Archive for the ‘Growth Strategy’ Tag

4 rules for running a business

Many companies in mature sectors have been known to embrace the latest management thinking (or fad) to help cope with low market growth, margin compression and lack of differentiation. Examples of these “big ideas” include lean management, outsourcing, business process re-engineering, offshoring and, lately, social business and cloud computing. Despite considerable effort and investment, most of these firms have been unable to outperform their peers over the long term, often due to weak strategic fit, poor planning or flawed execution.

In fact, only 344 of 25,000 public companies analyzed in the Harvard Business Review by Michael Raynor and Mumtaz Ahmed of Deloitte consistently produced above average return on assets from 1966 to 2010.

What made these firms special? Two rules identified in the study — noteworthy for their simplicity, reliability and practicality — helped drive the extraordinary business performance. Below them, I’ve included two other rules for achieving exceptional performance well worthy of consideration.

Better before cheaper

Companies need to focus first on service, quality, design or distribution — not on being the lowest-price competitor. Non-price differentiated brands tend to command richer margins, which can support further product and marketing investments, which, over time, further sustain the firm’s competitive position and profitability.

Revenue growth before costs

Leaders should prioritize top-line revenue by driving volume gains, competing in growing categories and taking advantage of every opportunity to maximize pricing. Volume increases also bring other benefits, including scale economies and channel optimization, which help drive down operating costs and block out competition.

Brands matter

“Brand equity might be the only asset that consistently generates differentiation, higher margins and long-term revenue streams,” says Jerry Mancini, president, Dole Packaged Foods Company. “Dole’s focus on value, quality and brand-building has helped deliver almost 100% brand awareness in close to 100 countries. This allows us, for example, to provide transient consumers around the world with the same quality and unique products they are familiar with, wherever they go.” This strong brand equity has enabled Dole to more easily tap new markets and categories — and drive higher volumes.

Maximize human capital

“Competition, technology and customers are never static,” says Paul Bruner, a partner with McCracken Executive Search. “The key to long-term success is attracting and developing leaders of exceptional character, with the brains, passion and resourcefulness to adapt to and lead through changing circumstances.” Organizations need to focus on recruiting and training the right employees and reinforcing positive behaviours through innovative training and compensation programs.

To be clear, the above four rules suggest a direction, not specific strategies and tactics; it is up to management to make the tough strategic choices and back them up with good plans and sufficient investment. Leaders still need to understand where they should compete (i.e., which markets with which value proposition) and what they are especially good at (i.e., organizational and asset fit). They’ll also need to support their mission by assembling the right capabilities and cultivating them through a culture of continuous improvement and adaptability. Finally, the company and shareholders must recognize they are playing the long game — they will need patience and resilience as well as management systems that reinforce long-term thinking.

For more information on our services or work, please visit the Quanta Consulting Inc. web site.

Advertisements

The best way to grow

For the first time since 2008, the majority of executives we speak with are talking about growth, not cost cutting. Companies refuse, however, to throw caution to the wind; they want to avoid the pitfalls and high cost of an acquisition. Many leaders are looking to organically grow by expanding into new, adjacent categories. While less risky in many ways, new market entry is not a no-brainer. Success requires both deliberate planning and a start-up mindset.

Companies face many barriers when expanding into new categories or markets. Achieving meaningful brand differentiation is difficult particularly when the market has been commoditized. In other cases, competition has locked up channel partners such as retailers or distributors, preventing the new player from gaining sufficient access to the market. Finally, generating a strong ROI will be tough if the entrant is unable to achieve sufficient volume or economies of scale.

Canadian financial services giant, Sun Life Financial, provides a number of lessons for sensibly expanding into complementary markets. In 2010, Sun Life made the strategic decision to expand its investment management presence in Canada with Sun Life Global Investments, seeing it as a complement to their successful insurance franchise. Sun Life Global Investments was launched with a handful of employees, 12 funds and zero assets under management. Fast forward to 2014, the firm has grown to nearly 140 employees, 87 funds and $7.8B in client assets under management. How did they do it, particularly in a tough investment management climate?

Once the decision to add asset management to their strategic growth priorities was made, the Company moved quickly to assemble the right team. First, they recruited within Sun Life Financial high-performers who were familiar with the culture, brand and practices. To maintain momentum, this internal start-up was quickly supplemented with external hires who possessed key investment industry experience.

Secondly, the team explored and then aligned around a singular mission – to bring the best asset managers and investment solutions from around the world to the Canadian investor.

“We focus on the end investor and work closely with advisors and pension plan sponsors to build solutions that meet investor needs,” says Lori Landry, chief marketing officer and head of institutional business at Sun Life Global Investments. “We fill in gaps where other offerings may fall short, and we work hard to put the customer at the centre of everything we do”.

With a strong team and mission in place, senior managers got to work on developing a brand and marketing strategy that best leveraged their channel and addressed investors’ and financial advisors’ needs in a compelling way. The goal was to build a distinct reputation for Sun Life Global Investments as an asset manager with a unique and authentic value proposition (offering the best global investment managers and products regardless of provider) and go-to-market approach (sell through trusted and expert advisors or through employers), while leveraging the awareness and credibility of the corporate Sun Life Financial brand.

As the above example demonstrates, companies need to really understand their own business, target customer’s needs and market dynamics when looking to expand into new markets. This simplified four-step framework can help managers evaluate growth opportunities:

The market gap

  • Is there a value ‘gap’ between what providers deliver and what customers want? Changing buying habits (e.g. mobile commerce) and a recessionary mindset is shaking up the customer’s value equation in many categories, putting a reliance on thoroughly ‘knowing your customer.’
  • Does the market have untapped ‘white space?” New technologies and business models give firms an ability to reorder existing product categories or create new ones (e.g. iTunes)

The offering

Available capabilities

  • Which competencies, assets and customer relationships can be quickly leveraged? The fastest way to market and ROI is by using existing capabilities and then driving scale economies.
  • Can the resource gaps be quickly addressed? Sustaining early market success will depend on identifying resource and skills gaps early on and quickly filling them.

Competitive reaction

  • What competitive moves could hamper your plans? Many executives give short shrift to understanding their competition. The reality is that most incumbents will not sit idly by and let you steal market share without responding. Managers can analyze competitive moves by using simulation tools like business war gaming and game theory.
  • Do non-industry players pose a threat? Large and profitable companies in low-growth environments may also choose to leverage their scale, customer franchise or new technologies to compete in your target market (e.g., Rogers in home monitoring).

For more information on our services  or work, please visit the Quanta Consulting Inc web site.

 

Cross sell to grow

In a low growth economy, many companies understand that one of the best way to grow revenues is by selling more goods and services to existing customers.  At the core of this strategy is ‘customer focus’ – providing better solutions to satisfy more customer needs.   Yet, this easier said than done. A variety of factors can combine to scuttle the best designed plans.  Managers can overcome these barriers and be ‘cross sell ready’ by optimizing their organization structure, product portfolio and incentive schemes.

A corporate buzzword for the past decade, CF is a simple idea:  understanding and targeting a customer’s full gamut of needs will enable the delivery of solution value, therefore catalyzing the cross selling of other products. Our clients that have gotten CF right have generated millions of dollars in profitable, new revenue along with higher customer satisfaction scores and lower marketing costs. Though each firm had a unique CF strategy, they all share three important characteristics:  a deep understanding of customer needs across a purchase life cycle; a shift from selling products to marketing solutions and; a focus on relationships versus transactions.

Despite a compelling premise, increasing cross-selling rates is not a slam dunk.  There can be multiple organizational barriers to better performance.  For example, most firms are organized in product, geographic or functional silos making information sharing, collaboration, and joint selling very difficult.  These silos often extend down to the IT systems, restricting visibility into a client’s sales history and requirements. Secondly, compensation schemes and metrics often do not support cross selling versus other goals like client acquisition.  Finally, the culture in many organizations is a barrier to implementing a CF mandate, collaborating or cross selling.

Our consulting experience suggests that the difference between leading cross sellers and under-performers comes down to who can get the 3Cs of organizational alchemy right:

Capabilities

Customer-focused firms have deep knowledgeable of their customers and the capabilities to enable them.  Len Lyons, General Manager of Workplace Medical Corporation a leading occupational health service company, asserts: “We demonstrate to our clients that we’re experts in our field and in theirs. People maintain strong loyalty to someone they trust and for us, this has had the added benefit of significant growth through customer referrals.”   Companies with a strong CF have well-developed people, technology and marketing competencies.  Their workforce features a large coterie of generalist, and team-driven problem solvers who can interact directly with the customer.  Formal corporate education programs and defined career paths cultivate and reinforce these vital individual traits.  Moreover, these firms will have: an advanced CRM and data management systems that deliver a comprehensive view of each customer and prospect’s buying behavior; a long term, relationship-inspired sales approach and; product and R&D teams that are connected directly with buyers and users.

Cooperation

Being internally cooperative (as well as with channel and supply chain partners) is critical to aligning around customer needs and deploying maximum capabilities.  Workplace Medical implemented this shift in two steps.  Says Lyons, “first, we systematically recalibrated our entire organization and marketing strategy from a transaction focus to a solution-driven model. Then, we led our clients through a paradigm shift in the way they perceive the nature and value of our service.”

Customer-focused enterprises encourage and reward cooperation across the organization.  For example, they foster accountability by having all team members measured against key performance indicators like customer satisfaction and cross selling rates.  And, they subordinate departmental metrics to larger, more customer-centric measures.  However, achieving higher levels of cooperation and information sharing will be problematic in low-trust cultures. Many firms will need to undertake change management initiatives to get recalcitrant or skeptical employees (particularly disinclined sales people) to go along.

Coordination

Maximizing cross selling activities requires internal departments as well as channel partners to be strategically and tactically aligned.  High levels of coordination – enabled through supporting technology, regular communication and processes – are needed to share information, efficiently deploy resources and solve multi-faceted customer problems. One way customer-focused companies achieve this is by putting sufficient authority in the hands of an ‘owner’ who is closest to the customer or segment’s requirements – and opportunities. In some of our clients, the leaders needed to dismantle their siloed department-based structures and replace them with multi-functional, autonomous customer-based teams.

Improving a firm’s organizational model to deliver high cross selling rates is not for the impatient or clumsy.  It is part culture change, process redesign and incentive re-engineering.  Furthermore, cross selling efforts need to be consistent with the company’s value proposition and brand image, not to mention the best interests of the client.   Managers should expect to spend at least six months transitioning to a new model while they work through hiccups.   Though the process is time consuming, the rewards are undeniable.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

5 sources of growth in 2013

North America is mired in a low growth funk driven by cautious consumer spending and frugal capital expenditures.  For 2013, many CEOs are bracing for zero or even negative revenue performance. Even frothy companies are adjusting to this ‘new normal’ by continuing to restrain R&D, sales & marketing and M&A activity.  Is this reaction a tad premature?  Have firms exhausted all avenues for growth?  Since 2008, we have helped a variety of dynamic companies drive topline growth an average of 27% by identifying market ‘white space’ and monetizing under-utilized assets.  Managers should explore these 5 areas to propel their 2013 business:

1.    Find under-serviced or ignored niches around your core offering

The fluid nature of many categories and consumers hide a number of market anomalies that could be exploited by nimble firms.  For example, the majority of markets can support different strategic positions including low cost, specialized and premium offerings.  Some categories, however, are missing one of these players offering opportunities for new and differentiated entrants.

Other companies will discover adjacent “white space” – an ignored market or compelling, unmet consumer need – where they could extend their strong brand franchises. P&G has done this successfully by launching Crest White Strips, extending their Oral Care line-up from toothpaste and brushes into the Whitening business; and by launching an array of Swiffer products to clean various surfaces in addition to their other cleaning line.  “Cutting costs is important, but you cannot shrink your way to growth.  You’ve got to reinvest the savings in distinctive value-added products and services that customers are happy to pay for.” said Tim Penner, retired President of P&G Canada.

2.    Increase revenue from current customers

Most firms inadvertently leave money on the table, often with their best customers. This occurs for a number of reasons including: over-zealous discounting; poor visibility into the customer’s potential value; low customer awareness of the vendor’s full offering or; ineffective cross-selling programs.    Fact is, opportunities exist in every customer relationship and company.  We designed a revenue maximization program for a software company that plugged billing leaks and better aligned pricing to value deliveredpainlessly producing an 18% revenue lift.  In another case, we helped a U.S. industrial goods manufacturer double their cross-selling rates by mining their customer data with advanced analytics and developing targeted sales and marketing initiatives.

3.    Turn platforms into new revenue generators

Following significant capacity, infrastructure and IT investments over the last decade, many firms now have robust but under-utilized operational platforms that can be leveraged into new revenue opportunities.  Amazon has successfully pursued this strategy.  Early on, they recognized the potential of their B2C e-commerce platform by launching a host of new B2B services including cloud computing, online storage and merchant e-commerce services.

4.    Maximize all distribution opportunities

Many marketing strategies have not kept pace with the buying habits of their customers, who increasingly are directing their purchases through a plethora of direct and indirect on & offline channels.   Filling these distribution gaps is an ideal way to build volume and outflank competitors.  For example, we helped a consumer products company drive a 18% increase in shipments by gaining ‘bricks and clicks’ shelf space in non-traditional retail and B2B channels.  Furthermore, firms can no longer ignore the revenue, margin and custom experience benefits of going direct to the consumer.

5.    Monetize intellectual property and process by-products

In some firms, healthy investments in R&D and strategic partnerships have spawned a significant amount of intellectual property.  Much of this IP may now be lying dormant due to lower commercialization investments or a shift in corporate strategy. Organizations should look to monetize inactive IP through outright sale or by licensing to non-competitive 3rd parties.  In addition, many companies like Cook Composites and Polymers have discovered that there is gold in the waste by-products of their manufacturing processes. Turning waste into new products can create new streams of high-margin revenues and improve sustainability performance.

In tough times, prudent companies will seek to maximize their revenue by better leveraging their existing customer base, resources and capabilities.  To realize this potential, managers will need to relook their entire business, including: enhancing their understanding of the market ecosystem, mining their consumer data and; looking for creative ways to serve customers in unique and compelling ways.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Innovation in product development

Most consumer and industrial goods companies rely heavily on product development to remain competitive.  However, the traditional approach to developing products and performing R&D may not be optimal due to economic and organizational realities. To continue growing, managers should rethink how they develop and commercialize innovative products and services

Profitably growing market share has gotten a lot tougher since the 2008 financial meltdown – a situation unlikely to change in the medium term.  Stagnant market growth and evolving consumer behavior is negatively impacting the demand side of the equation.  At the same time, product development – the end-to-end process of bringing a new product to market – has grown more expensive and risky due to the high cost of R&D and the difficulty of generating truly differentiated innovation. The hash reality is that up to 90% of all new products fail to achieve market objectives.  Equally concerning, conventional product development practices are challenged to deliver category-expanding ‘blue ocean’ strategies or to target the unique needs of emerging market – so called ‘bottom of the pyramid’ – consumers.

The traditional product development model has 3 major drawbacks:  i) it is challenged to generate breakthrough thinking and execution beyond incremental improvements; ii) it is unable to deliver new products at a significantly lower cost and; iii) it typically does not produce a true and holistic picture of consumer needs.

In many cases, the only way to overcome these business challenges is to fundamentally retool how companies develop products.     To make this happen, organizations should address the 3 Rs of process innovation:   1) revamp how they approach product development; 2) refocus around fundamental consumer needs and; 3) remove organizational barriers within the structure, process, and culture.

Revamp the approach

In many enterprises, siloed product developers are hostage to preconceived notions and assumptions about what a product should be and how it should be developed.  This mindset is also reinforced by the firm’s dependence on the existing supply chain as a source of new ideas and technology.   In a revamped development process, open-minded managers approach product innovation with a clean sheet of paper, focusing on delivering only the most essential features and functionality with superior value.  Managers will adopt a wider product lens, looking outside the firm and industry to academia, other suppliers and geographies for inspiration and new technologies.  

Rethink consumer needs

In these difficult times, gaining superior utility and value (including but not limited to low cost) is top mind of most consumers, even in premium categories. Yet, many companies have a poor understanding of their consumer’s core functional and emotional needs (i.e. the job to be done) and are unable to prioritize these needs against their product roadmaps and capital spend.  Gaining a deeper, more holistic understanding of consumers and the trade-offs they make oblige managers to go beyond basic research techniques to include analytical tools such as ethnography and choice modeling.

Remove barriers

As with most change initiatives, any effort to improve the product development process will fail unless managers can overcome organizational barriers and inertia.  To do this, leaders should stress:

  1. Top-down support – Traditional enterprises, particularly successful ones, will exhibit inertia in the face of major change. Senior, cross-functional leaders will have to commit to and maintain ongoing support for the change initiative. This attention should include bold (yet realistic) goal-setting, ongoing performance tracking and regular engagement with external stakeholders and key customers.
  2. Cross-functional mobilization – Radical product or service innovation is about speed and creative problem solving.  One of the best ways to achieve this is by forming high-performance, cross functional teams that will secure input and support throughout the organization. In many cases, these teams will need to function as unique structures with their own streamlined processes, frank communications and pragmatic management styles.
  3. Open up R&D – Few companies have the resources, inspiration and time to support all of their R&D requirements. A proven way to catalyze new thinking and execution speed is by opening up product development to external stakeholders including supply chain partners, academia and innovative start-ups.  A variety of firms such as 3M, Siemens, P&G and GE have used Open Innovation strategies to improve R&D productivity and partner collaboration.

Many companies have successfully retooled their product development functions to dramatically improve how they develop and launch new, cutting-edge products.  Some examples include Nokia (the 1100 model is the best selling, low cost cell phone), Tata (with their $2000 Nano car) and GE (with their low-cost, portable Mac 1 ECG machine).  If firms want to develop more compelling and innovative products, their leadership should look to process innovation as a catalyst to enhance results.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Resetting private equity in 2011

The private equity industry is in a funk, and for good reason.  Investment returns have not rebounded to pre-2007 levels and look to remain stagnant in the near term as cheap and plentiful debt remains scare, valuations continue to be subdued and global economic jitters plague confidence everywhere.  Importantly, these conditions are negatively impacting the sector’s ability to raise capital and successfully exit investments with good multiples.  At the same time, the industry is plagued by a host of other challenges including rising costs, bad press and market maturity – many of the large institutional investors have already maxed out their PE investments within their asset allocation mix.

The times they are a changin’

If PE is going to regain yearly historical returns of 20% or more, the traditional model built around financial engineering  (piling on debt, waiting on rising valuations etc) and one-time cost reduction (headcount and capacity cuts etc) will have to evolve. For one thing, few firms can continue to stand out from their peers based on their  corporate finance capabilities.  Furthermore, valuations remain stubbornly low (post write downs) despite fat trimming within the portfolio companies.     

Reigniting historical returns is possible. One way is for PE managers to begin focusing on organic revenue growth in their portfolio. This is not a novel strategy.  Some firms like Bain Capital have been doing this for years generating industry-leading returns. This formula moves beyond slash and burn cost cutting and swapping management;  it is about working with existing managers to tap new markets, foster product innovation, and leverage existing technology and operations into new revenue-generation activities.  This new PE value creation model is also about them developing internal sales, marketing and product management skills, leveraging their Rolodexes and rolling up their sleeves as interim hands-on managers and consultants.  

Examples of this new approach include:   

Adding and deploying expert bench strength

Some firms like TPG, KKR and Bain Capital have internal consulting groups whose mandate is to drive portfolio growth by improving revenue generation and operational performance in key areas such as sales force effectiveness, “lean” management and pricing optimization.  In some cases, this support is in the form of advisory services; in other cases, it is about embedding expert PE management at the portfolio company.  PE firms are well suited to add value, fast.  They can: bring a bias-free approach; implement cross-industry best practices and; deploy expert management quickly. Those PE firms lacking TPG’s scale or Bain’s pedigree can form strategic alliances with industry leaders and consultants.

Reframing earnings generation

Focusing more on growth will require PE firms to adopt a different paradigm when looking at market potential.  One proven approach for mature markets is to focus on the available market “headroom” – the market share a firm does not have minus the share it will never get. Headroom-focused PE firms concentrate their efforts and capital solely on how many potential customer switchers are available, what their needs are and what is missing in the existing product offering. Adopting a headroom-based organic growth strategy will increase marketing effectiveness and efficiency, thereby boosting earnings faster, improving resource allocation and conserving scare capital – in many cases generating self-financed growth. 

A win-win…

Having demonstrable growth competencies will also help PE firms in their two core missions.  Fund raising efforts will be aided by improving a firm’s industry differentiation through offering an alternative value creation model.  Additionally, PE managers can improve deal making win rates by leveraging enhanced risk management and analytical capabilities.

…if you can execute

Unfortunately for many firms, becoming an organic growth multiplier won’t be easy.  Today, most PE firms lack internal expertise & experience as well as an operational mindset.  Moreover, PE managers will inevitably discover what their investee managers learned eons ago:  execution is not easy.

Going forward, every PE firm will have to adapt to new market and business realities.  Focusing on organically growing their portfolio companies will be an attractive option for many firms.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Can RIM regain its mojo?

Attacked on many front by well-capitalized and innovative foes, RIM is facing what many consider an existential threat.  A year ago, RIM was the smartphone market share leader with a lock on the lucrative corporate sector.  How times have changed.  Over the past 2 quarters, RIM has been steadily loosing market share to Apple and Google. Apple’s iPhone has set the consumer standard for smartphone innovation and design while Google’s Android platform is gaining traction with powerful functionality, an open-source operating system and zero cost to channel partners. Consumer polls that measure Product Desirability consistently favour the iPhone and Android platforms over RIMs. If RIM did not have enough to worry about, Apple’s new iPad has outflanked the market by creating an entirely new product category, forcing RIM and others into catch-up mode.

Despite these worrisome signals, it is too early for RIM to wave the white flag.  The firm still maintains significant corporate capabilities, a strong brand and a large (and still growing) customer base.   What RIM’s management needs to do is to return to the strategic principles that made them category leaders in the first place.

Protect their lucrative corporate niche

First and foremost, RIM must retain the high margin and device-loyal business user that propelled BlackBerry dominance.   To do this, the company must quickly improve enterprise level functionality in areas like system interoperability, stability and security as well as continuing to develop winning channel programs to lock up distribution.  RIM will need to move fast.   Sooner rather than later, Apple will begin aggressively targeting the corporate segment.  Moreover, the days where firms handed out free Blackberries and stipulated that the device was the corporate standard are over.  Increasingly, employees are allowed to use their personal iPhone or Android handsets for work. As a result, there is a risk that RIM’s appeal may be diminishing.

Expand the consumer franchise, RIM’s way

RIM’s prospects will come in large part from their ability to penetrate deeper into the growing yet fickle consumer market.  To date, RIM has appealed to consumers primarily with their BlackBerry Messenger functionality.  While important, this strategy is insufficient by itself to win in today’s consumer market.  RIM must build consumer appeal beyond BlackBerry Messenger the same way they tackled the business segment.  In particular, the firm needs to develop a consumer-focused functionality around mobile productivity similar to what worked with business users while providing enough useful apps to satisfy the majority of users.  This feature set would attract soccer moms scheduling practices or a group of teens planning a party.  As well, the company needs to combine product excellence with newer, more compelling marketing campaigns that plays to its core strengths and consumer needs, namely people who primarily use the phone for different kinds of communications.

Avoid Apple envy

With the BlackBerry Torch, RIM introduced a product that incorporated features that Apple pioneered, such as touch screens and mobile apps.  Despite good reviews, the Torch did not deliver product superiority or stem share losses.  Yet at the same time, RIM was ignoring key weaknesses and opportunities with their operating system and hardware that were more fundamental to their value proposition and core segments. Going forward (especially with their iPad targeted PlayBook), RIM runs the risk of focusing too much time and resources on aping Apple and not enough on understanding and leveraging their own unique business franchise. Management should realize that RIM will never be Apple, nor should they. 

There is nothing pre-ordained about Apple or Google’s success.  Each company has had its share of setbacks.  For their part, RIM has enjoyed an excellent string of product successes and retains some impressive capabilities.  RIMs’ strategic challenge will be how to get back to their earlier winning formula without taking their eye off of a rapidly changing consumer and technological landscape.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

New market penetration: a passage to India

Growth-focused North American companies can no longer ignore India.   Traditionally known as a center for business process outsourcing, India is rapidly joining the ranks of the first world as a major market for consumer goods and services.

According to the IMF, India is projected to generate GDP growth of 9.7% in 2010 and 8.4% in 2011.  Much of this growth can be traced to burgeoning consumer demand.  According to Stewart Hall, economist for HSBC Securities Canada:  “India is essentially a high-growth economy.  It’s a story fueled to a large extent by domestic consumption.”    Domestic growth, according to the IMF, is being driven by a “low reliance on exports, accommodative polices and strong capital inflows.” 

There remains considerable room for economic expansion arising from strong economic fundamentals.  These include: growing urbanization, a large, young workforce, and an expanding service sector.  All of these factors are contributing to the emergence of a sizable, materialistic and ambitious middle class. According to McKinsey, the India’s middle class is forecasted to grow from about 5% of the population to more than 40% by 2025, creating the World’s fifth-largest consumer market.

 Given the opportunity, what factors should companies consider when crafting their Indian-entry strategy?

Understand that India is a country of contrasts – A week and fractured government and hundreds of millions of poor and illiterate people coexist with a dynamic management class and World Class technology.

Consider India’s diversity – India is unique in many ways:  home to 1.2B people, governed by 28 different states plus the federal government; possessing 24 official languages with hundreds of dialects; absorbs a myriad of religions, ethnic groups and cultures and; encompasses a variety of climatic zones ranging from the frigid Himalayas, to monsoon-drenched jungles.

Be wary of business challenges – Despite advances, India continues to score poorly on every “Ease of Doing Business” measure.  In most of the country, the infrastructure is inadequate and will be challenged to support future growth without substantial investment. Regulations and bureaucratic practices can vary dramatically between jurisdictions.  Corruption is rife and many local firms continue to enjoy tacit privileges not available to foreigners.

Get engaged locally – While your market entry strategy should be driven by the type of products and services delivered, firms need to cultivate an extensive coterie of local (private and government) contacts and business partners who can smooth market penetration and stick handle through government regulations.  Foreign companies must also be mindful of local sensitivities and customs and not appear patronizing or uncaring.

Consider new business models to serve consumers – Although national wealth has been growing steadily, meaningful disposable income is now only reaching the vast majority of people.  To reach these consumers, North American companies need to be creative about how to deliver useful products at significantly more affordable prices than their home markets.  Examples of the radical product innovation required include the $2500 Nano car and the recently announced $35 government-developed tablet PC.  Finally, expect incumbent firms to aggressively defend their market share.

Leverage India’s strengths as part of a larger regional strategy – With its British legal system, widespread use of English and strategic location, India can effectively serve as the hub of a larger South Asian network.

Be patient – Despite its riches, India remains a frustrating market for the uninitiated.  Market penetration and investment returns will require longer time horizons.  Moreover, developing the necessary trust with local parties will take a considerable amount of time and effort. 

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

Turning the Tables on Disruptive Innovators

Over the past 10 years, disruptive innovators (DIs) have taken on established industries like banking, airlines and media  – and have won.  By targeting unmet consumer needs or introducing breakthrough operational innovation, DIs can significantly alter the competitive landscape, industry margins and product offerings.  Unencumbered by institutional factors, DIs pose a major threat to market leaders because of their ability to quickly capture share, drive down pricing and reset the consumer’s value perception.  In many cases, traditional firms have had a difficult time fighting back due to their legacy strategies, financial requirements, and organizational environment. 

One common strategy is to launch a similar business model as the DI.  In effect, the new model competes against the DI in the low cost segment while the traditional model continues to fight it out in the core market.  This strategy, despite considerable effort and resources, is generally not successful in defending against DIs. In particular,  managing two different business models in the same industry at the same time is extremely difficult.  Furthermore, a dual business model plan is loaded with economic contradictions and frequently leads to insufficient investment and focus on one of the units.   Some management gurus like Michael Porter and Clayton Christensen believe it is possible to fight DIs with two business models if executives get certain things right.  These prerequisites include autonomously structuring and operating the business units with each choosing its value chains and go-to-market approach. As well, executives would need to integrate the units where they can coordinate strategies, reap scale economies and capture synergies in areas like finance, purchasing and channel management.  Who is right?

A study recently published out of MIT’s Sloan School of Business looked at what worked and what didn’t work with a dual business model strategy.  Sixty-five public and private companies were analyzed between 2007 and 2009. The authors concluded that running the units autonomously may not be enough in making a dual unit strategy work.  To successfully defend against DIs, the study recommended firms consider 5 fundamental questions before committing to any strategic moves:

  1. Should the company enter the market space created by the new business model?  Incumbents may correctly choose not to defend in the short term.  The new market may not be attractive or be a good fit with the firm’s competencies.
  2. If the firm wants to enter the new market, should it do it with the existing business or a new unit?  There is no simple answer to this question.  The decision will be based on which strategy best serves the customers and delivers the highest profitability. Furthermore, companies may decide to get into the market without adopting the DI’s model (e.g., an acquisition or strategic partnership).
  3. If a new model is required, should the company follow the same strategy as the DI?  The research indicates that incumbents will not be able to beat DIs at their own game.  Instead, firms should look to ‘disrupt the disruptor’ with a better business model, where they could better leverage their strengths in areas like scale, talent and relationships. 
  4. If a new business model is developed, how much should be leveraged from the parent company?  The question is not whether units should be separate or apart but rather which assets or activities should be run together and which should be run separately.  The decision should be based on careful deliberations around 5 factors:   1) name/brand 2) location 3) equity 4) value chain activities and 5) organizational environment.
  5. If a new model is formed, what are the specific challenges of managing both of them at the same time?  Not surprisingly, winning companies tended to give much more financial, organizational (e.g., culture, incentives and processes) and strategic autonomy to the new business unit.

Ultimately, the most successful companies are the most pragmatic and ambidextrous, basing their approaches on their unique circumstances and capabilities.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Recession Lessons #1- Look Who is Growing!

Recessions are opportunities for firms to move up as well as slow down.  While most firms hunker down to weather the storm, it is quite common for market leadership to permanently change.  A significant amount of research confirms this. 

Some Bain Consulting analysis of the1991-92 recession found that twice as many laggards (bottom quartile firms) made a leap to market leaders (top quartile firms) in the recession versus non recessionary times.  Furthermore, a US McKinsey study discovered that one-third of banks and two-fifths of industrial firms fell out of the top quartile of their sectors during the 2001-2 recession.  Significantly, most of these shake-ups became permanent.  According to Bain, 70% of the companies that improved share and performance in the 1991-92 recession preserved those gains into the subsequent market expansion.  On the other hand, less than 30% of the companies that fell back in the recession were able to recoup their losses in better times.

The current recession is unlikely to buck history.  While it is too early to identify winners and losers, I can draw on my learnings from earlier recessions to identify several conditions that increase the propensity and potential success of major strategic moves:

  1. Growth imperative – Some companies traditionally emphasize growth regardless of immediate economic conditions. Firms like Goldman Sachs, Intel and Google would support Craig Barrett’s (former CEO of Intel) philosophy:  “You can’t save your way out of a recession;  you have to invest your way out.”  Moreover, these Type-A firms rarely carry out expensive, skills-gutting and demotivating “purge & binge” hiring practices.
  2. Corporate muscle – Size matters, especially in recessionary times.  Strong market shares, buying power and cash reserves can be leveraged to vertically integrate key parts of the supply chain, outflank competition or extract deeper discounts from suppliers.  For example, McDonalds is opening up to 1000 new stores; P&G is undertaking its biggest expansion in 170 years, building 19 new factories globally and; PepsiCo is investing $6B to take control of its two largest bottlers.  Well-heeled corporate buyers can also take advantage of challenging times to make acquisitions at lower valuations. A BCG study of US M&A activity between 1985-91 showed that deals done during recessions generated 15% higher returns to shareholders than those during boom times.
  3. Competitive weakness or retrenchment – The natural tendency of many firms in recessions is to focus on short term results and abandon or defer important business-building activities and initiatives.  This strategy is often self-defeating.  It leaves firms vulnerable to more aggressive or forward looking players (see point 1).  And, retrenching companies end up being less prepared to take advantage of the inevitable upswing. 
  4. Customer and market openness – Customers and markets are often most open to change during difficult times.  Aggressive and innovative firms will exploit powerful market forces like sustainability, social media and globalization to serve customers better and cheaper, and potentially create new markets.  In fact, many of today’s leaders  (e.g., CNN, FedEx and Microsoft) were launched with disruptive offerings during bear markets. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site