SMB DNA®: Focus on the small/medium sized company

Should growth always be the goal?

There’s a lot of emphasis on corporate growth these days. And well there should be, with all of the staggering shifts in the corporate landscape. Growth seems to be the given in most discussions about strategic planning, even in challenging economic times.

Meanwhile, very large companies are increasingly unstable these days (read: large financial institutions), calling into question the view that larger company size equates to more stable and more sustainable.

Should growth always be the goal? Which questions should business leaders ask ourselves when we set the bar for the scale of our companies?

What is the proper scale for your business?

The shift from large corporations to smaller firms as the drivers of the next wave of economic prosperity is one of the new trends hitting the scene and capturing the attention of the general public.

The most recent We Media/Zogby Interactive poll revealed a tremendous amount of hope for small businesses as drivers of economic prosperity.

FEBRUARY 2009 We Media/Zogby Interactive Poll – Most Americans are putting their faith in small business owners, entrepreneurs and science and technology leaders to lead the U.S. to a better future – and they are significantly less hopeful the news media, government or large corporations will do the same, a new We Media/Zogby Interactive poll shows.

Nearly two-thirds of Americans (63%) said small business and entrepreneurs will lead the U.S. to a better future, while 52% said the same of science and technology leaders. Americans are far less optimistic about the leadership of government (31%), large corporations and business leaders (21%), or traditional news media such as newspapers, television, radio, and magazines (13%).

It leads to a very important set of questions to consider:

1. What is the right size for a company?
2. Is bigger always better?
3. Should growth always be the top driver for companies?
4. When is smaller size an advantage?
5. When is larger scale an advantage?

Ever since AG Lafley addressed the subject in the Harvard Business Review a few years ago based on his perspective at the helm of Procter and Gamble, business leaders started to question conventional wisdom about the advantages of being a large corporation.

Lafley made the case for a shift from the large corporation’s role as creator of the majority of research and development toward a new definition of a large corporation’s role, described as: Connect and Develop. Under the Connect and Develop scenario, large companies would fully embrace a “Not Invented Here” approach, focusing on finding other people’s good ideas and scaling them up so that they could be more widely distributed on a global basis. The large corporation’s area of competitive advantage would become the ability to accelerate deployment and achieve economies of scale from widespread distribution.

Since that 2006 article, additional studies have been done–the jury is back and it turns out that small and medium sized businesses excel in some areas; large corporations in others.

Figuring out the new forces in the equation is now critical—will your company do better if it’s bigger?

Small and Medium Sized Companies Have Huge Strength in the Market

The sheer number of small businesses in the United States underscores the importance of thinking through the questions of scale.

The Intuit Future of Small Business Report sets the stage for the conversation about the importance of small business to the overall economy in the United States:

Small businesses are an important and growing driver of U.S. economic growth. There are 27.2 million small businesses in the United States. They employ about half of the nation’s 144 million private sector workers. They create 60 to 80 percent of new private sector jobs. They generate more than $6 trillion in annual revenue and create more than half of the country’s non-farm gross domestic product.

Business Genome conducted a poll of 100+ companies that further clarified some of the dividing lines of where bigger was better and where smaller made more sense.

BUSINESS GENOME’S INFORMAL POLL (highlights)

Big Versus Small

The conclusion is that a large company cut in half does not demonstrate the same core qualities as a small company.

Other Experts Weigh In

Seth Godin weighed in on the topic of scale last week and came to this conclusion:

“Many businesses that are in trouble are in trouble for a simple reason: they’re the wrong size.”

Godin illustrated his point:

“A newspaper that only had a few dozen employees would be doing great today. But they have hundreds or thousands of employees because that was an appropriate scale twenty years ago. When I started my first web company fifteen years ago, the idea that you could be successful with six or ten employees was crazy, but today many of the most successful companies have not many more than that. That’s 15,000 fewer employees than eBay has.”

Small Business Labs recently presented a compelling discussion on niche markets that illustrated an advantage that small firms with low fixed costs have over larger firms with higher fixed costs. It turns out, that just up to the point where a product is offered to the mass market, a company with lower overhead and a more responsive distribution model is more competitive than a company with a higher fixed cost structure in their equation.

Small Business Labs Illustrates the Right Size Based on Underlying Cost Structures

2009 New Realities Change the Old Assumptions about When Bigger is Better

It used to be that the advantages in innovation were dominated by the companies with large R&D budgets—that changed a few years back. In the next era, the larger companies dominated in the ability to drive costs out of the equation with vendors and distributors in the supply chain. It turns out that smaller companies are starting to do well in the supply chain arena too, especially when it comes to niche markets.

Case in point: one of the medium sized software companies we recently worked with did such an expert job of partnering in the areas of logistics and contract manufacturing that they competed head-to-head with the behemoth in their field in one of the core customer areas. The relationships they had developed in the niche market over the past 10 years started to add up to market dominance in that niche, created one account at a time.

What to Watch When it Comes to the Question of Scale

Business Genome predicts three areas of competitive advantage to watch over the next 2-3 years when assessing the question of growth for our own companies:

1. RESEARCH AND DEVELOPMENT: Can a small or medium sized company bring sufficient innovation and technological capabilities to achieve competitive advantage in markets dominated by larger companies?
2. DISTRIBUTION AND INFRASTRUCTURE: To what extent can a small or medium-sized firm achieve market strength through networked relationships with suppliers and vendors?
3. BRAND DOMINANCE: Will small and medium sized firms capitalize on the infiltration of web 2.0 worlds as an alternative to traditional advertising as a means to build brand awareness and competitive advantage?

All bets would be off once small and medium sized companies are able to win in those arenas.

Gentlemen (and women), start your engines.

Our Musical Coda for Today

Humming a refrain from Short People when thinking about the question of scale: What’s the Right Size for our Companies?

Short People
Randy Newman

Short People got no reason
Short People got no reason
Short People got no reason
To live

They got little hands
And little eyes
And they walk around
Tellin’ great big lies
They got little noses
And tiny little teeth
They wear platform shoes
On their nasty little fett

Well, I don’t want no Short People
Don’t want no Short People
Don’t want no Short People
Round here

Short People are just the same
As you and I
(A Fool Such As I)
All men are brothers
Until the day they die
(It’s A Wonderful World)

Short People got nobody
Short People got nobody
Short People got nobody
To love

They got little baby legs
And they stand so low
You got to pick ‘em up
Just to say hello
They got little cars
That got beep, beep, beep
They got little voices
Goin’ peep, peep, peep
They got grubby little fingers
And dirty little minds
They’re gonna get you every time
Well, I don’t want no Short People
Don’t want no Short People
Don’t want no Short People
‘Round here

When three different business leaders, from three different coasts, representing three different industries quote the same example to me in the same week, it’s worth taking note.

What’s with the Mozart and Tiger Woods 10,000 hours image that is striking a chord with so many sharp business minds?

For people who aren’t familiar with the reference, there are 2 best sellers out now that tell similar stories about expertise: Talent is Overrated by Geoff Colvin, and Outliers by Malcolm Gladwell, both loosely based on research that appeared in the Harvard Business Review as The Making of an Expert and research compiled in The Cambridge Handbook of Expertise and Expert Performance. It turns out that the genius of Mozart has something in common with the genius of Tiger Woods—each one owes his success not only to an innate talent, but even more to the investment of 10,000 hours, which equates to 4 hours a day for 6 days a week, for 10 years. Since they both started so young, they had a chance to cut their teeth on the tough losses at a young age, but they still hit their stride only after hours and hours of hard work.

It takes 10,000 hours to become an “overnight success”

What is it that a California-based builder of hospitals, a Washington DC-based marketing guru, and a global leader in chemical manufacturing have in common that puts the same story on the tip of their tongues at the same moment? It’s the appeal of expertise finally having its day. Finally, the dirty secret of accomplished leaders is out—it takes a ton of hard work to get ahead of the pack in business. Especially in a week filled with scandals and stories of excessive rewards and bonuses, it is important to be reminded of the not-so-glamorous school of hard knocks and swings that takes true talent to the level of expert.

So much for today’s common wisdom—important, yes. But before everyone puts in the 10 years of 4 hours a day of 6 days a week to perfect his or her game, it’s worth considering the deeper question: “are the 10,000 hours you’re about to invest in expertise focused on the RIGHT STUFF?” Or, simply stated, How Would Tiger Woods do at World of Warcraft?

10,000 hours of expertise in the old stuff or the new stuff?

The first time I learned this lesson was in 5th grade, when I was learning the basics of basketball. Our teacher spent a couple of weeks teaching us the basics and it was a hell of a lot of fun. Shooting the perfect hoop, running fancy footwork drills, passing the ball, dribbling—easy to become addicted to that. Appealing to picture 4 hours a day, 6 days a week, for 10 years having a ball with that kind of hoopla.

Until the teacher explained that on Monday, we’d be facing THE OTHER TEAM. What? You mean we have to do all the stuff we just learned with someone else blocking us? Sticking their arms in our faces and screaming to distraction? Good thing I learned that early, so that my 4 hours a day, 6 days a week for 10 years could include the skill of training my peripheral vision for the unexpected jab or the distracting jump.

Or, in my case, in a 98-pound, 5 foot 2 frame, give up on basketball altogether and move on to a life in business.

But, the point is, sometimes we as business leaders get focused on hard-driving, nose to the grindstone commitment without reflecting on the RIGHT STUFF that is required for the business challenge at hand.

Breaking the “Other” Sound Barrier

Which brings us to Chuck Yeager, the guy who broke the sound barrier and was the inspiration for The Right Stuff.

The Right Stuff or Yesterday’s Stuff? Are our companies Wired for the Wars to Come?

It’s easy for Chuck Yeager to be everyone’s hero—he was mine for years, an inspiration because he represented the perfect combination of instinct, moxie, attitude, and machismo that inspired us all to be bad-asses in the day.

But last week, in the same week that everyone around me was quoting Gladwell and Colvin, I heard Chuck Yeager talking about warfare. Real warfare. And dogfights. With planes. And what he said blew me away (I’m paraphrasing): “with all the robotics of war these days, there’s a new kind of guy (gal) that will win wars—a person with manual dexterity and attitude, yes, but also the well-trained trigger finger of a gamer and the mental skills of a robotics expert.”

What? You mean it might be the Poindexters of the world, with their taped glasses, pocket protectors, ivory-white skin from sitting indoors all day, un-cut muscles, who have been playing those damn video games all day long for 4 hours a day, 6 days a week, for the past decade who might have the NEW RIGHT STUFF?

P.W. Singer pointed out at a recent lecture I attended, that modern wars are way more likely to be fought by robots controlled by geeks in cubicles than by soldiers with bayonets on the ground. So, 4 hours a day, 6 days a week, for 10 years training in jumping over fences and holding a weapon, will now include training new instincts with new reflex responses.

This is news that is too painful to admit.

Almost like when I realized that the cool artistic types who drew their lower-case “a’s” like architects and had fingers covered with charcoal were soon to be replaced by the binary code toting AutoCad-ers.

But, we’re not in the business of fighting wars. Not literal wars. Or drawing pictures. We’re in the business of creating shareholder value. So, it’s more about Steven Johnson’s book, Everything Bad is Good for You, where he made the point that young Poindexters, with over-developed thumbs from gaming, might be smarter than we think. And, better-prepared to lead in business in the future than we thought.

What is the secret weapon that we can insert into our arsenal that will prepare our companies for the coming era?

Which questions do we need to ask ourselves before we embark on a company-wide initiative that will require 4 hours a day, 6 days a week for years level of effort? How can we instill a sense of the right stuff attitude in our companies that incorporates a forward-view of the forces that will face us sooner than we admit: global competition, scarcer resources, a need for innovative product design, pressure to accelerate time to market for new service offerings?

It turns out that the secret weapon is a question, not an answer. It’s actually a state where we, as business leaders, force ourselves to Aim before we Fire. We need to insert new questions into the equation before we blindly (or deaf-ly) go about copying the Mozart model:

1. Have we scanned the business landscape first so that we are certain we’re practicing discipline in the right areas?
2. Before we take on a new initiative designed to streamline our processes (like a Six Sigma optimization process), have we thought about whether the processes we’re trying to perfect are the ones that matter most to our customers?
3. Before we rigorously pursue a business-to-business market strategy, have we looked beyond what our suppliers are telling us and touched the people who are using our stuff?
4. Insert your Questions here.

What are the questions that you’ll ask yourselves the minute before you embark on your next turnaround?

How will you know that you’ve got to change course on your 4 hour a day, 6 day a week initiatives? How will you know that you’re leading your teams down a road where their huge efforts will pay off? How will you know that your stuff is the right stuff for the future?

Most of us aren’t facing Doomsday Missions, at least not right now. But, it turns out that these questions are the proven remedy in the area of Doomsday-Avoidance, where we train ourselves 4 hours a day, 6 days a week not in one particular skill, but in one very important mindset—looking ahead and making sure we’ve asked the right questions about our stuff.

So, in the spirit of Doomsday-Avoidance, we present Elvis Perkins, who turns a funeral dirge into a real butt-kicker.

Elvis Perkins: Doomsday

Lyrics to Doomsday (excerpted)

And while I forget your name
I forget your sweet face
Till Doomsday fell out again.

Man I went wild last night
Oh yes I’ll pay tonight
but I don’t let Doomsday bother me.
Does it bother you?

I know you told me again and again
will it mean that we won’t be friends
when Doomsday rears her ugly head again?

Not in all my wildest dreams it never once was seen
that Doomsday might fall anywhere near a Tuesday.

But flight across the skies seein’ fate before my eyes
there isn’t any sense to feel the light
for I don’t plan to die
nor should you plan to die

when Doomsday rears her ugly head again.

We are Human: The Checklist

My dad was a psychiatrist (and, after retirement, a stand up comedian, but that story is for another day) who developed a list of Rules for Survival that got me through every important transition in my life. It was a simple checklist that I could review when I was facing the big decisions. What I loved about the list was that just at the point where I couldn’t decide which major to pick, which industry to focus on, how to make it through big personal challenges like death and taxes, all I had to do was to review my basic Instrument Flight Rules and I could catch my breath for awhile and figure out a new angle—a new way to swim out of the current and see new possibilities.

Learning how to swim out of the current

These days we call it “hope.”

The list began with:

1. Face the Facts
2. Make a Plan

Which brings me to the observation I’ve had over the past few weeks as I witness business leader after business leader, in many different industries, confessing that they have no precedent for the current situation they find themselves in and are looking for ways to get unstuck (or worse, to stop the bleeding.) I am reminded of a fact that we sometimes forget: as business leaders we are human.

And, as humans, we sometimes have to admit that we are stuck. We have to face the recent facts. We have to face new facts. We have to envision the facts to come.

Bernie Madoff and Steve Wozniak: Facing the Music

Sometimes we even have to face the music (this month it was Bernie Madoff on the one hand, and Steve Wozniak on the other)

No matter our circumstances, business leaders have to use some sort of checklist, first of all to assess which “facts they need to face” and second to figure out how to “make a plan” when their current checklist no longer applies. (Like the old joke about Rule One: follow all rules; Rule Two get a new rulebook.)

Know When Your Current Checklist No Longer Applies

Which facts should we be paying attention to? How do we know that today’s tea leaves are leading to an important new conclusion?

One of the main lessons of the Business Genome is that business leaders who are stuck have a relatively quick checklist they should use as the first line of attack. This brings us to The Business Genome Instrument Flight Rules: Getting Unstuck, a list that is the crystallization of insights from 300+ business leaders about what to do first when times are tough.

The Business Genome Instrument Flight Rules: Guide to Getting Unstuck

1. Face the facts. Admit that you’re stuck. Experience is the best teacher here—just sensing that there is something wrong is often the first sign that there is.
2. Read the trends with a new eye. Not just the same old trends and reports from the past that you’ve been reviewing for weeks. But, the meteors that are about to hit from new angles (Like, women entering the workplace, aging customer base, new suppliers in the supply chain, new headlines in the global news.) Ask yourself: “Are these trends starting to encroach on my business-as-usual?”
3. Explore cross-industry ideas. Which solutions from other industries might help catapult our organization to the next level? Like the IDEO team that studied the details of NASCAR pit crews to improve the Emergency Room experience…where is there an industry that is doing a kick-ass job of something that could be tried in your organization?
4. Make a quick experiment. Create a rapid prototype that cobbles together your hunches in a scientific way. Pilot your new ideas with small teams of intrapraneurs and pirates who love to stay up 24/7 working on a new idea. (Good for morale, good for taking the risk out of a new hunch.)

Dis-Card: Hewlett Packard Executive Discarded 3 x 5 Card

I remember a few months ago, when I was working with an executive from Hewlett-Packard, who realized that it had finally reached the point where his team had to admit that they needed to face the facts and make a new plan. I have a vivid image in my mind of the reach of the hand into his shirt pocket, the 3 x 5 card that came out of the pocket (his “dashboard metrics cheat sheet”) and the ripping up of the card…his symbolic gesture for “it’s finally time to admit it’s time for a new 3 x 5 card.”

There’s a lot of talk about the how-to’s of designing smart business experiments, like the recent article by Thomas H. Davenport in the February 2009 Harvard Business Review: How to Design Smart Business Experiments.

The worst mistake of all is NOT for the experiment to fail. It’s to NOT try to experiment with something new when it is clear that status quo isn’t working. Today’s theme isn’t about whether or not the end result of a new approach ultimately turns out to be a good idea—it’s about realizing that it’s time to make a new plan and jolting ourselves into a break out mode.

We all have to learn when it’s time to swim out of the current and try a new direction.

For any business leader who hasn’t seen the Dancing with the Stars clip of Steve Wozniak’s routine to Ain’t Seen Nothing Yet, it really is a classic.

Steve Wozniak Faces the Music: Dancing With the Stars

Sort of a blend of Geeks Gone Wild mixed with Why the Business Genome’s Cross-Industry Approach is Flawed. But you gotta hand it to the guy—he did face the music and made an effort to try something outside his comfort zone. And, he of course began by learning the new routine step-by-step.

Of course we are human. Of course sometimes we need to admit we’re stuck. And, we can rest a bit easier knowing that there is another checklist when our 3 x 5 card isn’t working for us anymore.

Which leads us to the musical refrain for this blog, courtesy of The Killers.

Are We Human or Are We Dancers (excerpted)

The Killers

Are we human or are we dancers?
My sign is vital, my hands are cold
And I’m on my knees looking for the answer
Are we human or are we dancers?

Pay my respects to grace and virtue
Send my condolences to good
Give my regards to soul and romance
They always did the best they could

And so long to devotion
You taught me everything I know
Wave goodbye, wish me well
You’ve gotta let me go

Are we human or are we dancers?
My sign is vital, my hands are cold
And I’m on my knees looking for the answer
Are we human or are we dancers?

Which stars should align where in today’s business constellations?

We’re living in perplexing times. As business leaders, it is clear that yesterday’s rule books no longer apply. Literally yesterday’s. Every wrinkle in the fabric of today’s business challenges requires a new slice of character, different from those leadership habits, rules, adages, upbeat smiley face motivators that we can get away with during times when growth curves are moving upward and times when we are tempted to mistake our luck for skill. These are times that would perplex even the most seasoned business leaders.

So, this is a perfect opportunity to reflect on the list of attributes for today’s leader. 2009: a chaotic, hard-to-predict era. What is the profile for the type of business leader who can guide us through the vicissitudes of today’s uncertain environment?

One thing is certain: yesterday’s leadership profile ain’t gonna cut it.

We’ve all received the virtual assignment (via the Obama campaign-abilia) to read Team of Rivals, Doris Kearns Goodwin’s book about the moment in history where the stars were aligned perfectly for an individual like Lincoln to lead the nation to new levels. Goodwin’s perspective underscores a very important lesson about leadership: sometimes the times themselves and the issues associated with them indirectly dictate the profile for the type of leader who needs to enter the scene and galvanize the people around him/her toward a better outcome.

Inspired by these harsh new realities, the Business Genome is beginning to capture input and ideas about the new role of leadership in today’s unique environment, a time when profits are tough to come by, natural curves are heading downward, public trust has eroded, global forces are more complex, capital is tight, youth is fearful that there will be no jobs, experienced workers face layoffs, and all bets are off.

What do today’s times tell us about who’s on first, and who should be on first over the coming months? What is the profile for the ideal leader for today’s business?

The Business Genome has learned that there is a distinct difference between the profiles of a leader for the heydays versus the type of leader we need today:

The comments we’ve heard from business leaders about which skills are called for within the context of these challenging times reflect a common theme: No Time for Imposters.

An executive team at a software company with 200 employees says: “We don’t know the answers, but we want our CEO to challenge us to find new opportunities for revenue growth.”

A Fortune 100 CEO says, “The pressure is already enormous, but now every move we make is under the microscope. There’s a need for transparency in how we operate not only for accountability, but also for ideas. I am sharing the burden of discovery with my teams in a new way, hoping that we can work together to drive profits.”

A small business owner comments, “I need to be looking over the horizon with a much broader view; I need to admit that the old ways of operating aren’t working.”

The feedback also reflects a common theme: leaders face new pressure to be real, be open, and be responsive.

No time for imposters in today’s business environment.

The good news is that a leader can retool him/herself to adapt to the business forces at work. They would be wise to swallow technology quickly, invite new people into the boardroom, take off their blinders, and accelerate their move away from PowerPoint presentations and toward real dialogue.

And, based on our initial feedback, it seems that employees are eager to help corporate leaders get up to speed. They’re looking for engagement around important strategic issues that leaders can use to drive profitability: how can we interact with vendors differently? what can we do about our cost of goods? who’s making money in our business or in adjacent businesses and how can we gain a share of those dollars?

Today’s Leaders Can Engage Employees to Get Them Up to Speed with the Times

Contextual Intelligence

There are some great books that do for business what Team of Rivals did for the Lincoln presidency: these books provide historical context for which type of leadership is called for at key moments in history. In Their Time and Paths to Power describe specific success factors for business leaders, including “contextual intelligence”, an imperative for success based less on a firm orthodoxy and more on a sensitivity to the forces at work around the enterprise.

The real imperative for business right now is to take the time to reflect on what type of leadership is called for over the coming months, and to make a beeline for any resources that can accelerate your path to embodying it. Has your organization made a conscious effort to retool your leadership profile? Have you defined the ideal? What song is your company singing these days about the ideal leaders to guide us through these perplexing times?

Our musical coda for today comes from Mary Poppins.

The Perfect Nanny

If you want this choice position
Have a cheery disposition

Rosy cheeks, no warts
Play games, all sorts

You must be kind, you must be witty
Very sweet and fairly pretty

Take us on outings, give us treats
Sing songs, bring sweets

Never be cross or cruel
Never give us castor oil or gruel

Love us as a son and daughter
And never smell of barley water

If you won’t scold and dominate us
We will never give you cause to hate us

We won’t hide your spectacles so you can’t see
Put toads in your bed or pepper in your tea

Hurry, Nanny
Many thanks sincerely
Jane and Michael Banks

The number of numbers that companies use to charge toward growth is astounding.

The innovation gurus love to snicker at the green eye shade types who insist that double digit growth for the coming year is as simple as last year’s spreadsheet times 1.10. Which, in times of steady growth and simple patterns, isn’t a bad way to look smart.

And the analytical types have been known to dismiss the wild antics of the creative spirits who bring “outside the box”, “off the whiteboard” and “coloring outside the lines” approaches to the issue of growth. “What if we make the tacos purple?” “Let’s bring in poets and anthropologists to find untapped market opportunities.” “We can develop the next Post-It note if we keep brainstorming.”

In times of economic stress, we need to hasten our success toward growth opportunities that work. We need to provide results: upward sales figures, increased value, and solid investment in assets that will appreciate substantially over time.

We need proof that we’re on a growth path and we need numbers that will back up our hunches.

At the same time, predictive and probabilistic numbers and models have failed us. We have constructed numbers that are intended to provide certainty and offered numbers to our employees and shareholders that promise outcomes. We have optimized our counting systems around many different priorities: having an easy-to-audit set of numbers, tracking things that have been bought and sold, measuring prices and capturing trends. It’s no wonder we have started to confuse which numbers tell us what and how to use numbers with a specific eye toward future growth.

The issue isn’t whether or not numbers matter. It’s whether the numbers you’re gathering and analyzing are the right numbers to charge into an uncertain future on a growth vector.

Our gut tells us that if we keep painting the same picture with different colors of paint, we’ll never really achieve growth, especially in an economically-distressed market. But, we are hard-pressed to find new canvases with new numbers that could guide our strategic path to growth.

Conventional wisdom tells us that analysis of numbers reduces risk and that creativity upsets the apple cart. It’s actually the combined approach that reduces risk, by thinking extremely creatively about your company’s future and by gathering information and analytics in a new way to cobble together data models that keep you on your toes.

Today’s times call for a new approach to analytics based on patterns of success that combine the best of both approaches: analytics and creativity.

The Business Genome offers some of the fine points of this approach to analytics:

MBA + NBA = a new approach to winning

A prime example of an industry that is benefiting tremendously from a new approach to the numbers comes from sports, where the revolution in statistics begun by the likes of Bill James in baseball is now reflected in people like Sam Hinkie in basketball. Sam Hinkie, vice president of basketball operations and head of basketball analytics for the Houston Rockets, comes to the NBA with an MBA from Stanford. He also exemplifies a new way of using analytics to drive wins, and we can look at his example as inspiration for how a new way of looking at metrics can fuel a new approach to driving business, which in his case means wins.

A recent article described the new school of thought for sports statistics, based on understanding of new numbers to track in his sport, numbers that have led to a new philosophy in scouting, recruiting, strategizing, coaching, and ultimately winning.

Hinckie’s new read of analytics, drove him to understand why Shane Battier, a player who “doesn’t grab many rebounds can be [The Rockets] most valuable player.”

“When (Shane) Battier guards (Kobe) Bryant, the Lakers’ offense is worse than if the NBA’s best player took the night off.”

Hinckie’s analytics provided new equations for valuing specific players even without scoring points directly, Shane Battier proved to be the killer app on the floor, and his value was revealed to the likes of Sam Hinckie because Hinckie took his eyes off the old metric for valuing players based on points scored and put his focus on the metrics of how many times a player like Battier could “kick a player like Kobe Bryant from his good zone to his bad zone.” Which has been responsible for a surprising number of wins.

The business press has taken on the challenge of which numbers matter. Competing on Analytics: The New Science of Winning offers some helpful ideas about the power of metrics, and widespread skills within an organization to integrate numbers into decision making.

Their ideas about how more pervasive Business Intelligence (BI) software and how more real time analytics will improve decision making are compelling.

As long as we don’t get lured into the fog of forgetting which numbers are telling us what and as long as we don’t use better analytical tools to do a fancier and faster job of measuring the distance between deck chairs on the Titanic instead of noticing the patches of ice in the distance.

The question is: How much of a revolution in analytics is called for right now, as the tools for measuring are becoming more and more sophisticated and the ability to count things can be done faster and faster?

Who better to set a revolutionary tone than Bob Dylan, who offers a great coda to the theme:

Someday, everything is gonna be smooth like a rhapsody
When I paint my masterpiece.

Sailin’ ’round the world in a dirty gondola.
Oh, to be back in the land of Coca-Cola!

I left Rome and landed in Brussels,
On a plane ride so bumpy that I almost cried.
Clergymen in uniform and young girls pullin’ muscles,
Everyone was there to greet me when I stepped inside.
Newspapermen eating candy
Had to be held down by big police.
Someday, everything is gonna be diff’rent
When I paint my masterpiece.

Which numbers will you use in the future to create your greatest hits?

I love the food industry. It teaches the basic meat and potatoes of consumer demand, even without performing fancy calculations. At its very core, the food industry demonstrates to any business leader some of the most important lessons of the market, partly because people eat three times a day, so there are frequent checks on strategy, and partly because people choose where to eat or how to eat based on how they’re feeling that day or that week. Which makes the entire industry, from high-end restaurants to casual dining to fast food to grocery stores a great litmus test for the mood of the market.

There’s one classic way to read the food industry that applies to many industries if we stop to think about it very simply. I call it The Waterbed Effect, the phenomenon where you can see where your customers have gone after they’ve left.

The Waterbed Effect is based on the fact that if you push down on one corner of the waterbed, the water shifts to another corner; it generally doesn’t leak out. In math, it’s a closed set.

With certain exceptions, you can look at people’s eating habits and make some observations that describe this type of closed set:

1. On average, people eat approximately the same amount of calories per week (despite the supersizing and 4th meal trends.)
2. If money gets tight, they will trade one option for another. A high end restaurant might lose customers during tight times; restaurants might lose customers to grocery stores over time. However, except in dire times, the customers have not stopped eating.

Therefore, if you are in the food business, it is safe to assume that you don’t have far to look to see where your market has shifted and to interpret the clues about what’s happening with consumer demand and consumer preferences.

Of course, if you’re a restaurant chain, it’s not that easy to turn on a dime and respond immediately to the changing market. However, whether you’re in the food business or any other business, it’s important to read the Signs of the Waterbed Effect to learn about what matters most to your bread and butter customers and change as quickly as you can.

Many times we don’t realize that we’re living in a waterbed. We can blame slumps in sales on a softening economy; we sometimes even make the leap (in non-food industries) directly from “people have stopped buying certificates of deposit” to “people have stopped saving money.” But, it’s critical to look at the closed set of options and see which other players are benefitting when we’re at a loss.

Looking at the clues, we can uncover what is really happening, and we can adapt to the market shifts.

In this dreadful economy, it’s sometimes too depressing to study the details of where dollars are being spent and what’s being traded for what. Common sense tells us what we see in the numbers at first glance: during tough times, people trade food away from home for food at home.

But, digging deeper into food trends, there are some clues about what goes up when the tide goes down. For example, the American Italian Pasta Co reported a 5 percent rise in sales last year:

It’s like a certain number of people rediscovered pasta, according to the CEO of New World Pasta, maker of Ronzoni, American Beauty and Creamette. They reported that this rise in pasta sales reversed the former downward trend, caused partly by the high-protein diets.

Or, in Waterbed terms, push down on beef; push up on pasta.

How would the Waterbed predict chocolate sales? Staples up? Luxuries like chocolate down? Not so. Market Watch reported, Hershey’s fourth-quarter net income rose by 50%, as sales edged up and its chocolate business weathered the economic downturn better than many.

So, what lessons to learn from those results? Dig deeper and discover what went down as Hershey’s was riding high.

Market Watch explained: “Pressure in the high-end chocolate market may benefit Hershey, which sells more less-expensive sweets.”

It’s easy to jump to the wrong conclusions, or to forget to read the simple signs of change in a Waterbed world. But, training yourself to watch the water shift and interpret the implications will provide valuable lessons about how to tap into the trends and regain customer loyalty.

This week marks the 200^th anniversary of the birth of Charles Darwin, and I just attended the 2009 TED conference (Technology, Entertainment, and Design www.ted.com) where there was a lot of discussion about evolution and other biological and scientific themes juxtaposed with presentations on the economy and the future of business.

Which brings to mind an important theme about the differences between business ideas that make it versus business ideas that go extinct.

At the TED conference, Nina Jablonski, author of Skin: A Natural History, presented evidence that skin offers valuable clues to adaptation. For example, when people with high levels of melanin, designed to protect from the sun, suddenly relocated to places with radically different climates, melanin, the very thing that allowed people to thrive in the tropics set the stage for vitamin D deficiencies and other ailments because tropical skin was not well-adapted for colder, less sunny climates.

How do the forces of adaptation and evolution apply to the world of business? Which attributes separate the winners from the losers as shifts in business climate occur? And, is there a trait that keeps business ideas and even companies ahead in the evolutionary cycle?

It’s easy to point to signs of extinction in business, where the equivalent of the horse and buggy yields to the equivalent of automobiles. Many a business concept hit the cutting room floor because it did not keep up with changing times.

But, we can learn even more valuable lessons from companies that adapted nimbly to changing times.

In December 2008, Ravi Mehrotra, chief scientist and co-founder of IDeaS, a revenue optimization software company with a focus on the hotel industry, explained how they avoided extinction when the hotel industry shifted dramatically post-9/11. “With the firm on the verge of extinction IDeaS decided to sell its software over the Internet. That model, now called software-as-service, enabled IDeaS to quickly and cheaply distribute its technology to big and small hotels alike.” (www.startribune.com)

According to the Minneapolis Star Tribune, IDeaS’ approach not only helped IDeaS avoid extinction, but led to their acquisition by SAS Institute, Inc. Today, IDeaS software calculates most hotel prices in the United States and is expanding into car parks in London, bus service in Mexico and sports arenas in the United States.

By contrast, a recent report describes the threat of disappearance of the garment industry in New York’s Garment District, whose manufacturers produce roughly one-third of all clothing sold within the United States. According to statistics from the NYCEDC, the fashion industry in Big Apple employs about 169,000 people, but rising rents and reduced demand put that industry at risk of disappearance. Nanette Lepore, a fashion designer whose entire collection was designed and sewn in the Garment District, brought the economic issues for the industry to light when she was quoted in a recent article in a college newspaper (www.loyolagreyhound.com): “Here in the fashion capital of our country, the factories, trim and fabric shops, design studios and showroom are on the verge of extinction.”

The differences between a company or an industry that faces a chilling turn in the business climate and is nimble enough to survive versus those where the forces are too overwhelming ultimately separate those that adapt and thrive from those that disappear.

Businesses are luckier than the biological species described by Dr. Jablonski. It can take an entire generation or longer for animals to change their skin. But, business leaders can see a shift in climate and react much more quickly. For business, the ability to see the signs quickly and change course becomes the most important attribute in the survival of the fittest.

The time has come, the Walrus said

First, came the Human Genome Project in 1991, designed to analyze the components of DNA and trace the information that we humans have inherited from our parents and their parents. It was a huge project that started with mapping of genes and led to new medical insights and innovations.

Then, came Pandora, an internet-based music service based on the Music Genome Project, sparked by the imagination of Tim Westergren, who in 1999 decided that the time had come to organize music based on new categories that freed us from the notion that our taste in what to listen to would be limited to the old music industry categories of “Rock”, “Classical”, “Heavy Metal”, “Rap”, “Country”, “Rhythm and Blues”.

The Pandora model started with a lot of people with trained musical ears sitting in a room and developing 600+ categories of how they would describe a piece of music. From there, Pandora.com launched as an internet radio station that combines the elements of music’s DNA with a thumbs-up/thumbs-down user voting that teaches the station how to refine its next selection for you. A personal profile develops and two things occur: #1: you find yourself exposed to new ideas (as in, “I never realized that Cat Stevens’ Hard Headed Woman sounds like Guns N’ Roses Patience) and #2 you discover that your taste can’t be categorized as only “Rock”, and your taste evolves, letting in new genres, new styles, new possibilities.

In 2006, Netflix, the company that transformed movie rental and created a unique online community of film fans, created the Netflix Prize, with a grand prize of $1,000,000 to any team that could beat the Netflix calculation engine designed to predict film ratings and selections. (That competition starts with 100 million ratings done by 480,000 viewers of 18,000 films.) When you’re trying to develop an inventory of films, it makes a lot of sense to be able to predict, but what is more interesting to this discussion is: what are the subcomponents of something like a song or a film? What is it that makes something a “category” in music or film? Is it “woman singing with sexy voice” or “black and white silent film with happy ending” that makes something a category?

Which leads us to the Business Genome project. It’s based on the idea that the possibilities for a business leader about what to do next have to come from somewhere other than simply what they’ve done before. Especially if what they’ve done before is leading to flat sales results or decreasing market share. Or if a corporate team finds themselves in a tight squeeze: What should our next product be? How can we capture a new market? How can we learn from another industry, another company that has addressed this type of question? What is the secret sauce that will drive growth for our company?

How can you mine information from a lot of other people who have been in the same boat or who are wrestling with similar issues?

Unlike the Netflix Prize approach, the Business Genome isn’t designed to be predictive—even an infinite number of monkeys at a googolplex number of calculators couldn’t earn a million dollars predicting with certainty which combination of business options will be the perfect idea for your business. Like Pandora, there is a lot of human element involved in the categories of what to look at. What can a cereal company learn about a clothing designer’s experiences with teen purchasing trends? How can a manufacturer benefit from a defense contractor’s insights into “applications of hydraulics?” What can a medical equipment distributor learn from FedEx about “global logistics innovations?”

So, that’s the invitation of the Business Genome project starting in 2009: to create a sense of possibility for decision makers in the world of business who are stumped about where to head next, who want to scan through ideas about what’s worked and what other people in business are thinking about. The Business Genome approach sparks new insights for translating the DNA of one business to the growth challenges of another. Welcome to the Business Genome Era.

The secret to discovering (or creating) your next set of customers.

In honor of the Chinese New Year, the Year of the Ox, characterized by a spirit of helping others, comes the subject of how to maximize customer impact. The question of where to learn lessons that will drive revenue growth based on meeting the needs of current customers is only the beginning. There has been so much said and done about delighting everyone we touch and creating fans, raving, rabid, and loyal.

But that’s not the hardest challenge.

The conversations I hear these days have to do with the NEXT customers—where will they come from? Once we’ve captured the loyalty of our current customers, where do we look for the next bunch of people who will connect themselves to what we have to offer?

How do you mine the unknown?

Let’s dedicate this discussion to the hospitality industry, an easy way to illustrate the concept of Cross-pitality, the newly-minted term for borrowing great practices from one industry and implanting them in our own.

The questions sound like these: “What will it take to attract more young professionals to our hotels? How can we sell more tickets to NFL games to Hispanics? In a down economy, how can we revamp our sweet spot to include cost-conscious consumers to our restaurant guest profile? What are the best ways to create a great live concert experience for the 20-somethings?

What we know for sure is that the new groups of customers won’t necessarily act like our traditional customer base. Parents with cell phones don’t look for the same thing in a gadget as their kids do.

The answer is Cross-pitality, the discipline of cutting and pasting elements from something that is already a big hit in one industry and piloting them in our own.

Cross-pitality has been the secret behind luring the grab-and-go customers buying potato salad at the grocery store deli into our eateries based on mastering the art of convenience; the trick that shifted the focus at an oil company from viscosity to “the waiting room experience” (think Jiffy Lube); the competitive approach that combined the concepts of just-in-time and time-shared resources and traditional car rental to create Zipcar, a concept that attracts a new demographic group (with different needs and buying patterns) to the car rental industry.

How does Cross-pitality work?

First, cross-pitality is a discipline, not a magic trick. It’s not simply a matter of appliquing a technique or approach onto our businesses. Just because polenta sells well and Starbucks sold coffee well does not mean that Starbucks’ foray into polenta sales was a hit (it wasn’t.)

You have to start with the mind set that expertise in selling the same stuff we currently have to different people will require understanding of these questions:

1. What makes us BELIEVE that this new group of potential customers is a good prospect for our company?
2. What are these new people CURRENTLY DOING OR PURCHASING that could lead them to want to buy from us?
3. What types of experiences from OTHER INDUSTRIES (like fantastic e-commerce, smooth queuing, retail, design) appeal to our target group?
4. How are the people in the new target group DIFFERENT from our current customers? Will we have to do things differently or offer new things to gain street cred with the new group?
5. What will our NEW SWEET SPOT have to be to capture the loyalty with these new people?
6. How can we create a rapid prototype or simple MODEL TO TEST AND TWEAK OUR HUNCHES?

The NFL teams looking to attract new demographic groups as fans can become experts at tracking consumer data on leisure activities, consumer purchases, top brand affiliations. Airport hotels with slow check-in procedures can look at the best of the rental car capabilities for pre-registering guests in the shuttle.

Remember, some of these hybrids won’t work. Dodo birds couldn’t fly.

But, when you’re stuck with flat sales and need to chart a path toward a new customer base, it’s all about the discipline of Cross-pitality.

How can you find out who your NEXT loyal customer base might be? Make it your first Chinese New Year’s resolution to find out.

Welcome to 2009. The year of uncertainty. A time when people are feeling betrayed by the economic models and equations and forecasting that had given us our sense of security.

What Do You See Out There That Lets You Know it’s Monday?

A boy, looking out the window for signs of the future.

It’s the beginning of a new era as we swear in a President of the United States who was, just a few months ago, a long shot. As our world gets more uncertain, the desire to know the future remains constant: every business leader I meet greets me with the question, “What is your prediction for business for 2009?”

They want to know specifics about the stock market, about oil prices, about purchasing patterns, about global commerce. What they really seem to be asking is, “how can we avoid being blindsided? Which emerging forces should we be tracking right now to lead our companies toward a more certain and thriving future?”

It struck me that the skills that are required for businesses to thrive are less about the knowledge of one particular fact, or about keeping our eyes on one particular competitor. By definition, all of those measures are defined by what is, what was, or by what has always been.

The skills that are required for uncertain times should be driven less by facts and more by sensitivity and rapid response. The better approach for changing times should focus more on sensitivity to trends, the discipline of being prepared for adaptation, and the processes that lead to nimbleness.

The questions should be: “What am I noticing that could lead to change? Which factors might lead my company to extinction? Which factors open the window of opportunity to beat the odds, capitalize on the trends, gain momentum in the market, drive sales, and set our company on a path to growth? What can I learn from other industries that have faced these issues to improve my chances at success?”

We need to interpret differently.

Easier said than done?

Not necessarily. It’s a matter of focus.

When we focus all of our business processes and strategic planning efforts on absolutes and predictions, we sometimes make the assumption that double digit growth will come from taking a spreadsheet of 2008 and hitting: “multiply by 1.10″ and convincing ourselves that we’re all set for 2009.

Better to initiate the discipline of training ourselves and our co-workers to start to read the signals of what’s changing in our business environment, instilling a sense of urgency for considering how those shifts could affect our business, and pouncing on the chances to adapt to the changing environment.

Most experienced people see change coming. They are like the elephants before the tsunami who felt the tremors way before the storm. But if all of our measures are geared toward events that have happened, all of our measures will miss what’s to come. On the other hand, if we synthesize our gut sense of what the signals all mean, we can have a better starting point for responsiveness.

How can we become companies that know how to read signals, interpret, and take action?

I’m reminded of a scene from years ago, when my friend’s 4 year old son was standing at the window, looking out at the neighborhood at the beginning of the day. He looked out for a long time, and finally turned around and said, “Dad, just what is it about what you’re seeing out there that lets you know it’s Monday?”

What signs and signals do you see out there and what do you think your “Monday” is?