Distilled into its simplest form, strategy consists of creating a unique, valuable and defensible offer which addresses a significant target market. A unique offer is one that is differentiated from competitors’ products and services in the relevant target market. A valuable offer addresses a clear customer need. A defensible offer is one whose competitive advantage is sustainable by virtue of the fit and alignment of the activities and capabilities deployed by the firm against the offer. (Michael Porter, “What Is Startegy?” Harvard Business Review, Nov./Dec. 1996)
We tested this very simple framework against our sample of rapidly growing firms and concluded that there must be other forces at work to explain their explosive growth. Few, if any, of the firms displayed a unique competitive positioning. While all of the firms addressed a customer need, their value propositions were, at least initially, often ill-defined and unfocused. While some of the firms were founded on innovation, none had created an interconnected set of capabilities that were difficult to replicate.
We concluded that the real force behind the success of these rapidly growing firms is rooted in their ability to adapt. Small firms have far fewer embedded systems and processes that constrain flexibility, impede fast decision-making or slow the speed of execution. Governance is usually concentrated in one or two people (usually owner-managers) who are very close to the operations, its customers and the competitive environment. This creates tight, rapid feedback loops to the decision-makers(s). Quite often, the owners and managers are one and the same, resulting in the perfect alignment of decision-making and value creation.
As a result, smaller firms appear to enjoy a significant advantage in their ability to react quickly to developments in the marketplace, and to make the necessary changes to their competitive positioning. In a Darwinian sense, smaller firms have the advantage of being able to evolve rapidly, which, in turn, enhances their competitiveness and chance for survival.
We posit that, at some point in a firm’s growth, the lack of formal policies becomes a significant drag on operational effectiveness. As well, the complexity and multiplicity of markets in which a firm competes may grow to the point where a formal strategic process is necessary. This leads inexorably to the institutionalization of certain processes and systems, which, in turn, diminishes the flexibility advantage these smaller firms enjoy. Indeed, we believe the smaller firm can enjoy rapid rates of growth despite its relatively poor competitive strategy.
A BRIEF NOTE ON COMPETITIVE STRATEGY
For the purposes of this article, we propose using a simple framework for thinking about competitive strategy. Essential components of a successful strategy include, but are not limited to, the following:
- A unique positioning
- A defensible positioning, i.e., difficult for competitors to replicate
- A clear customer need in a defined, significant target market
It is trite to say that the essence of competitive advantage is a differentiated offer relative to competitors. Differentiation can occur by way of a variety of dimensions, such as brand, technology, product features, customer service or distribution. We would include in this category a low-price-based positioning, although some would argue otherwise.
Clearly, it is necessary for the offer to be unique, but it is insufficient if the offer does not provide substantial value by addressing a clear customer need. In other words, the product or service must produce an experience that satisfies a customer’s need, preference or desire. If the offer is unique and valuable to members of the target market, a competitive advantage may be created.
However, a competitive advantage will not be sustainable unless the positioning is difficult to replicate. Sustainability can be established by aligning strategy closely with the supporting activities. (The Gap is one example of tight alignment between activities and the underlying strategy. The Gap has closely aligned its inventory replenishment systems with its strategy of ensuring that the latest fashions are in the store quickly. Through its point-of-sale systems and highly efficient replenishment process, low-demand products are sold very quickly by aggressively discounting them. This makes way for faster-moving products and newer fashion lines. In this way, the Gap maintains fresh, up-to-date, highly demanded styles in its stores at all times—an essential component of its positioning.)
We applied this simplified framework for creating sustainable competitive advantage to our sample of 50 Rapidly Growing Firms. We found that, without exception, each of the firms lacked at least one of these essential strategic elements, at least in the initial phase of growth. What defined the ability of each of these firms to survive and flourish, however, was their ability to quickly adapt by modifying their competitive positioning, adjusting their value propositions and targeting different customer segments. We provide several examples below to illustrate our point.
“ME TOO” INITIAL POSITIONING
The initial competitive positioning for almost all of the firms in our sample was not unique. Of the 50+ firms we studied, at most a handful were clearly differentiated in their relevant markets. Moreover, there were no firms in the sample that could be categorized as low-cost providers. Some of the firms based their initial value proposition on an innovative product. However, the majority were “copycat” business models that simply replicated goods or services that were being offered by others.
Many of these firms realized their initial growth by virtue of their participation in a rapidly growing industry. In our sample, examples of this included temporary staffing, video games, environmental engineering, computer-server sales, and laser-printer servicing. Initial growth could be significant if the company was the first into a geographic area or the first to address a particular customer niche. But rapid growth was not sustainable for these “me-too” companies as the market became saturated by competitors. The result is that, as the segment matured, each of the companies was forced to change its competitive positioning, sell out to another firm or go out of business. Take the example of Jacobs Brothers Bagels.
Andy Jacobs was the co-founder of Jacobs Brothers Bagels. When Andy and his brother founded the company in Chicago, the concept of bagel bakeries was already well established in the East. However, they were one of the first bagel stores in the Chicago Loop, which gave them a toehold in a rapidly growing marketplace. Although Jacobs Brothers got off to a good start in Chicago, the market was soon the focus of several major franchised bagel chains, and the company could not survive on its own. Eventually, the company was sold out to a major chain as the competitive intensity increased and margins declined.
Jacobs Brothers was typical of the firms in our sample. Their competitive positioning was unique for only a short period of time, if at all. Also, Jacobs’s business model was inherently indefensible. Once other firms moved into the Chicago Loop, Jacobs Brothers had to either change its competitive positioning, or create a defensible advantage by configuring its activity system in such a way that it would be difficult to replicate. Jacobs Brothers decided to sell out. However, other firms were able to change to survive.
INCREMENTALLY MODIFYING THE COMPETITIVE POSITIONING
Given the inadequacy of the initial competitive positioning, it is not surprising that virtually all of the companies in our sample modified their positioning at certain inflection points in their rapid growth. Several did so on more than one occasion. That isn’t to say that these firms found unique positionings. More often, it was a question of finding another high-growth market or segment, or a new twist on the value proposition. The key, however, was to quickly perceive the need for change and then make it happen. The ability to adapt quickly when they saw that a particular positioning wasn’t working constitutes a key success factor for these firms.
An excellent example of this may be found in Marketing Innovators (MI). Marketing Innovators is a performanceincentive company launched by Chuck and Lois LeMenager. When they started the business they simply did what they knew from past employment experience—a performanceincentive business to help other firms motivate their employees. The LeMenagers were able to generate a reasonably good business initially, in large part due to their commitment, contacts and effort. However, they quickly reached the point where they needed to refocus to sustain growth. At the time, there were five large, privately owned performance-incentive firms with revenues exceeding $100 million and a multitude of smaller ones. In an industry where scale is important, MI could not continue to grow profitably unless it was able to develop a distinctive value proposition. To this end, MI developed a simple, yet brilliant idea. It consisted of granting gift certificates, instead of delivering actual merchandise, for performance-incentive rewards.
The traditional model was for the performance-incentive firm to carry an inventory of items to satisfy reward claims. Upon reaching certain, predefined, merit-based thresholds, an employee would select an award, usually from a catalogue. The alternative was for the performance-incentive firm to place an order with a distributor who would deliver the reward. This entailed a number of logistical and administrative costs. By offering certificates, MI avoided both of these challenges.
This is but one example of firms that successfully refined their value proposition to generate incremental growth. It is interesting to note, however, that this business model, like others in our sample, can be easily replicated by other firms. In order for MI to continue to grow, it must continually modify and enhance its offer to remain ahead of the competition. Fortunately. MI has done so.
DISCONTINUOUS CHANGE TO COMPETITIVE POSITIONING
Marketing Innovators is an example of a firm that changed its value proposition incrementally. Some of the firms in our sample made more dramatic changes in their underlying competitive positioning. The best example of strategic flexibility is the firm that is able to transform itself radically and permanently. Such is the case of Spyglass, the firm which commercialized the first Internet browser, Mosaic.
When David Colbeth and his partners, three researchers at the National Supercomputing Institute at the University of Illinois (NSCI), started Spyglass in 1994, their purpose was to commercialize graphical modelling software for the scientific community. It had nothing to do whatsoever with the Internet. However, after almost 1 1/2 years of mediocre growth, Spyglass was at an inflection point. It was at this juncture that a Swiss client inquired about a piece of software at the University of Illinois that allowed users to navigate the Internet through a graphical interface. Using his partners’ connections, Colbeth was able to negotiate a licensing agreement with the NSCI. Thus began a period of explosive growth, followed by the IPO.
However, Spyglass was soon not alone in this market. Netscape joined the fray, followed by Microsoft. Mosaic’s business model was built on licensing its technology to other firms, as well as selling the browser to individuals. One of Mosaic’s largest customers was Microsoft. As with many firms, Spyglass soon found Microsoft flexing its bargaining power to the point where Spyglass could no longer generate sufficient returns. Colbeth soon found himself at another inflection point.
As Colbeth likes to say: “A bend in the road is not the end of the road, unless you fail to make the turn.” He reinvented the firm again, this time as a technology consultancy and systems integrator for Internet-enabled devices, such as interactive-television set-top boxes. Spyglass was able to execute discontinuous change in going from a scientific software firm, to an Internet software firm, to a professional services enterprise all within five years. In March, 2000, Spyglass was acquired for $2.5 billion by OpenTV (a joint venture between Thompson Multi-Media & Sun Microsystems).
Clearly, Spyglass’s success was due to its ability to participate in successive growth markets. However, the key success factor was Colbeth’s ability to scan the environment, identify new markets for growth and execute transformational strategic change. This implies a high degree of organizational flexibility. Spyglass’s first software offer did not address a large enough market to sustain growth. So Spyglass reinvented itself. The initial competitive positioning of Mosaic was not defensible against new entrants such as Netscape and Microsoft. The choices were clear: change, sell or go bankrupt. Spyglass changed again, and then sold out at a substantial premium.
Once the need for change has been recognized, the ability to quickly execute significant strategic shifts requires strong leadership and operational flexibility. This combination of factors was typical of the firms in our sample, as exemplified by Spyglass.
THE INEVITABILITY OF SYSTEMATIC APPROACHES
It appeared from our sample that a growth company can maintain and leverage its strategic flexibility for only so long as it increases its size and extends its scope. At some point along the growth curve (which likely varies according to the nature of the business), firms are increasingly forced to codify formal policies and establish business processes and procedures. Otherwise, operating effectiveness will decline significantly. While initially the founder(s) can exercise discretion in making each business decision, this eventually leads to a bottleneck and delegating becomes necessary. The higher the degree of delegation and fragmentation of roles and responsibilities, the greater the need for embedded processes and systems for the firm to function smoothly. A good example of this is Blackwell Consulting Services, an information-system consulting firm.
In its early years, Blackwell was a “me-too” technology consulting company that attempted to differentiate itself from others by its very good relationship with Lotus, excellent customer service and high-quality workmanship. Although in its early years an outside observer might have described its operations as chaotic, the company was able to deliver on its promises because it had a small group of highly motivated, well-trained employees. The company grew rapidly, but as it approached $20 million in sales, the number of employees increased significantly. It was no longer possible or even desirable to have all projects run by high-priced “stars.” In order to serve its customers economically, it became necessary to introduce methods and processes that ensured the repeatability of best practices. As President Bob Blackwell says, “We need to take the risk of becoming less flexible in order to ramp up our efficiency. This is one of our biggest ongoing challenges.”
FLEXIBILITY FACILITATES SUSTAINED GROWTH
From our sample, we concluded that the initial rapid growth of the firms could not be explained by using a traditional competitive framework. Our hypothesis is that the key to the success of these firms lies in the ability of the founders to recognize the need for change, understand how to effect the change, and quickly make the change at important inflection points.
Looking across our sample, we believe this ability to effect strategic change was the result of a number of factors, including:
1. NOT BEING WEDDED TO A CONCEPT
Companies tended to be focused on growing their business, and if their competitive position did not provide this opportunity, they were willing to shift focus.
2. CONSTANTLY SCANNING THE COMPETITIVE ENVIRONMENT
These entrepreneurs continually scanned the environment for other opportunities both within their immediate business and outside of it. If a new opportunity came along, they were quite willing to seize it.
3. STAYING CLOSE TO CUSTOMERS
The founders of these firms were often involved in the sales and service process. This put them very close to customers’ concerns and suggestions. The ability to take the “pulse” of the customer and act on it quickly is clearly an advantage over large firms, with their many layers between key decision-makers and the customer sales and service representatives.
4. STAYING CLOSE TO EMPLOYEES
In many cases, it was clear that the founders were in daily communication with employees at all levels of the firm. For instance, Lois LeMenager of Marketing Innovators takes a different employee out to lunch every day. This type of regular communication, whether formalized or incidental, allows ideas and concerns to rapidly become apparent to the founders.
5. MAINTAINING LOW OR VARIABLE OVERHEAD
Firms that made significant fixed investments such as long-term contracts or an investment in significant fixed assets were less able to modify their competitive position. For example, Facilitec, a manufacturer of commercial grease-guard filter systems, entered into a five-year exclusive manufacturing contract, in exchange for initial product design work. This proved to be a costly move which limited Facilitec’s growth. Companies with a highly variable cost structure were much better able to modify their strategy as needed.
6. SYSTEMS THAT WERE NOT CAST IN STONE
One weakness of many mature firms is that their systems are firmly entrenched, thus limiting strategic flexibility. Organizational structures that crystallize systems and processes make change very difficult. This is due to the resistance of employees who have a vested personal interest in perpetuating the existing organizational dynamic. Smaller firms tend to have employees with much broader job descriptions and generally operate in a less structured environment. Employees of firms that experience rapid growth spend less time worrying about process, and more time on getting the job done relative to the employees of large firms that compete in mature markets.
7. FEW DECISION-MAKERS AT THE TOP
The more people that are involved in the decision-making process, the more difficult and time-consuming it is to reach a decision. In smaller, entrepreneurial firms, there were fewer decision-makers at the top. Rightly or wrongly, they were able to make decisions quickly. Moreover, these decisions could also be implemented quickly. If the decisions were ill advised, we observed that corrective action was rapidly taken.