There are three more tapes that get replayed again and again.   The narrative and plot is always the same, just the actors are different (well admittedly, we’ve even seen the same actors in a few situations, but we digress).

(1) Strategies Tire – simply put, strategies have a fixed shelf life.  Problem is when designing strategy, the vast majority of execs don’t think this way.  Most often, strategies are presumed to be long-lasting.  Pro tip:  they’re not.  Seems the logic is that since a lot of clever thinking went into it, it must be good for awhile.  When is the last time a strategy was announced with an expiration date on it?  Sure we know a strategy is obsolete when growth stalls, market share shrinks and profits disappear, but then it’s too late – way too late.   Blockbuster stayed way too long with a strategy dependent on a big fat bricks and mortar retail footprint that required me to be inconvenienced in the process.  They had years to respond, but simply didn’t.  Welcome to the deadpool.

(2) Markets Change – the frog in the boiling water analogy notwithstanding, most growth companies that stall are often unable to see the shifting market sentiments that ultimately are their undoing.   The Sony Walkman franchise has been around 30+ years, and guess what?  The Walkman franchise finally died in February 2012.  The Walkman pioneered a space, dominated it, and then finally lost it when they did not sense the strategic market changes underway.  Personal devices merged and morphed as well as software/hardware combinations like iTunes/iPod fundamentally changed our digital audio consumption patterns.  Welcome to the deadpool.

(3) Competitors React  - very few companies have strategies that can’t be (ultimately) copied.  Defensibility is a temporal word when it comes to strategy.  In every industry, the laggards are most often found trying to emulate the leaders.  They seldom catch the true leaders – who are constantly revving their strategies to stay ahead, but the laggards do most often catch some ‘false leaders’.  BMW has remained a leader in the multisport motorcycle segment for over a decade.  Ducati appears to be catching up with them quickly with the Multistrada.  BMW’s successful formula in this bike segment has been renowned.  Needing to diversify, Ducati has gone to school on them, much to BMW’s chagrin.  BMW motorcycles are far from the deadpool, but competition is certainly intensified versus what it was just a few years ago.

The number one cause we see is the incumbents not recognizing strategic or market shifts early enough.  They don’t see soon enough how their strategies are tiring, how markets are fundamentally changing or how competitors are reacting and creeping up on them.  Why?  They often don’t have the market sensing skills, they don’t want to believe the data they see in front of them and they don’t have a replacement strategy ready to be put in place.

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Question.  What do Nokia, Sega, Kodak, Nortel, GeoCities, Seagate, AOL, Excite, Ariba, AltaVisa, MySpace, Exodus, Wang, Compaq and Kana all have in common?  All once white hot growth companies that stalled.  So why do once high growth companies ultimately falter?  We believe there are four fundamental reasons.   We’ll look at the first reason – Blinded By Success – in this  post and address the other three reasons in subsequent blog entries.

Blinded By Success – Pretty straightforward.  Successful high growth companies are lulled into a feeling of invincibility that prevents them from proactively changing their strategy from an invariably predictable and pronounced shift they are thus not prepared for.    Successful high growth companies that are blinded by success are most often blind-sided by the extremely rapid decline in their prior success.

There are a couple of underlying causes of being blinded by success.

First, past success often blinds companies from reinventing their future.  Go back to early 2007.  Nokia, RIM and Motorola had a whopping 64% combined share of the mobile handset market.  They all thought they were firing on all cylinders.  ‘Why change anything?’  was evidently the mantra of senior management at these companies.   They were locked in a red ocean strategy with each other – fighting for incremental market share gains against each other, with relatively minor ‘me too’ functionality easily replicated by each other in subsequent quarters..   These three companies had strong relationships with operators worldwide and churned out incrementally new products year after year.  Then along comes two new mobile market entrants from out of nowhere: Apple’s iOS and Google’s Android.  Both entered the mobile market as outsiders to utterly dominate the high end of the mobile handset market – and they did it in very short order.  Apple and Google saw a huge market opportunity where innovation was stale.  It’s fair to say past success is not always a good indicator of future success.  Too often, company Boards and management teams too often believe their own hype.  They think they are innovators when their customers are actually buying on price for instance.  Look, all products can’t be innovative.  Definitionally, half of all products in any category are statistically below the median.  Companies also get lulled into the fallacy of cash cows.  Sadly, a lot of cash cows are missing the ‘cash’ part.

Second, companies are typically built to do one thing and one thing well.   That’s fine when you’re small, when you’re growing fast, and when you’re grabbing market share.  Monolithic companies are much more problematic in mature markets.  Dell pioneered the build-to-order model and enjoyed nearly two decades of high growth.  They literally built the company brick by brick to be a build-to-order company – something we now take for granted in the PC business.  Dell’s core competence is as a manufacturing/assembly company with a thin marketing veneer.  It now wants to get heavily into software?  We agree with the rationale but Dell wasn’t build to be a software company, it was built to be a manufacturing/assembly company.    Can it change?  Maybe.  In time to matter?  Maybe not.

Are you a high growth company?  Your choice is either to be confident in your success, a little complacent, and thus exposed to being blinded by success.  On the other hand, Andy Grove once said only the paranoid survive, and it’s (usually) never to late to proactively get ahead of the curve.  Disrupt or be disrupted.  ‘More brain’ now by you and your team will mean ‘less surgery’ later.  The choice is yours.

We’ll post Part 2 in this series in the next two weeks or so.  Stay tuned.

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Both answers are shallow and short-sighted.

Let’s take the first response ‘we don’t have any competition’.  Trouble with this answer is I can only conclude one of four possibilities:

1. They don’t know their market very well and haven’t done their homework.
2. They’re trying to deceive me somehow and are not telling me something that they have already discovered about competitors in the market.
3. They’re probably doing something that doesn’t matter — they’re the only one doing this because a market for what they do doesn’t exist (‘uninformed teams creating uninteresting offerings chasing uninhabitable markets’), or
4. They’re pure genius; they’re actually proposing a new idea that has never been tried before.

Generally not a big fan of the ‘no competition’ angle!

So let’s take the second response, they rattle of 4-5 competitors and tell me why they’re better than each of them.  This usually goes down the path of features/functions and what their product can do incrementally better vs. the named competition. Companies typically make the argument they have better product than the competition. (Really?  Half of all products in any category are statistically below the median, but I digress.)  So a company makes a claim that they are a product innovator, they compete with 4-5 named customers, and they are winning deals.

So far, so good, right?

In our work helping companies understand their strategic positioning, we very often uncover two additional ‘competition’ factors companies get blindsided by.

First, most companies don’t have an appreciation of all the companies that market/brand/message/position in their space.  A company that names 4-5 competitors might actually have 30, 40, or even 50 competitors that market/brand/message/position just like them.  On one recent assignment, we identified a whopping 108 competitors for a client who said they only had 3 primary competitors.  (We actually stopped at 108.)  Our research team was then able to identify key customers, key technology partnerships, etc.  We asked the GM of this business unit if all 108 were competitors.  He said he only saw the 3 he named in competitive situations so that is how he defined his list.

Hmmm, think about that response.  If you’re not seeing companies in deals competitively then they’re not your competitor? Perhaps there are a lot of companies closing business in your space not seeing you either?  Our point is competition thus isn’t defined purely as who you see competitively on deals. One of the greatest sources of market disruption comes from companies once cited as ‘low end’ and ‘can’t do what we do’, only to move up market quickly and dominate.

Second, most companies don’t fully understand and appreciate substitutes for their offering.  We’ve worked with three different clients recently that were all basically selling against Excel.  When first asked the ‘who are your competitors’ question, each CEO gave us their 4-5 primary competitors.    Reality was in all three instances, Excel was the primary competitor and 4-5 in each instance we’re all struggling for a much smaller percentage of the market.  Yet none of the three client CEO’s fully recognized how embedded Excel was as a competitor – it was already installed (and perceived as ‘free’), it was already being used to do similar things each of the three CEO’s was proposing, and it didn’t take a few months and hundreds of professional services hours to get up and running.  A very steep climb for each company competing against Excel-based alternatives.

Short of it is competitors and alternatives to solving the problem your company purports to solve is a lot more complex than most companies fully appreciate. Dig a little deeper with customers and find out how they’re thinking about various alternatives to solve the problem you are selling a solution for.  You might be surprised.

Failing to get right a broader perspective who you compete against means you’re potentially leaving a lot of money on the table.

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Who’s right?

Certainly customer-centric market research has contributed immeasurably to new product design.  On the other hand, Mark Cuban has a point, classic market research may not be sufficient to uncover innovative products/services such as Facebook, the iPad and the Nest home thermostat.

We believe both approaches are missing the point and both are far too product myopic in their thinking.   Too many companies equate ‘innovation’ with ‘product innovation’ and thus fall into the ‘listen to your customers’ trap.

So reframe the question.  How many companies talk to existing customers in absence of some revenue transaction?  We call on customers when we are selling to them, we call on them to renew, perhaps we place a courtesy customer service call post transaction to see how we did and how we might improve, etc.  Companies often wheel out the CEO to close the big deal.

So what’s the CEO Challenge?  It’s a technique we developed a few years back that’s showing some remarkable results for our clients.  Simply put, we mandate our client CEO’s to call three current clients and two lost clients per week for four weeks straight.  Twenty calls total.  Each call is reasonably brief, limited to 30 minutes unless the person called would like to speak longer.  The CEO is not pitching a deal or following up on a complaint from a key customer.  These are random calls.  The CEO is listening — and importantly — listening outside of some revenue transaction.  The CEO is not calling ostensibly to sell a big deal, thank a customer for a recent order, try to convert/win a lost customer, etc.  The point of the CEO Challenge is twofold: (1) to pleasantly surprise your customers and prospects as well as engage them in a broad discussion about what they really think of your product and company, and (2) to sharpen the CEO skills of ‘active listening’.

Active listening?

Yes, CEO’s and C-level execs have very well honed frames of reference, biased judgments and other internal mental activities that frame how they ‘hear’ a customer or prospect.

Think of it this way.  In soccer penalty kicks, goalkeepers choose their action before they can clearly observe the kick direction. An analysis of 286 penalty kicks in top leagues and championships worldwide shows that given the probability distribution of kick direction, the optimal strategy for goalkeepers is to stay in the goal’s center. Goalkeepers, however, almost always jump right or left.  Norm theory: Comparing reality to its alternatives implies that a goal scored yields worse feelings for the goalkeeper following inaction (staying in the center) than following action (jumping), leading to a bias for action. The omission bias, a bias in favor of inaction, is reversed here because the norm here is reversed – to act rather than to choose inaction. The claim that jumping is the norm is supported by a second study, a survey conducted with 32 top professional goalkeepers. The seemingly biased decision making is particularly striking since the goalkeepers have huge incentives to make correct decisions, and it is a decision they encounter frequently.

So, a bias for action or active listening?

CEO’s that engage customers and prospects not with a bias for action but rather an active listening approach will most likely learn and amazing things about your products and services as seen through your customers and prospects eyes.

Try it … and be sure to report back to your Board what you learned.

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We recently met with a leading venture capital firm. Interestingly, at the end of every quarter the partners look at year-over-year quarterly revenue growth for each of their portfolio company in an aggregated way. In other words, the firm calculates the sum of the revenue of all their portfolio companies and compares it to the same quarter a year ago. What they discovered was amazing: the correlation of the portfolio value percentage difference between the current quarter and the same quarter a year ago was pretty much the same as the percentage of the aggregated revenue change. For instance, if for the March quarter the aggregate revenue of their portfolio grew from $250M this year to $400M last year, i.e. growth rate of 60%, the portfolio value would also grow at about the same 60% rate.

So, we asked ourselves the following question: what would the same correlation analysis tell us for publicly traded companies?

Of course, as always the devil is in the detail. The exercise has to be done carefully to be able to compare apples to apples. One must take into account currency exchange rates at various time, inflation / deflation to compare the value of the same currency at different periods of time; compare market capitalization or enterprise value growth relative to the exchange growth.

As we are embarking in this detailed analysis, we decide to look at one simple example of two companies driving the bulk of a market: the one for commercial large body airplanes: Boeing (NYSE: BA) and Airbus. This oligopolistic industry simplifies the analysis, because of the highly concentrated market (high Herfindahl index). Airbus is now part of EADS (European Aeronautic Defense and Space) that was formed in July 2000 and is trading on the French public market under the symbol EADS. In 2010, Airbus represented 66% of EADS’ revenue and commercial planes represented 50% of Boeing.

From 2001 to 2010, EADS grew its top-line revenue at a CAGR of 4.5% and generated €45.8 billion in revenue in 2010. During the same period, Boeing grew at a CAGR of 1.2% to generate $63.3B in 2010, so EADS grew at 3.8 times faster than Boeing during that time. EADS market cap grew, during the same time at a CAGR of 2.9% compared to 3.0% for Boeing. One can’t compare the growth of the market cap of both companies since they are trading on different exchanges, with different investors, under different rules, different economic and political climates and arguably with different valuation models. So, one must look at the stock performance relative to the market the stock is trading in. From 2001 to 2010, the CAC40 market lost value at a -3.3% CAGR and the NYSE market grew at a 1.3% CAGR rate. So, a dollar invested in EADS would generate $0.55 more than the same dollar invested in the French market and a dollar invested in Boeing would only have generated $0.18 more than the NYSE market. In other words, EADS outperformed the market by a factor of 3.1 compared to Boing in its US market. Interestingly, this is fairly close to the revenue growth ratio of 3.8.

It’s a simple example, but it does show that the fastest growing company is outperforming the market compared to its competitor. While there are exceptions, we believe that there is a good correlation between relative returns to investors and the company’s growth rate. Further research we are currently undertaking will help us determine if this is generally true or not.

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So what’s going on?

The Lake Wobegon effect (“where all the women are strong, all the men are good looking and all the children are above average”), otherwise known in psychology circles as Illusionary Superiority is a cognitive bias where we overestimate our positive qualities and we underestimate our negative qualities, relative to others.

So MAZ what does this have to do with business growth you might ask?

A lot …

Name a company with sustained high growth and a crappy product or service? We can’t think of one either.

It’s understandable why we think our products of services are above average, but the reality is statistically only half of you have products/services that are above the median.

Many companies are kidding themselves; half of all products are inferior and by definition are below the median – it’s a statistical fact. Yet companies hype the markets that their products are ‘above average’ and better than the competition.

Is your growth rate higher than your peers? If not, might it be your (inferior) product is holding you back? How do you really know your product is above the median?

Oh and by the way, statistically half of you are above the median in terms of sexual performance and the other half of you aren’t; nothing personal mind you, just a statistical fact.

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• All midsize tech companies (two public, one still private).
• Revenue growth for each company seemed about ‘average’; not poor performing, not stellar.
• Low double-digit growth for each, nothing terribly exciting at first glance.
• Each company had quite a few product offerings for a company of its size. Didn’t do the analysis, but I strongly I’d suspect I’d find a long tail of mediocre margin contributions by product type.
• CEO’s at each indicated they felt they had decent growth but could not tell me with much precision by how much they are outgrowing the various markets they are in by product offering.
• CEO’s at each confided in me that perhaps they are not focused enough as a company.

Weird. Three eerily similar situations and conversations.

Hmmmmm. Obvious question I had for each CEO was by how much were they outperforming the markets they are in (by product type). 20% growth isn’t impressive if the market you are in is growing at 40%, but is impressive if market growth is say 5%. It’s understandable why a lot of mid-stage companies end up with too many products:

• Customers pull them in directions they think are ‘strategic’, they (wrongly) believe it’s an opportunity to get into new markets, but ultimately these foray’s don’t pan out.
• In the pursuit of revenue and making their numbers companies don’t say ‘no’ enough.
• They often don’t do the hard analysis where the real opportunities are. They are ‘convinced’ they are solving some big customer problem, but more often than not, the customers are not buying as first anticipated.
• They fall for the ‘mirage’ effect (thinking they see a market, but it isn’t there) For whatever the reason, too many companies have too many products and their lack of focus is resulting in slower growth.

Interesting to note Steve Jobs told Google to focus on five products, do them well, and forget about everything else. Do we believe companies that stay focused grow faster? All things being equal – yes. Do we currently have the data to prove it? Not yet… (but we’re working on it – stay tuned)

So what are the takeways MAZ?…. I’d ask you to think through a number of questions with your Board and management:

• Do you think your company isn’t focused enough? If yes, how did you get there?
• What unfocused initiatives/products are you going to say ‘no’ to going forward?
• If you grew 50% faster than the market(s) you are in, what would it mean for your investors and management?
• What are you doing to make 2012 and beyond more focused and thus have higher sustained growth?

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The first phase of growth is to get from $10 million to $100 million. Of course, these numbers are not set in stone, but should be thought as some indicative boundaries. We call this phase “Accidental Growth”, because companies get there mainly by accident, chance or some strange chaotic alchemy that is hard to predict or reproduce. For some companies, it takes a long time for others, it’s quick. Compaq was probably the fastest company in history to cross the $100M mark. It was founded in February of 1982 by three Texas Instrument managers. The following year, its employee base grew from 100 to 600 and the company generated $111.2M that year on its way to become the largest personal computer company in the world. By contrast, it took 10 years for Microsoft to cross the $100 M revenue mark in 1985.

The second phase of growth is what we define as “Deliberate Growth.” This is when the Board and Management set their eyes on the $1B mark. There is a considerate and deliberate effort to reach that goal. Various paths are examined; growth strategies and tactics are crafted and tested. Recurring revenue, business repeatability and churn become the center of attention. A good example is Red Hat that crossed the $100M mark in 2004 and that will be over a billion this coming year. During these 8 years, the company acquired Netscape and JBoss, aggressively expanded in China and South America, continually improved its product line including JBoss and Enterprise Linux, launched into virtualization and Cloud and released desktop products.

The last phase is what we describe as “Calculated Growth.” This typically applies to large businesses over $1B and in mature industries. Companies like Verizon, United Airlines or Toyota tend to have a fairly well understood formula for growth; be it by adding a certain number of subscribers, or opening up routes for the airline industry or adding a number of trucks and cars through its dealership network. For example, Starbucks grows primarily by adding new stores and secondary by increasing the average revenue per store. In FY-09, it had 9,800 stores in the world. It added 900 stores in FY-10 and another 1,000 stores in FY-11. Revenue per store averages $640,000. Total revenue grew from $9.8B in FY-09 to $11.7B in FY-11.

Knowing where the company is in its growth lifecycle is important and like parenting with children, different approaches need to be taken depending on the growth phase. If you are in the accidental growth phase, try various approaches and quickly abandon the ones that don’t work and focus on the ones that do work. If you are in the Deliberate Growth phase, understand the key components that will drive growth: adding new customers, selling more to existing customers, expand in geography, acquiring other companies, etc.

Up and Right!

We actually believe there is another significant reason for Apple’s outsized success, one that is not talked about enough and is most often overlooked: the post purchase experience inherent in all Apple products.

Think about it.  If Apple shipped an insanely great product that was innovative, the technical specs were attractive, etc. but the post-purchase experience didn’t live up to your expectations, wouldn’t you be extremely disappointed?  Remember Fiat?  Great car but always in the shop (who could forget the acronym Fiat drivers lamented: Fix It Again Tony?)  Imagine if Apple didn’t deliver post purchase?

Consider for a moment the consumption lifecycle of any product or service.   Let’s define the starting point as you purchasing /acquiring said product and ending point is of you disposing of it.  We call this consumption lifecycle of any product or service the Product Interaction Experience (or PIE). It consists of six consecutive steps.

Now lets take a look at Apple in the context of PIE:

Step 1 – Purchase and Acquisition: you can purchase online or via an Apple store.  Apple makes it extraordinarily easy to purchase via either channel, In fact, purchase is now multi-channel – you can now purchase online and pick up at a store.  The purchase process is handled by store associates who are not on a sales commission and have excellent product knowledge.  If they don’t know an answer, they don’t fake it.   Apple products are simply extremely easy to purchase.  BTW, I’ve never heard of anyone mention Fry’s Electronics and “excellent product knowledge” in the same sentence!

Step 2 – Discovery & Setup: unpacking an Apple product is elegant and minimalist compared to so many other competing products.  Setting up an Apple product is not only painless, it’s exciting.  Steve Jobs used to pay critical attention to how much it took to close a product box; how the box opened itself is made overtly simplistic, yet design centric.

Step 3 – Consumption/Usage: Apple products are renowned for being easy to use. Apple has managed to somehow let me build an emotional connection between “my” MacBook or my iPhone and me. Most of the interaction with any Apple’s product is pleasurable and often “magic”.

Step 4 – Maintain/Support: If you have a technical problem with an Apple product it’s usually resolved with a quick online search.  If you do require a real person to interact with, it’s as easy as making a reservation with a Genius at one of their retail stores.  I’ve always been amazed with this service.  It’s quick, it always exceeds expectations and it’s free. Apple will not hesitate to replace a defective product with a brand new one if they can’t fix it.

Step 5 – Expand/Upgrade: Apple operating systems has a built in, easy to use software update service.  They are efficient, unambiguous and simply work.  Ever try to permanently move data/files from one Mac to another?  Apple’s Migration Assistant is an amazing application that I used once to painlessly move all data/apps from one Mac to another.  Painless.  Took less than 30 minutes when I had to do it recently and was very easy to understand.

Step 6 – Disposal: Apple has a great recycling program.  Did you know you can actually get an Apple gift card for disposing of your obsolete product with Apple? Even if it is not an Apple product. Yes, Apple will even take your old Dell laptop and give you an Apple credit for it.

We believe a critical component to Apple’s success can be explained with Product Interaction Experience (PIE). If Apple simply built insanely great products, but those products were then difficult to consume throughout their lifetime, we believe it would result in less customer satisfaction and thus slower growth and market adoption.    Apple has done the opposite.  Every step of PIE for Apple is frictionless, quite magical and very easy to interact with.   We believe it’s a key reason for Apple’s market place success and corresponding dramatic growth.

A few things to think through…  So what does PIE look like at your company?   Who ‘owns’ it?  What aspects of your PIE are bottlenecks and thus preventing further growth?  Where is your competitors PIE eating your lunch and what are you doing about it?  Can you objectively identify and measure your PIE vis-à-vis all your competitors?

You could say Steve Jobs got it right by offering up a great piece of Apple PIE!

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What happened?

The company ended the quarter with $799M in revenue, up 44% from a year ago and net income of $62M, up 63% from a year ago. Despite the impressive growth, why would investors abandon the company in such a massive way?

A careful read of their 8-K form reveals the simple answer: “we greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-cancelled rebranding of our DVD service.”

This confusion generated a significant negative impact on Netflix’ customers. For the September quarter, Netflix added 4.7M new subscribers, but a whopping 5.5M existing subscribers canceled their subscription, so their total number of subscribers went from 24.6M at the beginning of the quarter to 23.8M in 90 days. In other words, the company added 19% to its base, but lost 22% of its existing customers and therefore the total number of subscribers decreased by 3% during the quarter. It is not hard to understand now how the 22% loss of customers translated into a 35% loss of the company’s market cap. By not adding net new customers this quarter, Netflix’s revenue growth will be negatively impacted in the near future and investors took note.

Netflix created serious damage to its customers by failing to recognize what they value most: simplicity of the offering, easy pricing and great customer support. Suddenly customers lost their confidence in the company to understand who they are and what they want. Customers became confused about the Netflix’ values that were so attractive to them. The gap between the customers’ expectations and what Netflix offered has been unexpectedly widened and a tremendous amount of enterprise value has been destroyed in that process…

The sad thing is that Netflix could have totally avoided the situation it put itself in.

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