Renaissance Growth Advisory

In an earlier blog, we established that strategy is about choices. The choices you take as a business owner, manager or entrepreneur will indeed decide if your enterprise will turn a profit or not. Or how profitable it will be versus competition and vis-a-vis its full potential.

Choices will also determine the long-term viability of the business. After all, even if you have made the right choices early on, competition is hard at work making them as well. Your brand or business may gradually lose whatever distinct advantage it used to have. Market conditions, regulatory demands, consumer expectations and availability of resources may change as well, sometimes suddenly, turning what once were good choices into dead weights for your business. Such is the pivotal importance of choice, and of perennially revisiting choices, in effective strategy development.

Despite the critical importance strategic choices have in the viability of brands and businesses, there is no foolproof recipe to distinguish a priori good decisions from bad ones. In fact, strategic choices are often made heuristically and intuitively, based on observed experiences and without the thought rigor they deserve. Many of our decisions are made with incomplete data or insufficient regard to all possible scenarios. An IBM study revealed that 59% of midsize business leaders say critical decisions rely too much on gut feeling (Fortune magazine, March 18, 2013).

As seasoned operators with dozens of strategic plans to our credit – and occasionally to our blame – the partners of “Renaissance Growth Advisory” (www.rgacompany.com) have learned that there is no substitute for vigorous, upfront and candid debate on possible choices backed by hard data supporting their viability and sustainability. In this blog, we present eleven “elimination” steps to improve your odds of selecting the right choices leading to effective, winning strategies. Think of them as “peeling the layers” that cover – and often hide – the kernel and substance of effective strategy creation. We present them in a particular sequence, from what we regard as the outermost, visible layer to the innermost, deepest surface. But other sequences might work well for your particular brand or business. What is more important is that you use them all to screen out bad choices, making it easier to arrive to great strategic decisions using a depurated selection.

Step 1: Ignore choices that do not project high rates of return within your industry. As a precursor of winning, any business must make money and eventually create wealth. This basic yardstick appears to assign an overtly transactional purpose to strategic choice. Some owners and managers may dislike the idea of choosing strategies devoid of noble purpose or broad stakeholder benefits. But no well-meaning intent, such as "help people lead more fulfilling and productive lives", will ultimately be achieved without an enterprise that makes money – unless you are a government agency with the capability to compensate your losses with printed money and the capability to raise taxes. No perennially money-losing proposition can ever hope to have the resources to eventually win in the marketplace and fulfill its intended mission. And without consistent wealth creation, the sustainability of any business hangs in the balance.

Making money goes beyond just being profitable, as no business can last by being financed at a higher cost than the otherwise welcome profits it brings in. This is why strategic choice should always be confronted against the potential of a business to earn a rate of return that exceeds its cost of capital. In other words, viable strategic choices must make enough money to create wealth. By simply measuring the capability of a business to make money, any money, one can have the dangerous illusion that the strategic choices earlier made were appropriate and deserving of even more investment. The net present value of a particular choice, like launching a new product, entering a new geography or offering new products and services, must exceed the investment required by at least the cost of capital required. Any lower returns would destroy value and disqualify the decision as a viable strategic choice. Many strategic decisions turn out poorly as they are taken without due consideration to the cost of capital, the time value of money and/or the imperative that any viable strategy must involve making money to the point of creating wealth.

Candidly confronting the expected financials of your business over the next ten years is a foolproof way to help clarify the picture. We recommend you include sensitivity scenarios that actually “punish” your forecast with more funding, slower demand growth and the impact of competitive upmanship and retaliation. Be sure to show your "viability forecasts" to intellectually honest confidants and even outsiders who can "plug holes" in your reasoning, challenge your assumptions and prepare your business for the inevitable contingencies and bumps in the earnings curve. Remember: rosy scenarios might be great to give you stamina, explore possibilities and enthuse investors; but have no place in sobering strategic choice.

Step 2: Remove from consideration choices that do not align with your company’s mission or purpose. Winning an above-average industry profitability and rate-of-return does not need to be inconsistent with a mission-centric approach to business. Quite the contrary, it is a requirement that strategic choices be consistent with the stated mission of a business. Success must always be measured by how well corporate purpose is being attained while creating wealth.

Yogurt maker Stonyfield, for one, is committed to prove that healthy profits and a healthy planet are not in conflict. And that dedication to health and environmental sustainability enhances shareholder value. Upholding this mission meant the creation of the largest organic yogurt business in the world, one that supports family farms, helps local producers become organic and reduces waste. By 2008, Stonyfield had a business with revenues of US$300 Million before being purchased by Danone, a world leader in dairy products and bottled water.

Spanish Engineering & Construction firm Acciona has created a global business by addressing its mission to demonstrate the technical and economic viability of renewable energy models. It proudly cites the 11.7 Million metric tons of CO2 emissions it has avoided through its operations as evidence of success, alongside its US$9.2 Billion in revenues, US$1.9 Billion in cash, 7.7% in operating profit margin and 4.4% rate of return, higher than the sustainable-energy industry average.

Aligning with purpose does not limit choices; it actually amplifies them. Take Google: its mission is to organize the world's information and make it universally accessible and useful. It has guided the company to choose many mission-centric yet diverse ways to grow the business, from US$3.2 Billion at the time of its public offering in 2004 to US$66.7 Billion ten years later. Among Google's key choices were the launch of Google Maps (2005), the purchase of YouTube (2006), the launch of web-browser Chrome (2008), the launch of the Nexus line (2010), the introduction of Google Glass (2012) and a monthly music subscription service (2014). All these decisions had the common thread of organized and accessible information and all enabled Google to today have a robust 26.7% profit margin and a leading 13.7% rate of return.

Step 3: Discard choices that do not offer truly differentiated benefits. Your brand or business must offer benefits that are unique, superior or easier to obtain, either through lower cost or greater accessibility. A good example of a firm which became successful by offering unique benefits is Direct Line in the UK. Back in 1985, when insurance companies sold exclusively through intermediaries and brokers, Direct Line became the first insurer to ever sell automobile policies over the phone. Competitors took many years to react, allowing Direct Line to become one of the most successful insurers in the world. By 2013, it had reached US$6.5 Billion in revenues, 11.7% in operating income and an 8.9% Return on Equity, higher than the industry average.

As an example of superior benefits, we can cite Samuel Adams: its Boston Lager has 30 International Bittering Units (IBU), 175 calories and 4.9% Alcohol by Volume (ABV), all significant and tangible differences versus Copper Bell, another craft lager beer manufactured in Northeastern USA with 12 IBU's, 148 calories and 4.5% ABV. Consumers seeking a full-body, more aromatic and flavorful beer without regard to calories would likely choose Samuel Adams over Copper Bell and other competitors given this tangible superiority. A distinctly better product surely helped Samuel Adams close 2013 with US$739 Million in sales, a 15.3% profit margin and 23.1% return on investment, well above the industry average.

Well-differentiated brands can become more accessible and thus gain an additional competitive edge. Apple lowered the price of its novel iPhone 8GB in September 2007, from $599 to $399, a significant 33% decrease barely three months after its introduction. Why? It simply wanted to give greater access to its otherwise hugely successful product. It was on track to sell one million iPhones despite the higher price tag. This and other good choices have helped Apple secure a 28.7% profit margin and a 30.6% rate of return (2013 data). But lower prices is one side of the access story: another is greater availability. Early on, Coca Cola had chosen to make its brand available “within an arm’s reach” of any thirsty consumer, cold to wit. Ubiquitous distribution has allowed Coca Cola to achieve an industry leading 18.4% net profit margins and a 26.0% return on equity, the best in the industry.

You can actually make products both more available and affordable. Roku, a maker of streaming devices that send internet video to TV screens, decided in 2014 to build its circuitry into the TV sets themselves, rather than through separate boxes, gadgets and consoles. This not only provides instant availability for its streaming gateway but lowers the cost through co-branding with TV manufacturers. It also gives a point of differentiation versus key competitors Tivo, Sling and AppleTV. Online transportation company Uber, founded in 2010, made its service both more available and affordable by quickly expanding from just one city (San Francisco) to 169 cities in 44 countries and offering lower-cost taxi and ride-sharing services (versus initially limousine-only services). Uber, a four-year start-up, has already been valued at US$18 Billion (The New York Times, June 09, 2014).

Step 4: Leave out choices that cannot be later measured and benchmarked against your industry. Often, it is the established business model of industries which dictates how to define superior profitability and winning status. Such industry-centric approach is used by insurance firms when they measure success by the amount of "float" created between premiums collected and claims paid. They also use loss ratios –claims plus adjustment expenses – and returns on investment income. Outperforming competitors in these areas translates to wealth creation, superior solvency and greater ability to pay premiums, all critical to ensure the sustainability of any insurance firm. While having more policies, higher market share, greater prestige and/or better customer retention are worthy manifestations of winning in insurance, they are nevertheless subservient to first having the lowest loss ratios within specialized lines of business (e.g. Motor, Home, Health, Life), meeting or surpassing legislated solvency ratios and beating index benchmarks on investment returns.

Pharmaceutical companies also use industry-centric metrics as some of the yardsticks of success and superior profitability, such as the amount of revenues under patent protection and R&D investment. Engineering & Construction companies measure back orders, employed man-hours and completed projects as part of their winning criteria. Churn rates are measured to distinguish winners from losers among mobile carriers. Revenue growth generated from new products and services is pivotal to gauge success in many industries, such as video games and medical devices. Having the most early-adopters in the innovation adoption lifecycle makes winners out of software and technology companies.

Of course, winning and superior returns can also be attained by reaching self-imposed consumer-centric metrics, such as having superior customer satisfaction, generating the most referrals and conversions from social-media investment or by extracting the most consumer lifetime value. Salesforce.com defines winning by, among other measures, its ability to engage opinion-leaders and influencers into promoting its products. Facebook measures performance by the number of page likes, people reach and engagement – the number of unique people who have clicked, liked, commented on or shared posts during the previous week. Grocer Wegman's measures its success largely on how well treated consumers feel in their stores. Net, be sure you know exactly how winning is defined and measured in your industry, and make sure that your choices are easily benchmarked against those yardsticks.

Step 5: Eliminate choices that do not bring tangible extra value to customers. The benefits you intend to offer cannot just be different; they must ultimately improve the lives of consumers in a meaningful way. Autodesk's AutoCAD software, for example, has improved the productivity of millions of architects, engineers and designers since its inception in 1982. How successful is Autodesk? Very. It has become the most ubiquitous microcomputer program in the world. And it has an average return on equity of 12.6%, higher than its 9.2% cost of capital.

At a time when cybersecurity and privacy intrusions are in every networked consumer's mind, instant messaging app Snapchat provides a valuable service: it makes photos, text, drawings and videos disappear from the recipient's mobile device and its own servers after ten seconds. Launched in 2011, it famously rebuffed Facebook's buy-out offer for US$3 Billion in 2013 and was recently valued at US$10 Billion (Bloomberg, July 10. 2014).

Another example worth noting is Lipitor: the best-selling drug of all time, with over US$140 Billion in global sales since its launch in 1996. It would be easy to ascribe its success to its proven effectiveness in lowering LDL cholesterol to the then-acceptable 120 mg/dl levels and thus reduce the risk of heart attacks. But the truth lies deeper: after billions of dollars in development, thousands of successful clinical trials and after the drug was approved for global distribution and sales, Pfizer took the bold decision to invest an additional US$800 Million in clinical studies to study the effects of even lower LDL cholesterol levels. Pfizer went on to show that patients with 100 mg/dl and lower LDL cholesterol levels, previously considered as “low-risk”, would also benefit from Lipitor treatment. The study revealed a drop of 22% in heart attacks and 25% less strokes on these previously unsuspected patients. Millions of lives more have been saved. And Pfizer increased dramatically the size of the opportunity and its target consumer base. Everybody wins when strategic choice is guided by adding value to customers.

Conversely, not keeping in mind what is truly important and useful for customers may result in the demise of an otherwise bright business idea. Launched in 2011, Findit was a mobile application offering universal search across emails and files stored in the cloud. It indexed all of a user’s files across Gmail, Google Drive and Dropbox and used intelligent filtering to both narrow and rank the search results based on file type, name, author and date. It was akin to Gmail’s advanced search, but powered by touch instead of the keyboard. Interesting, right? Alas, not useful enough. The business closed in 2014. In their shutdown letter, the founders admitted that the majority of their users did not use nor need FindIt often enough to justify the company's existence. The moral of the story: make sure what you want to sell is really important to consumers and brings extra value to them, not once or twice, but always.

Step 6: Omit choices that do not satisfy observable or latent customer needs. By observable, we refer to customer needs that are obvious through ethnographic and consumer research. Google’s unique algorithm replaced the human curation then-performed by Yahoo and other search engines, taking advantage of the growing and evident need to search for information online. As of this writing, Google controls 68% of the global search traffic.

By latent, on the other hand, we refer to needs that consumers themselves are unaware they have, most likely because they do not know the realm of possibilities. Steve Jobs famously believed that consumers do not know what they need and that no measure of market research would ever reveal those “hidden” desires. Apple went on to address the latent desire of consumers to have all their communication devices interconnected in a seamless mobile ecosystem which included iPod, iPhone, iPad, iTunes and iCloud. Like Jobs, the effective strategist connects random and loose dots to select smart strategic choices, even when they are not apparent and even in the face of “common-wisdom” opposition.

Step 7: Reject choices that do not address both tangible and emotional needs. For years, Dove toilet soap communicated largely rational benefits, such as its moisturizing properties and pH-neutral mildness. Then its “Real Beauty” campaign shifted focus to build the brand at an emotional level by conveying a more self-managed, independent and natural vision of beauty. In doing so, Dove appealed to millions of women who were tired of trying to live up to the idealized and unachievable standards promised by other brands. Almost overnight, Dove changed from being dull and dormant into a highly distinctive, dynamic and admired brand with a resulting uplift in sales and increased brand loyalty. In 2012, Kantar's Brandz ranked Dove as the world's fourth most valuable personal care brand, with an estimated value of US$4.7 Billion. It is Unilever's third largest global brand.

The explosion of Social Media in the past decade is a great example of tangible and emotional needs being simultaneous addressed. On the one hand, people are in constant search for tangible information, learning, creation and tailored products and services. On the other, people are in constant need to emotionally connect, engage, share, cooperate, be entertained and/or instantly gratified. As such, Twitter informs and shares. Pinterest creates and entertains. Kickstarter cooperates and engages. Facebook actually addresses many of these tangible and emotional needs at once, plus effectively allows brands, products and services to interact with consumers. Its versatility as a social media vehicle that satisfies many tangible and emotional needs has been rewarded with a US$192 Billion valuation, 35.6% profit margin and above-average 11.0% return in equity.

Step 8: Put aside choices that are easy to imitate. First-entry advantages count. True enough. But, obviously, a product seizes to be unique when a competitor imitates it effectively. This is why it is important to create a “moat” or impregnable layer against imitation around strategic choice.

Consider the case of Red Bull. The brand almost single-handedly created the global market for energy drinks. This first-mover advantage meant that Red Bull controlled over 80% of the worldwide energy drink market by 2008. But there is no patented technology or exclusive ingredients behind the product. It was thus a matter of time before a suite of imitators would follow its success. Today, Red Bull remains a strong and iconic brand but highly vulnerable as well: its global market share has slipped to 43% and Coca Cola recently announced the purchase of Monster Drink, its closest competitor with a 39% share, 25.5% profit margins and an unbeatable 41.0% return on equity. Monster has actually surpassed Red Bull U.S. sales since 2012.

Now, consider the example of Songza, a no-cost, ads-free music-streaming service purchased by Google in 2014 for reportedly US$39 Million. Launched in 2011, it had just 5.5 Million users, compared to the 77 Million of Pandora and the 10 Million of Spotify. However, Songza has contextual technology and a curation algorithm that allows users to listen to pre-assembled lists of songs based on mood, location, time of day, exterio light, user activity and even current weather conditions, the latter thanks to a partnership with The Weather Channel. The acquisition brings this hard-to-imitate contextual technology to Google Play Music, which had been lagging behind in streaming technology (The Washington Post, July 02, 2014).

Net: always remember that superior performance is eventually neutralized by competitive upmanship. And firms can certainly match prices and obliterate any cost advantage transmitted via price. And beware of good choices that become obsolete as competitors vie for a piece of the action.

Step 9: Exclude choices that are not easily marketable. The utility derived from your proposition must be easy to communicate and be made available to the end customer. Offering demonstrably superior performance or lower cash outlay is certainly a precursor of effective strategy. But superior utility or lower prices may not always be in evidence. In these cases, compensatory marketing measures must be implemented. For example, the promised faster speed of claim resolution of a health insurance policy would only be manifested at the time of an accident or surgical intervention. Convincing potential policy holders of this point of differentiation may require creativity, testimonials and possibly more marketing investment. Likewise, the lower price of a product may be in the disguised form of cost-per-usage; or the greater efficacy of a therapeutic drug masked by higher unit cost.

Unique, rare and unprecedented benefits also have particular challenges, not just to communicate but to make them available. This is currently the challenge facing Stratasys and other 3D printer manufacturers: a great technology whose cost-per-use is hard to justify to the mass consumer. At other times, benefits are not real but rather perceived, as when an Engineering & Construction company wants to sell prestige over equally-qualified and able competitors. Thus, at all times, be sure that your strategic choices can be pragmatically and easily conveyed to customers.

Step 10: Suppress choices that are unaffordable to your customers. Your chosen point of difference may have all the right qualities but still be unaffordable to most target consumers. This is self-defeating. Merck found this out when it attempted to sell its important and marketable anti-HIV drug Atripla, which uniquely combined several antiretroviral molecules into a single dose. However, it carried an annual treatment cost of over US$22,000 in the U.S., thus unaffordable to most HIV patients, especially those in developing countries. Only after lowering the drug’s price did Merck start having any traction and bring relief to patients all over the world. Today, the company makes Atripla available to poor regions of Africa for as low as US$528 annually.

The lack of affordable options often represents an opportunity for the entrepreneurial mind. Such is the case of Coursera, the education company which offers free online classes from prestigious universities, the so-called MOOS, or "Massive Open Online Courses". It offers the revenue stream of its Signature Track program, in which the most-committed students pay solidarity fees to take digitally proctored exams that verify their identity and scholastic achievements. Already more than 4 Million students attend Coursera classes instead of traditional university courses, increasingly considered as overpriced. Coursera has received US$65 Million in venture capital funding and a large public stock sale is likely (Forbes, July 10, 2013).

Step 11: Dismiss choices that lead you astray from what you do best. Few companies have been more successful than Microsoft. There are many reasons for its success, including having a superior product that is highly relevant to the growing mass of PC users and its quick and tangible improvements in work productivity. The protective moat provided by thousands of patents, intuitive ease-of-use and brilliant commercialization are other valid reasons. There are surely others. But few people realize that a big part of the company’s success, certainly at the onset, was the single-minded focus of its founders on productivity-suite software development.

That is all they did. Indeed, Bill Gates and Paul Allen were computer hobbyists who had already proven their precocious abilities to create computer language when they decided to develop and sell software for microcomputers. They had actually logged thousands of hours coding software using an Intel’s 8008 eight-bit micro-processor when Ed Roberts, founder of MITS, invited them in 1975 to develop software for its Altair 8800, which happened to use the same micro-processor. So strong was the founders’ focus on software development that the company was many years later blamed for having missed the hardware boom of smartphones and tablets. The fact is that Microsoft smartly stuck to its core competency and to what it knew best. Every business owner, entrepreneur and manager should do likewise.

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Hope you found this blog post interesting and worth sharing with others. Be sure to periodically visit our thought-blog (www.rgacompany.com/thought-blog), where we share more business insights, case studies, tips and advice from years of managing business and organizations around the world.

Contact Pedro A. Medina, Principal of “Renaissance Growth Advisory”, if you wish to engage our services and unveil new ways to finetune your strategy accelerate your company’s profitable growth. His email is [email protected].

Rennaissance Growth Advisory A strategy consulting firm with seasoned business operators trained at Fortune 500 companies all over the world. We are experts in profitable growth.

Over the years, the partners of Renaissance Growth Advisory have learned important lessons on effective strategy development and managing businesses.

Visit our blog at http://www.rgacompany.com/thought-blog for more business lessons, insights and tips.

We are pleased to share now two more of these lessons:

Lesson # 6: Think solutions not features.
Consumers are not interested in products and services. They are really interested in solutions to their needs. A person may be looking for car insurance, but what she is really looking for is protection for her asset (functional solution) and peace of mind (emotional solution). Crafting strategies with solutions in mind will enable you to differentiate better, as your product or service may have the same features as others but offer entirely different promises and solutions. This is why the iPad, with its integrated ecosystem solution, has held its leadership of the tablet market in spite of similar and sometimes better features offered by Samsung, Kindle, Acer, Lenovo and several others.

Lesson # 7: Build your strategy around core competencies.
A core competency is an entrenched capability that enables a brand or business to deliver unique, superior or better value to its consumers. Understanding them allows firms to invest in the strengths that differentiate them and set strategies that unify their entire organization. The truly good strategist understands that by weaving core competencies into a strategy, the brand or business de facto acquires sustainable competitive advantages that are difficult, if not impossible, for competitors to copy.

Come back to our page for more of our "Top Ten Lessons towards Becoming a (Truly) Good Strategist".