Starting out

After you introduce a new kind of product or service in the market, it begins to generate revenue — at least you hope so. Because developing and launching something new is expensive, costs are relatively high at this stage, and you normally don’t find many competitors around. Growth depends on your company’s ability to make the product or service, generate market awareness, and get customers to accept and adopt it.

At this stage in the product life cycle, your efforts focus on getting the product out the door or on rolling out the new service and ensuring that everything works according to plan. At the same time, you have to drum up plenty of interest as you struggle to create market awareness. Table 15-1 points out many characteristics of the introduction stage.

Growing up

During the growth stage, the new product or service gains a reputation. If the product or service involves a new technology, the industry leaders agree upon standards — all the details that determine how the technology should work (see Chapter 14 for additional info). Demand rises rapidly, and sales increase. Competition increases as competing products jump into the fray to take advantage of an expanding market; “me-too” copycats multiply. Customers begin to develop brand loyalties, and companies tweak their product features to better serve customer needs — needs you can now recognize.

In the growth stage, your priorities should turn toward meeting growing product demand, improving your product or service, and targeting specific groups of customers. Along the way, you have to fend off a growing crop of competitors. Table 15-2 highlights characteristics of the growth stage.

Maturing in middle age

The growth of your product or service begins to slow in the maturity stage as market demand levels off and new customers become harder to find. New competitors are also harder to find, so the competition stabilizes as the weak die off or get acquired. Profits keep on growing, however, as your costs continue to fall. Changes in market share reflect changes in the value that customers place on the competing products, and an increase in market share for one product usually comes at the expense of its competitors since overall demand has stabilized.

At this stage, your attention should turn toward reducing costs and finally reaping the benefits of stable profits. Although you can easily feel comfortable at this stage, you still need to keep a careful eye on the competition — especially those pesky little disrupters who start tinkering with radical new ways to serve your market. Table 15-3 identifies the characteristics of the maturity stage.

Riding out the senior stretch

Nothing lasts forever. Amen to that. At some point in a product’s life cycle, sales usually start to fall off and revenue begins to decline as market saturation occurs. Competitors drop out of the market as profits erode. Large-scale changes in the economy or in technology may trigger the decline stage, reflecting changing customer needs and behavior as alternatives emerge. Products and services still on the market at this stage are redesigned, repositioned, or replaced.

When a product’s life cycle begins its decline, your work shifts to redesigning your product or redefining its market, or you can come up with new uses or different kinds of customers. If all your attempts fail, you have to concentrate on ways to get out of the market so you don’t lose too much money. Table 15-4 shows various characteristics of the decline stage.

Gauging where you are now

Take your product or service and see whether you can figure out its estimated position on the product life cycle curve (refer to Figure 15-1). If you’re stumped, ask yourself the following questions:

• How long has the product been on the market?
• How rapidly is the market growing (compared to prior years)?
• Is the growth rate increasing, decreasing, or flat?
• Is the product or service profitable?
• Are profits heading up or down?
• How fast are product features changing?
• How many competitors does your product have?
• Are there more or fewer competing products now compared to a year ago?

Even if you feel confident about your product’s position in its life cycle, take the time to confirm your analysis. You’re likely to get mixed signals from the marketplace, and the clues you find may even contradict one another. No two products ever behave exactly the same way when it comes to product life cycle. Unfortunately, acting prematurely on the evidence at hand can lead to hasty planning and a self-fulfilling prophecy. The product life cycle concept, after all, is not a law of physics. So be sure you always double-check what you think you see to make sure you don’t mistake a temporary hiccup in sales for a full-scale life cycle change.

Same product and same market

Many big-name companies have grown and achieved success by relentlessly managing a single business, a single market, or even one individual product decade after decade. When you see a Coca-Cola sign, for example, you imagine drinking a Coke. When you pass a McDonald’s, you probably picture a Big Mac. Your IT staff likely knows what Oracle and Cisco do, and the marketing folks are familiar with Salesforce.com. But these companies haven’t turned into billion-dollar corporations simply by launching their flagship product and letting the marketplace take care of the rest. Companies that largely depend on a single product spend enormous amounts of time and effort to continually rejuvenate and revitalize their core markets.

If you glance at the Ansoff Matrix shown in Figure 15-2, you notice that these companies invest heavily in the top-left box. How do they do this with success? They use the four main strategies we describe in the following list:

• Encourage greater product use. You can increase demand by encouraging your customers to consume more of a product or service every time they use it. Maybe that means getting customers to feel good about buying more or giving them a better deal when they do. Customers may do the following things:
  • Buy larger boxes of cereal because they can save money
  • Visit stores more often when they stay open longer or on weekends
  • Buy more than one product and get a discount
• Generate more-frequent product use. You can stimulate sales by getting customers to use your product or service more often. That may mean making the product more convenient, introducing it as part of a customer’s regular routine, or offering incentives to frequent customers. Customers may do the following things:
  • Use toothpaste after every meal because of the hygienic value
  • Regularly drink wine at dinner because they’ve heard of its health benefits
  • Join a frequent-flyer program and take an extra trip just to build more miles
• Devise new uses. You can expand your market by coming up with new ways for customers to use your product or service. That may include getting customers to use the product at different times, in different places, on novel occasions, or in unconventional ways. Customers may do the following things:
  • Snack on breakfast cereal throughout the day because you make it handy and tasty
  • Rent a spare bedroom that sits empty most of the time
  • Desire a consumer version of an industrial usage product
• Woo customers away from competitors. You can increase demand for your product or service the old-fashioned way: Take customers away from the competition. Although the result is sometimes a fierce and unwanted response from competitors, you can do the following things:
  • Create incentives for customers to switch from competing products and give them rewards for staying with you
  • Concentrate on becoming the most attractive low-cost provider around because of your unbeatable prices
  • Focus on meeting or exceeding the needs of specific customer segments or groups

Companies that manage to grow in the same market with the same product do so by continually generating new demand and maintaining or even increasing their market share. Often, these companies succeed in slowing the product life cycle, extending its maturity stage almost indefinitely. In some cases, they even manage to reset the life cycle, pulling the product back into the growth stage by inventing new and creative product uses. But steady and sustained market penetration based on a single product doesn’t always work forever, and you sometimes have to look in new directions for growth.

New market or new product

At some point during the life of your company, a single product or service may not be enough to sustain an attractive level of growth. Where do you turn? The Ansoff Matrix (see Figure 15-2) suggests that the most reliable paths point to market expansion in the near term, as well as to extending your product line. These two directions for growth have the distinct advantage of building on capabilities and resources that you already have. You know what you’re doing and how to be efficient in doing it, so you offer it to new markets. Product extension builds on your experience and knowledge of your current customers: They know you and trust you and will likely give you a try when you have something new for them.

New product and new market

Has your company hit a midlife crisis? Do you find yourself searching for attractive new customers and hot new technologies, feeling the pinch of age? The need for rejuvenation comes to many companies at different times. A plan to move in new directions often involves diversifying the company, a move down into the bottom-right corner of the Ansoff Matrix (refer to Figure 15-2). That corner, after all, is where the grass — and the profits — always looks much greener.

You have to weigh the potential rewards against the challenges and risks that go along with diversification. Too many companies end up looking foolish as they try to learn new tricks in unfamiliar businesses without much time to practice — and they have to face the financial consequences.

To improve your odds of success, start by doing your homework, which means researching all the new issues and new players. If this task sounds daunting, it should be. The stakes couldn’t be much higher.

Your chances of success improve substantially when you identify the ways that a potential new business direction is related to what your company already does. Even without the benefit of any existing product or market expertise, you can often discover aspects of a new business opportunity that play right into your company’s core competence (flip to Chapter 10 for more on that). Here’s what to look for:

• Name recognition: If you work hard to create a name for your company, you can sometimes make use of your brand identity in a new business situation. Name recognition is particularly powerful when the name has positive, clearly defined associations that you can carry over to the new product and market. Luxury-car companies such as BMW, for example, now give their names to expensive, upscale lines of touring and mountain bicycles. Many celebrities generate money through product endorsements.
• Technical operations: The resources and skills required to design, develop, or manufacture products in your industry — or perhaps the technical services that you offer — may be extended to bring in additional streams of revenue. Amazon realized its expertise in designing and operating a huge online sales and distribution platform could be a service others would be willing to pay for.
• Capacity and scale: Sometimes you can take the excess capacity that you or your company has in production, sales, or distribution and apply that capacity directly to a new business area. You reap the benefits of a larger scale of operations and use your resources more efficiently. Uber, Lyft, and Turo are on-demand ride-sharing services that give car owners a source of additional income.
• Financial considerations: Persistent demands on your company’s revenue, cash flow, or profits may inevitably point you in a new direction. Low-margin businesses might be exited and new ventures entered that offer higher returns. Weetabix, a UK-based breakfast cereal maker with U.S. and Canadian markets, dumped about 14 percent of its private-label business and discontinued its Barbara’s cereal bars line. The result was a double-digit increase in profits and funds to try out some new ideas.

The temptation to set off in new directions and diversify into new businesses, creating or acquiring brand-new products for brand-new markets, has bewitched and bothered business planners for decades. Unfortunately, the failure rate for new business ventures can be as high as 75 percent. And the most perplexing part of the puzzle is the fact that in the beginning, the ideas and research look so good on paper. Here are some examples: Campbell Soup launched a family of juice drinks for kids; Colgate, the toothpaste firm, introduced a line of frozen foods; Coors, the beer maker, came out with bottled sparkling water; the National Semiconductor Corporation introduced digital watches; Northrup Grumman was a major defense contractor with extensive experience in airplanes, robotics, and warfare electronics — and decided to build ships for the Navy.

Surprise, surprise — all of these new venture ideas failed, most immediately upon launch. What were they thinking? Strong brands, insider contacts, surplus resources — too many firms thought that these alone would lead to success in new markets. Business planning is a serious business, and it needs to be taken seriously.

A few companies, however, manage to succeed with new products and new markets time and time again. What the Wall Street types call “unrelated diversification” and the business school texts call conglomerates work for some, if managed with precision and discipline (and perhaps a little luck as well).

Newell Corporation, now called Newell Brands in recognition that its product portfolio is all over the map, is an example. Food-related brands include Ball and Calphalon; commercial products, in addition to Rubbermaid, include Quickie and MAPA; Mr. Coffee and Oster are in the home appliances unit; Dymo, Paper Mate, and Parker are in writing; baby brands include Graco and Aprica; Coleman and Marmot are in outdoor and recreation; Wood Wick and Yankee Candle are at home in home fragrance; and finally First Alert is in the connected home and security group. Whew — in fact double whew, since there are more brands than just these at Newell Brands.

The glue that binds all these disparate businesses together under one roof is called “synergy.” That’s more B-School blah-blah, like conglomerate. (Both terms derive from geology. The good professors probably thought that if they coined words from real science, then people would start to believe they were in fact real scientists. Hah! Fat chance of that.) The underlying concept of synergy was that astute planners could find unique means to generate additional value from two or more entities. This is the old “the whole is greater than the sum of its parts” logic, more conveniently demonstrated as 2 + 2 = 5. How so? Perhaps two of Newell Brands’ business units purchase similar raw materials, even though they are used in very different ways at each. But by combining both units’ orders into one, Newell could command a lower price from the supplier through a volume discount. Also, bringing all of the personnel of all of the units together in one firm gives Newell an enlarged pool of talent to draw from as it promotes individuals and moves them around to share their expertise and wisdom.

Newell is a shining example of the tiny universe of firms successfully managing an unrelated diversification strategy. For generations the gold standard in this class was the General Electric Corporation (see the later section “Utilizing strategic business units”). Others, like Berkshire Hathaway, run by the investment superstar Warren Buffett, were more like “holding companies.” These firms were composed of numerous individual units who were acquired and left to operate on their own by the parent corporation, remitting profits to the parent that “held” them. There was little if any attempt to integrate operations of the many into a single standard approach. The benefit of this approach at diversification was primarily spreading risk. Another was that the parent could act as a kind of central bank for all the subsidiary businesses, sourcing funds at more favorable rates than if done individually.

Utilizing strategic business units

Juggling additional products and markets requires a bit of preparation, of course, as well as practice. The first thing you want to find out is how many balls and bowling pins — or products and services, in this case — you have to keep in the air at one time. The following questions tend to arise:

• How many products or services does your company have?
• When you add another feature or an option to your product, will the addition essentially create a new product that requires a separate business plan?
• When you have two separate sets of customers that use your service in different ways, do you really have two services, each with its own business plan?
• When you offer two different products, each of which you manufacture, market, and distribute in much the same way, to the same set of customers, are you really dealing with one larger product area and a single business plan?

Often, these questions have no right answer, but taking time to think through the issues helps you better understand what you offer. The firm that pioneered how to do this task best was the General Electric Corporation, or at least it used to be.

General Electric struggled with questions about how to manage its many businesses in the late 1960s. The company had grown well beyond the original inventions of its famed founder, Thomas Edison; it wasn’t just in the electric light bulb business any more. In fact, it was a diversified giant, with businesses ranging from appliances and aircraft engines to television sets and computers to finance and plastic. GE had to figure out the best way to divide itself up so that each piece was a manageable size that the company could successfully juggle along with all the other pieces — and be more than a mere holding company.

The managers at General Electric hit on the clever idea of organizing the company around what they called strategic business units. An SBU is a piece of your company that’s big enough to have its own well-defined markets, attract its own set of competitors, and demand common resources and capabilities from you. Yet an SBU is small enough that you can craft a strategy for it, with goals and objectives designed to reflect its special business environment. By using the SBU concept, General Electric transformed nearly 200 independent product or service divisions into fewer than 50 strategic business units, each with its own well-defined strategy and business plan that could be managed efficiently.

Consider ways to reorganize your company around strategic business units. Each time you outline a separate business plan, you identify a potential SBU. How do you start? Because strategic business units often refer to particular product and market areas taken together, begin with the following steps:

1. Break your company into as many separate product and market combinations as you can think of.

2. Fit these building blocks back together in various ways, trying all sorts of creative associations of products and markets on different levels and scales.

   Think about how each combination may work in terms of creating a viable business unit.

3. Keep only the combinations of products and markets that make sense in terms of strategy, business planning, customers, the competition, and your company’s structure.

4. Determine how well these new SBUs mesh together and account for your overall business.

   If you don’t like what you see, try the process again. Don’t change the way you define your products and markets with SBUs — or the way you organize your business and allocate resources around them — until you’re satisfied with the overall structure of the company.

Aiming for the stars

Managing a number of products or services is similar to managing a set of financial investments. Take your personal savings or retirement accounts, for example (boy, now there’s an assumption). Every financial counselor tells you the same thing: You should spread out your investments to create a more stable and predictable set of holdings. Ideally, financial counselors want to help you balance your financial portfolio based on how much money you need to earn right away and what sort of nest egg you expect to have in the future. Given your financial needs and goals, planners may suggest that you buy blue-chip stocks and bonds that generate dividends right away and that you also invest in more speculative tech companies that might pay off well down the road.

Your company’s products and services have a great deal in common with a portfolio of stocks and bonds — so much, in fact, that the juggling of your products and services is called portfolio management. To manage your product portfolio as professionally as financial experts track stocks and bonds, you need some guidance. Portfolio analysis helps you look at the different roles of the products or services in your company and determine how well they balance one another so that the company grows and remains profitable. In addition, portfolio analysis offers a new way to think about strategy and business planning when you have more than one product or service to worry about.

To juggle your collection of products or services (or SBUs, if you divide them up as we suggest in the previous section), start by dividing them into two basic groups, depending on the direction of their cash flow: Put the ones that bring money into your company on one side and the ones that take money out on the other side.

Maybe you’re surprised that you have two sides here. But because every product goes through a life cycle that likely includes an introduction stage, a growth stage, maturity, and then decline, different products naturally have different cash-flow requirements. (For more details, check out the earlier section “Facing Up to the Product Life Cycle.”) You invest in products during their introduction and growth phases, and your mature products end up paying all the bills. Keep on juggling: You always need at least one mature product aloft to support the up and coming products.

Understanding the Growth-Share Grid

You could make a first attempt at portfolio analysis now, using the two basic product groups: those that make money and those that take money. All you have to do is make sure that the first category is always bigger than the second. But the two categories don’t help you figure out the future. Fortunately, the bright guys and gals at the Boston Consulting Group (BCG) came up with an easy-to-use portfolio-analysis tool that provides some useful planning direction. The BCG’s Growth-Share Grid (see Figure 15-3) directs you to divide your products or services into four groups.

You base your portfolio analysis on two major factors: market growth and relative market share.

• Market growth: Is the product or service part of a rapidly expanding market, or does it fall somewhere in a slow- or no-growth area? You use market growth to define your portfolio because it forces you to think about how attractive the product or service may be over the long haul. The exact point that separates high-growth and low-growth markets is rather arbitrary; start by using a 10 percent annual growth rate as the midpoint, but adjust this according to what’s happening in your own industry.
• Relative market share: Does your product command a market-share advantage over its nearest competitors, or does its market share place it down on the list relative to the competition? You use relative market share as a major characteristic to define your product portfolio because evidence suggests that a strong market-share position is closely tied to the profitability of a product. Separate your products into those that command the highest market share and those that don’t.

Here’s a review of the four types of products and services divided up by the Growth-Share Grid:

• Problem children: These products have relatively low market share in high-growth markets. Problem children often represent newer businesses and are sometimes referred to as question marks because you aren’t quite sure which path these products may take in the future. Because problem children are in expanding markets, they require plenty of cash just to tread water and maintain what market share they already have, but their relatively low sales generate little or no revenue in return. If you can substantially increase their market share over time — and that means shelling out even more cash — problem children can blossom into stars. If not, you may have to give up these products and just let them drown.
• Stars: These products have a dominant market-share position in high-growth markets. Every product wants to be a star. Stars usually have an expensive appetite for the cash needed to fund continual expansion and to fend off competitors that want to get a piece of the action. But their market-share advantage also gives these products an edge in generating revenue, margins, and profits. So stars usually support themselves, both producing and consuming large amounts of money. You shouldn’t hesitate to step in and support a star product, however, if it requires additional resources to maintain its market-share lead.
• Cash cows: These products have a major market-share position in low-growth markets. Because of their market-share advantage, cash cows generate a great deal of cash without requiring much in return. Their low-growth markets are mature, and the products are already well-established. The bottom line: You can milk cash cows to produce a cash surplus and then redirect that cash to fund promising products in other quadrants of the grid.
• Dogs: These products deliver low market share in low-growth markets — and little else. Although many people are dog lovers, this particular junkyard breed is hard to love. Revenue and profits usually are small or nonexistent, and the products are often net users of cash. Although they require periodic investments, these marginal business ventures usually never amount to much, so it may be best to dump ’em at the pound, cut your losses, and turn your attention to more-promising product candidates.

Knowing that, yes, growth is good

The transformation of the economy in the 21st century has cast a new light on growth. In Chapter 5 we inform you of entry barriers in business — that is, those means by which competitors try to keep out any potential new entrants. But today’s “new economy” has created a powerful new barrier. Ask yourself: Why do you use Microsoft for your word processing, Google for search, Facebook for social media, or perhaps Amazon for online shopping — all to the exclusion of any other platforms? Is it because we just love these rascals to death? No comment.

The herringbone tweed with leather patch and pipe folks have provided an answer by drawing attention to one barrier that’s become increasingly important — and controversial — for lots of new industries today, perhaps one that you’re considering entering yourself. Excuse the jargon but it’s called a “network externality effect.” (Yes, we know it’s academese, but that’s what we do.) Firms such as Microsoft and others learned that they’re competing in a winner-take-all game and being first is critical, for reasons both economic as well as psychological. From we customers’ point of view (POV in Millennial-speak), there is a huge benefit to having but a single network to meet our needs. How so?

Suppose that there were half a dozen equally sized platforms for creating and sharing online word processing documents. You conjure up a brilliant survey of the prospects for success in your new venture and want to send it out to trusted friends for comment. But uh-oh; some would-be recipients use your platform, others don’t. In fact, you realize you have to format the darn thing in six different versions, and even then you can’t shoot it to everyone because your PC is loaded with only MS Office. Microsoft became dominant because ol’ Bill realized that his industry would be captured by the one provider that quickly roped in the most users. Each new user to join the network would drive up its value. Being “best” wasn’t nearly as important as being first, because after you purchased his software, installed it on your PC, and learned how to use it, the switching costs to a superior alternative weren’t worth the effort. Any new buyers of the product would likely also go for MS Office because that’s what everyone else had.

And what might have been the true business brilliance of Mr. Gates was offering a low price for his operating system to PC manufacturers only on the condition that it be pre-installed on their machines. After IBM agreed, other competitors joined in. You went to your friendly electronics retailer, selected and paid for a new PC, and when you got home and fired it up, presto, there was MS-DOS up and ready to go. Genius! For Microsoft, this software became the gift that just keeps giving. (Perhaps a pithier substitute for network externality effect would be the QWERTY effect. Don’t know it? Google the term and you’ll see.)

So, is your market one that is of the winner-take-all platform variety where first-mover benefits are powerful? If so, you want to grow as fast as possible, signing up users before they migrate to an alternative platform. This logic was seen in the behavior of venture capitalists who funded such start-ups: Spend everything and more on marketing and don’t worry about profit. When you hit a certain threshold and you dominate your market, then bottom-line issues can be discussed. (Some, in fact, even paid users to join.) This doesn’t mean you ignore customer needs once they’re locked in, of course. This was the MySpace problem described earlier in this chapter. But by becoming the big dog in the show, everyone else has to come up with a very good reason to convince users to switch to them — and a lot of them would have to do so before that rival site becomes valuable.

So yes, growth is good — even mandatory — in some types of business. The one downer to keep in mind is that digital businesses that rely on platform strategies with winner-take-all tendencies can run up against antitrust laws. Some of these firms are extremely profitable and powerful, and have attracted the attention of the politicians and pundits. In the United States today — and Europe, too, for that matter — their market power has become a critical concern for public policymakers. There are deep and ongoing discussions to legislate restrictions on how these firms do business or, in some cases, perhaps even to order them broken up into smaller units.

Managing growth wisely

For much of the last half of the 20th century, there was near universal consensus that General Electric was the best-managed large firm in the United States. We note some of GE’s contributions to strategic management in this chapter. Under the dynamic leadership of the firm’s charismatic CEO Jack Welch, GE in 2000 became the world’s most valuable public firm; Fortune magazine dubbed him “manager of the century.” GE competed in 14 different large business segments and was a leader in all of them. This diversity, it was claimed, allowed the firm to overcome cyclical issues that affected firms that “stuck to their knitting.” The market capitalization of GE was more than $600 billion in 2000.

Through its innovative and effective management practices, the firm showed that the conventional wisdom regarding unrelated diversification strategies — that is, avoid them — didn’t seem to apply to it. Many informed observers, in fact, regarded its internal management training center as a Top 10 business school. GE managers were sought and poached by companies everywhere.

But nothing is forever, a theme we repeat often in this book. Mr. Welch’s last day as CEO was September 9, 2001. The new CEO, Mr. Jeff Immelt, took over just one day prior to the 9/11 tragedy. As the world irrevocably changed, many of the hidden problems with GE began to surface as new realities sank in and digital commerce began to flourish. These were compounded when, following the Great Recession of 2008, an overreliance on the firm’s finance subsidiary, GE Capital, led to huge losses and write-offs of assets. Many management experts now wrote that as a decentralized conglomerate, GE was “too big to manage.” Each business line and division operated autonomously with decentralized budgets and duplicate, triplicate, and often even more repetitive infrastructures; an aggressive culture of winning often pitted units against one another in the dog fight for promotion up the corporate ladder. Without strong centralized governance and management oversight, compounded by continuous investor pressure to improve its market value, GE’s performance floundered.

Mr. Immelt was removed as CEO in 2017. Assets and whole lines of business were sold off to pay down debt. GE’s revenue level and market capitalization dropped to the point that GE was removed from the list of firms that comprised the Dow Jones Industrial Average, the traditional metric used to measure stock market performance in the United States. GE had been the only firm that had been on the list since its inception more than 100 years prior.

So the final question: Are some firms too big to manage? Will the artificial intelligence (AI) revolution provide us the necessary tools to achieve success regardless of organizational size and scale? Growth is not always its own reward. Be careful what you wish for — and have a good parachute just in case.