GEOStrategy

Anyone Have A Little Change?

They must often change, who would be constant in happiness or wisdom.  ~Confucius

We’ve heard a lot about change lately. It may or may not be change you can believe in, but like it or not, things are changing in our economy.  While we all want to know when the economy will recover, an equally important question is how dramatic and sustained will that recovery be. Perhaps, most important, is how will markets and competition have changed as a result of this economic downturn and subsequent government interference in the marketplace.

Unfortunately, there are a lot of questions to ponder. Which sectors will recover first? Which sectors will continue to grow and which will become stagnant and decline? What do the business opportunities of the future look like? How will competition change? What kind of new alliances and partnerships will be necessary to compete? How do we leverage new technologies? If competition intensifies, how do we finish ahead of our competitors?

If there is a silver lining in this downturn, it could be that slowing growth and increased competition is forcing companies to take a hard look a their strategies in terms of market-focus, competitive positioning, and value proposition. While it can be hard to drain the swamp when you are fighting alligators, a low water situation can give you a better perspective on the lay of the land. Many of us have now had a quarter or two where market growth was no longer assured and we had the inconvenient luxury of a pause to examine the nature of competition in our markets.

Fortunately, no matter what winds of change buffet markets and economies, strategic principles remain unchanged. The art, of course, is applying them the right way at the right time. In 1957 Igor Ansoff published a simple matrix for examining growth opportunities. Ansoff’s Matrix, shown below, offers five fundamental choices:

1. Market penetration (existing markets, existing products): Market penetration is about new strategies and tactics to take market share away from competitors or to sell more of your products to current customers. This is the ultimate “red ocean” of competition, and companies without clear strategic positioning can sometimes find that slowing growth causes competition to disintegrate into a price war. An understanding of competitive dynamics and a search for a unique and compelling value proposition is key here.
   
   
2. Product development (existing markets, new products): The strategic opportunity is created by a strong market position which allows the firm to introduce new products to existing customers. We recently worked with a supplier of industrial pumps and valves to formulate a strategy to sell process instrumentation to existing customers, for example. We assisted an affordable housing manufacturer in their quest to sell additional financing products to their loyal customer base. Creating strong brand loyalty and a sense of community can be critical here.
   
   
3. Market development (new markets, existing products): An established product that is strong in one marketplace can be tweaked or targeted to a different customer segment, as a strategy to generate incremental revenue. We recently worked with an aluminum manufacturer looking to explore aluminum as a replacement for plastic in consumer electronics casings and to replace steel as a block mold material for plastic injection molding. We assisted an industrial valve company who was exploring municipal markets and helped a pressure vessel manufacturer identify best new markets for expansion. It is important to understand the different nuances of each market and to be able to consistently leverage core competencies while building a slightly different business model.
   
   
4. Diversification (new markets, new products):  This was the strategy of choice in the sixties when stable growing markets with little outside competition supported the view that a good management team could manage any business. In today’s more competitive markets, the strategy can still be effective if true core competencies can be leveraged across all businesses. A private equity firm, for example, often employs this approach.
   
   
5. Consolidation (pulling back): Sometimes, particularly when market growth is slowing, the right move can be to move back and consolidate your strengths in the market in which you have the greatest competitive advantage. This can be a remedy for non-strategic growth that occurred when all markets were expanding and new business came easily.

This model has stood the test of time, although as markets become more fluid and dynamic and competition intensifies, another dimension could be added to represent “blue ocean” opportunities. The concept is to uniquely apply product and service offerings to create a new value proposition that meets and underserved need. It is often created by modifying existing products and finding opportunities between markets. By doing so, you effectively create a new market, and for a while at least, enjoy uncontested market dominance. 

Simple concepts with enormous implications for risk, return, and the need for strategic focus. Most important are the clear need for a disciplined focus and, a clear understanding of your core competencies and sources of competitive advantage. They are the fulcrum on which you leverage growth. Growth that misaligned with core competencies is not sustainable. Finally, it is important to understand which markets and which products are going to be winners in the future, which is why market intelligence and strategic analysis are critical.

At Geo Strategy Partners, we work on the basis of a simple but effective methodology:  to help companies determine where and how to compete in the future. We build a market attractiveness model that can be as sophisticated or simple as the situation requires. Graphically, it represents three dimensions: the x axis is a weighted average of the potential for market opportunity growth; the y axis represents a weighted average of factors that suggest degree of fit with the organization’s core competencies; the opportunities themselves are represented by spheres or “bubbles”, the diameter of which represents the relative size of the opportunity.

Behind this graphic is a spreadsheet of multiple calculations of various definitions and dimensions of fit, size, and growth. They are quantitative in the model, but often built upon an interpolation of a great deal of qualitative insights as well as quantitative data. Each measure of fit is weighted for its relative significance. The output can be instructive in taking a broad view of market opportunities.

The real work then comes in analyzing the value drivers for promising industries and developing a go-to-market strategy that leverages your core competencies properly. No matter how good the model, markets will change but if your core strategy is sound, you can adjust to that change and navigate products into markets from a position of strength, not desperation.

The important lesson is that change is necessary for survival and growth. When markets are stable and growing, it is easy to be lulled in to complacency. When markets are contracting and changes are on the horizon, it is critical to know how you want to position your firm on the new competitive landscape. Changes in markets and competition are inevitable, but strategic principles are a constant that can be applied to navigate these changes.