Monday, October 24, 2011

Lifecycle Strategy: The 3 Strategic Follies | Organizational Physics

Lifecycle Strategy: The 3 Strategic Follies | Organizational Physics

Lifecycle Strategy: The 3 Strategic Follies


There are three classic strategic follies that cause companies to fail in their strategy execution. Essentially, all three strategic follies occur when a company attempts to bypass the long way around the product, market, and execution lifecycles and tries to find shortcuts instead. The three strategic follies are the Face Plant, the Flame Out, and the Lost Opportunity.

The Face Plant

The first folly is what I call the Face Plant. This happens when an entrepreneur is innovating on a product but targeting a commodity market. The company foolishly spends resources to solve a problem that the market views as already having been solved. The company doesn’t establish thought leadership in quadrant 1 and it doesn’t nail it and prove that it can solve the underlying problem in quadrant 2. Therefore, it doesn’t understand the true customer spending priorities and fails to create a product that meets them. It never establishes profit margins in quadrant 3 and so it comes into a commodity market against better-financed and more robust solutions, quickly getting crushed by those vendors with a more complete service offering.

Avoid the Face Plant.

It’s obvious that you don’t want to pilot a product directly into a commodity market. After all, no one in their right mind would invest innovation dollars into land-based telephones today (Note: Some entrepreneur may, in fact, invest in new land-based phones but they would do so by discovering a disruptive opportunity in the process of going the long way around the strategic path). What happens to many entrepreneurs is that they are so focused on product development and product features, that they don’t simultaneously validate and develop a market. They have a product in search of a problem. If the company isn’t testing, selling, and validating its early product prototypes with innovators and early adopters, then it runs a high risk of falling directly into a commodity trap.

For example, several years ago I was introduced to a start-up company in NY – we’ll call them CompanyX – that was building an online personal financial management tool. The founders were intelligent and passionate. At the time, Quicken Online, Microsoft Money, Mint, and Wesabe were already operating in the space. After the basic introductions and overview, I asked them some basic questions to get a sense for their approach. What struck me was that, although the founders were big believers in the technical features of the product, they hadn’t really considered who the target customer was and what core problems still needed to be solved. Instead, they had their heads down building new product features. Their basic assumption was that if they built a great product, consumers would respond and come in droves.

I explained that, even though they believed they were different or unique compared to the competition, having better tools alone wouldn’t cut it. At that stage in the product/market lifecycle, the market would view them as just another me-too competitor – but one with significantly less brand awareness, consumer trust, and resources. Even though this was a relatively recent, four- or five-year-old market, it was, in effect, a commodity one. Consumers could get any number of free online financial tools that seemed to meet most needs. No clear problem remained unsolved. Unless they could uncover a niche with an unsolved problem – going the long way around the strategic path and uncovering new growth opportunities – there would be little to gain as a “me too” competitor with some hard-to-explain technical benefits. They’d never compete. The company continued on its path anyway but was never able to get traction in the market and shut down operations a short time later.

I share this story because it’s very easy for an entrepreneur to become enraptured with why their product is unique or different in the marketplace and the reality is … that’s not what counts. What counts is how the market perceives you and if there’s a significant problem or need that you solve. If you’re going up head-to-head against a market leader with more capital, brand awareness, and overall traction, you can’t compete on improved technical features alone. Nor can you compete on being a low-cost, me-too provider because you’ve never established your profit margins through standardization and scale. Instead, you’ll need to go the long way around and catch or create the next wave of innovation. Like Wayne Gretsky, you don’t skate to where the puck is — you skate to where it’s going.

What’s interesting about this story is that the competitor, Mint.com, which started a few years earlier than CompanyX, did navigate the path to prosperity and achieve great success. By the time I had my meeting with CompanyX, Mint.com had already successfully piloted their product for innovators and nailed it for early adopters. Shortly after that, they quickly scaled the business by adding over 3,000 users per day. In fact, just a year or so later, Mint.com was sold to Intuit for $170M.

It may seem counter-intuitive to view a relatively new market (one just five years old like the online personal financial space) as a commodity market. The reality is that the Face Plant doesn’t have to occur only in an old, legacy market. In fact, as technology cycles continue to shorten, and the world becomes increasingly interconnected online, the length of time to navigate a product and market lifecycle will continue to shrink too. This is all the more reason to understand how to identify and execute on new growth opportunities, as I’ll explain in future posts.

The Flame Out

The next strategic folly is what i call the Flame Out. The Flame Out occurs when a company tries to scale prematurely. Usually this happens when the founding team, in a hurry to get cash flow from sales or because they believe the market window is closing, attempts to aggressively ramp up sales without having nailed the product first. Because the company hasn’t nailed the product and proven that they’ve done so, they don’t understand the customer’s real pain and spending priorities. They make a big marketing push and create a lot of market noise, but this doesn’t translate into real adoption and sustainable revenue and profits. In fact, it often results in dissatisfied early majority clients who are upset because the product doesn’t do what it promises or what they need and is rife with bugs and errors.

Avoid the flame out.


In life and in business, timing is everything. So how do you know that you’ve nailed it and should proceed to the Scale It stage? The only real indicator of having nailed it is that the early adopter clients have purchased the product and they come back to buy or use more. For example, a classic strategic mistake is when a company believes they’ve nailed it because the product meets the founder’s vision or because a lot of companies are expressing early interest in their solution. Then, in the race to get a return on investment and to respond to the apparent demand, they quickly launch into scale mode without truly understanding the customers’ pain points or true spending priorities. The company spends enormous sums of money, launches in a big way, and causes a lot of market noise but fails to convert interest into paying, repeat customers. This could be because the market is not ready or the features are not aligned right. Essentially, the company presupposes demand when the demand isn’t really there – so the company flames out.

Software as a service (SAAS) firms often make this mistake by confusing customer interest or trial signups with actually nailing it. For example, I was introduced to company building a mobile application platform for sports stadiums. Without hardly any outbound marketing at all, the company is receiving a tremendous amount of interest from sports teams and stadiums around the world. There’s also a lot of competition emerging. So the time pressure is extremely high to get their product fully built, easy to use, and rolled out at scale to meet this demand before the market window closes.

However, what’s really essential is that the company first proves that they have solved the core business problem for a few key stadiums — driving onsite revenue and improving the spectator experience. Nailing the product requires the company to put on its detective hat and spend an inordinate amount of time, energy, capital, and attention on really understanding stadium operations, the fan experience, and the core business problem to solve. They’ll know they’ve solved it once usage rates are high and that handful of Nail-It-phase clients is happy, willing to pay because the value has been realized, and clamoring to expand the solution out to the rest of their holdings or to buy more advanced features. The company must document this interest (through case studies, endorsements, metrics, etc.) for the entire world to see.

If they can figure out how to nail it and make it easy to use their product, then more stadiums will readily buy their solution, come back, and buy more. “Install our app, use our methods, and you can expect to increase onsite revenue by 25% and create a better fan experience, as shown by these other stadiums like you.” With evidence and endorsements like that, how could another prospect stadium refuse? And notice, too, that even if another competitor had scaled earlier with more stadiums in their portfolio, it would be possible to knock that competitor out using better evidence, a proven model, and a better approach developed by really nailing the product.

Once a product is really nailed, it becomes possible to scale. The detective hat shifts to a factory mindset. The company standardizes its learning and is now in the race to achieve dominant market share. The demand from the market should be increasing. In fact, it will feel like the company is being pulled into the market by customer demand, rather than having to create demand through outbound marketing. Remember, early majority clients buy during scale mode and the evidence they use to make purchases is the endorsements and evidence from the early adopters in the Nail It stage. First you’ve got to nail it, then you can scale it.

Another important factor in nailing it before scaling it is aligning with market timing. In your own investigations and efforts to really solve the core business problem, you may find that the market really isn’t ready yet, or that a critical piece of underlying technology hasn’t matured enough, or a host of other indicators that can tell you to dial down or dial up your expansion plans. Don’t be the company that does a global launch based on a vision of the future that just doesn’t exist yet. To avoid the Flame Out, spend the time and invest the resources to nail the product first and validate product and market fit.

That said, there is a risk of spending too much time nailing the product rather than scaling it. This risk shows up when a company is spending too much time and capital designing the ideal product … every feature and function under the sun … for its early adopter clients. Or else it’s designing a product for the wrong type of customer for this stage of the lifecycle. Instead, the company must only prove that it solves the core customer problem with its minimal viable product. Then it can focus its efforts on developing features and functions that meet the needs of the next customer stage, the early majority, through standardization and scale.

The Lost Opportunity

The third strategic folly is what I call the Lost Opportunity. In this stage, a company pilots it for innovators and nails it for early adopters, but they can’t execute quickly or efficiently enough to get to scale. The market window closes because some other company executes more quickly or efficiently, nails it, then scales it, captures the leadership position, and reaps the benefits. The lost opportunity company then tries to compete on price and pushes the product into the market as if it were a commodity. But because they haven’t standardized their product and established market leadership, the product hasn’t created the brand awareness and margins to be successful. It’s like a fruit that dies on the vine.

Avoid the lost opportunity.

For me, this is the saddest strategic folly. All entrepreneurs are in it for the opportunity. Entrepreneurs absolutely hate to miss an opportunity, especially one into which they invested so much passion, sweat, and tears. It’s very difficult — gut-wrenching even — to recognize that the business isn’t ever really going to make it to scale and some form of lucrative success. Sure, it may turn out to be a nice lifestyle business but you’ll always be playing a distant third or fourth to the market leaders. And that’s not a game that entrepreneurs truly want to play.

What usually happens in this scenario is that the entrepreneur ultimately loses their passion for the opportunity. If the business is operational and backed by investors, then the entreprenuer gets fired or kicked out and a professional manager attempts to find an exit, usually by selling to a larger competitor for a bargain price. If the business is operational but the founders still have control, they’ll continue to operate the business in the hopes of selling it one day, but their entrepreneurial fire will be gone. The business is a former shell of itself and its once promising potential. The opportunity is lost even if no one openly admits it.

The right course of action when dealing with a lost opportunity is to admit it. You’re too late. You’ll never be one of the market leaders in that particular space, nor will you have the margins, cash flow, and terrific success you’re seeking. It’s time to gather your resources and find a new opportunity (based on the learnings and insights of your work so far) and pivot into a new strategy. One that you can leverage into a scalable growth phase.

When you speak with successful entrepreneurs, what you’ll learn is that they often started one busines, poured their heart and soul into it and, for a variety of reasons, it didn’t work out. Some other company beat them to the punch. Rather than continung on that path or giving up, they pivot their original idea into a new market opportunity or make an adjustment to the product that serves an untapped opportunity — and that’s what ultimately makes them successful.

I started my first company in Minnesota in 1996, when I was 26 years old. My vision was to provide an electronic procurement service for small- and mid-size companies using corporate intranets. This was back in the day when the term “intranet” was just being coined. I moved back home to my mom’s llama ranch in rural Minnesota and, with a website, a business plan, and a cell phone, began to live my dream. Or so I thought. After a year of effort and spending all my personal savings, I was feeling really dejected because I had little to show for my efforts. I had no customers, no real product, no team, and no capital. Besides, I was beginning to hear rumours of two companies on the west coast that were operating in the same space, Ariba and CommerceOne. In March, when Minnesota is dreary, brown, and muddy, I flew out to meet with Ariba in Menlo Park, California, and see what was what.

I remember a few things about that trip. First, it was a classic sunny and beautiful day in California. As I parked my rental car in front of their offices, my mouth fell open. While I was working out of a small bedroom, here was a beautiful, modern office building jam-packed with people and buzzing with activity. The phones were ringing off the hook, there was energy and excitement, they had raised a bunch of venture capital, and they had hired an experienced management team. They were scaling out their sales force and had large Fortune 100 clients coming on board. I was absolutely crushed. There was no way I was going to compete with these guys. The opportunity was clearly lost!

I sulked around for a few months trying to figure out what I was going to do next. I moved out of my mom’s place and into the city. I started dating again (hey, entrepreneurship is all-consuming) and took odd jobs to pay the rent and plan my next steps. One morning, I read an article in the Wall Street Journal about a new marketing program created by Amazon.com. It was ingenious. Rather than paying up front for its ads, Amazon was offering a commission to anyone who sent them an online visitor who bought something. “Imagine that,” I thought, “only pay for your advertising if it results in a sale!”

I started to look more closely at the space and play around with different solutions. Even though there were two much larger competitors in the market already, I felt that there was still a big, unsolved problem and that I could solve it using the same methods I created for the electronic procurement business I had just closed down. I went back to the angel investors who didn’t invest in my last venture, pitched them again on the new opportunity, and I was in business! That new company, born out of the ashes of the old one, went on to become the industry leader in its space, generating hundreds of millions of dollars in sales. Most clich├ęs are true, including this one: “When one door shuts, another one opens.” If you find yourself in a Lost Opportunity and the passion is still there, keep looking for the next open door.

Go the Long Way Around!

Remember: the path to strategic success goes “the long way around,” as depicted in the figure below. Basically, if you pilot your product for innovators, nail it for early adopters, and scale it for the early majority, then you create maximum building of market awareness; you make smart, timely investments relative to market readiness; you maintain pricing and margins; and you avoid the commodity trap for as long as possible. That’s the path to prosperity and one that avoids the classic strategy traps.

The Path to Prosperity goes "the long way around."

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