Growth IQ

by Tiffani Bova

  SPEED IS THE NEW CURRENCY

  In its pursuit of Customer and Product Diversification, LEGO forgot about having the right internal capabilities and infrastructure to support the new business and product requirements. Pursuing one path without the necessary combination and sequence of efforts puts any company at a significant disadvantage. This time, it wasn’t so much diversification as much as LEGO being unable to respond to the changing demands of its customers fast enough. The pace at which the market context was changing and the competitive landscape was intensifying for the attention span of kids—and that proved too much for a complex organization to handle. Speed is the new currency in business, and if you can’t keep up, you risk being left behind.

  LEGO has increased sales by an average of more than 15 percent per year in the last twelve years, with a 25 percent growth rate in 2015. But while sales in Asia and Europe, its most mature market, grew by double digits in the first half of 2016, there was no growth in the Americas.

  After recovering from its first growth stall in 2000, LEGO was able to regain revenue momentum. With its success came a combination of growth paths it began to pursue. It wanted to sell more into its base (Customer Base Penetration), it was expanding into new markets (Market Acceleration), it was enhancing existing products such as City and Space (Product Expansion), and it chose to pursue an aggressive digital strategy with LEGO Dimensions and LEGO Life. LEGO Friends, Ninjago, Mindstorms, and Nexo Knights were toys specifically built for a new market—girls, plus grown-ups with LEGO Architecture (Customer and Product Diversification). It was also capitalizing on lucrative Partnerships, helping it to deliver an amazing Customer Experience.

  In September 2016 the company published its sales figures for the first half of 2016, announcing a 10 percent growth in sales from 2015. It experienced double-digit growth in Europe and Asia, whereas the Americas were flat year over year. Between 2012 and 2016, it added more than seven thousand new positions. But for the first half of 2017, LEGO growth slowed, with revenues down 5 percent and its growth rate just 6 percent. LEGO cut approximately 8 percent or fourteen hundred positions, many before the end of 2017. It also said that mid-single-digit growth rates were “more realistic for the years to come,” but it has since revised those expectations downward. Knudstorp said, “We are not saying specifically whether we will grow the next two years or not.”

  The lesson in this story is that even when you are growing, even when you have one of the strongest brands in the world, you can’t ignore what is needed to support the push into multiple paths . . . your people, and the ability for your company to respond, sometimes very quickly, to changing customer demands.

  LEGO

  KEY TAKEAWAYS

  Past success, even past failure, is not always a good teacher. In this case, LEGO had enjoyed decades of spectacular growth when it faced its first growth stall. As it refocused on its core, it cut underperforming products, reduced headcount, eliminated bureaucracy, and streamlined its product catalog—only to find itself back there again a little more than twelve years later. It took them sixty-eight years to hit their first growth stall, and then fifteen years to get themselves back to a fairly similar position.

  Beware of the organizational implications of Customer and Product Diversification. New products won’t just market, sell, and support themselves to a new customer base. The more products you develop, the greater the customer insight you will need to stay on top of. Keeping up with the pace of the changing market context is hard in one product category or customer segment—multiplying that by two or three can overwhelm a company.

  Customer and Product Diversification is also a way to, metaphorically, keep from getting your feet wet. By that I mean that if one of your businesses is beginning to experience a slowdown, diversifying into a new business may enable you to step from the sinking deck of one onto the dry deck of the other without having to suffer the “swim” of slashed revenues. But you can’t just do that on a whim. You need to have some process to keep your options open if the right opportunity presents itself in order to capitalize on a market opportunity.

  PUTTING IT ALL TOGETHER

  THE CUSTOMER AND PRODUCT DIVERSIFICATION path is one of considerable risk—not least because it can take you into areas in which you may have little experience. Some of these risks arise because this diversification requires you to develop new skills that you don’t currently have—including new distribution channels, different relationships with a new population of retailers, and the servicing of products for which you haven’t developed the requisite repair operations.

  Given all of the risks, why diversify? Because if you can pull it off, diversification can help reduce your overall future risk. A company operating in a single market or with a single product family is always at risk for discontinuities (e.g., a technological breakthrough, a shift in the customer base, a breakdown of the supply chain, the failure of a strategic partner, a cultural shift) and is almost always doomed when a revolution happens. But a company with a bit of diversity in its customer base and product portfolio, while still not immune to a terrible shock, can survive by shifting its focus to its “other” parts of the business if and when it is necessary. Taking a smaller perspective, having more than one product, especially an adjacent one, a line extension, can also help companies smooth out seasonal or cyclical demand (summer and winter clothes, summer fruit and winter vegetables, school supplies and hobby supplies, etc.).

  However, diversification also presents potential cultural problems. In particular, the more different the new product initiative is from the established one, the more likely the company will, over time, begin to pull itself in two. Senior management will need to keep the two efforts at the same table by constantly asserting the company’s common goal to achieve sustained growth.

  WHAT WORKS—AND POTENTIAL PITFALLS

  In some innovation circles, it is suggested that to be considered an innovative company, at least one-third of a company’s revenues should come from products developed within the last three years. Inge Thulin, president and CEO of 3M, projected that 40 percent of 3M’s revenue in 2017 would come from products that did not exist five years ago.

  There are a number of reasons why new product introductions fail; however, the one we see most often is lack of rigor behind sales and marketing planning and execution. Maybe the strategy was combined with the wrong path to support it—remember: great products do not sell themselves. So this path in isolation is much more destined to fail.

  Some companies—big and old enough to know better—have attempted to enter new markets, especially new markets in new countries, with exactly the same products or services they used in their original markets. Because they don’t know the “culture” of that market—its marketing channels, customer expectations, competitive history, pricing models, service, and quality standards, for instance—these companies find themselves blindsided by angry customers or retailers and end up making a bloody retreat.

  According to Harvard Business School professor Clayton Christensen, each year more than thirty thousand new consumer products are launched and 80 percent of them fail. A study by the Product Development and Management Association (PDMA) found that failure rates varied among industries, ranging from 35 percent for health care to 49 percent for consumer goods. Though lower numbers, the message remains the same: successful new product launches are not to be taken for granted.

  Similar to Market Acceleration, the two most likely combination paths for Customer and Product Diversification are the two that pursue the process of teaming up with other enterprises (Partnership and Co-opetition), as well as Product Expansion. You can’t do it all. In fact, when it comes to Customer and Product Diversification, the further you diversify, the less you’ll likely be able to do all on your own.

  Look at your current, established business: How long did it take you to fully understand your market—to es
tablish your supply and distribution channels, understand your customers well enough that you could create an effective sales and marketing campaign, establish a workable service and support system, determine the right coverage for warranties and return policies, and understand the financial cycles of your industry? I’m guessing years—and that’s in a market that you built your company to pursue.

  What makes you think you are going to be able to take on a new market of which you currently have little knowledge beyond that fact that it’s a good target for your diversification? Because you are now big and successful? That’s a common—and dangerous—mistake, because it assumes that your current operations can be readily transferred to this new challenge while you enjoy the same fit and economies of scale.

  The truth may be just the opposite of that. A big, successful company diversifying into a new market is, at least at first, a small and unproven company. You may be a Fortune 500 company, or even a proven, successful small business, where you are right now, but the reality may be that in your new market you are just the little unknown company you were twenty years ago.

  Even your brand, which may convey enormous prestige and power in your current market, may turn out to mean next to nothing—may even be a liability—in your new business. That’s why Partnerships—in everything from product design to manufacturing to marketing to sales—can be a powerful new growth path once you’ve chosen your diversification strategy.

  COMBINATION: PATH 5—

  Customer and Product Diversification + Path 4—Product Expansion

  This path requires expanding your product catalog. Diversifying can be a risky proposition, as you read with LEGO. You can push too hard and too fast after too many new products. Even with high demand, it doesn’t mean your company can handle the increased volume without changes to the organization, sales models, partnerships, and marketing efforts.

  COMBINATION: PATH 5—

  Customer and Product Diversification + Path 8—Partnerships

  The question here is: Do you develop products on your own or work with others? Do you go after new markets on your own or with others? There may be ways to minimize risks and costs if you work with partners in key markets to help you with sales and marketing coverage. Also, is there a way you could do joint marketing and selling to create a 1+1=3 multiplier effect? Entering new markets or new product categories may be better accomplished (especially if you are a small business) by working with others.

  COMBINATION: PATH 5—

  Customer and Product Diversification + Path 9—Co-opetition

  Co-opetition—a relatively new concept that has taken on much more force with the rise of the global marketplace—involves partnering with one or more of your competitors. At first glance, this may seem counterintuitive. After all, why would you approach your customers arm in arm with a company you are trying to defeat? Moreover, why are you sharing information and strategy with a company that would love to find your weaknesses and use them to destroy you?

  There’s no denying that those are risks and that you must weigh them if you are going to enter into a Co-opetition type of agreement. The worst-case scenario described above has happened in this kind of partnership in the past. But it has usually occurred in a very unbalanced relationship between two unequal companies—often a hot new start-up and an aging and increasingly uncompetitive older company. The fact is, even without the partnership, the one company was destined to overrun the other.

  PATH 6

  OPTIMIZE SALES

  OPTIMIZE SALES

  Work smarter . . . not harder.

  —ALLAN H. MOGENSEN, the “Father of Work Simplification”

  WHY OPTIMIZE SALES MATTERS

  Sixty-four percent of consumers are willing to pay more for simpler experiences.

  Only about 22 percent of businesses are satisfied with their conversion rates.

  Forty-four percent of sales organizations list Optimize Sales as a top sales objective.

  Over half of sales organizations (54 percent) do not formally align their sales process, or other aspects of how they sell, to the specific journeys taken by their customers.

  Sales teams spend an average of 25 percent of their time on administrative tasks.

  Overall, 5 percent of shoppers who engaged with AI-powered product recommendations accounted for 24 percent of revenue on Cyber Monday.

  U.S. firms spend $15 billion per year training salespeople and another $800 billion on incentives. Yet estimates of annual turnover of U.S. salespeople run as high as 27 percent, twice the rate in the overall labor force.

  THE LAST MILE

  Pretend that every single person you meet has a sign around his or her neck that says, “Make me feel important.” Not only will you succeed in sales, you will succeed in life.

  —MARY KAY ASH, founder of Mary Kay Cosmetics

  It was almost thirty years ago when I realized that my outgoing personality, insatiable curiosity, and competitive spirit would serve me well in the sales profession. Over the course of my career I was an individual quota-carrying sales rep, team leader, director of sales, and VP of sales. I finally ended my days of carrying a quota running a (sales) division at Gateway Computers (yes, the “cow” boxes). It has always amazed me how much misperception there is about the profession and the role that sales plays in a company’s ability to grow. Sales is the “last mile”—the moment of truth for any company. All the sweat and tears that have gone into developing products, the pain of creating the perfect marketing campaign, the hard decisions made along the way hopefully lead to a sale. Otherwise, how can you possibly sustain a business without generating revenue?

  Many years ago, I was advising one of the largest technology providers in the world on how best to optimize sales performance. This wasn’t a global, boil-the-ocean assessment; rather, it centered on the U.S. region and large “enterprise” accounts it was targeting. A quick (I mean, like, two-minute) analysis of the coverage model exposed the first area ripe for improvement.

  There were over 4,500 accounts under “management,” and only 600 sales reps to cover them. All it took was easy math (4,500 divided by 600) to realize that 75 individual accounts per rep was completely unrealistic, from both a time and a customer value perspective. In addition, we found that existing sales resources were deployed by region (city, state) and spent more than 50 percent of their time in non-selling activities such as commuting, which meant that the company wasn’t getting the full potential (revenue or otherwise) of its sales resources. Leadership doesn’t always take the time to review current sales practices on a regular basis, so it was a bit caught off guard by the simplicity of this discovery.

  This example, as basic as it might seem, should have been caught long before I showed up. The fact that the number of accounts assigned to each rep had reached a point of diminishing returns had gone totally unnoticed at the executive level. The point of this story is not to discuss how it solved this problem as much as it is about focusing on the basics, staying diligent on sales optimization, and rationalizing current sales efforts on a consistent basis. Isn’t it true that pipeline reviews (a representation of where customer prospects are in the purchasing process) are weekly, maybe even daily? Quota attainment is a sales rep’s score card. So, you must set them up for success. Optimize Sales is one of the ways to do that.

  Indulge me for a moment in this vast oversimplification, but companies do two things: (1) they make stuff, and (2) they sell stuff. It’s my belief that even the greatest products in the world can’t market and sell themselves. Companies have to be good at bringing customers to their products.

  With collapsing product life cycles, a more informed buyer, customer experience playing a greater role in buying decisions, and 24/7 access to online commerce, companies can no longer count on products alone to be their sustainable competitive edge. In addition to focusing o
n what they sell, companies are now placing more attention on how they sell. The goal? To meet customers where and how they want to buy, with the right products and services, at the right time, in a seamless, frictionless manner.

  Easy, right? Not so fast. Sales optimization can be an amazing way to double down with existing (sales) resources, accelerate the effectiveness of another path by combining the two, and subsequently fund additional growth initiatives as revenue and cost of goods sold (COGS) improve. However, many companies get trapped by the paradox of hitting numbers “now” versus improving sales for future quarters or years ahead.

  What can get a CEO fired from a publicly traded company (besides an ethics violation)? Not hitting sales numbers, or missing sales targets over an extended period of time. There is tremendous pressure each quarter to perform, show quarter-over-quarter or year-over-year growth, and there are really only two ways to do that to improve revenue and profitability performance: sell more (top line) and cut costs (bottom line).

  I coined the term “Seller’s Dilemma” while at Gartner many years ago—playing off Clayton Christensen’s The Innovator’s Dilemma, to describe this paradox while at Gartner many years ago—and this concept still rings true today. Sales executives who exclusively own quota-bearing resources are the ones impacted by this dilemma. If they don’t hit their numbers today, they won’t have a job six months from now to worry about. So, they keep their heads down and push through each quarter to get revenue across the goal line. They are working harder, no doubt—nobody in sales would tell you otherwise. But could they be working smarter and not just harder to meet long-term performance goals?