The ABC Gap of High Growth

The ABC Gap Dilemma

Somametrics abc-gapEvery company has some form of an ABC Gap: ‘A’ is where a company is today, ‘C’ is where it wants to be, and ‘B’ is its bridge (what it needs to do) to get from A to C.

The idea is that to the extent that a company is able to chip away at the gap between ‘A’ and ‘C’, then it is likely meeting its growth objectives on a consistent basis. Managing this gap and successfully moving closer to ‘C’ is what all executives spend most of their time doing, especially CEOs.

One important question is: when companies find it difficult to meet their growth objectives, is that because they don’t have a good plan ‘B’, or are they having difficulty executing on ‘B’?

What our research and experience shows is that it is more often the latter. Execution is the key challenge primarily due to resource constraints. Sometimes, a company doesn’t have certain skills it needs to execute the plan. But more often the case is that its people are already busy doing what today demands and don’t have the time to do the work that tomorrow demands.

In other words, when today (‘A’) competed with tomorrow (‘C’) for the same resources, almost always, it is ‘A’ that wins.

The reasons for this are well documented in books such as The Innovator’s Dilemma by Michael Clayton of Columbia University as well as in books by marketing consultant Geoffrey Moore (Dealing with Darwin and Escape Velocity).

We believe, however, that the reasons documented by these noted experts primarily apply to larger companies, and that smaller companies face a different ABC Gap challenge. This article discusses this issue from the perspective of a small company and attempts to provide a practical solution.

The Nature of ABC Gap

soma-generic-bus-mondelRegardless of industry, almost all companies must handle three generic business operations: they must continuously innovate and bring out new products and services, they must take these products and services to market, and they must fulfill the demand they created (manufacturing, delivering, supporting, and so on). While they don’t have to do all three internally (and indeed that is not the best option), they must execute all three better than competitors to achieve high growth.

The assumption here is that a company continues to innovate and bring out new products and services, which it markets/sells, and then delivers and supports.

However, what seems to happen to most companies is that ‘today’ wins over ‘tomorrow’. In other words, the customers of today, who use the products of today, get the lion share of the company’s resources—both in number and talent—first.

Geoffrey Moore, in his book, Dealing with Darwin, outlines this issue—what he calls “Core” vs. “Context”. According to Moore, Core, which is what differentiates a company, must be continually renewed in order to maintain competitive advantage and grow at a high rate. However, most of the company’s key resources are allocated to “Context”—those things that if not done will result in really bad things happening, but doing them well will not increase growth.

While Context work must be done, it confers no competitive advantage. For example, paying taxes or meeting regulatory requirements are necessary in that the consequences of not doing them can be serious. However, neither enables a company to achieve high growth.

Differences in Small and Large Companies

The Large Companies Go-to-Market Dilemma

When it comes to large enterprises, their greatest challenge is that their new innovations do not see the light of day in time before competitors beat them to it.

Most of these large companies have very good labs and innovation centers where they develop many new products. However, the revenues that would come from these new products are so dwarfed by the overall revenues from existing products that they get little or no top management attention.Eventually, they die at birth from lack of attention.

A case in point is Apple’s infamous Newton. When Apple launched its first Macintosh computer, it celebrated the day it passed the million-dollar mark with champagne.

The Newton, however, did not get the same treatment. Although it generated far more dollars than the first Macintosh ever did, it was considered a dismal failure and scrapped. Why? Because by then, Apple was a multi-billion-dollar company and their existing products were generating many tens of millions if not hundreds of millions of dollars in revenues.

For big companies, the challenge is not that they don’t innovate sufficiently, Typically, it is that they never get enough “go-to-market”resources for these innovations to take off and become successful.

Small companies, however, face a different challenge.

The Small Company’s Innovation Dilemma

For smaller companies, the challenge is quite different. Typically, it is finding the resources to build new products. The visionary founders are never short of ideas. However, bringing these ideas to fruition seems to be the challenge.

The reason for this is pretty much the same as for large companies. All available resources are used to support the existing products and the existing customers that use them. In fact, their best engineers often work to fix issues for important customers, rather than working on new products.

And since support people are usually less expensive than engineers, they tend to have very large support organizations compared to their engineering department. It is common to have a ratio close to as much as ten support people for each engineer they have. As more support people are hired, there is less money to hire engineers, requiring more support people to patch together products, etc.

Every CEO of a small company knows this problem too well. But where to find a practical solution that takes care of today as well as tomorrow?

Outsource what’s Context

There is one strategy that small companies can use effectively to free up scarce capital so they can close their ABC gap:

Hire for Core and outsource as much context as possible.

This strategy enables a company to get two benefits in one fell swoop: free capital for Core and improve the quality of Context work, both at the same time.

Outsourcing Benefit 1: Focus

The problem with Context is that it tends to take over and create a distraction. Employees are human beings with lives, and lives are complex. The more employees a manager has reported to her, the more time she spends dealing with “people” problems separate from the functional or business problem over which she has responsibility.

By definition, context is work that must be done since not doing it will create very bad problems. However, doing context work in no way improves the competitiveness of a company.

Think of it context as a bad headache. You can’t ignore it when you have one. But not having a headache does not mean you don’t have any other problems. It just makes it harder to solve other problems with a bad headache.

Outsourcing context work is essentially outsourcing the headache so you can focus on solving the real problems you need to solve without the distraction of the headache.

Outsourcing Benefit 2: Flexible Spending

Another important benefit of outsourcing Context is enabling a company to pay for what it needs when it needs it and at a higher level of expertise, instead of committing to “bulk purchase” of resources it can’t fully utilize.

For example, a typical B2B marketing operation may consist of the following tasks: building and managing campaign lists; developing new content; maintaining the company website and its social media properties; managing outbound and inbound campaigns, and more.

Each of these tasks is a specialty area with its own best practices. Hiring a specialist for each task is usually overkill for a small company. So, what typically happens is that smaller companies hire a couple of people in their marketing department and have them basically divide the tasks.

Since each marketing staffer cannot reasonably master more than one area, he or she will end up learning just enough to complete the task, but not enough to do it exceptionally well. That is all he or she can do given the amount of learning required and the limited time they have to master each area.

Compare that with an agency that has several specialists, each focused on a single area of expertise. Because each is an expert, whatever work they do is done at a higher level of effectiveness. At the same time, the client company only pays for what it needs when it needs it.

This enables the company to utilize a small portion of its available resources for Context work, and have it done even more efficiently and at a higher level of competency than it would internally.

How to Decide what to Outsource

The chart below provides a short analysis for making a decision to hire versus to outsource.

Function Category / Decision Analysis
Sales Core/Hire Sales needs to partner with buyers in order to effectively sell products and services. The more complex the solution, the more strategic the relationship and the more it needs to be in-house. Winning a deal greatly depends on the sales rep’s ability to forge trust and build partnership with the buyer.
Business Development Context / Outsource This is a very high-volume short-relationship engagement. Potential buyers will remember if this goes bad, but will not remember if it goes well. No company wins customers because the person who first called them and set an appointment with a sales rep impressed them.
Marketing Context / Outsource While the development of a marketing strategy should never be outsourced—it is what the top level management does—the execution of the marketing strategy is largely context and confers no competitive advantage to the company.

Most often, companies mistake strategy and execution. Execution on the strategy requires expertise that most companies do not need to develop—content creation, messaging, list management, campaign management, etc. There are many firms that have both the expertise and the advanced systems to do this work more efficiently than any company could or should internally.

Innovation / Development Core/Hire For most product companies, this is where their competitive advantage lies. While there are aspects of product development that are context (quality assurance, release management, etc.), the actual design and development of products should be an in-house operation.

We should make the distinction between a product company developing in-house versus say a financial firm outsourcing the development of an App to an independent agency.

Customer Support Context / Outsource Many companies can get away with outsourcing their customer support operations. The key is to make sure that the company to which they outsource would provide at least the same level of support to customers as they would.

In reality, however, many companies do not feel comfortable outsourcing this operation and tend to hire in-house.

Finance, Accounting, HR, IT Context / Outsource Generally, these areas of operation can safely be outsourced. The key is to have a very senior and strategic head with a very thin in-house operation managing by results the efforts of the outsourced team.
Legal / compliance Context / Outsource For companies that are in a highly regulated industry, the consequence of getting on the wrong side of the law can be very grave. Therefore, although this is clearly context, it is so mission critical that most companies will have a hard time outsourcing this function. The key is to really understand the risk and manage it in the least costly way for the firm.

 

The High-Growth Strategy Formulation Process

Most companies grow through an organic process of making adjustments and improvements as they go. While this keeps most companies in business and profitable, it is difficult to grow to become market leaders without a clear strategy for doing so. Companies aspiring to accelerate and grow above their competition, need to go through a High-Growth Strategy Formulation Process in order to create a viable plan.

The goal is to define a clear, coherent, and effective roadmap that is accepted and committed to by ALL senior team members. The best way to accomplish this goal is to physically remove the best minds in the company away from constant interruptions of phones, emails, and drop-ins, and have them focus on just the one task of cranking out an effective roadmap to sustainable 100% growth in 24 months.

The preparatory steps are:

  • Set a clear goal of defining a coherent strategy for how the company shall double its revenue within 24 months.
  • Determine who will be involved in this planning session. The end result should be about 10 – 20 of the top people in your company should participate in this effort.
  • Set the time and place. It should give participants enough time to clear their calendars and the location should be either easily commutable, or the company should plan for adequate transportation and accommodation for the duration.
  • Find a suitable moderator to run the sessions. The CEO should be focused on the actual work rather than trying to moderate the sessions.
  • Make sure everyone understands that their ONLY priority during the two days of the retreat is to come out of the retreat with a clear and coherent plan—a plan to which they will have to totally commit

Day 1: Identify the Optimal Growth Market Segment—Part 1

The most important decision that any company can make that will enable it to double its revenues within 24 months is to decide what market to go after.

The key to this is to understand that while what target market is selected is important, far more important is the decision to stick to the market chosen. In other words, the results are far more dependent on the discipline of execution, rather than whether the target market was the best or not.

The day’s work is divided into the following sections:

  • Session 1—Select the target Product. Your company may have many products and services. However, for growth strategy planning purposes, only one product or product family will be taken into consideration.  A voting process can be used to determine the consensus around which product should be the primary focus of this exercise. This typically should be completed in the first 30 min or so.
  • Session 2 – Select the target End Users. For the target product, open the brainstorming session and ask participants to generate as many possible end users for the product as they think. The idea here is to be able to “think out of the box” and uncover previously not thought of potential customers for the flagship product. Stop the brainstorming when the suggestions become repeating. This should be completed within 90 minutes or so.
  • Session 3 – Build Customer Scenarios. Divide the participants into small teams of three members, taking care that no two members are from the same department. Have teams pick as many as five potential end-users for which they will build customer scenarios.  The team will take each scenario through the scenario builder to ensure that a rigorous customer scenario is built that is ready to be evaluated. Someone on the team should be responsible for typing these into a laptop so they are easily read and reproduced. Teams should spend an average of 30-45 minutes to build each scenario, or about three to four hours to build about five scenarios.

This should end the first day. So far, the participants have selected the top product, generated all possible end users the can think of, and have created compelling customer scenarios for each end user type.

 

SOMAmetrics has the skills and tools to enable participants to quickly and accurately build customer scenarios.

Day 2: Identify the Optimal Growth Market Segment—Part 2

The goal on the second day is to arrive at the top three target customer groups, and ran these from first to their place.

  • Session 4 – Evaluate and score each scenario. The teams will take each of the scenarios they have built into an evaluation and scoring matrix. This will likely take 20-30 minutes for each scenario, or about 2-3 hours to complete all scenarios and rank them according to their scores.
  • Session 5 – Present the Scenarios. Each team will take turns to present their scenarios, one round at a time starting with their first choice, and moving last to their last choice. Teams should limit their presentation to no more than five minutes per scenario, or no more than 30 minutes total. Assuming there are between 5 and 7 teams, this should take about 3-4 hours to complete.
  • Session 6 – Vote on the top three scenarios. The rest of the day’s work is left for the Voting committee, which reviews the presentations and written evaluations and moves to vote on these—until they have the top three customer segments ranked #1, #2, and #3.

This marks a significant milestone in the strategy planning effort. The company now knows exactly which customers to go after and why these are the best customers for it.

SOMAmetrics has the skills and tools to enable participants to quickly and accurately evaluate and rank customer scenarios.

Day 3: Build the Go-To-Market Strategy—Part 1

The goal for Day 3 is to build an integrated and coherent go-to-market strategy for the top customer group. This includes defining targeted competitors, positioning, pricing, communication, and distribution strategies.

  • Session 1: Identify the Buying Scenario. For complex products, this step is critical in identifying the buying committee that will likely jointly make the buying decision. The goal is to define what the potential issues are for each and determine what the company must be able to provide to address each issue. This should likely take about 2 hours
  • Session 2: Identify the key competitors. Competitors come in different types. Some are direct and offer the same product to the same customer group. Others offer different products that provide the same benefit and therefore are viable alternatives. The company should brainstorm and identify all possible sources of competition and determine what it can do to beat these competitors. This will likely take about 2 hours.
  • Session 3: Define the Whole Product. The scenario building would have provided the key must-have product requirements for this customer group. During this session, the team will identify what is already available, what can be quickly built, and what capabilities will take the longest to find.  This is a major section and will likely take 3-4 hours to complete.

At this point, the team has identified the buying team and their main issues; the key competitors that target the same customer group with the same benefit and how to counter that; and what the whole product will need to look like in order to beat competitor.

Day 4: Build the Go-To-Market Strategy—Part 2

During Day 4, the team works through the remaining go-to-market strategy elements. Day 3 has defined the foundational elements that provide the context for the rest of the strategy formulation effort.

Session 4:  Define Pricing Model. The next step is to determine the pricing model and values. Pricing depends on a number of factors including: the value that the company can convincingly communicate to customers; the customer’s ability to pay; competitor’s pricing; and the input cost to the company. Regardless, the goal for high growth should be to ensure that pricing is no hurdle for winning customers. This should be completed within 90 minutes.

Session 5: Define the Positioning. The next step is to create a simple, clear, but compelling positioning statement for the company that will be the foundation for all communication efforts. This is a very important step that must be done very carefully. Companies should allow 2-3 hours to come to a consensus as to what the company offers and how it is different from competitors.

Session 6: Define the Sales Strategy. During this step, the team will define three things: how it will sell the product to the target customer group; identify the top five customers that must be won; set the 12 month and 24 month revenue targets. This session can take about 2 hours to complete.

Day 5: Integrate

The goal of the final day is to integrate the work done so far, and to ensure that each department now understands what it must do to implement the plan.

Session 1: Integrate the Strategy. The CEO will present the integrated go-to-market strategy that the team has worked on the past four days. This will be the plan that the team will from now on be focusing all departmental efforts implementing. This will take about one hour.

Session 2: Departmental Targets and Key Performance Indicators (KPI). The participants will break up into departmental teams and work on setting their targets and Key performance indicators. The first quarter will be devoted to making the transition from the current way of doing business to what the new strategy dictates. This is a critical and pivotal period, and the KPI’s should reflect that. At the end of the session, each team will have anywhere from 3-5 sets of eight (8) quarterly departmental key performance indicators. This will take about 3-4 hours to complete.

Session 3: Present Departmental Targets and KPI. Each department will present its Key performance indicators over eight (8) quarters. These will be the targets that each department will be committed to delivering over the next two years. Each department will take about 10 minutes to present its KPI’s.