Small Muscles and the Long Race – Building a Scalable Company

I have been doing strength training for the past three years with a personal trainer.  He focused on lifting weights to make me stronger.  I thought I was doing well – my body had become better toned and I could lift more weight than I ever have been able to.  Last year I took up distance running.  I hoped that my hard work in strength training would help me in running.  To my surprise, I didn’t make as much progress as I would have liked. I would get tired and I also started to develop heel pain.  Over the past few months, I have been working out with a new trainer who is focusing on making me a better runner. His diagnosis – I had focused on my big muscles and had ignored the small muscles in my feet and my back that are very important in stabilizing the body when you run.  My body was lop-sided – parts of it were quite strong while other parts were dangerously weak.  My new trainer told me that I was risking serious injury if I did not balance my muscle development.  Without this balance, there was no way that I could run a marathon.  I might make it to a half-marathon, but I would not be able to sustain my pace in a long race.

And so it is with companies as they grow. They focus on hiring engineers to build more products and beefing up the sales force to generate more demand for their products.  These are the most visible drivers of growth, so they get the most attention from management.  They are the “big muscles” of the company.  But other less visible areas get less attention.  Some companies, like the infamous People Express in the in 1980s, under-invest in service capacity.  Others pay less attention to building a professional marketing organization. Yet others don’t invest enough in capability development for their people or building a strong bench below the top management team.  These are the “small muscles” of the company – processes and activities that are less glamorous and less directly related to building stuff and selling stuff – the two core activities that management focuses on to drive performance.  So as the company grows, it becomes lop-sided.  Eventually, the areas that are under-developed start causing stresses and strains to the system, and the growth stalls. Just as a runner with lop-sided muscles cannot compete in a long race, a company with lop-sided capabilities cannot be built to scale.

I have been advising several mid-sized companies on growth strategy. A common question they ask me is – how do we grow 2x or 5x in a few years? How do we scale the company’s revenues aggressively? My advice based on my running analogy – what are the small muscles you have ignored?  What are the capabilities that you have under-invested in? What are the processes in your company that are not “built to scale”? I advise them to diagnose their capabilities in:

• Hiring and developing talent
• Accessing markets and customers
• Generating demand through marketing
• Serving customers
• Managing IT systems
•  Improving operational business processes
• Building bench strength in senior middle management

In my experience, these are some of the common “small muscles” that get ignored in mid-sized companies. If you don’t pay attention to these under-developed capabilities, your company is not built to scale.  If you want to win the long race of growth, start focusing on the small muscles.

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Blank Checks: Unleashing the Potential of People and Businesses

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1. Solve a real problem: The problem you solve for your customers should be real in that it should address a valid pain point. Sometimes, founders of startups are enamored with problems they believe are real, but customers don’t actually see things the same way!  For instance, Netflix solved a real problem of usurious late fees charged by Blockbuster, as did Blue Nile, when it helped men to buy jewelery in private without looking foolish in a store. 
2. Solve a focused problem: Too often, “world domination” and the pursuit of the mythical “mass market” leads to startup failure. The more focused the problem is, the better your chances of success because you won’t have “just-in-case” features in your product! Consider Segway, the revolutionary personal transporter from Dean Kamien. When Segway tried to pursue the “mass market for pedestrian travel”, it failed to gain market traction because the value proposition wasn’t compelling for anybody in particular. But it has become much more successful in the focused niche market for public safety, with its Segway Patroller for beat cops.
3. Solve a big problem: You should solve a problem that a lot of people have and problems on which a lot of money is being spent. If you create an e-commerce site to sell hot sauce (e.g., www.hothothot.com), how big can this be? On the other hand, the market for cloud infrastructure services is likely to be huge, so its well worth chasing.
4. Solve a difficult problem: Ask yourself – what prevents someone else from solving the same problem as you? What’s proprietary about the intellectual property and the knowledge? What’s difficult about the technology and the operational capabilities for your venture? For instance, the folks at www.diapers.com solved the difficult problem of online sales and direct distribution of bulky, low value to volume ratio commodities like diapers. Bigger players like Amazon had ignored this market because the logistics simply did not work. But these guys figured it out with amazing innovation in warehousing and distribution.
5. Solve an obvious problem: If you are asked “what does your startup do”, and you need more than 30 seconds to convey the core problem and solution, you’ve got issues! Your problem should be easy to define. For instance, Akamai “decongests the Internet” and GrouponNow finds you “deals RIGHT NOW, in your neighborhood”.
6. Solve a complete problem: Too many companies leave customers at the altar by creating incomplete solutions to a problem. A problem 80% solved is a problem not solved at all! That’s why Best Buy is aggressively building its Geek Squad service, because it knows that selling consumer electronics is not enough – they need to help customers install and set up the gear.
7. Solve a worsening problem: Pick a problem that is likely to get worse over time and you will guarantee that your market opportunity will grow for years to come. When Google set out to make the world’s information useful, its a problem that is getting worse by the day. So there’s plenty of headroom for them. On the other hand, distributing DVDs in stores or by mail is not a problem that has legs, which is why Blockbuster Video is bankrupt and Netflix is moving to online streaming.

I hope these seven tests will guide startups to problems that are worthwhile and can present a valuable business opportunity.

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We all marvel at the innovation and value that Apple has created in the past decade. But the lesson I take away from Apple is the power of focus . Apple basically has only five products, yet it generates $65 billion in revenues and has a market capitalization of almost $300 billion! One thing that Apple has alway resisted is to proliferate their brands or product lines. The iPad is just the iPad – you can choose different capacities and connectivity options, but there is only one brand. It is the same with the iPhone and the iPod. Contrast this with Samsung in the mobile device business. It has dozens of sub-brands including Instinct, Galaxy, Captivate, Epic, Fascinate and so on. The result – each of these brands has limited awareness and weak brand equity. The benefit of focus for companies like Apple is that they are able to put “more wood behind fewer arrows”. They can focus their resources in fewer brands and products. Companies like Sony, Samsung and Microsoft need to learn from this. They have thousands of products and hundreds of sub-brands. We see the same phenomenon in packaged consumer goods, in retail, in pharmaceuticals, in technology as well as in financial services.

Companies need to pick lenses through which they choose to focus. The lens may be a geography, a vertical market, a brand, a product category or a channel. Consider an example: in the case of Fonterra Foods (a dairy products company based on New Zealand), they chose the Foodservice channel (selling to restaurants and other commercial food establishments) as a lens to focus their growth efforts. While they narrowed their focus on the channel front, they offered a broad range of dairy products through the Foodservice channel. Dell used a channel focus (direct to consumer). Southwest Airlines has focused on the domestic market and on one type of aircraft (the Boieng 737) for 40 years. Enterprise Rent-a-Car has focused on a segment (Replacement cars for customers whose cars are being repaired or have been stolen). The insight – if you want to broaden your revenues, you have to narrow your markets!

Focusing doesn’t mean you are selling less. On the contrary, you are actually increasing scale but you are doing it in carefully selected areas. Therefore, if you pick a few brands to focus on, you need to take them to the world. And if you are going to pick a few markets then sell everything into those markets. So, you do need to pick the lens and then you need to drive that to scale through organic growth as well as through acquisitions. What companies have to assess is the product of the number of products, categories, brands, markets, geographies and channels the company has in its portfolio. For instance, a company may have thousands of products, but if they are all focused on a couple of vertical markets like health care and manufacturing, then they are still a focused company. But, if you have complexity along multiple dimensions, then it is quite likely that you have exceeded the point of diminishing returns and are unfocused.

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Last weekend, my wife made a convincing case for an interesting kitchen appliance – the Keurig Platinum Single Cup Brewing System.  The device is really innovative – it brews a single cup of coffee, tea, hot cocoa or even iced coffee in less than a minute, using “K-Cups” that you load into the machine and discard after each use.  It is easy to use, easy to clean, and looks really cool.  And you can choose from a lengthy list of branded providers of beverages. 

I was skeptical, arguing that we didn’t need yet another space-age kitchen appliance and that the TCO (Total Cost of Ownership) was very high.  But she won me over with her arguments that convenience trumps TCO and a hot cup of on-demand Joe was well worth the financial sacrifice and shelf space.  As I sip my cup of Newman’s Own Extra Bold coffee that I made on the Keurig, I must say that she was right, as usual. This machine is the greatest thing since sliced bread!  The coffee comes out piping hot, it tastes great, and the kids love the fact that they can make hot cocoa in less than a minute whenever they want. 

But what impressed me more than the device is the innovative business model that Keurig and its competitors (Tassimo and Lavazza, among others) have created.  I call it “Apple iPod/iTunes meets coffee”.  Let’s look at the similarities:

·         Like Apple, Keurig began with the premise that, while coffee makers have been around for a long time, the customer experience of making a hot, consistent and convenient cup of coffee in the home leaves a lot to be desired.  Coffee makers are difficult to clean, a hassle to operate, the coffee sits there and becomes cold and bitter, and it is difficult to figure out exactly how much coffee to put into the filter.

·         Like Apple, Keurig created a superb end-to-end customer experience consisting of an elegant hardware device, single-use “K-Cups” and a comprehensive ecosystem of “content” from 13 branded beverage manufacturers.  Further, like Apple’s proprietary AAC format, the Keurig K-Cups are not compatible with other systems.

·         Like Apple, Keurig sells the hardware for a similar price point as the iPod ($199), and content at a similar price ($0.60 per K-cup).

·         Like Apple, Keurig creates an “open yet closed” customer experience by allowing independent content providers to offer their own branded beverages, while maintaining tight control over the buying and brewing experience.

·         Like Apple, Keurig has been able to convince all beverage providers to sell the beverages at the same price.  Just as i-Tunes sells all songs at $0.99, all K-cups sell for $13.95 for a pack of 24.

·         Like Apple, Keurig has created a number of accessories, including reusable filters, milk frothers, travel cups, etc. that it sells at healthy margins.

·         Like Apple, Keurig has created a strong lock-in effect because of the investment that customers have made in its hardware and accessories.

All this allows Keurig to make a killing, first on the coffee maker and then on the K-cups.  For my household, here is the stimated CLTV (Customer Lifetime Value), assuming a 36-month horizon:

·         Coffee Maker: $199

·         Accessories: $50 (we have already spent about $30)

·         K-Cups: $6,000 ($0.60/cup x 10 cups/day x 365 days x 3 years)

That’s a CLTV about $6,150, assuming a 10% discount rate. And you thought Starbucks was an expensive habit!!

Here are the lessons to be learned from Keurig and its competitors:

·         Even a commodity category like coffee can be reinvented by focusing on creating innovative solutions and an innovative customer experience.

·         Business model innovation has far greater payoffs than product innovation

·         There’s a lot you can learn about business model innovation if you look beyond your industry

Now, I wonder why P&G and Kitchen Aid haven’t thought about creating a “personal laundry system” or a “personal dishwashing system”. This could include appliances that would accept proprietary “pods” of Tide or Cascade that would be inserted for each load, and would take the guesswork out of doing laundry or dishes.  If HP can make money from ink, Gilette from razor blades and Apple from MP3 players, what’s stopping other consumer packaged goods companies from using a similar “razor-razor blade” business model? 

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