Monday, August 30, 2010

The Conditions for Controlled Growth

4th in a series on Strategic Growth

In last week's post we discussed the case for pursuing controlled growth.  But is controlled growth always viable?  No.  So what are the conditions necessary to viability?

First, you can't be in an industry where fast growth is a necessity.  These conditions were discussed in a previous post The Rationale Behind Fast Growth.

Assuming that these don't apply, the main condition for being able to pursue controlled growth is a company's ability to erect competitive barriers to entry or, in other words, the ability to create long term sustainable competitive advantages (LTSCA for short).  This term is most associated with Michael Porter, author of Competitive Advantage and develop of the Five Forces competitive strategy framework.

Creating Barriers to Entry
Creating a barrier to entry starts by first accepting the fact that you have competition.  Not that you might have competition in the future.  Not that you will have competition.  But rather that you have competition right now, right out of the gate.  Why the distinction?

Because I've noticed that entrepreneurs who don't believe they have competition right now (i.e. "there's nothing like it out in the market!") are vulnerable to problems associated with competitive substitutes.  A competitive substitute is a set of products or services that, when combined together, can serve the same function as your product solution.  For example, if I need to tally up a long string of numbers, I generally use a calculator.  But I could also use the calculator application on my smartphone, a digital watch, an abacus, a pencil & paper, or just my head.  All are competitive substitutes to the calculator.

What problems?
  • Weak relative value proposition - In the quest for product/market fit, there are two elements of value that must be established.  The first is the intrinsic value to the customer - the value received by the customer using your solution to address a need.  The second is the relative competitive value of your solution versus an alternative.  By not downplaying competitive substitutes, these same entrepreneurs are then surprised when customer adoption is slower than it "should be."  Remember, status quo and doing nothing are legitimate customer purchase behaviors.
  • Neglecting to search for barriers other than first mover advantage and scale - So what happens if the company can't grow as quickly as expected?  Does this mean the business is not viable?  A good question to ask is "assuming that someone else reaches the market first and grows faster, how would we then compete?"  This may uncover potentially lucrative sources of LTSCA.
  • Surprised by fast followers or disruptive technologies - As discussed in a previous post, being a fast follower is at least as viable a route to market leadership as being a first mover.  Many times, fast followers come from fringe products that don't directly first.  This is classic Innovator's Dilemma.
It is not a goal of business to eliminate all competition;  this is impossible.  But one business goal should be to establish a defensible perimeter large enough and profitable enough inside of which it can thrive.  It's not good enough to play great offense;  a business needs to be able to play defense too.

Sources of Long Term Sustainable Competitive Advantage
So what makes an ideal LTSCA and where do they come from?  Ideally, an LTSCA must have significant value but be hard to replicate.  Without going into detail, here is a quick listof sources:
  • Size - market share, financial deep pockets, economies of scale
  • Lowest Cost - from superior operational efficiency
  • Superior Capability - organizational performance, product leadership, technology
  • Control of Limited Resources - natural resource (e.g. mines, oil), suppliers, sales channel, shelfspace, parter and customer networks, unique information, technical skills
  • Switching Costs - functional (e.g. unique part), retraining, work habits, sunk costs
  • Loyalty - brand, customer
  • Legal - patents, trademarks, favorable regulations (e.g. electric power utilities)
Aside from size, one does not need to be IBM to cultivate the development of one or more of these LTSCAs.

LTSCAs generally build over time.  If a company sets out with the intention that every year it will continuously enhance its capabilities in a lasting way, over time, this can result in a formidable barrier to entry.  This incremental approach is often more robust than embarking on the massive change initiative of the year approach practiced by many companies.  This is the idea behind Jim Collins's Flywheel concept from Good to Great.  Small actions timed right can build lasting momentum.

So what does controlled growth mean?  Is it revenue growth of 5% per year or 50%?  The useless answer:  it depends.  It depends on your industry and your business.  The final post in this series will look at the useful answer.

Next week:  Determining Your "Natural" Growth Rate

No comments:

Post a Comment