Sometimes looking at the “big picture” helps you understand business issues the best. Once you are in the weeds and dealing with the day-to-day ups and downs of running a business, it really is hard to see the forest for the trees. You can become so obsessed with fighting fires and making this months’ numbers that you never consider the macro issues.
Of course when you first join a business, there is a period of time, aka your honeymoon, when you use your big picture tools to understand things. Soon enough, however, you get brought into the weeds. I had this exact experience after joining a small technology company. During my honeymoon period, I walked around asking questions, trying to figure out what was preventing the business from really taking off. I got lots of very detailed feedback from the team. “We should do this, we should do that.” All tactical actions. None of the suggestions seemed to me to be the answer.
And then it came to me: we were “stuck in the middle.” I dug out a book I’d studied in B-school and found this chart:
Michael Porter suggests that each industry can support a small number of industry leaders, each with 10-25% market share. These firms will have cost leadership, economies of scale and well-known brands, leading to a high return on investment. Industries can also have many niche players, each with small market share, but, since they serve the needs of a specific customer set better than the industry leaders, they can command higher prices and hence earn a high ROI.
Then there is a set of competitors that have none of the strengths of these two segments. These firms have smaller market share, but no close association with a particular customer set. They lack the economies of scale or brand recognition of the leaders. They are often relegated to competing on price, lowering their already depressed ROI. These firms are “stuck in the middle.”
Let’s be clear however, that firms can remain in the stuck in the middle state for decades and in fact, if the industry growth rate is high, experience reasonable growth. This earns the management bonuses and if publically traded, may also grow the stock price.
However, this is not the place you want to be. I heard one well-known strategy guru call this the “Bermuda triangle of business.” Companies that remain here too long can disappear. They are either divested by their owners or acquired by the industry leaders at low valuations as a market share play.
I shared my epiphany with the CEO, the entrepreneur that started the business. He wasn’t impressed, and in fact, argued with me. He was very focused on emulating the industry leaders and wasn’t going to give up that dream easily. Unfortunately, I had to be the bearer of bad news: Our best chance to survive and grow will be as a niche player. We were unlikely, given our position, the strength of our competitors and our limited resources to compete across the board and win. My suggestion was trim the product line to the best-selling product and go after two specific markets exclusively.
To the CEO’s credit, he let me present this analysis to our board of directors. I went to the white board and drew the chart above and went through my analysis. It took about three minutes. After I was done the Chairman said, “It’s clear to me what we need to do.” The other board members chimed in with agreement and we changed the course of the company right then and there.
We followed that strategy successfully for several years. It was the single most important decision in the company’s history. All done with one slide, in three minutes.
The moral of the story? Don’t forget the big picture. Make sure your analysis of business issues includes a review of the overall market and your company’s position within it.
Are there big-picture business issues you have ignored? What would an outsider say about your business strategy?
You can connect with Eric on LinkedIn: www.linkedin.com/in/ericlundbohm/
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Categories: Running a Business