Two Reasons for Five Common Strategy Mistakes

Growth relies on having a superior strategy, and in her recent HBR post, Joan Magretta identifies five common strategy mistakes. In reading the piece, two common antecedents became apparent. Hopefully, naming them will amplify rather than oversimplify her points, since she expertly explains how to correct each of the five.

The twin antecedent causes are a lack of clarity and a lack of focus:

  1. Confusing marketing with strategy – While good marketing is important, simply identifying your value to customers is insufficient to win big and often. A clear understanding of why you’ll win using focused execution is vital.
  2. Confusing competitive advantage with “what you’re good at” – Just being good at certain things isn’t enough to win business. Most companies are good in multiple areas, but sometimes the “strengths” they identify are merely minimum requirements to stay in business, like good customer service. Clarifying what you’re uniquely good at and how your unique blend of products, services, and relationships delivers higher value than competitors’ offerings leads to real growth.
  3. Pursuing size above all else, because if you’re the biggest, you’ll be more profitable – A young, smaller company with a clear and focused strategy can maintain higher margins than larger competitors. It happens in many industries, and Joan’s example of BMW versus GM makes the point.
  4. Thinking that “growth” or “reaching $1 billion in revenue” is a strategy – Desiring to “grow the business” and “enhance revenue” constitute objectives; they don’t identify the strategic moves needed to fulfill them. As discussed often in this blog (e.g., see “Attacking Business Entropy“), clarity about positioning is crucial and fundamental to a successful strategy.
  5. Focusing on high-growth markets, because that’s where the money is – The retail sector was not a high growth market when Amazon entered it. It’s a classic example of finding a new, better way of attacking an old, slow growth market to take share from existing competitors.

Why is it important to get strategy right? Operations-focused CEOs sometimes wonder if strategy is about hiring high-paid consultants to create pretty slides and well-written plans for consumption by boards of directors and investment bankers. As pointed out here before, clear and focused strategic thinking is the key to effective execution. Clarity and focus provide the foundation, and the value of the results – accelerated growth, higher margins, and increased understanding of the market – profoundly surpass the value of a new presentation.

Stuck? 5 “Non-Urgent” Paths to Growth

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:

  1. 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.
  2. 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.  
  3. 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.
  4. 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.
  5. 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.

Three Steps to Growth Through Clarity

So many companies I meet aren’t getting the results they expect. The most common reason is a lack of clarity about (a) who they are, (b) what to communicate, and (c) how to accelerate sales. Correcting the problem enables a level of focus and efficiency that’s otherwise impossible to attain.

Here’s a three-step process to increase clarity in your business:

  1. A successful business begins with clear objectives, but that focus erodes over time as the mix of customer relationships evolves. To accelerate growth, resharpen the company’s current market positioning and gain alignment from your team. You’ll enhance their ability to evaluate potential growth initiatives, and the byproduct will be renewed energy and commitment.
  2. Based on the updated positioning, identify three key messages to communicate through all forms of marketing, including social media. This short list will quickly permeate everything written about your organization: web site, blog posts, sales presentations, tweets, analyst interviews, white papers, and articles. All interested parties – prospects, customers, employees, analysts, investors, press – will speak more clearly and forcefully about the company and its products and services.
  3. Once key messages are identified, develop five key sales qualifiers. Many organizations send salespeople into battle with shotguns instead of rifles. The result? Huge amounts of time are wasted on prospects who could have been eliminated early on. What seems like a tactical issue – qualifying statements for Sales – is often a strategic one. Armed with the right qualifying questions, Sales can quickly eliminate prospects that will never buy, thereby allowing them to spend most of their effort on promising prospects.

While creating this post, I received an unsolicited email from a current client who has used this process. “We have worked on several projects where we needed clarity and proper visual communication in areas of sales, marketing, business development and strategic corporate dealings” and he talks about how our work together has refocused the company.

Need a tuneup? Follow these three steps and lead your team to better execution!

Filling the Gaps

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.

Defining Product versus Services Businesses

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.

The Evolution of Internet Access

Long-time friend Paul Gillin is an acknowledged expert on social media who has written several books on the subject. I highly recommend subscribing to his excellent blog and newsletter where he continually shares what he’s found through helping firms work out their social media strategies.

In my own busy end of the year, I overlooked a piece in one of his December newsletters until this morning. In it he summarized five important insights picked up at the Web 2.0 Summit in San Francisco:

  1. Make marketing a service to customers
  2. You need a mobile strategy, and faster than you probably thought
  3. Social is the killer app (surprised, right?)
  4. Simulations are a powerful incentive to engage
  5. Everything on the Web

Supporting point #2 he included these projections regarding the transition we’re making toward mobile devices supplanting notebooks as our primary platform:

What implications does this have for your business? Will mobile devices totally supplant notebooks? Not likely, any more than notebooks have made desktop PCs disappear. What we’re seeing is a proliferation of devices in multiple form factors, all driven by data accessible via internet, with the user interface being packaged applications in more cases and browsers in fewer instances:

“Google’s Eric Schmidt made an interesting point: smart phones are actually more useful than PCs because they know more about the user, including location, and can deliver a more personal level of utility. This doesn’t mean PCs are going away. Rather, the plunging price of flat-panel displays will make PCs more of a dashboard for a user’s business and entertainment needs. However, the browser will be only one of several ways people will access the Internet.”

For more information, check out “Five Lessons from the Web 2.0 Summit“!

Thoughts During Freakish Weather

Freakishly cold weather meant waking up to no electricity this morning. Having to break two early appointments due to temperatures in the teens gave me time to think, and I remembered that it was exactly a year ago when I filed the papers establishing 20/20 Outlook LLC.

Moving beyond 30 years of mostly C-level jobs has been exciting, challenging, and gratifying. The exciting part is meeting many fascinating and gutsy people who are willing to take chances in order to follow their dreams. The past year’s challenge has been building a personal brand around what I do. Gratification comes from seeing how the 20/20 Outlook process resonates with CEOs and others who hear about it.

I’m thankful for having experienced a wide variety of responsibilities over the years. Most of the time I knew I had the best job in the company. While I was building strategic partnerships at the world’s fastest-growing networking company, the CEO’s verbal job description was “go make good things happen and keep me posted.” I learned from experts how to formulate business plans and implement integration plans successfully from arguably the most successful software acquisition company ever. A billion-dollar company recruited me to lead product direction for their 100+ software products and help transition from independent product lines to solutions. In between, I helped grow business for half a dozen startups.

Now I’m given the opportunity to apply what I’ve learned and draw on the wisdom of people I know by advising CEOs of small- and medium-size companies on new growth strategies. Helping them move beyond the “CEO dilemma” and into new levels of business activity is the dream. Working with truly courageous people every day and seeing them succeed in moving to the next level is more a gift than a job.

Every Portfolio Has (at least) One

Every private equity and venture capitalist investor I talk to has at least one portfolio company that stalls out. The company survives the original investment rounds to become an “established” business. Soon thereafter, the management team opts to focus on a single aspect of the business, e.g., “we’re going to focus on growing the customer base.” The monthly mantra becomes “keep the pedal down on sales, manage operational issues, and carefully manage cash.”

These activities are crucial to survival, yet the danger is that the CEO and management team can get comfortable working in the business and forget to work on the business. Neglecting to put a rational plan and adequate resources in place to enhance company value (including growing revenue) often leads to an abrupt plateauing of valuation that takes months and even years to recover from.

Initiating and maintaining productive relationships with relevant organizations at the right time establishes a decision-making context that maximizes the valuation of technology businesses. Created specifically to increase shareholder value, the 20/20 Outlook process enables a CEO to:

  1. view company value through the lens of potential acquirers,
  2. adjust market strategy and offerings accordingly, and
  3. initiate and maintain strong ties with key companies that can drive valuations ever higher.

The key is to intervene well in advance of a slowdown and put an enlightened process in place. Not doing so risks the ultimate loss of mega dollars and significant market share.

Surprise: Clients Tell It Best

It’s been awhile since the last post was published. Client deliverables, non-profit activities, and family priorities, as well as continual business development, have made it a hectic time.

The 20/20 elevator pitch is that “it is a process that helps a company get ready and stay ready for an exit,” but it’s more than that. While helping shoot some videos during that non-profit work, we were close to Infoglide’s offices, so I asked CEO Mike Shultz to stand in front of the camera and share his thoughts on his use of the 20/20 process.

Mike has started and sold several companies, which enables him to speak with authority in this 2:47 of unedited footage. With just one take, Mike captures the essence of the process better than any marketing firm I could have hired. Enjoy.

The Mystery of a Disciplined Process

“Mystery” and “process” aren’t often used together. A process is commonly thought of as a way to replace mysterious methods of accomplishing a goal with a well-documented, step-by-step procedure that, if followed precisely, always produces the desired result.

CEOs can be mystified when a competitor with seemingly inferior products and services is acquired by a larger company.  The response is, “Why not my company?” The answer often isn’t self-evident.

In his book A Whole New Mind, Daniel Pink proposes the need to combine left-brain analytical thinking with right-brain creative thinking for those who aspire to succeed in the 21st Century. They must combine both modes of thought in order to “connect the dots” faster than their competitors.  The 20/20 Outlook process demands right-brain and left-brain thinking from management teams who implement it.

A client CEO commented not long ago about how the process has precisely positioned his company for an exit. “At first we just wanted to determine where we fit in the marketplace. During the process, we identified twenty potential acquirers and then narrowed our focus to two industry groups. What we noticed over time was that a market for our products developed around those two groups as though the market was mysteriously growing toward us.”

The CEO came to realize that the illusion of the market coming to his company was the result of decisions he and his team made to follow the decision framework they had put in place. Now those decisions have put them in a position to achieve significant payoffs from relationships created using 20/20 Outlook thinking.

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