps.
“Marketing slime!” I used the term back when I developed software, then became its target after moving to the dark side (marketing).
Such statements are usually good-natured, yet tension can arise between software engineers and marketers when discussing appropriate language to describe a product. Engineers by nature must be very precise and may prefer to losing a prospect over misleading them. Marketers want to draw attention to a product by describing it in the most compelling terms possible and may prefer to stretch the meaning of a desirable word rather than lose a prospect.
Each group has a point. Prospects notice quickly and lose interest when a product description exceeds reality. On the other hand, an opportunity to address their problem can be derailed if a product description is devoid of words that connect with their needs.
Think about it like this. The diagram below represents the continuum between understatement and overhyping. Overhyping product capabilities hurts prospects by misleading them into thinking a problem can be solved when it can’t. Understating capabilities prevents them from solving their problem because they don’t fully understand what the product can do.
Writing about open source issues has been on my list for awhile because it’s so important to have a good strategy for using it. Thanks to John Curtis at Quotient for taking it off my list with a great post. Check out “Let’s talk about ownership” for a clear discussion of the major issues.
The genesis of this post is a comment I made about product companies at a large networking event earlier this week in Houston:
“If you think you’re a product company and you haven’t developed a repeatable sales model, then you’re a services company.”
In other words, if every deal closed is in a different vertical market and/or solves a different problem, then the transition from a services company to a product company is incomplete. What is the effect on the value of your company?
How to grow a company’s value is a topic I spend a great deal of time thinking about, and the 20/20 Outlook process focuses on aligning a company with others in the industry to grow a private company’s valuation. While that’s a vital driver of any corporate strategy, let’s consider how the form of a company’s offerings (specifically, products versus services) impacts its market value.
One attraction of starting a product company is the relatively rapid growth in valuation possible in comparison to that of a pure services company. To see why this is a critical issue, go to Yahoo Finance and compare the ratio of revenue to enterprise value for half a dozen public companies that derive most of their revenue from either products or services. For example, the well-run government services company Raytheon’s trailing twelve months’ revenue is $25 billion yet their enterprise value is only $18 billion, a ratio of 0.7. Compare that with your favorite products companies and you’ll find much higher ratios for well-run products companies.
Of course, customers demand varying amounts of service to accompany product purchases, thus few so-called product companies are successful without offering services as well. The percentage mix of product and services revenue can determine profitability and valuation, so it’s important to characterize the difference between products and services. Products and services both solve problems, but in their purest form, they do it differently. The chart below depicts these differences.
Cost – Any problem can be solved with enough services, but the cost may not attract any customers. Creating a product to solve the problem is an alternative, and the gap for customers who want more customization than the product offers can be filled with services.
Fit – Services by their nature enable delivery of customized solutions. Products exist because enough problems of a certain class can be solved well enough to satisfy most needs with a generalized solution.
EBITDA – Earnings vary widely, yet as a general rule, the EBITDA of a well-run product company can easily double that of a well-run services company of similar size.
In the software industry, for example, it’s fairly common for a services company to evolve into a product company over time. Consider the continuum below that depicts such an evolution, starting on the left with totally service-based solutions (“Custom Services”) and incorporating product-like characteristics as we move to the right and end with Product/Service solutions.
To the right of Custom Services is “Packaged Services.” Once you’ve solved the same problem several times, you can package a partial solution (60%? 80%?) that can be customized for each customer. Basing the price of the solution on value rather than level of effort (hours), profitability increases.
Continuing to the right, next to Packaged Services is “Product-Related Services.” If your staff becomes expert at designing, implementing, integrating, and managing solutions using highly desirable but complex products, the result is a scarce resource that can be sold at a premium and that raises your margins. The classic historical example is a services company that became a leading expert at implementing SAP systems.
If yours is a well-run product business or is evolving into one, the benefits include higher EBITDA and a higher valuation than those of a similarly-sized services business (“product only”). And finally, the highest valued companies are often those that have desirable products with an abundance of product-related services available, whether supplied internally or by partners.
As the line between products and services blurs with the introduction of new types of products delivered in new ways, it’s important to understand how value is derived. Does the statement about claiming to be a product company without developing a repeatable sales process ring true?
I ask forgiveness for some sweeping generalizations. Certainly, exceptions to this high-level look at valuation abound. Feel free to point them out and elaborate or disagree.