Senior Associate Dean of Curriculum and Teaching; Associate Professor of Strategy
Launching a great new product or a must-have service in an unchartered market may be exhilarating, but it also introduces uncertainty. Pour resources into the wrong endeavor and you may be risking disaster. One common response to this complexity is the equivalent of an organizational shrug: companies quietly edge into a market that roughly parallels one in which they are already working.
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“Growth is not often evaluated in a disciplined way,” says Mike Mazzeo, an associate professor of strategy at the Kellogg School. “Businesses simply perceive their opportunities as existing on planes related to customers or planes related to products or services.” This approach tends to uncover a narrow band of options—the usual suspects, if you will—while overlooking markets that are both better fits and richer with opportunity.
To maximize growth potential, companies should instead think in terms of the fundamental value they create and how well this value might serve other markets, however far afield they seem. Mazzeo has pinpointed four steps to help companies more intelligently determine where those opportunities may be lurking—and how to enter confidently.
Audit Your Resources and Capabilities
Before looking to future growth, a company should reflect on the present. “Companies must first understand why their customers are choosing them,” Mazzeo says. What about the business creates value for its customers? Is it a unique product, extraordinary customer service, distinctive design—or is it low prices, achieved through cost leadership?
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This information can be obtained through a range of customer insight tools, from direct interviews and surveys to big-data analyses. Once this value proposition is understood, it is up to the company to scrutinize its operations to uncover precisely what it is doing that supports the delivery of this value.
A rigorous audit of the company’s resources and capabilities goes beyond thinking of new audiences for your product. “That’s just not a deep analysis,” Mazzeo says.
Conducting a full audit opens doors on unforeseen prospects. “When businesses start to think about growth opportunities as relating to capabilities,” Mazzeo says, “then it opens up the possibility of them crossing into much different product or customer dimensions.”
Draw the Competitive Picture
Competitive advantage is a necessarily comparative concept. When considering new avenues for growth, companies must examine not what they do well, or differently, but what they do better than other companies. That requires isolating competitive advantages in two particular spheres.
The first is distinguishing the company’s competitive necessities from its competitive advantages. “I don’t want to do an audit and say that marketing is an important capability of my company simply because I’m good at marketing,” Mazzeo says. Every company needs to be good at marketing—however they choose to define “good.” “I have to be better at marketing than my competitors if I’m going to base a profitable growth strategy on the use of marketing to sell products and create differentiation.”
“Think deeply about what you can do better than everybody else—not just differently, but better.”
The second is distinguishing the company’s strategic differences from its competitive advantages. For example, the flight model that Southwest Airlines uses—a point-to-point route structure—is different from most other airlines, which tend to use a hub-and-spoke system. But this distinction alone does not mean that point-to-point routing constitutes Southwest’s competitive advantage: it is not a unique capability, and other airlines could readily imitate the approach. More likely, Southwest’s competitive advantage has to do with underlying resources that allow it to operate a point-to-point route structure particularly well.
Before growing, then, a business must answer two central questions: First, on what essential skill does the success of the growth rely? And second, can other companies readily imitate or replicate this engine for driving growth?
“This means really thinking deeply about what you can do better than everybody else—not just differently, but better,” Mazzeo says. “Then say, ‘Okay, what does that connect to?’”
Bring a Diversity of Opinions to the Table
Audit in hand, gathering a multidisciplinary team is essential for determining which of a company’s unique capabilities will provide traction in new markets.
“I’ve asked companies many times, ‘What do you think are some of your important capabilities?’” Mazzeo says. A handful of people might respond that the integrity of customer relationships is most important. “Then I’ll ask, ‘How is that driving value for your company? Are the relationships so strong that if you raise your prices people would still buy your product based on the relationship?’” That, Mazzeo says, is ultimately the kind of question that needs answering, and one that different departments might answer differently.
For instance, the sales team can offer a very deep insight about the strength and value of customer relationships, given the team’s connection with the customer. “They own that relationship, so they know how strong it is,” he says. The engineering team, on the other hand, may stress the compatibility of its intellectual property with other systems, or the way that customer feedback is integrated in updated product rollouts.
“Having a team with different angles of exposure to the strengths of a resource is really critical,” Mazzeo says. Getting the whole picture in this regard may lead to different outcomes than if all the assumptions about a company’s capabilities were generated from the product-development team.
Connect Distinct Capabilities to New Opportunities
To achieve growth based on competitive advantages, companies then need to connect their most uniquely valuable capabilities to new opportunities—wherever they may be.
“Find an activity or a market or product where success requires exploiting capabilities that you as a company already have, and that you utilize in the business that you’re currently doing,” Mazzeo says.
This typically requires a company to think more broadly about applications for its capabilities. TiLite, the largest manufacturer of manual wheelchairs in the U.S., started out in the mid 20th century making titanium tubing for the nuclear power industry. Though it had deep knowledge and superior capabilities in titanium swaging and welding, there were few growth opportunities as the nuclear industry waned in the 1980s.
TiLite began a comprehensive search of other industries to see where else its specialized skills could be applied. After rejecting bicycle, tennis-racket, and golf-club production, the company found its niche with manual wheelchairs. Because wheelchairs need to be customized to provide maximum value for users, the bedrock of the business was in place. TiLite needed only to update its sales and distribution network to grow its business.
IBM provides another, more familiar example. While it was founded on technology—and may traditionally be known as a computer company—its market leadership for more than a century is due more to the services it provides than to the products it manufactures and sells. IBM recognizes that its advantage lies not in the technology itself, but in the trust it has established with its business customers. By leveraging this reputation, the company has very effectively exploited growth opportunities in markets where consumers face uncertainty over the best technical solution to a problem.
“IBM is a great example of a company that understands its capabilities and uses this understanding for strategic growth,” Mazzeo says. “Yes, it is a company that over the years has been in a lot of different computing-related businesses. But what ties those businesses together is the importance of reputation and making sales to customers.”
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