Focus on Fit in Growth Plans

In 1967, many of us heard the same advice given Dustin Hoffman in The Graduate: “Plastics.” The 2011 equivalent of that might be “China.” Plastics was good career advice in 1967 and China is undoubtedly good market advice in 2011. Is such advice all that is needed for your firm’s 2011 growth plan?

One executive summarized his problems with that advice as follows: “Everything I read tells me that China is growing faster than anywhere else on the planet, and that we haven’t seen anything yet. But I’m not the only one reading those articles and web site postings. If we all go charging off to China, how are any of us going to make any money?”

It’s undoubtedly correct that most firms will be better off if their 2011 plans involve paying increased attention to China, but it’s also true that strategies like “plastics” and “China” are not particularly actionable. This executive’s comment provides focus on what’s needed to translate “China” into a growth plan.

The missing ingredient is the definition of what each firm can do to create value, better than their competitors, and translate that value creation into rewards for their shareholders. I have used “China” as the example of a growth target in the above discussion, but you can substitute any other focal point and reach the same conclusion — the challenge is that of moving from a potential opportunity to an action plan that delivers results and rewards your firm’s shareholders.

This is not to diminish the importance of identifying growth market — or whatever is the equivalent in your industry — is a great starting point. It defines where there are great opportunities. Great market opportunities involve multiple dimensions — significant scale, fast growth, customers willing to pay premium prices, etc. Every business plan should begin with a focus on great market opportunities. After all, what executive wants to tell his Board of Directors that the 2011 plan emphasizes markets that are small, shrinking and under price pressures.

But from among the great market opportunities that are available to every firm, the success stories will emerge from the firms that focus on “Fit” — the match between their company’s competencies and the factors that drive competitive success in those markets. It is the quality of Fit that determines whether a strategy succeeds in creating value for customers and capturing value for shareholders.

A focus on Fit is the way a firm can determine if “China,” “alternative energy,” or some other great market opportunity is right for their firm. And it’s the way that they can answer the executive’s challenge and explain how their firm is going to achieve a business success in a great market that is well known to all of its competitors.

When we look at Fit, we focus on three dimensions. In the paragraphs that follow, several examples are provided to assess the dimensions of Fit. The relevant factors change from firm to firm and from market to market. But the three dimensions of Fit that are examined are ones that should be examined in assessing all of the “great opportunities” that are being assessed as part of your firm’s 2011 planning.

First are the purchase decision drivers that customers in the target market use to choose among competing suppliers. The question to ask is whether your firm scores well on those factors. If so, it’s a positive signal about your firm’s potential for success.

We worked with two firms that were both market leaders in their product lines, which were sold into the telecommunications industry in North America. One of these firms had built its reputation and success on the basis of how its products contributed to worker productivity, saving time on various tasks. This contribution was a sure-fire winner in the high labor cost environment of North America. But it failed to translate into China, where labor was plentiful and labor costs were low. The second firm built its reputation on the basis of faster project competition, basically taking time off project plans. In China, the “build it and they will come” environment applauded fast project completion, with the firms first to market the ones that would gain market share. Each of these two firms had a competency that had enabled it to win in the North American market. Only one of the two competencies “Fit” the China market.

A second consideration is Short-Term Position. Any growth strategy has a short-term as well as a long-term, and it’s usually to a firm’s advantage to get out of the gate quickly. Those firms that are positioned for a fast start score well on this second dimension of Fit.

Two firms that served the petrochemicals industry had roughly equal market shares in the U.S. Each had its strong advocates among its customer base, and third party evaluations suggested pro’s and con’s of each of their technologies. When one of the customers of one of these two suppliers won a major award to build a large petrochemical facility in the Middle East, the supplier that was entrenched with this firm had a huge advantage in terms of its Short-Term Position.

In this case, the advantage was due to a relationship. In other instances, short-term advantages can be due to numerous other factors. For example, in the construction industry, we saw a firm with a two-year head start on its competitors because it had passed the hurdles of China’s Design Institutes and had its products approved for major construction projects. Its competitors were just beginning that process. They would eventually be successful, but they were quite a bit behind due to the head start achieved by the firm whose products had already gained approval.

The third component of Fit involves the underlying Business Drivers, the factors that motivate interest and decisions on the part of customers along the customer chain. Like purchase decision drivers and short-term position, Business Drivers likely differ from one planning environment to the next. But it is always important to know whether they match up well with your firm’s strengths and that they are likely to remain a positive factor over time.

One case example recently involved a firm that saw a surge in demand driven by capacity shortfalls in their industry. For a variety of reasons, there had been a disruption in some of the supply chains from overseas factories that had been relied upon prior to the recent recession. It was hard to envision that this situation would be permanent, and in fact within six months, the supply constraints had been alleviated and this firm was again experiencing the pricing pressures that it recalled from prior years. The dominant business driven in this situation was not one which suggested a solid Fit for this firm, one that would allow it to enjoy continued success in that market.

A contrasting example involved a firm that enhanced a component to improve its energy efficiency. With almost every industry recognizing the importance of energy cost reductions to their bottom line, this business driver appeared to be one that would persist and perhaps even intensify in the future. This is especially true in market segments which are highly energy intensive, with energy costs a significant portion of the cost structure. The product enhancement that delivered energy cost savings played quite well to this important business driver, a positive factor in terms of the assessment of the Fit in market segments where energy cost issues were significant.

In summary, planning for growth requires much more that spotlighting market segments in which opportunities are strong due to some combination of scale, growth, and profit potential. Within any attractive market segment, it is important to determine whether your firm is positioned for success, whether there is a strong “Fit” between your firm and the determinants of success in those market segments.

Looking at three elements of Fit — the degree to which your firm can deliver upon the factors that drive purchase decisions, the quality of your firm’s short-term position, and the relevance of key business drivers to your firm’s value proposition — can help you to sort out those market opportunities in which you can be successful from those where disappointment is likely.

Author: George F. Brown, Jr.

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