December 22, 2005

How David Can Beat Goliath- Summary of Strategies

Posted in culture, customer service, David vs. Goliath, Economic Model, finance, management, marketing, Metrics, Product Development, Sales at 11:50 am by scottmaxwell

This post is an overall summary of the David vs. Goliath Series and meant to act as a pointer to all of the posts in the series. There are three overarching points for the series:

  1. Emerging growth companies have several natural advantages over larger companies that they can amplify,
  2. Large companies have several advantages that emerging growth companies can minimize, and
  3. Emerging growth companies can (and should) take a series of specific short-term actions that over time will accumulate into a long-term defensible competitive advantage (by amplifying their advantages and minimizing the large company advantages)

I can’t emphasize enough how important it is for emerging growth companies to think through these issues and develop a clear point of view on what they are trying to achieve. Regardless of the long-term goal (a sale of the company or remaining independent), building a defensible advantage will make life much better for you (easier time in the product markets, better growth, better bottom line, higher valuation, etc.). Of course, once you know what you want to achieve, you need to execute against it!

The Nine Major Themes:

  1. Create an Information Advantage. The emerging growth company has the natural advantage of being closer to the customer that the large company. You can truly capitalize on this advantage by taking steps to increase the information flow into your company even more.
  2. Create the Time Advantage. The large company has a disadvantage as it grows, as solid communication between employees gets much much more difficult as companies grow. This communication difficulty turns into a time advantage for emerging growth companies, as larger companies have difficulty doing anything quickly, while emerging growth companies, with their smaller staffs, can turn on a dime. The emerging growth company can take several steps to capitalize on this natural advantage.
  3. Create the Scope Advantage. The emerging growth company has the ability to focus on one product market. The larger companies naturally need to increase their scope in order to sustain growth. The emerging growth company can exploit this natural advantage by staying focused and continuously improving “ownership? of its product market.
  4. Create the Scale Advantage. Large companies have difficulty seeing and/or addressing small markets, even if they are very high growth. This gives the emerging growth company time to establish a foothold in the market as well as create some level of defensibility before the large company enters the market.
  5. Create the Innovation Advantage. Large companies have difficulty executing against certain types of innovation (for example, innovations that cross department boundaries, such as new products with new channels of distribution and new customer service approaches). If emerging growth companies innovate against these natural advantages, they can create an edge against the large companies.
  6. Set Your Operating Point Closer to the Funnel Singularity. This is the strategy of allocating your resources against nailing the customer experience at low price points to the customer instead of allocating significant resources against sales and marketing activities. If you do this well in the right markets, you can create a large, profitable business that is very difficult for the large companies to compete against. This is a classic strategy, but the internet-based sales and marketing approaches now allows the strategy to be executed more aggressively.
  7. Attenuate Goliath’s Strengths. The large company does have some natural advantages itself. The posts below address each of the large company advantages as well as what the emerging growth company can do to minimize the large company strengths (and in many of the cases, create an edge):
  8. Defend Against Goliath’s Attack. No matter what you do, if you are successful then Goliath will eventually attack. These posts address the nature of Goliath’s attacks as well as how the emerging growth company can set up in advance to defend against the attack. I point out that the results of the attack will be determined well in advance of the attack! The two posts are:
  9. Execute Against Execution. All of the prior posts are about what the emerging growth company can do to create a strategic advantage. This post is about how to maximize the pace of your company toward the series of goals that you have set for your company. The higher your pace toward your goals, the faster your company will develop into a large profitable company with a defensible competitive advantage.

I am going to take a breather from this series for now, but I do intend to put together the implications for each department so that some of the more esoteric points will be made more tangible for each functional group. When I post each of the functional implications, I will place a link on this post below so that this post will act as the index of the major strategies in addition to the specific implications for each function.

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December 21, 2005

How Can David Beat Goliath?- Strategy #9: Execute against Execution!

Posted in culture, David vs. Goliath, Execution, management, Metrics at 6:01 pm by scottmaxwell

Up until now I have focused on how the emerging growth company can gain strategic advantages and minimize the large company advantages. If you have taken the best of the ideas, distilled them to their essence, and applied them to your emerging growth business, then you should have a very clear idea of what you are trying to achieve (a.k.a. your vision) at this point.

This post is about how you best execute toward your vision, which I think of as punching the fast forward button (like you do on your DVD player) so that your organization moves rapidly toward nailing a series of short-term goals and, ultimately, your longer-term vision.

Quite a bit has been written on execution (I list my favorite books on the subject at the end of this post). If you have been studying the topic, you have found there are many possible inter-personal and inter-group issues, many different types of people and situations, and lots of advice on leadership methodology for approaching each situation.

What I have done with this post is to boil away all of the tactical details and present what I believe are the most important skeletal components for execution (you will find these components in all companies that have been high achieving for a long period of time). If you get the skeleton right, you should be 80% of your way toward optimal execution. Get these wrong, and your results will be significantly lower that they could be (you still might get lucky with a unique product or a unique product market for some period of time, but you will regress toward the mean over a longer period of time).

The essence of execution is fourfold:

  1. Genetically engineer your organization. You need the right people doing the right activities in each position. Recruiting, training, motivation, reward, and separation systems that are 100% aligned with performance are key.
  2. Create challenging focal points. Every group and individual in your organization needs 2-4 short-term, challenging focal points that are aligned with the company milestones and interdependencies.
  3. Measure progress and make adjustments to close gaps frequently. Every individual and workgroup needs to review progress, understand gaps, and get help closing the gaps on a regular basis. Weekly, monthly, and quarterly reviews are a necessity.
  4. Be flexible. Adjust your longer-term goals based on short-term results. The world rarely turns out the way you expect.

These skeletal ingredients are very similar to agile software development principles applied to the entire organization (although I have tried to make the key ingredients more black and white for the purposes of clarity). If you have just these ingredients, you will execute at least 80% well against your game plan. Each of these four ingredients is discussed in more detail below.

Genetically engineer your organization…

Genetically engineering your organization means getting the right people doing the right activities, with a management approach that is merit based (a.k.a., the meritocracy). Each of these is outlined below:

  • Right people. I have already posted on the topic of recruiting best practices for hiring “A” caliber people. There are two additional thoughts that I would like to make here. First, if you want to get something done quickly, you need to hire a person that both knows how to do it AND has done it before successfully. Additionally he or she needs to be passionate to do it again (not people who have read a book or watched someone else do it, but rather people that have managed the activities that you are trying to set up). Even better, if you can find people who have both set up and managed the activities before, you will have much better execution as the skill to set up the group in the first place is much different than the skill to manage a group once it has been set up! For example, if you are developing a database application on SQL server in C++, getting a person that has been developing successfully in SQL server and C++ makes sense. Likewise, if you want to start a telesales group, getting a manager that has been highly successful setting up and managing a telesales group makes sense (rather than hiring a field sales manager to manage telesales). This is a simple point, but not followed as closely as I would expect. Second, you need to hire people that fit with the culture that you are trying to set. Either you need to hire experienced people that have the culture, or you should hire entry level people (“A” caliber!) directly out of schools and train them into your culture (this is the best long-term approach in my view, especially if you supplement the entry level people with the managers that have the direct experience. However, it will be less effective in the short-term, so you need to determine the trade-off you are willing to make).
  • Right activities. Just to reinforce my point above, you need to hire people that know how to do the right activities into the leadership positions of your company. If you supplement the leaders with entry level “A” caliber people, then you will form a team that should generally be doing the right activities. The major point is that the right people should know the right activities and naturally set them up and proper oversight will make the activities even more “right.” You need to be EXTREMELY careful that you are sure your hires know exactly what they are doing, however, as good people will do a good job executing what they think is right. If they do not know exactly what they are doing, you will end up with the wrong activities and it will be much more difficult to changeover to the right activities!
  • Meritocracy-based management system. If you want a management system to maximize execution, you need to set up a culture that makes it so that top performers that want to win will love working for your company (and lower performers won’t like working for your company). Generally this means compensation and advancement goes to those that perform and separation goes to those that can’t or won’t perform. The trick here is to start at the point of recruiting and let the recruits know that you have a performance-based culture that rewards top performance and does not have time for underperformance (this will both set expectations and help to attract the top performers and reduce the attraction from the underperformers). Once people are hired, set up goals (more on this point below), and then reward the performers in various ways (rewards can include the obvious compensation and advancement, but other rewards are in many cases more valued, such as publicly thanking people, giving them awards of various kinds, and giving them challenging new opportunities and leadership roles). For the non-performers, moving them into less critical positions and/or helping them find jobs outside of your company will help you maximize your execution while doing the right thing for your underperforming employees.
  • Prevent “bad behavior.” Finally, you must make sure that “favorites,” “sacred cows,” “politics” and other management approaches that are not merit-based do not creep in your organization. These approaches not only hurt execution short-term, but also dramatically impede your ability to build a long-term sustainable execution advantage. Merit-based approaches get high-performers focused on results, non-merit-based approaches disengage high performers and get everyone else focused on issues other than results. Managing for high performance will significantly reduce the energy focused on “bad behavior”, but you will also need to manage away these behaviors (and potentially the people exhibiting these behaviors!) before they breed in your organization (this is particularly difficult as you grow into a large organization, as their are more places for these behaviors to breed).

Create challenging focal points…

Given your staff is in place, you need to disaggregate your longer-term vision into a series of goals for each department, group, and person in your company. Overall, this gives everyone in your organization a focal point to think about and act on when they come into work every day. Generally, the more they focus on the goal, the more their activities and actions will be aligned with the goal. The goals need to be:

  • Specific. It is very important that the goals are very specific. For example, “have the best product” is not at all specific and very difficult to take actions against. However, product download speed, installation time, alignment with specific use cases, and user satisfaction are all much more specific.
  • Measurable. Measurability goes hand-in-hand with specificity. If you can measure your performance against your goals, you can determine that pace of improvement. For example, product download time from a broadband connection, number of “clicks? to install, install time, number of clicks to complete a given action, wait time for a given action, and user survey results are all measurable and repeatable so that you can both benchmark yourselves and measure your progress against your goals.
  • Short-term. Having the goals be short-term is highly important, as an immediate goal creates a sense of urgency in the business. Forget goals that are one year out, and set goals that need to be accomplished this month, this week, or today. This is probably the most important factor in execution!
  • Stretch. The goals need to take real work to meet, as goals that are too easy to accomplish will create a sense that “this can wait until tomorrow.” You want your staff to be working toward the goal every day!
  • Achievable. Ultimately you want everyone to build excitement around achieving the goals AND you want everyone to know that you are serious about everyone meeting their goals. The only way to do this is to set goals that can be achieved if people work hard (if you truly work on this, then you will get better at setting your goals over time so that they are both stretch goals and achievable goals). The more people think that the goal is not possible, the less they will work toward achieving it (why work hard if they are going to miss nailing the goal anyway?)

Some examples (note that these may or may not apply to your business):

For Product Development, make the next build by Friday, release the next version of the product to customers by next month, work toward builds every other day by the end of the quarter, work toward customer releases every 6 weeks by the end of the quarter. Build specific use cases into the product by a certain date, improve download time to 1 minute by a certain date, etc.
For Marketing, create 100 qualified leads (with a specific, measurable definition for “qualified”) a day by the end of the quarter with an average cost of $10; generate at least one featured article in a trade magazine this month. Generate at least 30 customer referral leads per week by the end of the quarter, etc.
For Sales, Make 50 new customer contacts each day, create $1 million in bookings this month and build a $20 million of qualified pipeline by the end of the quarter, etc.
For Customer Service, pick up the phone by the second ring 95% of the time and don’t leave anyone for more than 2 minutes. Resolve 95% of customer issues while they are on the phone and the remaining 5% within 3 business days. (Of course, you would expand this into e-mail support, self-help tools, VRU approaches, etc.)
For Finance, reduce days receivable down to 50 days by the end of the quarter (and many other possibilities depending on your current situation).
For Business Development, create and propose at least 3 partnership proposals to the 3 our of the list of targets by the end of the quarter, close on one deal that generates a specific revenue stream in a specific time period.
For (insert the right department) increase pageviews per visitor by 10% within 30 days, reduce customer churn by 15 percent by the end of the quarter, increase.

These are just meant to be thought starters. The more your goals disaggregate to specific people across your organization, the more the people know the dependencies with other parts of the organization, and the more your people help each other to meet their goals, the more setting these focal points will drive execution.

Measure progress and make adjustments to close gaps frequently…

The focal points are only words on paper (or e-mail?) until you put the proper management model in place that reviews progress against goals and make adjustments as you determine gaps in progress against the goals. Your management model should give everyone the opportunity to review their results vs. their goals and also has the opportunity to hear the ideas of others to help them improve on their goals both during the review meetings and in between the review meetings. Everyone should have review sessions at least weekly (more likely daily or intra-day for some of your work groups), and less frequent, more in depth meetings as well (I think about weekly reviews that are short and to the point unless there are gaps emerging, monthly in-depth reviews for everyone to get a detailed understanding of what is going on and to offer their ideas and assistance, and quarterly meetings to have even more in depth reviews and to set up the next set of goals. These time periods are rough, but the nature of the work week/weekend cadence requires at leas one checkpoint each week).

As a separate point, these review sessions are better when they are not meant to put people on the spot or to create unhealthy stress, but rather to be collaborative sessions to truly understand progress and to help people nail their goals. If they are set up in the right way, the combination of individual and group accountability, problem solving/idea generation, and resource adjustments based on results, will make the sessions an extremely important part of your execution program and something that people will look forward to (would you rather feel like you are being judged in a session or feel that you are going into an environment where people are going to acknowledge your hard work and help you achieve your goals?)

Be flexible…

Most emerging growth companies are working in extremely dynamic markets and their companies are extremely dynamic as well. The nature of the business is such that sketching out the long-term and then focusing on the short-term is a necessity. But sticking to the longer-term when market opportunities change or execution challenges become apparent is not a good idea.

This brings up the issue of annual budgeting and planning sessions. My view is that thinking through an entire year and sketching out a plan and budget are very important to making sure that you are rethinking the big picture at least once a year. However, the annual planning cycle in my view is more of a starting plan rather than the last plan for emerging growth companies each year. Each day, month, and quarter will bring its own surprises, and reviewing and adjusting your plan each quarter is totally appropriate (you will have plenty of time for long-term planning when you are a large public company that must implement these approaches as control systems!)

Wake Up to Your Current Situation
The four skeletal ingredients for execution are pretty obvious, perhaps too obvious. I can’t tell you how many companies and mangers think that these points are obvious, unnecessary or think that they are doing these things well, but actually are quite average at execution (roughly half the companies are actually below average!!). Every once in a while, however, I meet a senior manager or a team that has implemented these principals and the results are truly phenomenal.

When I was a young McKinsey & Company Consultant, I had an assignment working with a senior manager at a client that was extremely capable at execution. He had just given a similar framework to one of his junior staff members and the junior staff member said “any monkey could do this!” The senior manager’s response was “yes, any monkey could do this, but no monkey does do this!” It takes a capable leader to manage execution, even though the steps are very basic.

How do you determine where you stand with respect to execution right now? Start by taking a baseline audit of your current approach. The best approach that I have found is to ask a cross section of employees several questions:

  1. What are the short-term goals of our company? What are the measurements? Are they easy for you to measure? Are the measures objective?
  2. How does your group (or team or department) contribute to those goals? What are the measurements? Are they easy for you to measure? Are the measures objective?
  3. How do you contribute to your group, thereby contributing to those goals? What is the deliverable that you are currently working on? When is it due?
  4. How does your supervisor, team members and/or other groups review progress and assist you in achieving your goals? Do they know this? Do they have measurable goals against this? Are they easy to measure?
  5. What are the rewards for nailing your goals? What happens if you don’t nail your goals?
  6. Do you think that everyone in the company understands their goals and is working hard to achieve them?

If you are like most companies, the results will be awakening. You will probably find a complete lack of consistency in the answers, which is the key indicator that they ingredients described above are not in place (or if they are in place, they are not being executed against). If you are a high performing company with high performing teams and individuals, you will both see a consistency across answers and see a clear enthusiasm for the processes that have been established.

Summary
Execution is not rocket science. It is all about getting the right people, telling them what is expected in the short-term, reviewing progress, making adjustments, and making sure success is rewarded and the less successful processes and people are managed out of the organization.

The approach outlined here takes some level of management discipline. I find that a lot of people lack the discipline to either implement these items or to continuously executed against the items. You may want to make someone responsible for making sure that the processes are followed and/or sit in on conversations periodically and give friendly reminders to all of the managers responsible for execution.

I left out mention of interpersonal behavior as an item above. There are several very good books on the subject if you need them. In my experience, if you take the steps outlined above, then people will not have a lot of time for bad behavior and that some combination of 360 degree reviews and one-on-one feedback will help you both determine the issues and help you address the issues. Ultimately, there is some level of interpersonal behavior that is acceptable and you will need to separate the people that tend toward extreme unacceptable behavior, even if they have high performance.

Reference Books
There are a lot of details beyond my outline above that will help bring you from 80% to 100% in terms of execution. The first three books below are some of my favorite books long-term that I keep as references. The fourth is a quick read and has some good ideas as well. My strong advice is to focus your attention on the outlined points above, as all companies can move the needle quite a lot by executing against these points. If you have the time and inclination, pick up one or more of these books:

  1. The Breakthrough Strategy by Robert Schaffer is my all time favorite book on execution. Robert does a great job of distilling execution down into what you need to do and what you need to look out for. Summarized here.
  2. The Wisdom of Teams by Jon Katzenbach and Doug Smith is getting to be a classic on building high performing teams. I was lucky enough to contribute to the book when I was a McKinsey & Company consultant, working with the authors. Summarized here.
  3. Double Your Profits in 6 Months or Less by Bob Fifer. While this book is not directly about execution, Bob has some great ideas that are completely aligned with getting things done in the short-term.
  4. Execution: The Discipline of Getting Things Done by Larry Bossidy and Ram Charan. This book also has some great ideas, although it is probably a bit too heavily weighted toward large companies (rather than emerging growth companies). PDF Summary here.

December 12, 2005

How Can David Beat Goliath?- Strategy #8: Defend Against Goliath’s Attack (Part 2)!

Posted in David vs. Goliath, management at 9:58 am by scottmaxwell

This is the second part of my post on defending against the large company attack.

In “part 1” of this topic, I described the attack vectors that Goliath might pursue. Depending on how aggressive and effective an attack the large company mounts, it will use a combination and sequence of the attack vectors.

This post is on how the emerging growth company can set up to defend against Goliath’s attack. The overarching point here is that the result of the attack will be determined before the attack begins! If you wait until the point of attack to respond, you will lose (unless you are lucky!). When you boil all of the possible attacks down, there are five major defensive focal points for the emerging growth company:

  1. The best defense is a good offense– Stay focused on building your advantages and minimizing goliath’s advantages
  2. Delay the attack as long as possible– Minimize your perceived size and attractiveness as long as possible
  3. Add the teflon coating– Minimize your exposure to Fear, Uncertainty and Doubt (FUD)
  4. Fortify your position– Make it very difficult and expensive for Goliath to win by building a really strong and defensible competitive position
  5. Be prepared to negotiate– If Goliath wants to discuss acquiring you, be prepared to talk to Goliath (and other possible acquirers) to help you guide the result.

If you execute against the first four points very well, then the only troubling attacks for you should be Goliath executing an all-out, focused, attack against you, either organically or by purchasing one of your competitors. Once it decides that a particular product market is attractive, a really well run large company will run the numbers before deciding what to, and probably start a conversation with you about a potential acquisition to help it decide its attack vectors. The key then, in point 5, is to use the conversation as a vehicle to help you guide the outcome of the attack.

I address each of these five major focal points below in more detail.

Focal Point #1: The best defense is a good offense…

Your first major focal point should be around maximizing your advantages and minimizing Goliath’s advantages. I have already written on several major advantages that the emerging growth company can focus on as well as how the emerging growth company can minimize Goliath’s strengths. These are all great concepts to consider, and the more you are able to implement successfully, the more defensible you will be to Goliath’s attack. Below are the links…

  1. Create an Information Advantage
  2. Create the Time Advantage
  3. Create the Scope Advantage
  4. Create the Scale Advantage
  5. Create the Innovation Advantage
  6. Set your Operating Point Closer to the Funnel Singularity
  7. Attenuate Goliath’s Strengths

Focal Point #2: Delay the attack as long as possible

The major point here is that you have the opportunity to manage Goliath’s perception of both you and your product market. You need to directly consider Goliath’s window into your company and product market and determine how you can “paint the window” with the scene that you want Goliath to see (the more you dominate your market niche, the better your opportunity to hold all the paint brushes). Goliath’s perspective will help determine the emphasis that it places on attacking your market.

Goliath will have more interest in the market the larger and more profitable the market appears AND the easier it appears to win in the market. Therefore, your goals are to:

  • Make the customer economics appear very lean or opaque, at least at first. If you aim for the economic singularity, you will have a much larger install base before your draw goliath’s attention. In terms of making the economics look opaque, the advertising driven economic model is an example of business economics that are very opaque to outsiders (whereas, a product with a set customer price is easier to understand).
  • Focus on a niche market. Even with good customer economics, if Goliath applies it against a small number of buyers, the perceived market size will be small.
  • Focus on an “older” market.  This is not for everyone, but doing new things in an old market is not very attractive on the surface (it could be extremely attractive, but difficult for the large company to get its mind around until you prove it with results).  Google may have bought itself a lot of time, for example, due to the fact that earlier search engines were not very successful from a business perspective.  Similarly Salesforce.com enterered an older market in a new way, and there were a lot of early naysayers.
  • Make your approach too “unique” for Goliath. An extremely unique product and/or business model will catch Goliath flatfooted for a very long time. The less data that is available on the approach, the more creative the approach, and the more differentiated the approach from Goliath’s business model, the more naysayers there will be in Goliath’s organization preventing any real attack. Google, Salesforce.com, Webex, and Skype are all great recent examples of this.
  • Make sure that Goliath knows it will be difficult to win. The more you both execute and communicate on Focal Point #4 (below), the more difficult the market will be to win (this assumes that Goliath does the right analysis!)

Focal Point #3: Add the teflon coating

The point here is to minimize your exposure to Fear, Uncertainty, and Doubt (FUD). I addressed the situations where FUD would be more effective in my last post. There are several ways of minimizing the effectiveness of FUD:

  • Focus on customers other than Enterprise customers. Focusing on departments of large enterprise (rather than the entire enterprise), small and midsized businesses, and especially consumers will help prevent the effectiveness of FUD. (The smaller the decision-making group, the less effective FUD becomes.)
  • Make your product very inexpensive to implement and to switch off. The lower the cost of a buyer “making a mistake,” the less worried he/she will be about making a mistake. The buyer costs include all of the costs associated with price, implementation, configuration, and learning as well as all of the costs of migrating to another product. Work hard to keep these costs as absolutely low as possible.
  • Make sure that your product can’t be considered a “feature” of Goliath’s product. The more the buyer thinks that the product could or should be combined into Goliath’s product, the more he/she will wait for Goliath to offer it.
  • Make sure that everyone surrounding the company makes good money off of offering your product. The more they suffer economic loss by waiting for Goliath’s product, the less interested they will be in waiting.
  • Distribution outside of North America may help minimize the effectiveness of FUD as well. Stephen Pollack, CEO of Platespin (my most recent investment), pointed out in a comment to my last post that his experience FUD results are the strongest in North America and much weaker in other parts of the world, Europe most notably.

Focal Point #4: Fortify your position

The last two focal points (3 and 4) are really medium-term tactics (they are important, just will not be long-term in nature). Longer-term, once the large company decides that it is interested in your market, you want the larger company management looking at you and thinking “man this company is going to be extremely difficult to displace!” (You also want it to be true!) Below I list the characteristics that you should consider building into your company that will give you this strong, defensible position:

  1. A very very large number of really really happy customers who speak highly of you and your products (if you bought enough time, it will help you get more customers prior to the attack). You get this from
    • building a product that truly meets your target customer’s deepest needs at a very reasonable price point,
    • creating great customer support,
    • not making missteps with your customers (for example, a product update that has too many bugs), and
    • continuing to make the customer experience better
  2. A very specific brand identity in your product market. I have discussed this point in a recent post. The point is that you want to be the “Kleenex, Webex, or Google” of your market niche…so intertwined with the product market that your brand name gets confused with the product market (this is not fluff!)
  3. A product that is extremely difficult to replicate. Generally, this also means a product that is really difficult for you to make, but your small “A-caliber” team working for a few years should have a much better product than a much larger team at a large company working half that time (IP builds exponentially with time and is equal to the number e raised to the q times t power, where q is the quality of your team working together and t is time the team is working together on the product. It assumes a minimum appropriate team size and larger team sizes actually reduce q!). The product that the team builds should have some specific characteristics as well, including:
    • An architecture that is easy to evolve and has a rich API. This may be the most important factor in your product. It is hidden from the outside world, but amazingly important to the continued strength of your product advancement!
    • A large amount of engineering and development. Assuming that your development writes highly efficient code, the more lines the better from a defensibility perspective (also, this assumes that your customers find every line valuable!)
    • A daily-use and intuitive user interface. The more intuitive your user interface the better, and the more frequently the user interacts with it, the more comfortable the users will be with your product, which leads to a level of defensibility.
    • The “real world” problem solving that gets baked into your product. In my experience, most products have code that is theoretically replicateable. The problem is that the newer entrant (large company) will need to hit all of the real world “snags” that you did (scale issues, customer environment issues, interface issues, etc.). But when you were trailblazing the market, your customers were pretty forgiving. Now that you have a fully baked product, your customers are going to be less forgiving to the new entrant. Why buy their product with all the “snags” when your product has solved these problems? In my view, the more snags that you hit along the way, the more defensible the product…think about the snags as “tacks in the road” that are behind you but in front of the new entrant (note: this issue is a real defensibility, but it is very difficult for the large company to understand until they start trying to deliver a similar product…most companies underestimate domain expertise until they hit the “snags”!).
    • The heterogeneity of your product environment. The more your product works in heterogeneous environments, the more defensible the product (assuming customers view this as a benefit).
    • Interoperability-interfaces to other products and services. The more you easily integrate into other products and services, the more defensible the product (again, assuming customers view this as a benefit)
    • Your networked externalities. If you have a product whose value increases with increasing users (like the telephone, fax machine, social networking sites, e-bay, Craig’s list, certain spam filter approaches, etc.), then your product will be more defensible (assuming you have a number of users that the large company can’t easily replicate).
    • The combination of data and application delivered together. In the past there were application providers and data providers. This distinction is blurring and the companies that can provide both add more value and are more defensible (at least until the approach becomes more common).
    • The outside world only seeing the tip of the iceberg. The more your product details and plans are hidden from view, the more difficult it would be to copy what you are doing (Google has been extremely effective with this approach…all the outside world sees is its simple user interface).
    • Your patents. I wrote previously on patents, and continue to believe that this is an important area to explore. The more useful patents you have, the more defensible you are.
    • Your employee turnover. The fewer employees that leave the company, the less information can be shared outside the company. Hire the “right” employees, separate out the “hiring mistakes” early and keep them happy and productive!
  4. An Economic model that is extremely difficult to replicate. Aim closer to the economic singularity!
  5. A business model that is extremely difficult to replicate. The more aspects of your business model that the large company does not have, the more difficult it will be for the large company to copy you. For example, use of viral marketing techniques, unique channels of distribution, customer service built into the product, and self-service are all useful to consider and many large companies do not have one or more of these processes in their current businesses. If you have a complete business model that meets the needs of a unique customer segment and the large company does not have it, you will have more defensibility.
  6. An execution effort that continues to accelerate. I am going to develop the point of having great execution as another post in the series (and will link to it when I post it). The key here is that you need to be moving like the movie when you press the fast forward button (my DVD fast forward knob is a better analogy. The more I turn it clockwise, the faster the fast forward speed…you should be constantly “turning clockwise!”)
  7. Plenty of capital. The more capital that you have, the more you will be able to defend attacks that hurt your business economics. Also, the more capital you have that Goliath knows about, the more Goliath will see your economic defensibility. Possible approaches include:
    • A very high growth rate with a positive cash flow (the higher the better),
    • A strong balance sheet, and
    • Investors with deep pockets.

If you do all of the above very well, then the large company will have a much lower probability of organizing to compete directly with you, and if it does, you will have a much better probability of defending the attack. Once it does the analysis (assuming that it does the analysis correctly), the large company will probably approach you to discuss the potential for purchasing you (and will probably approach your competitors as well).

Focal Point #5: Be prepared to negotiate

If you have executed on the appropriate points above, then you should expect an e-mail or phone call from the large company at some point (I actually work to make sure that the appropriate large companies connect with my portfolio companies at the appropriate stage of development, which helps to grease the skids for this call). What you need to focus on is what you want out of this call and its follow-on activities. The issue that you need to address is whether you are ready to sold and, if so, at what price and terms.

To help you determine this, you should be considering:

  • What is a real scenario (or probalitity weighted scenarios) if you continue to go it alone?
  • What is the probability that Goliath executes a very targeted attack AND what is the probable outcome if this happens (you probably want to assume that Goliath purchases your best direct competitor to help)?
  • What are the other opportunities to be purchased, both now and in the future?

With these two issues fully considered, you should be in a relatively good position to determine what the best outcome of the conversation with Goliath should be. For example, if you are convinced that you will win regardless of Goliath’s attack, then you should hold out for a very strategic price or just go it alone (and be careful about the information that you offer up). If you are less convinced, but think there is a better acquirer, you should start a conversation with that company in parallel with the Goliath option. If there are many likely acquirers, you may just want to “do nothing” at this point. If Goliath is the only game in town and you are convinced that Goliath will win (or just want to be part of the Goliath team) determine a fair price and sell…the point is to fully understand your decision tree and to determine what you need to guide the conversation down the best path(s).
This post is not about the details of the communication or negotiation strategy with the large company (perhaps a later post). However, Ed Sim has a couple of good posts on the topic of selling to large companies to the extent you are looking for some good thoughts on the issues (Companies are Bought and Not Sold, Beware of Fishing Expeditions).

Summary…

The overarching point of this post is that you need to set up well in advance of Goliath’s attack so that you are best positioned for a positive outcome. The more time you have before Goliath attacks, the more defensible your strategy, and the more prepared you are to discuss acquisition, the better the outcome.

I did not directly address attacks on your reputation or regulatory attacks here. My best advice on reputation attacks is to ignore them (take the “high road”). They reflect more on the company making the attack then they do on you. With respect to regulatory attacks, these are so specific to individual situations that it is difficult to offer broad advice in advance of the attack. Therefore, my best advice is to surround yourself with the best advisors to construct and execute a plan if/when you find yourself in a situation where you think this type of attack might be possible (and, as with all of the other points, take action well in advance of the attack!).

(note: you will see that many of the supporting actions for building a defensible position were also supporting points to developing an advantage. These overlapping actions are particularly important to consider. In later posts, I plan to describe the implications for each of the functional areas of your company, which should help clarify the priority actions.)

December 4, 2005

How Can David Beat Goliath?- Strategy #8: Defend Against Goliath’s Attack (Part 1)!

Posted in David vs. Goliath, management at 9:16 am by scottmaxwell

In a recent post, I described being stung by a yellow jacket that was part of a hive that had been built on my house. I discussed how it is possible for emerging growth companies to grow without being discovered (like the yellow-jacket hive). Ultimately, once the large company gets stung by you (or otherwise discovers you or your market niche), the large company may respond and try to take its “fair share” of your market (if it is aggressive, the large company will try to take more than its “fair share” of the market).

The key point here is that the large company can still do what I ultimately did to the yellow jackets if you do not set up and execute a solid defensive strategy (the yellow jackets didn’t have a strong-enough defense against my attack!).

In this posting (part 1), I focus on the attack vectors that the large company can use against the emerging growth company and an assessment of how well they work in different situations. In my next posting (part 2) I will discuss how the emerging growth company can set up to defend against Goliath’s attack.

The nature of Goliath’s attack…

The large company product market attack can come from several different angles (the “attack vectors”). They generally do one or more of the following (together or in sequence):

  1. Confuse the market with their “new product” announcements. This is well known as creating “Fear, Uncertainty, and Doubt” (F.U.D.), and is fast becoming the classic approach for large companies, especially those that sell to enterprises. The large company will have press releases, customer meetings, webinars and etc. to announce products and plans in your market, whether or not the products currently exist. They will also plant the announcements with the “media” outlets and the industry analysts (to whom they make significant yearly payments) so that these “influencers” can help spread the FUD. There are several dimensions that determine the effectiveness of the FUD attack:
    • The size of the buyer organization (and buyer decision-making group). FUD works much better for large enterprise products. At the SMB/department level, the FUD is much less meaningful (in many instances it may even backfire on the large company) and as you move toward internet-based applications and data, especially browser-based applications, the issue goes away almost completely.
    • The total cost of the product to the buyer. FUD works best the higher the price, the greater the implementation effort, the greater the user learning curve, and the greater the migration effort (the so-called switching costs) if/when the buyer moves off your product.
    • The relationship between your product and the large company product. The more your product relates to the large company product (competitive OR complimentary), the better FUD will work. This includes integration at the application or data level, and generally how closely related the buyer perceives your product to be to the large company product (btw, this point is stronger when the buyer already has the large company product installed!).
    • The relationship between the buyer and the large company. The greater the relationship, the better FUD will work.
    • The economic relationship that both your product and the large company’s products have with the large company’s channels of distribution. The more the economic loss with your product, the more effective FUD will be (the channels will help the FUD effort).
  2. Attack the reputation of the emerging growth company and/or its management. Most large companies probably won’t execute a large-scale reputation attack from the senior management level, but rather the seeds will grow in their employees (particularly the front-line employees). Their local sales reps or business development people may attack the emerging growth company’s reputation in one-on-one conversations. (There are much more aggressive strategies with respect to impugning the reputation of the emerging company and/or its management, but I like to believe that this is as far as it generally goes from an institutional level.)
  3. Claim (or aid in the claiming of) patent infringement against the emerging growth company. This attack vector can either be a direct attack (“you infringed on my patent”) or an indirect attack (funding or otherwise aiding a third party in attacking you for infringing on the third party’s patent). Of course, the approach only works when the large company has at least one patent that the emerging company might be infringing on OR if they can encourage a third party that has a patent the emerging growth company might be infringing on.
  4. Lobby for regulations that will help the incumbent large companies at the expense of the emerging growth companies and lobby against regulations that will help the emerging growth companies at the expense of the incumbents. This attack vector is difficult to assess broadly, but has been long term successful in many instances and unsuccessful in others.
  5. Execute an unfocused organic attack. Fortunately for the emerging growth company, this is the approach that many large companies take in many market situations. This attack is essentially building and launching the large company’s product within existing departments with existing staff. Generally, this attack vector will be much less effective, as the product will not get the attention and focus necessary to compete against a solid emerging growth company.
  6. Execute an all-out focused organic attack. This attack has a much greater chance of success than the unfocused attack and generally gets launched after a heavy dose of FUD. The approach includes
    • A reorganization of the large company to put together the right, focused team,
    • Heavy spending on product development,
    • Heavy sales and marketing,
    • Promotions and/or permanently lower price (the most aggressive attacks include completely free products), and
    • Some level of bundling, including possibly building your feature/function into their platform.
  7. Offer to purchase you. This approach is most effective when the emerging growth company is interested in being acquired AND the offer is in a range that seems fair to both sides. The offer a lot of times comes with a subtle threat of purchasing your best competitor and entering the market aggressively if you decline. Also, many people believe that at least some of these offers are intended more to understand your company and its products in detail rather than a true intent to purchase your company (truth here is difficult to determine, but there are many suspicious data points).
  8. Buy your best emerging growth competitor. The better the competitor, the more effective the approach.

The large company will choose how aggressive and from what angle and sequence they attack based on several criteria:

  • How much they believe this new product market will damage their core business. The greater their fear, the more aggressive the response.
  • How large and profitable they believe this new market is and will be in the future. The larger and more profitable the market, the more aggressive their response.
  • How strategic this product market and/or your core strengths are to their current and future business needs. The more strategic, the greater the response (though, not as important a criteria as the first two).
  • How aggressive they need/want to be with respect to growth. The more aggressive the growth need, the more they may steer toward an acquisition.
  • Their interest and abilities with respect to organic growth vs. inorganic growth (i.e., growth through acquisition) and their buy vs. build analysis for your product market. Tough to handicap this one, although build analyses always underestimate costs and overestimate results.
  • Their understanding of their ability to successfully execute on a particular attack vector. Again, hard to handicap.
  • Their corporate culture and senior management style. Some companies are naturally more acquisition oriented, some naturally more organic growth oriented. Also, some are more oriented toward “take the high road” behavior and some are more agressive against their competitors (to the point their competitors call in the regulators).

Some of these attack vectors are pretty powerful and quite effective, particularly if you are not set up with a solid defensive strategic position. In my next post, I will discuss my thoughts on how the emerging growth companies can se up to be in the best position to defend against, and benefit from, these attack vectors. (I will also link part 2 to this post).

December 3, 2005

Attenuate Goliath’s Bundling Strength

Posted in David vs. Goliath, management at 8:18 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Bundling is offering a set of products at a price for the package. In some cases the products are tightly coupled via proprietary software interfaces, but in many cases they are independent products that are sold together.

Large companies bundle their products to lock out the small competitors who do not have the product breadth. It is a great strategy (If I were advising the large companies, I would approach the world in a similar way). That said, I think that the way many companies are approaching bundling may actually create a disadvantage for them in at least some of the cases (which is an advantage for the emerging growth company!).

From a “get users” perspective, the results are positive, as certain users will give the bundled products a try. However, there are a few disadvantages to the large company, especially in instances where the products are independent (that is when they are not connected via a unique API):

  • Many users will not use the products, even though the price for the product is “free.” This is because customers also look at implementation and configuration cost, longer-term cost of ownership, and product benefits in addition to the purchase price. Much (most?) of the time, these other costs and benefits greatly outweigh the benefit of the product being “free”.
  • Many times the large companies lose their focus on the smaller products, as they are lost when included with the large company’s larger products.
  • Most of the time, the large company doesn’t understand the true economics of the smaller products because of the bundling (both cost and revenue allocations are impossibly difficult to do when products are bundled). This makes it difficult for them to make solid business decisions with respect to these products.

The problems that large companies have can result in their products not realizing their full potential…which is a real opportunity for the emerging growth company.

The emerging growth company doesn’t need to do anything more than execute against the strategies that I have already outlined in prior posts. You may lose a few sales because of bundling, but I have seen many emerging growth companies that compete quite well against bundling by focusing on the customer and delivering the best products and services available. Also, the sales that you lose may have been to prospects that do not have the unique needs that you can sell into, so they may not actually be lost sales.)

Attenuate Goliath’s Scale and Scope Economies Strength

Posted in David vs. Goliath, finance, management at 8:00 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

The large companies have economies of scope and economies of scale. This is true. But, fortunately for the emerging growth company, in most cases these are economic benefits but not strategic benefits for the large company (see the strategic benefits for the emerging growth companies in “Create a Time Advantage,” “Create a Scope Advantage“, and “Create a Scale Advantage,” for example).
The emerging growth company can compete with the larger company’s scale and scope economic advantage by following the thoughts in my last post on attenuating Goliath’s financial strength advantage, as scale and scope economies lead to a better economic model and, therefore, better financial strength. The emerging growth company competes with, and attenuates this large company strength by running a very efficient business and having plenty of capital to take it through tough market climates, which I discussed in that post.

Attenuate Goliath’s Financial Resource Strength

Posted in David vs. Goliath, finance, management at 7:42 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Financial resources are probably a large company’s greatest strength vs. the emerging growth company. They have more staying power and a larger bank account than the emerging growth company. If they choose to (or are just clumsy), they can severely hurt the economics of any product market that they enter.

Attenuating the large company’s financial resource strength…

With respect to financial resources, all you can really do is to set up your company not to run out of cash, even in the difficult situations. Some thoughts:

  1. From day one, set your pricing and business model at a point of efficiency that will be difficult for the large company to meet. This will reduce the large company’s interest in the market and set you up in a very economically defensible position if the large company does enter your market (see “Aiming Toward the Economic Singularity” for some ideas on this).
  2. Get cash flow positive as soon as possible. If you need or want to invest in growth and can’t be cash flow positive, be in a position to either
    • Dial down the investment expenses quickly, or
    • Have plenty of cash to make sure that you do not end up in a tough financial situation, or
    • If you do not want idle cash, make sure that you have deep enough pockets (your own, your bank and investors) to ride through a market storm (I would be careful relying on others to fund you during a storm, however…it is not a good time to request capital).
  3. Develop several contingency plans for the business and make sure that you can successfully get through those scenarios financially. These plans should include the scenario of a large company coming into your market and underpricing you (even if you follow the advice in point 1 above).
  4. If you have developed to a point that this issue has become important, you probably need a strong CFO (or equivalent analytical talent) to help you understand the cost model of the business and how you can continue to make it more efficient. The CFO should develop a model (with both activity metrics and economic metrics) for the business based on historical calibration points (this is important, as a model that has not been calibrated isn’t accurate!). The model can be used for various purposes:
    • Determining the efficiency of various groups and processes (to find opportunities for improvement)
    • To chart progress vs. predicted progress and understand the implications (this is highly valuable!)
    • Determining cash flow under various business growth scenarios
    • Determining cash needs during a tough market situation
    • Determining opportunities to reduce the price paid by users.

None of this is particularly difficult and part of running a well oiled long-term business. The major point is that you can take steps to have plenty of cash to get through good times and, more importantly, bad times. If you take these steps and have enough cash to get through the tough times, you will attenuate Goliath’s financial resources strength!

December 2, 2005

Attenuate Goliath’s Brand and Reputation Strength

Posted in David vs. Goliath, management, marketing at 10:24 am by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Well-run large companies have a well-known name and a solid reputation. This is a powerful strength. But, as with all of Goliath’s strengths, you can and should take steps to attenuate it…and try to get the edge!

Brand/Reputation Definition…

In a lot of ways, branding has been turned into a relatively esoteric topic by the “experts”, so I try to boil it down to its essence here. My definition of brand/reputation is basically the mental model (or models) that your customers, prospects, employees, partners, etc. have regarding your company, its products and its services. Brand/reputation is not a company, product, name, or symbol, but rather a mental model (more specifically, a repeatable biochemical reaction) that gets triggered in people’s minds when they read or hear your name or see your symbol (the mental model could be an image, sound, touch, feeling, taste, thought process, or any other type of reaction.)

My best simple example of this is Pavlov and his experiment with a dog (Pavlov’s dog). Essentially, Pavlov figured out that if you ring a bell and feed a dog over and over and over then, over time, the dog will associate the bell with being fed (which triggers saliva in the dog). After repeated training the bell will make the dog salivate without the food being given. The bell triggered the mental model that made the dog salivate.

Attenuating the large company brand strength…

So, how can David build a better brand (mental model) than Goliath? Before I address the point, I need you to do a quick test… below is a list of names and I want you to quickly (within one second each) identify what comes to mind:

1. Webex
2. Google
3. Kleenex
4. Linux
5. MySQL
6. Technorati
7. Del.icio.us

Assuming you have heard of them, pretty easy, right? If you thought “web conferencing, web search, tissue, open source operating system, open source database, blog search, and social tagging” then you would get the same answers that I did (If you salivated, you got a different response than I did!).
Now let’s try another set:

1. Oracle
2. IBM
3. Microsoft
4. Computer Associates (now called CA)
5. Procter & Gamble

Much more difficult, right? You probably did not get a single, clear mental model associated with the name. All of these companies are relatively well known, but the name doesn’t necessarily mean anything in particular (or, perhaps, it means a lot of things or it means different things to different people!), as the mental model has gotten too complex and lost its focus.

Other than Kleenex, the first set is of relatively new companies but the brands have very specific meaning. The second group is of older, larger companies with many products. Larger technology companies should be branding at the product or product set level as they grow, but in general they do not do this very well (they generally try to include their company name into the product name because it is well known).
In contrast to the large technology companies, Procter & Gamble is an example of a company that is particularly good at creating true brands well beyond its company name. Just for laundry products, as an example, Procter & Gamble makes Bounce, Gain, Downy, Cheer, Dreft, ERA, Febreze, Ivory, and Tide! Each brand stands for something, and most consumers do not even know that the products come from Procter & Gamble.

The emerging growth company opportunity…

Given that large technology companies are not addressing this opportunity very well, and they already have the Scope Advantage, emerging growth companies can seize the opportunity to become THE brand in their particular market niche! The goal is that when people hear or read your name or see your symbol, they trigger the mental model AND if they think of the mental model, they trigger your name or “see” your symbol!

In my view, it is a simple three-step process of packaging the mental model, making sure that your business is truly aligned with the mental model, and then delivering the mental model:

Step 1: Package the mental model. Determine the best message for your company/product (that is, how do you best allow people to understand how you fit into “their world”?).

You could start from scratch and try to explain everything or you could do the same thing that a productive developer does and package together pre-built components. The pre-built components in this case are the pre-existing mental models and associations that people are already carrying around. If you can understand them, link the right ones together and then link your company to them, you win!
Geoffrey Moore describes several approaches to creating these associations in his classic book Crossing the Chasm (a must read in my view).

One approach that he suggests for the elevator pitch (with some slight modifications that I made):

Just fill in the blanks:

  • For (insert specific target customers)
  • Who are dissatisfied with (insert the current alternative)
  • Our product is a (insert new product category)
  • That provides (insert key problem-solving capability)
  • Unlike (insert the alternative product)
  • We have assembled (insert all aspects of your customer approach, which he calls the “whole product”)

He gives the Intuit example (this is a relatively dated example at this point) for the above approach:

  • For the bill-paying member of the family who also uses a home PC
  • Who is tired of filling out the same old checks month after month
  • Quicken is a PC home finance program
  • That automatically creates and tracks all your check-writing.
  • Unlike Manage Your Money, a financial analysis package,
  • Our system is optimized specifically for home bill-paying.

Geoffrey gives a lot of color around this idea as well as different approaches for different situations as the company and the market evolve. (As I said, I highly recommend the book.).
That said, there are a lot of ways to skin the cat when it comes to simplifying messages down to their core and developing the right mental model and associations to your audience, so if you don’t like this approach then pick one or two that are equally simple or even simpler. My best advice is to read through a few books to find the simple approach that will help you form your simple message, but to ignore all of the complexity that is discussed. It is much more important to have one simple message and then to overcommunicate it to the market (step 3 below) than it is trying to get too clever with the message!

Step 2: Make Sure that every activity that you do is aligned with your message and that your message is aligned with every activity that you do. The key is that the product, marketing activities, sales, professional service, customer service, and everything else that you do reinforce the message as simply and effectively as possible. Anything that you do that is not aligned with the message does not reinforce it and will probably tend to complicate it.

Step 3: Deliver the mental model over and over and over…and then deliver it some more!

Once you have the message that you want to deliver, start communicating it. The key is to recite it enough so that your

  • senior management is repeating it,
  • marketing messages are repeating it,
  • salespeople are repeating it,
  • customer service people are repeating it,
  • influencers from outside the company are repeating it, and then
  • prospects and customers are repeating it.

You need to make sure that you have seeded the message enough so that everyone can and does repeat it until it truly becomes everyone’s mental model for what you do AND the mental model is associated with your company! Before long, you will have THE brand in your niche (so long as you deliver the message AND deliver against the message!).

The key point here is that it is not possible to overly simplify or overcommunicate your message. You can only undercommunicate and/or make your message too complex. Keep communicating! Play this game a few times and you will understand the point…

Additional thoughts:

  • In my view, there are two ways that emerging growth companies fail on these points. One cluster of failure is ignoring the issue completely, as it is considered fluff. This isn’t fluff…it is important stuff and can be engineered into the business just like everything else! The second cluster of failure is that companies spend way too much time wordsmithing and otherwise perfecting the messages and not nearly enough time with the other two steps, which are the steps that really make or break your approach. A perfect message that does not get delivered is wasted! An acceptable message that gets delivered is powerful!
  • None of the steps above requires hiring branding consultants or even having a branding expert on hand. The point is to spend 10-20 hours over the course of a couple of months getting very clear on your message and then managing the message into everything that you do and every contact that you have! You can only go wrong by having a message that is too complex or undercommunicating it!
  • At some point, the market will start talking about the new category with companies like yours…my view is that you need to keep the process above going until it is overly-clear that the mental model has been built and that you are considered one of the leaders in the market.
  • You will bake yourself in as the brand name in your market niche if you continue innovating your product and business activities so that they continue to deliver more value to your customers in the niche. The more you improve your performance, the better you bake in your company as the leader!
  • If you get large enough that you are going to enter a new niche, keep in mind the large company issue. You may want to create a completely new brand for your attack of the niche (not common practice with technology companies, but it should be!).

Well-run large companies are also well known and have brands and reputations that have complexity associated with them. The key for the emerging growth company is to own the brand and reputation for the market niche that you play in. If you do it right, you will attenuate Goliath’s strength, and gain an edge!

November 28, 2005

Atttenuate Goliath’s “Channels of Distribution” Strength

Posted in David vs. Goliath, management, Sales at 7:20 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

As a large company, Goliath has a well-developed set of channels of distribution, both direct and indirect in many cases. Channels of distribution come in several flavors, including:

Direct distribution approaches

  • Field sales into large enterprise
  • Telesales into small and midsized businesses, departments of large enterprises, and municipalities
  • E-commerce sales to consumers and individuals at businesses (of all sizes)

Indirect distribution approaches

  • Through systems integrators to large enterprise and large government
  • Through VARS/Resellers with or without distributors
  • Through big box retailers to SOHO and consumers
  • Through e-commerce affiliates
  • Through OEM approaches to all customer categories

The large company has spent years perfecting its channels of distribution and generally has well thought out approaches that function very well.

Attenuating the large company channel of distribution strength…

While the large company starts with a significant advantage, there are a several approaches that the emerging growth company can use to help minimize the large company strength and, perhaps, gain an edge:

  1. Align yourself with the large company channels of distribution if you have complimentary products to the large company. This is a straightforward approach that works if you are truly complimentary. (It works best if the large company agrees that you are complimentary and agrees to help!) This could result in you getting introductions to prospects as well as gaining valuable indirect channel partners.
  2. Align yourself with your large competitor’s large competitor. Two companies competing with the same large company might be natural allies.
  3. Focus on the Channels of distribution where the large company isn’t involved or where the large company has some issues. This would generally be indirect channel partners who have great relationships with your target customers that for one reason or another are not working with the large company (for example, different geographies, bad relationship, channel conflict with the large company’s direct sales force).
  4. Develop your channels of distribution that have more efficiency than the large company’s channels (note, this really needs to be part of an overall strategy that includes simpler and more targeted product, lower price, more efficient customer service, which I describe in “Aiming Toward the Economic Singularity“). The basic concept can be a significant advantage over the large company, as they will have difficulty building their more efficient channels (even more difficulty than you will, as they already have a distribution approach in place that will have conflicts, both internal and external). For example, use telesales into departments of large enterprise (and the SMB market) if they have field sales into large enterprise, use the indirect channel if they have only direct telesales, use e-commerce approaches, etc.

No matter what distribution approach you choose (excluding the OEM approaches, which are highly varied), the following approach seems to be the best practice:

  1. Start with direct distribution. You need to have direct access and relationship with the end users so that you can perfect your product, services, and marketing messages. You also need some reference customers!
  2. Once you have perfected your value proposition to your customers directly, you can work on expanding your reach through building up your indirect channel. Some thoughts:
    • You should do your homework and truly understand the segment of channel partners that are best for you. This is the exact same process as choosing the right customer segment and will take real work. Just so I am clear, it may turn out that there are not appropriate indirect channel opportunities for your product. If there aren’t, don’t push it, as it won’t work!
    • You need to perfect the value proposition for the end customer before you approach the channel. While there are some exceptions, this rule is important, as there is no reason a channel partner should work with you if you do not have a solid “package” to offer their customers.
    • The best indirect channel relationships seem to start with the emerging growth company offering value to the channel partner rather than the reverse. You need to develop your value proposition to your channel targets (this is very similar in concept to the approach to developing your value proposition to your target customers)! Note that this will take some effort and resource to do right! The key question that you need to ask is “what is in it for them?” (Btw, the best way to find out is to ask them who they currently do business with and why, what there ideal scenario is, and how can you craft a package that will add the most value for them).
    • Put in place a training program and website specifically to address the channel partner’s needs. You need to treat them like your most valuable customers, as they truly are customers!
    • Once you have your value-proposition right for the channel partners, you need to “prime the pump.” If you have ever siphoned gas from a gas tank, you know that just putting the hose into the tank and into the bucket doesn’t do anything (which is the same thing that will happen when you sign up most channel partners if you don’t “prime the pump”). Just like you need to suck on the hose to get the gas flowing into the bucket, you will need to offer up leads and help close some deals with each salesperson/group at your channel partner so that they can learn how it is done and also see how easy it is to make money relative to selling other products and services that are in their catalog.
    • Start with a very small number of target partners. Remember my magnifying glass analogy? If not, take a look.
    • Indirect channels take a very long time relative to direct channels to build. They also require you giving up some of the economics, which is hard for many companies to swallow (especially if they have a direct sales culture). My view is that if you are building a large company OR if you have a product or service that is naturally an indirect channel sale, then you will want to pursue this strategy. If you need or want short-term results, however, then you will need to pursue a direct strategy.
    • As with every other specialty in your business, there are a lot of complexities with respect to the indirect channel. I highly recommend that you hire an advisor or full time person that has this type of expertise to help you both build your channel strategy and execute it.

Large companies do have the advantage that they have great channels of distribution. However, developing a targeted approach to building your own channels can help attenuated the large company advantage. If you adopt the strategy of going after a different channel, particularly if it is part of a strategy of “aiming toward the economic singularity” or a strategy of focusing and delivering superior value to your niche then you can gain an edge, possibly a large edge in the longer term!

November 26, 2005

Attenuate Goliath’s Customer Relationship Strength

Posted in David vs. Goliath, management at 6:00 pm by scottmaxwell

This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:

Well-run large companies have many great customer relationships and the best spend a great deal of time maintaining and improving those relationships over time. The relationships result from all of the value-add points of contact that the customer has with the company including marketing, sales, professional services, and customer service contacts.

These relationships are valuable to the large company as they give the large company a better opportunity to have strong new product introductions. Also, customer relationships are similar to a bank account that you have to help you through tough short-term situations…your bank account is helpful getting you through a disaster such as an earthquake, hurricane, or job loss as a strong customer relationship is helpful getting you through a better competing product release, some issues with your product, or other temporary set-backs.

From the emerging growth company perspective, it is difficult to compete head-to-head with a large company that has built great relationships. This post examines the large company relationships with its customers and suggests focal points and activities that will help attenuate the large company relationship strength and, perhaps, give the emerging growth company an edge.

What is relationship?

When you boil down all of the issues relating to relationship, a great customer relationship means that the customer trusts the vendor to “do the right thing” for the customer.

The relationship gets stronger:

  • the more the vendor activities are aligned with customer needs,
  • the longer the relationship is in place with good results for the customer.
  • the broader and more diverse the group (on both sides) involved in the relationship. The more points of contact you have at the customer and the more different “departments” that you have relationships with, the more robust the relationship.
  • the more frequent the value-add contacts. The key here is that the contacts need to be considered “value-add” by the customer. You can easily hurt the relationship if you try to over-contact the customer and effectively waste his or her time. So long as the contacts are considered “value-add,” the more contacts the better from a relationship point of view.
  • the more the customer-initiated contacts result in a positive outcome for the customer. Most well run large companies spend a great amount of time working on their proactive contact strategy, generally out of the sales and marketing units. But, the more difficult processes to design and execute are the processes that originate from the customer having an issue and the company needing to address it. Companies that have developed best practices at resolving customer-initiated issues have much better customer relationships!
  • the more effective the contacts are at building relationship. As a general rule, in-person contacts beat video-conferencing which beats phone contacts, which beat e-mail and other electronic contacts. (Note that the costs to the vendor go in the opposite order.) This is not to say that you need in-person contact to build relationship, just that the more you move toward the electronic contact end of the spectrum, the more work you need to do to make sure that the contacts are building relationship.

Characterizing the large company customer relationships…

It is important for the emerging growth company to understand the strength of relationships that the large company has with its different customer segments. Below I offer some thoughts on how the elements of relationship work together to create various levels of customer relationship. This is greatly simplified, but offers up an approach for thinking through the relationships, which is the first step in developing a strategy that addresses them:

  • Very Strong Direct Relationships– Large enterprise and large government sales that involve field sales staff and professional services staff selling, installing, configuring and training at the customer’s location generally produce very strong relationship bonds with the customers (assuming there is a positive outcome). These types of relationships are the strongest, as they hit on all the relationship points above.
  • Solid Relationships– Direct telesales relationships with departments of large enterprise, municipalities, and small and midsized businesses can also create strong relationships (not as strong as field sales, but still strong). Also, indirect relationships that companies have through Distributor/VAR/Resellers or OEM probably fit into the solid relationship category if everything goes well (in this case, the large company needs a strong relationship with its channel partners and the channel partner needs a strong relationship with the end user).
  • Virtual Relationships. Big Box retailer and Internet-based relationships are probably the weakest relationships, as they do not generally involve human contact (which helps drive the relationship). Nevertheless, a well-run virtual relationship can be developed if it is addressed correctly.

The large company also has the opportunity to develop stronger relationships if they have a solid teleservice approach to addressing inbound customer issues, regardless of the original sales approach. More on this point below.

Attenuating the large company relationship strength…

With the above points as a guide, there are a several leverage points for the emerging growth company:

  1. Aim directly at the large company relationships if you have a product set that is highly complementary to the large company. Also, get the large company to help you to the extent that your product or service helps sell their products. The best approach here is to get a small number of sales that sell through the large company’s products and then contact the large company to discuss ways that you might be able to work together.
  2. Aim at the set of prospects that the large company does not have relationships with or where the relationships are weaker. My comments above suggest that large companies have strong relationships with their customers, but this may actually be more perception than reality based on a study by Bain & Company. The study suggests that there is a significant amount of room for companies to improve: 80% of the companies surveyed believe they are delivering a “superior experience” to their customers, but only 8% of their customers agree with this statement. I actually did not need this study data, as I have wasted a lot of time on the phone trying to get customer service!
  3. Aim at the set of prospects that the large company has weaker relationships with. This generally means going after small and midsized businesses, municipalities, and consumers as the large company is using approaches that are less effective at building relationships with this group.
  4. Radically rethink your approach to serving your prospects and customers in all segments. I am a customer of Rackspace, as an example, who has a theme of “Fanatical Support.” Everything that they do supports this theme, and it works! With all of the possible newer approaches to customer relationships, including chat, e-mail, voice recognition in phone systems, online tutorials/FAQs/Training videos, there is no doubt that there are many approaches that can be developed to produce much better relationships with your customers and prospects. Take a look at David Teten and Scott Allen’s new book (The Virtual Handshake: Opening Doors and Closing Deals Online) to get some great ideas and examples on how to go about doing some of this.

I am a strong believer that emerging growth companies have a large opportunity to both attenuate the large company’s customer relationship strength and gain an edge, particularly if you examine the situation, focus on the right opportunities, and radically rethink your approach to serving your prospects and customers!

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