A sample text widget

Etiam pulvinar consectetur dolor sed malesuada. Ut convallis euismod dolor nec pretium. Nunc ut tristique massa.

Nam sodales mi vitae dolor ullamcorper et vulputate enim accumsan. Morbi orci magna, tincidunt vitae molestie nec, molestie at mi. Nulla nulla lorem, suscipit in posuere in, interdum non magna.

Five more questions for market entrants

28 June 2010

In my last post I discussed five fundamental questions every business entering a new market needs to consider. In this one we consider the other five:

6. Does our value proposition give customers a compelling reason to choose us repeatedly?

7. How will we achieve an organisational culture that combines entrepreneurial spirit and management discipline?

8. Who are/could be our most formidable competitors and how do we measure up?

9. What’s special about us? How will the firm differentiate itself?

10. How coherent and realistic is our strategy?

I ended last week with the challenge of winning the first customers, which leads directly to the next question: does our value proposition give customers a compelling reason to choose us, and to do so repeatedly. Webvan’s didn’t; Ryanair’s does. It’s not a delightful experience, but it’s cheap and reliable, so even though passengers moan about it, they keep coming back. That’s the acid test – coming back. We only have a business if they come back again and again. There has to be a reason, but a surprising number of businesses would be hard put to spell out what theirs is.

The safest and simplest reason is exceptional value, but that requires capabilities and economies of scale that most new companies don’t have. Amazon and Ryanair are textbook cases of how to build capabilities with a clear value proposition always in mind.

Technology companies can have a tough time defining value propositions – it’s in the nature of major innovations that they start as solutions looking for problems. That term applied to the most successful technologies of the last 30 years, the PC, the Internet and the mobile phone. They took time to discover benefits for customers, but that was too late for most of the early technological pioneers, who did not earn rich returns from their innovations.

Customer propositions are infinitely more important than mushy mission statements. They effectively encapsulate my first four questions. The most fundamental questions for any business are: What exactly do we have to offer customers, and why should they buy from us?

Question number seven: how will we achieve a degree of disciplined entrepreneurialism? Creativity without discipline means products don’t get delivered on time and costs run wild. But too much efficiency and focus can easily stifle experimentation, and crush the creative spark. It’s an incredibly difficult balance that very few firms really manage, for any length of time. It’s basically about building balanced teams. Brilliant entrepreneurs like Steve Jobs and Jim Clark rarely have all the qualities necessary to make things happen and to take well-judged decisions – they’re often prima donnas. They need sensible people around them with complementary skills, but people they’ll listen to, who’ll occasionally remind them that they’re mortal. That’s why partnerships have played such a crucial role in the birth of great entrepreneurial firms like Apple, Sony, Microsoft and Google.

The next question is one that previously successful organisations frequently fail: who will be our most formidable competitors, and how do we measure up? None of us like facing up to our weaknesses, and strong organisational cultures can make it almost impossible. They reinforce intellectual rigidity and block out dissent. The more successful they’ve been in other fields, the more likely they are to think they’re invincible.

Nearly all the companies I’ve studied that came to grief underestimated their rivals and overestimated themselves: Apple versus IBM, IBM faced with clone PCs and Microsoft, Sony blundering into Hollywood and having to write off four billion dollars, Netscape attacking Microsoft, Webvan challenging Wal-Mart, AOL thinking it was a real media company that could transform Time Warner.

Entrepreneurs and business leaders need extraordinary levels of self- confidence and optimism. It’s often their stubborn belief in an idea everyone else thinks is crazy that leads to enormous success. But there needs to be someone in the organisation prepared to challenge the consensus view and ask the difficult questions. All too often, hubris leads to nemesis.

There certainly needs to be something special about the business, something people in it can believe in, something that differentiates it from competitors. If a new market’s growing fast, there’ll be a flood of new entrants, typically with near-identical strategies and offerings. That happened during the dotcom boom, with discount telephony and even wine-growing in New Zealand. The end result is invariably massive over-capacity, commoditization and a big shake-out. To have any chance of survival, you have to follow Apple’s advice – think different, and stay different. Great market creators do it by being better than anyone else. That’s a wonderful strategy if your capabilities are truly distinctive, and you can keep them distinctive. And some companies achieve differentiation through strategic assets like brands, customer relationships or exclusive rights to content or technology.

Entirely new ventures don’t have these advantages, so they need to think of other ways of being different. It doesn’t have to be one big thing, it can be dozens of little ways of providing better service or being memorable, but it has to add up to something that others can’t easily imitate. There’s no such thing as an inherently attractive market, and sexy ones are dangerous – lots of other people are swarming around them. Really attractive opportunities are ones where we have something special to offer, where we have a chance of establishing a competitive edge, where there’s some white space. The vast majority of businesses can’t aspire to create an entirely new market, but the next best thing can be a niche it can dominate.

If we have plausible answers to all these questions, we’re most of the way towards the last one: how coherent and realistic is our strategy? That mostly means thinking clearly about the market we’re addressing, and being honest with ourselves about our capabilities compared to the competition. Almost certainly both will change, and we must be prepared to revise our previous assumptions and adapt our strategies frequently. But great ventures don’t start with realism and coherent plans – above all, they need imagination, energy and passion. Both heart and head are important, and the willingness to try many things. But every now and then, enthusiastic entrepreneurs need to step back, and ask themselves some hard questions – and not just these ones.

1. What exactly is the market?

2. What will it take to compete in this market? What are the essential enabling capabilities and assets to be a credible player?

3. Do we have all of them? What would it take to acquire them?

4. Who is/who will be the customer and why should they choose us?

5. Who pays? Does our business model add up?

6. Does our value proposition give customers a compelling reason to choose us repeatedly?

7. How will we achieve an organisational culture that combines entrepreneurial spirit and management discipline?

8. Who are/could be our most formidable competitors and how do we measure up?

9. What’s special about us? How will the firm differentiate itself?

10. How coherent and realistic is our strategy?

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>