Strategic Thinking & Strategic Action

Think before stretching

Talking this morning with a serial entrepreneur whom I highly respect, the question of business scale came up.  What's the right size for your business?  Should you stretch to grow?

In his case, his accountant, spouse and others have been after him to ramp up the size of his Internet-based consumer business.  "No way," he said.  He has steadfastly resisted the lure of "getting really big" because his calculus is that by going for size he would diminish or lose profitability.  "I could quickly be three or four times larger" - this from someone whose annual Google Adwords bill is already $120,000 - "but it could put me out of business."  For his current investment he gets the Google page ranking he needs and quality leads and conversion through his keywords.  Pouring more money into this channel would increase activity but not profitable sales.

My entrepreneur friend understands from his background in face-to-face sales and marketing to support sales that a key factor is the cost of acquiring a customer.  Through long and hard effort and testing he seems to have optimized his yield of quality business from Google search.  If he is going to grow beyond the organic rate that Google is delivering, it will be through other channels and methods.

Many times I have seen organizations stretch for growth, with the customers gained being less profitable and more marginal, and the business negatively affected by the greater level of activity.  Other times I have seen organizations "settle" for their current scale when ripe opportunities for growth are ignored and are instead picked off by competitors.

As a strategist, my role includes helping leaders size up opportunities and whether to stretch for growth.  Multiple factors need to be considered to make the best decision, including organizational capacity, effect on product/service quality, potential diversion of attention from more important considerations, effect on margins, new doors that can be opened through growth, and comfort with being larger.

Here are some questions to address when looking at whether to stretch for more volume. 

When it suddenly changes

Disruption.  Is it good or bad?

While listening to Michael Raynor of Deliotte make a presentation on his great new book, The Innovator's Manifesto, I got to thinking about the two-sided nature of disruption in markets.

One can easily argue that it's bad because it dramatically changes the landscape and the likely outcomes of strategies in place.  MF Global fails and trading accounts are frozen.  If you are a trader, that's bad news!  Child abuse is revealed at Penn State and the college president and worshipped football coach are canned.  If you are a Penn State board member, that's bad news! Greek political turmoil causes Italian borrowing costs to soar.  If you are the prime minister or finance minister of Italy, that's bad news!

But that same sudden shift in landscape and effect on embedded strategies can also be good.  The competitors of the trader with the frozen MF Global account may see new customers.  Incoming students who might have chosen Penn State suddenly favor another school with their acceptance.  Speculators who sold Italian bonds short make a killing.

And then there is the opportunity for "planned disruption," where the strategy is to cause the sudden landscape change to a gain a competitive advantage.  Innovation of this type is difficult to achieve but holds the potential for great competitive success and differentiation.  Think 3D television or carbon fiber airplanes or gene therapy or LinkedIn or the iPad.

So where do my musings lead?  To thoughts of scenario planning, that's where.  Organizational strategists are wise to consider how their major assumptions and strategies can be disrupted and what they might do in advance to mitigate the damage and when disrupted for quickest recovery or new advantage.  They are wise to look at what might disrupt market leaders and offer a new opportunity for competitors.  And if they can find innovation strategies that disrupt the leader's strategies, so much the better!