Posts Taged absorptive-capacity

The One Year, Thirty Minute Challenge :: Week 52 :: Strategic Planning :: Competitive Landscape

In an earlier One Year, Thirty Minute Challenge, I encouraged you to survey your industry landscape using Porter’s Five Forces plus one more (you can read that here). It’s a valuable exercise because it requires you to zoom out and look at the environment in which you compete from 10,000 feet. For this week’s One Year, Thirty Minute Challenge, we’re again going to survey the environment in which you compete, but this time, it won’t be from 10,000 feet. Instead, we’ll be in the trenches looking at specific competitors, vendors, and distributors with specific actions in mind.

This differs from other challenges where the endgame was evolutionary – changes in the attitudes and actions of leadership, a change in processes, or a change in a specific discipline in the organization. The changes emerging from this challenge can be revolutionary. Executed well, they can return 3x, 5x, or 10x growth. Executed poorly, they can decimate the organization’s reputation and finances. In other words – big risk and big rewards.

Let’s jump in –

  • Identify competitors that you admire. They might be local, regional, national, or online. Why do you admire them? Do they have a fanatical customer base that keeps buying and singing their praises while they do it? Do they have robust processes for delivering their products and services? Is their messaging engaging? Do they have a readily recognizable brand? Do they have a uniquely talented staff that is driving their organization ahead?
  • With that competitor in mind –
    • Can you emulate any of the things you admire? Strategists discuss “absorptive capacity” – the ability to observe the value drivers in a competitor’s product or delivery, internalize them, remake them (taking into account your company’s unique personality), and redeploy them to eradicate the other company’s advantage. Is this a possibility for any of the things you admire in your competitors? Keep in mind, if you do this, it must make economic sense and any imitation must still be consistent with your brand, values, and culture.
    • Would it make any sense to pursue a merger or acquisition? You never know what might be going on inside that organization. You might have an owner eager to sell his/her company or one that’s looking to acquire a company like yours. Horizontal integration immediately increases market share (by eliminating a competitor and capturing their customers as your own) and cuts unit costs (by spreading fixed costs over more sales volume). Typically in a merger or acquisition, the new enterprise eliminates redundancy (you don’t need two finance departments, two HR departments, etc), while retaining newly acquired product or service offerings. Be warned however, integrating two organizations is extremely difficult. It must be done well to realize the full financial benefit of the merger or acquisition. Read more about mergers and acquisitions here.
    • Would it make any sense to pursue a strategic alliance or joint venture? Collaboration among competitors can make sense when each one has unique products, delivery methodologies, or competencies from which the other could benefit. You can offer your customers additional products or services (originating from the competitor) and still keep them in the fold. Your strategic alliance partner can offer their customers products and services provided by you. Additionally, both of you can learn from the other. Neither party is likely to expose or unfairly leverage newly learned trade secrets since the other party could do likewise in retaliation. Read more about alliances here.
  • Are there any suppliers that it might make sense to acquire? Moving upstream in the value creation chain sometimes makes sense. Could you more effectively create value for customers if you had complete control over a particular supplier? Could you benefit from the additional margin now taken by the supplier or could you benefit from prioritizing your own delivery of their product or service? While these are certainly two benefits you could derive from acquiring an upstream supplier, there are plenty of potential downsides to consider –
    • Do you have sufficient knowledge to operate in that industry?
    • Are you comfortable selling to your competitors? (It’s unlikely that you consume all of the product coming from that supplier. The supplier probably sells to your competitors also.)
    • If you were to buy the company, are your competitors OK with buying from you?
    • If a new technology emerges that makes the products you purchase from that supplier available at a greatly reduced price, you can easily switch to the new, cheaper supplier. However, if you’ve purchased that current supplier and the new technology emerges, you’re stuck with a company whose customer base is fleeing to the new, cheaper supplier – and, depending on the circumstances, you might be stuck using your own more expensive supply while your competitors cut their cost of goods sold. Plus, you might be stuck with a company whose value is plummeting as their product falls out of favor with the market.
  • Are there any distributors that it might make sense to acquire? Moving downstream in the value creation chain can make sense also. It gets you closer to the customer and allows you to capture the margin now going to the downstream distributor. This interaction with downstream parties can help you become more innovative as you more intimately understand problems that you can solve with new products and delivery mechanisms. You might up your “creative destruction” game significantly. You also have the ability to exercise more control over the customer’s experience with your product or service. However, just like moving upstream, moving downstream has some risk. More interaction requires more resources – people, communication infrastructure, and customer facing tech just to name a few.

 

Many of the One Year, Thirty Minute Challenges have much shorter runways and yield their fruit quickly – even days or weeks. This one is decidedly different. You won’t see the full financial impact of these initiatives for years. Confer with trusted advisors and make haste slowly. If you forge ahead with one or more of these, do it well. Get help if you need to. Stakes are high, screw ups are expensive, but rewards are huge.

The One Year, Thirty Minute Challenge :: Week 44 :: Strategic Planning :: Absorptive Capacity

One of the most disconcerting things any business leader contends with is “disequilibrium”. Disequilibrium is that queasy feeling when what you think you know for sure is, all of a sudden, in question. One moment, your world is tidy – all the pieces make sense – and now, suddenly, it doesn’t. Disequilibrium happens in all parts of life, not just work – faith, relationships, health, and the list goes on. But for this week’s One Year, Thirty Minute Challenge, we’ll discuss work.

Sales are humming along. Everyone loves your product. You have to beat customers off with a stick. And then, a little-known competitor introduces a product that upends your industry. Customers flock to your competitor and your revenue plummets. Yesterday, revenue projections for the next couple of quarters looked stellar. Today, with the money on hand, you’ll only be able to make payroll for 8 more weeks.

Now what? Disequilibrium – that situation when new information comes into your world and throws everything you know out of sync – reveals your Absorptive Capacity. Absorptive Capacity is the ability to synthesize the new information you’ve received, reconcile it to what you knew before, and respond in a way that reflects your new understanding – all while pushing towards your vision and fulfilling your mission.

Before jumping into this week’s exercise, let’s illustrate with an incredibly over-simplified example. You sell cameras and the film that goes inside those cameras. People point the camera at an image, push a button and the image is etched on the film. After those people have taken a few dozen of those pictures, they send the film to a third party that puts the film through a process and prints the images from the film on special paper. That’s how pictures are made. Everyone knows that. Then, one day, you learn of a new camera. People point that camera at an image, push a button and the image is translated into millions of electronic picture elements (pixels) organized on a grid and saved on a silicon chip. No film. No third party. No printing on paper. The little chip holds hundreds of images. And the images are completely portable and can be sent to other people using a variety of electronic devices. You’ve just experienced disequilibrium. What you thought you knew about taking pictures has been disrupted with new, confusing information.

What you do next determines what your business will look like going forward. You can deny the new information – “the way we do pictures is what customers will want forever”, “this is a passing fad”, “this will never be commercially viable”. Or, you can demonstrate your Absorptive Capacity by synthesizing the new information and begin making positive progress towards your vision armed with an updated understanding of the environment in which you compete.

Let’s jump into this week’s exercise. It’s not possible to engineer a moment of disequilibrium. That’s part of the reason they’re so jarring. They come out of the blue. So, for this week’s exercise, we want to create a framework that you can use to lead yourself and your team through these events when they come. In that framework, we want to strengthen your organization’s Absorptive Capacity so you emerge from disequilibrium stronger and more prepared to reach your vision.

Understand exactly what’s threatened by the new information – Is your entire business model in jeopardy (like the camera illustration above)? Is your workforce in danger of being poached (a large employer with deep pockets is building a new plant in your city and will be hiring thousands)? Are your customer’s expectations likely to radically change (better product available, better pricing for a competing product)? What problem is being solved now more effectively than you were solving it before? This is no time to “whistle while you walk through the graveyard”. Instead it’s time for radical truth-telling. Get your most trusted team members together and ask hard questions. Talk to current and existing customers to gauge their response to the new information (depending on the information, it might or might not affect them). Define the breadth and depth of the impact from the new information.

Identify the downstream effects – What’s the impact on revenue? Does existing equipment become obsolete? Do existing core competencies become meaningless? Does customer acquisition messaging need to be reworked? Is your cost of goods sold or customer pricing impacted?

Envision the new reality – Clearly, no one has a crystal ball, but using your best judgment, envision the new world created with the new information. Who will win? Who will lose? What will the winners have done to win? What will the losers have done (or not done) to lose? What vendor resources will become important? What will be important to employees? What will be important to customers? What will be important to other stakeholders – shareholders, regulators, vendors?

Create alternatives – With your new, expanded understanding create multiple scenarios that make sense in the new reality. For each scenario, push towards effective value creation and push towards fulfilling your vision. Can new, capable competitors become strategic partners? Can new, capable competitors become acquisition targets? Should you become an acquisition target for a new, capable competitor? Can you successfully emulate a new product or service offering? Can you move up or down in the value creation chain? Is there talent you need to acquire now? Are there assets you need to jettison now? What becomes the new, valuable core competency?

Leverage existing knowledge and experience – When faced with a challenge, your gut reaction is to do what you already do except to it faster, with more intensity, and with higher quality. I get it. But, if you’re riding a bicycle, you’ll never go faster or farther or carry more than your new, capable competitor who’s driving a delivery van. That’s where your knowledge and experience become your competitive advantage. You know the limits of your current team, your current model and the needs and wants of your customer base.

Leverage existing relationships – Tap the collective genius of employees, vendors, and even customers. If you don’t have one already, establish a true idea meritocracy – an environment where the best idea wins the day – no matter whose idea it is. Beware of the HIPPO (the Highest Paid Person’s Opinion).

Look for meaning in adjacent areas – Does the new information or the new reality it produces allow you to pivot to an adjacent area? Many years ago, during a downturn in general aviation sales, manufacturers of small planes become subcontractors for commercial airline manufacturers (whose business was booming) building wings, tail sections and other subassemblies for them. Can you leverage existing capabilities into new opportunities?

Look for meaning in other industries – Are there other industries that were faced with a similar situation? How did the players in those industries respond? How did the actions of the winners differ from the actions of the losers?

Fire bullets – When you’re ready to test your responses, as much as possible, fire bullets – small, controlled, cheap tests to evaluate the promise of that response. Tweak and test again until you have an effective response to the new reality. You can read about firing bullets in an earlier One Year, Thirty Minute Challenge.

Measure and adjust – As you roll out your new response, measure the factors that accurately indicate that you’ve successfully reacted to the new environment. It might be things like no decrease in customer retention, no loss of revenue, no increase in cost of goods sold, stable customer satisfaction scores or, depending on your unique situation, a whole different set of measurements. Whatever the metric, continue to evolve your response as the metrics dictate.

The speed of change in the competitive environment continues to accelerate. And the magnitude of the changes continues to increase. Increasing your Absorptive Capacity is a critical skill to ensure that your business continues to not only stay relevant but prospers in an increasingly turbulent business environment.