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CHAPTER 8
Generating Growth Strategies

During 2006, the worst year of Ford Motor Company’s history, chairman Bill Ford sent an email to employees stating that “The business model that sustained us for decades is no longer sufficient to sustain profitability” Ford’s reversal of fortune was swift. The company went from profitable maker of SUVs, automobiles and trucks to losing $13 billion in a single year. Not only were its products out of favor, its business model was suddenly obsolete as well.

The speed with which Ford plummeted into a pool of red ink points to a change brought about by the global economy. No matter how favorable times are right now, somewhere out there, there’s a bullet with your company’s name on it. No business model is sustainable in an age of change, competition and disruption.

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Business models now have shelf lives, like loaves of bread at the supermarket. Your customer’s definition of what constitutes “value” is a moving target; it is relative to all other value propositions they are exposed to, and the mind to paraphrase Oliver Wendell Holmes, once stretched by a superior value proposition, never reverts to being satisfied with the old one. Count on yours being imitated, copied, one-upped, attacked, diluted, and commoditized unless you fight back by constantly introducing ways to create new, unique, and exceptional value for the customer, and capture some of that new value for yourself. How to do this in your firm is the subject of this chapter.

Who Moved Our Value Proposition?

One day record companies are thriving, minting money; the next minute new technology allows music fans to download your product for free onto MP3 players, or an Apple Computer (now Apple Inc.) comes along with a new way of legally downloading music, and your industry is decimated. Or you’re in the newspaper business and suddenly your readership begins to decline precipitously as younger readers quit reading entirely or graze the Internet. You’re Blockbuster Video and you haven’t seen much growth, but all of a sudden Netflix comes out of nowhere and steals your thunder.

It won’t be long before you’ll be able to time the duration—birth, rapid rise, maturation, decline—of business models.

Category Killers: The Rapid Maturation of a Business Model

Remember when, seemingly only a few years ago, the “category killer” retail business model was all the rage? Specialty superstores such as Office Depot, Toys R Us, CompUSA and many others collectively challenged the value proposition of traditional retailers. Mostly, family-owned, privately held stores, their business models were based upon a three-step distribution process: products went from manufacturer to wholesaler-distributor to retailer before being purchased by the end customer. The superstore business model cut out the wholesale-distributor and products went from manufacturer direct to retailer, thereby cutting out the distributor’s profit margin, which ostensibly could be passed on to the end customer in the form of lower prices. The allure of this new model was so strong that thousands of small, independent retailers of stationery supplies, musical instruments, toys, hardware, sporting goods, and other products did not survive.

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But in an age when business models are vulnerable, next it was the business model of the specialty retailers that came under attack.

Consumers were initially attracted to the larger specialty stores, with their promise of lower prices and greater selection. But over time, say retail analysts, customers wearied of making special trips to individual stores, which were often located in out-of-the-way areas. If customers expected even a hint of customer service, or product knowledge from specialty store employees, they were disappointed when instead they found aisles and aisles of merchandise with clueless clerks, if they were successful in actually locating one.

For the stores, the business model had its challenges. Maintaining a broad product selection boosted inventory costs. The spread of category copycats made it impossible for stores to guarantee the lowest prices. When two or more stores in the same category competed in the same local market, there was little to differentiate them except price. Result: in one category after another, profits dwindled as competing specialty chains slugged it out for survival.

“Category killers will be a diminishing force,” predicted Richard W. Latella, senior director of the retail group at real estate marketer Cushman &Wakefield. Latella predicted, rightly as it turned out, that another business model, represented by Wal-Mart’s supercenters, would be the fastest growing segment of retail in the future. “When they build their supercenters, they incorporate a lot of the categories, and they’re good at execution,” Latella noted. While most of the category killers are still around, their overall performance, with notable exceptions such as Best Buy and Guitar Center, has hardly been stellar.

Getting Serious About Strategy Innovation Growth

Companies must constantly be on the lookout for new strategy innovations if they hope to survive, much less grow. The challenge is how to achieve strategy innovation initiatives on purpose; how to know which ones to pursue and which ones to pass up; and how to measure the success of your initiatives once you launch them.

Numerous surveys reveal that top executives are routinely dissatisfied with their return on innovation, yet they plan to increase spending in this area. A Boston Consulting Group survey of 2,500 worldwide executives is 154typical. The study notes that although most firms say they plan to increase innovation spending, “they feel they should be getting more from their efforts: more and better new products and services; stronger internal processes; improved customer experiences; and more effective business models?

What such surveys reveal is that most companies are still trying to approach innovation piecemeal, ad hoc, and one-off, rather than strategically, systematically, via a well-conceived, top team/CEO supported process. It reminds you of Albert Einstein’s definition of insanity: doing the same thing over and over and expecting different results.

You can see this adherence to the status quo in the yardsticks companies report using to gauge their progress (or lack thereof): most still rely upon measures of customer satisfaction (57 percent) and overall revenue growth (51 percent), which are important, granted, but are not really helpful to making advances because they are lagging indicators, not leading indicators. Implementing metrics such as tracking time to market and return on innovation investment are what you look for to assess companies making a true commitment, and these measuring methods are used by only 22 percent of companies surveyed. Nearly all the respondents (92 percent) in the survey reported that their firms are more concerned with innovations for existing customers than with breaking into new markets with existing products and services, much less new products for new markets, obviously the most difficult of all.

The Payoff of Strategy Innovation

If you’re willing to rethink how you and your firm accomplish strategy innovation, you can count on growth—that’s the conclusion of a major IBM study called Expanding the Innovation Horizon, which was based in part on interviews with 765 CEOs worldwide. Among the findings:

• Companies that are using business model innovation enjoyed significant operating margin growth, while those using products/services/markets and operational innovation have sustained their margins over time.
• Companies that have emphasized business model innovation have grown, on average, over the five-year period studied, five percent greater than competitive peers.
• 155CEOs are using business model innovation not just to preempt competitive threats but to create them.
• Leading companies use business model innovation to gain an advantage with competitive dynamics that would otherwise adversely affect entire industries. One chief executive said, “Since 70 percent of our business is based on a service that will no longer exist as we know it, we need to adapt our enterprise to survive.”
• If CEOs’ emphasis on business model innovation continues or intensifies, such innovation could become the relentless battleground that product and process innovation have been in the past.

Generating growth strategies involves many of the same elements and practices as innovating in other areas. There’s really not a lot of difference: you cast a wide net in looking for new ideas, you ideate like crazy, you experiment and you prototype, you pilot and you test.

As we saw when we first defined the different types of innovation in Chapter 1, product innovation is about the what (what you make or sell that solves the customers’ problem) while strategy innovation is about the how (how you deliver your product into the hands of customers, how you add value in your service to the customer, how you customize your offerings, etc.). To recap, strategy innovations involve new ways to distribute one’s products, new value-added services that glue your customer to you, or new branding innovations that de-commoditize your offerings (think “Intel Inside”), and an almost unlimited number of other ways. Most companies of any size have some sort of new product development process. But when you ask managers how strategy innovation “happens” inside their company, until recently, you were greeted with a blank stare. But that is changing, if slowly.

Generating growth strategies, just like generating new products and services, should be about creating new customer value, rather than “what’s in it for us.” Here, it’s useful to have deep understanding of the customers who will be expected to buy the toys, financial services, beauty products, furniture, or whatever it is that the business model purports to deliver. Indeed, case studies of successful business model innovations show that evolutionary, rather than revolutionary thrusts, experiments, and probes may have the best chances of success.

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Doing More with Chicken at Tyson Foods

The more I study effective strategy innovation, the more evident it becomes that effective business models are easier to talk about after they’ve proven successful than when they are in the unproven idea stage. For example, in retrospect, Tyson Foods has been a terrific strategy innovator over the past several decades, but I have no evidence whatsoever that they consciously set out to do strategy innovation. Here’s the story.

When Donald Tyson took over the family poultry processing business from his father in 1971, it wasn’t doing badly. With $71 million in annual sales, the business consisted of buying chicks from local farmers and raising the birds until their eleventh week. After dressing the broilers, Tyson trucked them to grocery stores in Arkansas and neighboring states.

As Tyson sought to grow the business, it became a question of how and where. Answers came cackling forth in the form of a motto that somebody tacked up on the bulletin board at the company’s modest, cement-block headquarters in Springdale, Arkansas: “Do more with chicken.”

“We were just processing raw chickens when we first started,” Tyson told this author in a 1998 interview. “Then we started making chicken patties and that opened up a whole new area of business for us because people could have chicken sandwiches. We tapped a new market is what we did. Then, of course, we evolved into doing all sorts of things.”

All sorts of things indeed. Tyson led the industry in figuring out ways to sell chicken in more forms (not just fresh, whole fryers, but also chicken pieces, marinated chicken, and frozen prepared dinners). The company then began aggressively inventing new products (chicken tenders, chicken nuggets, even a ready-to-eat chicken snack, Buffalo Wings). Actually, invent is not the right word; borrow is more accurate, as was the case with Buffalo Wings, which Tyson scouts learned about on a visit to Buffalo, New York, to learn why the company was unexpectedly selling so many chicken wings in that football-crazed city.

Tyson operatives quickly discovered that sports bars in Buffalo had created a new way to use chicken wings, because they could be purchased so cheaply. By adding flavorful sauces and serving the wings during happy hour, the taverns kept patrons around longer. Tyson adopted this idea, expanded it nationally, and created demand for a chicken part that had previously been virtually unmarketable.

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Process innovations enabled the company to standardize a product that had always been inconsistent in taste and texture. Introducing factory-style farming methods, Tyson Foods was one of the first to create fresh chicken with consistent enough quality and size to carry a national brand name. The biggest breakthrough occurred when the company went all out to sell chicken into venues far beyond the grocery store channel.

Noticing that Americans were eating outside the home more and more, Tyson Foods early on realized that doing more with chicken meant making it available where people were eating—fast-food outlets, fine dining establishments, airlines, and hospitals. Tyson himself made a now-famous sales call on McDonald’s Corporation in the early 1980s to persuade the company to add chicken to its menus. The result was a breakthrough for McDonald’s— Chicken McNuggets—and a growth explosion for Tyson, which grew annually at rates of 36 percent for the decade that followed.

While Tyson Foods may not have consciously set out to become a strategy innovator, the company’s relentless drive to “do more with chicken” transformed it into just that.

The Elements of Successful Strategy Innovation

To be considered strategy innovations, initiatives that alter a firm’s business model must first turn a consistent profit. No amount of venture capital money or advertising “buzz” can substitute for that fundamental necessity. Strategy innovation has always been about solving problems for customers in ways that they, not the sponsoring company, perceive to be superior or unique from their present way of addressing those problems. Strategy innovation can be incremental, involving minor changes to the firm’s business model. Or it can be a radical departure, as when a firm decides to market its existing products and services to new customer groups.

Strategy innovations can occur in your customer service, marketing, advertising, selling methods, or in how you distribute your offerings to end customers. Whatever their source, successful strategy innovations have one thing in common: They result from discovering new ways to create value for customers, as measured by bottom-line results to the sponsoring company. Strategy innovation may be spurred by a desire to grow (“what’s in it for us”), but this desire should never be allowed to overshadow what the proposed new way of doing business will do for the customer (“what’s in it for them”).

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Strategy innovation is, first and foremost, an act of imagination—the ability to see how something could work better from the customer’s standpoint, in a way that in turn profits the sponsoring firm. New business models present themselves when companies and their leaders imagine opportunities to do more with their products and services than they have in the past.

What follows are six places to jump-start your search for imaginative new business models for your firm:

Growth Strategy 1: Look for Opportunities in Market Positioning.

What aspect of your market is not being adequately served and what might you do about it? Very simply, the imperative is: How can you hit ‘em where they ain’t? In many markets, commonly used terms such as “we’re high end” or “we’re a discounter” point to how your firm and its product/service offerings are positioned in the marketplace, and how others who sell what you do differ on the dimensions of quality, service, and price.

Motel 6 in no way compares to Four Seasons Hotels, save that both offer guests a place to lay their heads for the night. The stripped-down version of the Korean import Hyundai is not comparable to the latest model Mercedes or BMW except that both offer a means to transport human beings from one place to another via streets and roads and highways. Looking for gaps in competitor positioning involves rethinking often long-held assumptions about a company’s positioning, and either adding unique or exceptional value to one’s current position, or entering a different position in the following market segments:

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Less for Less. Southwest Airlines, from its inception, offered customers less and charged them less for it. “Less” came in the form of a scaled-down level of service (no in-flight meals, no pre-assigned seating, no travel agents, no coast-to-coast nonstops). Hyundai did it with new product offerings at the very lowest end of the market. Dollar Stores and Dollar General, both of which have prospered at the less-for-less end of the market, did so by carrying products, many of them imports, at prices even lower than Wal-Mart, K-Mart, or Target stores. Costco has pioneered ways of making this market positioning attractive to the middle class. They offer less selection breadth, less convenience, less consistency of offerings, and instead sell on volume a limited, opportunistic selection and eschew service in the traditional sense.

More for More. Here, the strategic focus is on giving the customer more, meaning more service and more quality, and charging more in the process. Examples abound, from the Neptune washing machines to Tiffany & Co. to Sam Adams Beer, from Rolex watches to Dove soap to Dove Bars, from Ritz-Carlton and Four Seasons to Mercedes and BMW. There’s no question that this positioning strategy relies greatly on appealing to customer wants, rather than merely satisfying needs. And therein lies the biggest challenge of maintaining success while playing in this arena: You will be expected to be a leader in adding unique and exceptional value, just as you will be expected to continuously redefine “customer wants.” Woe unto those who do not have the finest market-sensing antennas, who are trend followers rather than trend leaders.

Same for Less. The extreme ends of the market aren’t the whole story in positioning. Two additional positioning strategies are not only viable but are advisable, especially for new entrants in existing markets and those desiring to establish and enlarge market reach. Same for less is just such a positioning strategy. While this is the traditional appeal of the “sale,” it is the fundamental strategy of Men’s Wearhouse, the Fremont, California men’s clothing retailer. While many men’s suit retailers have shuttered their doors in recent years due to declining sales of business suits and the trend toward more casual dress, Men’s Wearhouse has aggressively expanded and has, in some cases, taken advantage of huge drops in the cost of retail space. Men’s Wearhouse also provides more for less by including free pressing and follow-up calls to determine the level of satisfaction. Highly visible television advertising raises the company’s profile.

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More for Same. When Virgin Atlantic started up in the early 1990s, the airline knew it had to offer a noticeably superior value proposition to get travelers to switch from then-dominant British Airways. Why would passengers, especially business travelers accumulating frequent flyer miles on BA, want to try a different brand? Virgin introduced the attention-getting Upper Class service, which offered the larger seats and leg room of traditional first class at the price of business-class service. Virgin further enhanced its value proposition by offering to pick up and deliver Upper Class passengers from and to their destinations. And it continues to freshen its value-added extras, most recently with onboard masseuses.

Growth Strategy 2: Look for opportunities in customer outsourcing.

The operative strategy here is look for opportunities in meeting customers’ ever-expanding desires to outsource their chores, tasks, and responsibilities to focus their time in more productive and meaningful ways elsewhere. This driving force of change shows up in both business-to-consumer and business-to-business relationships. The advance of the service economy in general, and service businesses in particular, is the story of companies and entrepreneurs imagining ways of creating customer value via outsourcing tasks consumers formerly had to do themselves.

Take the chore of changing the oil in your car. In 1980, American car owners either changed their own or brought their cars to dealers or local mechanics, an often time-consuming chore. Ten years later, 70 percent of car owners outsourced this ritual to a newly created service business, the quick lube industry.

The industry was invented in the late 1970s by a former Baltimore football coach who grew frustrated with the inconvenience of existing solutions. Jim Hindman designed Jiffy Lube to give motorists a way to solve their problem that was quick—a ten-minute time guarantee—and inexpensive. Result: Jiffy Lube grew quickly into a national chain.

Having discussed how consumers gladly outsource their chores and responsibilities when the value is perceived to be attractive, contradicting this trend has potential also. Value innovator Home Depot avoided the category killer duke-out by focusing on the unmet and unarticulated needs of homeowners. Home Depot easily undercut local hardware stores on price, while 161offering greater selection and knowledgeable associates who, in some cases, have real-world experience in carpentry, tile-setting, etc.

Home Depot did not achieve its phenomenal growth merely by taking market share from mom-and-pop hardware stores, however. It created a larger market for its wares by tapping pent-up demand. People wanted to make repairs on their homes, but often lacked either the skills to do it themselves or the funds to outsource such projects to contractors. Home Depot’s strategy innovation was to empower customers through knowledge-exchange: giving them the know-how and confidence that they could regrout the kitchen tile, or paint the living room, or install that drip irrigation system in the yard.

Growth Strategy 3: Look for opportunities in understanding customer needs.

All too often, competition in an industry tends to coalesce around accepted notions of market positioning from high end to unbundled low end. But these commonly accepted assumptions often extend to the basis of appeal of a product category as either providing entertainment and/or emotional-support value, or problem-solving value. Such definitional rigidity does two things: it keeps us from imagining alternative possibilities for our offerings, and it keeps us from anticipating the emerging needs and unarticulated desires of consumers, which lie dormant, waiting to be addressed.

In developed countries, most basic consumer needs are largely satisfied. A hierarchy of wants supplants psychologist Abraham Maslow’s hierarchy of needs. The quest for survival gives way to a quest to improve your standard of living, which morphs into a quest for a higher quality of life. In probing for consumer wants rather than needs, new possibilities present themselves all the time.

Say, for example, that you run a mid-sized dental practice and you are faced with declining revenues because of fewer patient visits. Americans have fewer cavities these days than ever before, which is good news for them, bad news for you. Do you look for ways to attract more customers? Or do you try to “do more with dentistry”?

One new strategy might be to get into teeth-whitening. Already a $600 million industry, it is growing at 20 percent a year, according to the American Academy of Cosmetic Dentistry. BrightSmile is a fast-growing chain of stand-alone teeth-whitening centers. “There’s a whole movement 162taking place from fix-me dentistry to transform-me dentistry, from fill-my cavity to change-my-smile,” says a spokesperson for the American Society for Dental Aesthetics in New York City, an international organization for cosmetic dentists.

Growth Strategy 4: Look for opportunities to reinvent your business model.

Frustrated with the high prices, bureaucracy, and poor customer service of the auto insurance industry, California’s voters passed Proposition 103, mandating auto insurance premium rollbacks and introducing other reforms. As we saw in Chapter 5, the 1988 measure forced insurers to rebate millions of dollars to customers and forced drastic survival measures on an embittered industry.

One company, Progressive Insurance, turned this voter-tossed lemon into lemonade and reinvented their very business model. “It was a wake-up call,” says Peter Lewis, Progressive’s chairman. “I decided that from then on, anything we did had to be good for the consumer—or we weren’t going to do it.”

Progressive responded by reinventing auto insurance from the ground up. Before, Progressive claimants waited weeks while their paperwork languished in some adjuster’s in-box. These days, Progressive settles the claim with its client on the spot, no matter when the accident happens, 24 hours a day, seven days a week. The company often settles claims before other companies even know there’s been an accident. Progressive’s 1-800-AUTO PRO service quotes the firm’s rates to potential customers—along with the rates of competitors, even if competitors’ rates are cheaper.

And Progressive continues to think unconventionally in seeking to make its business model more alluring. In one pilot program, Progressive customers pay for insurance based on when, where, and how much they drive. Normally, prices are based on risk posed by a driver’s age, record, marital status, and other criteria. But Progressive maintains those factors are less important than things like how much a car is used and where it is driven. “A mile driven at eight in the morning is safer than a mile driven at midnight,” says a company spokesperson.

So now Progressive has been monitoring the miles—and routes—of participating Texas drivers via a tracking box affixed to their cars. The device uses cellular phone and satellite technology to monitor miles and times 163the car is driven each day. Billing works much like a home’s gas meter. The company says premiums for Houston drivers have dropped an average of 25 percent.

Whether this experiment becomes Progressive’s business model remains to be seen. But it is exactly this willingness to question long-held industry assumptions that has put Progressive in the driver’s seat. Progressive has been growing at an average rate of 16 percent annually, compared to the industry’s average of 3.6 percent, and it has achieved profit margins of 8 percent, whereas the industry as a whole has run at an underwriting loss over the past five years.

Growth Strategy 5: Look for opportunities to redefine value-added.

Before J.D. Power and Associates came along, the research industry defined the market for information research, and “the way we do business in this industry” in one way. Market research companies would call upon customers to obtain research contracts, which they would then conduct on a proprietary basis.

Power turned the equation upside down. Bearing all the costs up-front himself, he investigated their customers’ experience and then sold his findings to the car companies for a hefty price. Customer satisfaction standouts were given the right—for an added fee—to advertise the results. Only if they paid for the research did they have the right to claim that they were “number one in customer satisfaction.” A typical J.D. Power study includes 40 makes of cars, but Power publishes only the rankings of the brands that score above average. Those that finish below average are listed alphabetically in the results that are released to the public.

Growth Strategy 6: Rethink how your product or service gets into the hands of customers.

L’eggs pantyhose built a market for itself by distributing its product in non-traditional outlets such as supermarkets and convenience stores. Amway, Mary Kay, Tupperware, and Avon all, in their own way, innovated new business models in distribution. And the dozens if not hundreds of new multilevel marketing companies that are started each year ride this wave.

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Dell Computer did not follow the traditional two-step distribution, but pioneered a new business model. Dell chose not to distribute its products through the then-standard channel—to wholesalers or resellers, who sold to retailers, who then sold to end-customers—but instead sold directly to end-customers. Other innovations rounding out Dell’s unique business model were strategic in nature as well: From the beginning, Dell didn’t manufacturer a single computer until it received a customer’s order. Because it manufactured products to order, Dell didn’t have to create an inventory of standardized products to be stored until sold in one warehouse or another.

Similarly, eBay represents strategy innovation when compared to the way in which people searched for odd items such as used John Deere tractor seats and early 20th century toothbrushes.

Jump-Starting Strategy Innovation at Your Firm

While these and many other strategy innovations relied on technology to change the game, not all strategy innovation is based on technology, nor does it need to be. Viable business models require imagination and passion in seeking to solve customers’ problems in superior ways, rather than simply pumping up our own balance sheets. While it is all too easy to dream about creating value for ourselves, successful strategy innovators with names like Ford and Walton and Tyson seem to think deeply about creating superior value for customers.

To jump-start strategy innovation in your firm, first you must foster a willingness to rethink your understanding of how your customer receives value from you. Your business model is simply a description of how your company creates value for customers that in turn generates revenue and profits for your company. Use these six methods from this chapter to enlighten your search for new ways to strengthen your firm’s business model, and be prepared for growth, increased profitability, and sustained competitive advantage.