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What’s your slice of the pie?

May 29, 2013

In the current economy, most businesses operate a competitive strategy based on taking a larger slice of the pie, gaining market share from others. A few are innovators, and create their own market space and make the competition irrelevant with unique value propositions. But far too few many opt for pie-splitting instead of pie-growing strategies.

Nielsen Research identified that of the billions spent each year on marketing and innovation, estimates are that only £1 in every £8 spent on marketing (13%) and £1 in every £20 (5%) invested in innovation, results in a company growing the market capacity as a growth strategy.

The majority of the expenditure just shifted market share from one business to another. These pie-splitting strategies often drive short-term, unsustainable results where companies are merely ‘renting share’, that is until someone else comes along with sharp elbows and takes a few % off their revenue and reduces their existing customer base by way of a tactical response. Supermarkets exhibit this behaviour.

In the long-run, too much share stealing without genuine market growth destroys industry profitability for all participants: everyone is just chasing the same customers and end up cannibalising their offering and their business, for the lack of game changing innovation.

This is shouted out loud and clear in Nielsen’s research: the single largest result of marketing is subsidised volume at nearly 55% of all market spend. This is spend where there are no new consumers or incremental sales units are achieved, instead, customers who would have purchased a product anyway are being given discounts, cutting profits. They just sit back and let everyone eat away at other’s margin in a price/discount war.

One might think that all consumers would be happy with lower prices, but The Cambridge Group analysis across dozens of categories shows that the truly price sensitive customer tends to be only 10-30% of a market. Most customers actually want new value and innovation, and are willing to pay for this.

With regard to innovation, the numbers indicate that innovation may result in splitting the pie and not always growing the pie — and in some cases, innovation inadvertently shrinks the pie. Nielsen looked at sales from new products in various categories within the grocery market in recent years to evidence this.

In one year £2.7 billion in new sales was generated via new products in the grocery channel but £3.2 billion was lost due to failed products and ‘lost’ products that were pulled from the shelves – a net negative £500 million. Put another way: for every incremental £1 gained from a new product, £1.20 was lost due to product de-listing.  

So is growing the pie an impossible task? No, but the path to pie-growing strategies centres on innovation that drives category growth. The lesson is: innovate to grow the overall market size, not just your own market share.

First, innovation needs to be redefined in terms of ‘what does success look like?’ Too often businesses set financial targets, almost at random – ‘let’s aim for £5m of new sales from this new product’ without regard as to where the additional revenue will come from. Ideally it comes from category growth – growing the market by introducing a new value proposition that attracts new customers.

As highlighted above, if it comes from a competitor’s share or, even worse, cannibalising a product in our own portfolio, it’s a less effective innovation. Innovations that grow the pie allow a business to benefit disproportionately instead of reapportioning existing shares. Innovations that are truly differentiated and are appealing enough to command pricing power have a much greater chance of growing the market size and thus uplift sales and margin.

I think it’s about the ability to innovate your ‘mental model’ of your business, to reflect the new realities of an industry, and remove the confusion of what you’re trying to achieve with ‘growth’. This confusion begins with a flawed mental model that fails to reflect reality but still serves as the basis for taking action. ‘Growth’ is often just ‘grow revenue with a new approach’, not genuine innovation. Why would that succeed?

So what exactly is a company’s mental model? Simply put, a robust mental model eliminates internal confusion and sets down a clear strategy and metrics of success. The mental model is a framework that simplifies a strategy with clarity and focus on articulated goals.

Without a strong mental model strategy can become open to interpretation, decision-making can become bogged down, or both can occur at once. Simply, it articulates ‘this is what we’re going to do’ with total transparency.

I recently took this approach with a client of mine in engineering. They had set a target of 20% top-line growth, mobilised their marketing and sales teams to win more business – and set out with gusto to succeed. The top line grew. But profits declined.

The company’s top salesman, winner of the annual incentive trip to some exotic holiday destination five years in a row, was almost singlehandedly putting the company out to business. How? The strategy called for delivering the highest quality service to customers who were the biggest users of their products. That will keep the competition out, won’t it? The sales team prided itself on bringing in the biggest deals with huge volumes from these target customers. Their mental model was essentially ‘big customers, big volumes, big profits’. They had a swagger, and at face value it looked good.

While this interpretation of the strategy seems valid, there was a fatal flaw: big customers with big volumes also command big discounts, and advantageous payment terms. Making matters worse, most of these high volume customers did not value high quality and their cost-focused approach put the high-quality products the company had invested in at a disadvantage.

As a result, profits steadily eroded as the top line grew.  They’d won a larger slice of the pie, but at what cost? A simple exercise for building a revised mental model brought a new focus, answering a series of key questions:

·       Which customers are the most profitable?

·       How well aligned is our value proposition to their demands?

·       What differentiates our value proposition from competition?

·       How will we compete and win?

·       What will customers pay for our differentiated offering?

Comparing the answers to these questions quickly revealed that individual business functions were operating from their own radically different mental models. Sales and engineering had very different views of the most profitable customers, with sales focused on scale, whilst engineering focused on precision.

Working together, the teams identified a previously unrecognised value proposition – an innovation. With this new information, marketing identified customer segments with the most profitable projects. They were smaller customers with moderate volumes that valued quality.

By focusing on these customers and building a new value proposition focused on their needs, the sales team started filling the factory’s capacity with profitable jobs. Ultimately, the dialogue begun around the dislocated mental model created the reality check. The realignment externally with customers based on innovation and segmental analysis needed to turn the business around, was achieved.

In my experience, a successful mental model must provide an accurate reflection of your reality. A major flaw, is starting from faulty assumptions. There is a tendency, especially under pressure, to see the world as we wish it were, or how it used to be, rather than as it really is.

Thus our growth ambitions, over simplified in raw financial (revenue) metrics are ill considered and doomed to failure at the outset. Just because we achieved 20% growth last year, why can that simply be replicated again?

Starting a dialogue about your company’s mental model can lead to significant improvements. Begin with the types of questions above. One potential outcome is to confirm that everyone understands and is aligned behind a shared mental model. Another outcome is to identify gaps to be addressed. Building a stronger mental model can only increase your odds of success.

A bi-product from the project, was my realisation that creating an organisational culture that is focused on learning is more effective than simply focused on winning. If you are focused on winning then there is always an implicit win/loss associated with every action or result, and it’s a binary outcome with a binary measure of success chalked on the scoreboard.

Winning consistently can elicit complacency and a lack of thinking. Most companies lose more than they ever win, so they are constantly playing some game to make losses feel like wins or over emphasise actual wins. A company needs to learn that they cannot get long-term success without challenging and refreshing their mental model, because success masks the curiosity of learning and doing new things or creating new ideas. Success disables innovation, losing provides for agitation and a desire (and need) to improve.

Companies often have this culture hang up, and fail to recognise that they are the most vulnerable when at their most successful. They can focus on winning when in growth mode as it’s easier to have lots of winners. However for long-term sustainable success a business needs to revolve around learning and a culture of introspection.

Fundamentally, the issues are rooted in our culture of competition. Pie-splitting as a growth strategy is attractive because it is more familiar and easier. It’s also generally based on sales and marketing tactics, not adding value to products. For many of us it is deeply ingrained that for one to win, the other has to lose, and we feel good when we win.

Pie-growing takes more courage, as it is a more uncertain and riskier strategy. It also takes more creativity, as well as an ability to stand in your customers’ shoes. But as Edison said, don’t invent something that you can’t sell, so what does innovation look like from your customers’ perspective?

Innovation was defined for me some 52 years ago on Saturday just gone, on May 25, 1961. President John F. Kennedy stood before a joint session of Congress and announced This nation should commit itself to achieving the goal, before this decade is out, of landing a man on the Moon and returning him safely to Earth.

This must be the greatest vision of innovation of all time, the Man on the Moon is a resounding statement of ambition and intent. It has become one of the most compelling, unifying visions ever articulated by a leader.

So, on this anniversary, it is worthwhile to highlight it and reflect that every business must craft innovation into their mental model of what they want to achieve in terms of growth and doing something new. Does your mental model meet the Man on the Moon standard?

It’s not about new ideas being pie in the sky, rather it’s about an abundance of ideas to create a larger pie. Pie-growing not pie-splitting is the only route to genuine growth, creating new, uncontested market space. Then ask yourself, who ate all the pie? The answer is easy: the market innovator with a new mental model.

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