The hidden power of knowhow

It’s been awhile I know since my last posting; but we’ve been busy growing the company.

Time for another musing. 

Today’s tale is one of three curves. 

The first is a classic diagram from Geoffrey Moore’s Crossing the Chasm with thanks to  themarketingstudent. The chasm diagram depicts the cliff many a startup falls from in attempting to scale from initial success. What the graph attempts to tell us is that many an innovator falls prey to a sense of false security in understanding one’s market. Of course, there will always be fellow innovators and early experimenters/adopters that want to try your novel product/solution/service/technology. But success and real money lies on the other side of the chasm; populated by stingy folks who require proof positive that your product/solution/service/technology truly improves their lives.

However, the curve I want to focus more on today is the one you see below.

This graph I believe describes a lot of industries in sundry variations. It is a middle market evolution scenario; one which is not too new and flooded with lots of new entrants, and not too old, where all the competition is settled with the customary 3 big winners, some 2nd tiers, and a smattering of niche companies.

The truism the graph attempts to show is that the bigger you get, the tougher it is to maintain the same high rate of growth.  There could be, and are, many potential reasons for this, including the usual attracting your own competition argument-which I will get to in a minute. However, I think there is more going on here.

As a qualitative illustration, specialty chemicals come to mind. For a small company with successful, unique products, it is not uncommon to see initial annual growth rates in the 8-16% range. However, with success and growing size, which in this industry, curiously seems to be at about the $1B in annual turnover, growth slows to a 1-2% rate, at or slightly above [if you are nimble] global GDP. Perhaps this is not altogether surprising if you consider that many of these companies function at the far upper end of any given value chain and are therefore suppliers to suppliers to other suppliers, ad infinitum, so to speak.

To paraphrase one BU leader, “We’re so far up the supply chain, the only thing behind us is dirt!”

If you can survive this “valley of slow growth” and rise in size to say the likes of a BASF or Dow, you should be able to garner 4-6% annual growth, perhaps not stellar by today’s investing expectations, but solid, and usually due to size-enabled superior scale and market reach that drives a 1.5-2.0X of GDP type growth trajectory. 

The danger in finding yourself in this valley is the tremendous energy needed to keep moving forward, and the tendency to get acquired by bigger players in the food chain who routinely hunt in this valley. This is not unique to specialty chemicals; I have similar conversations with people ranging from the services industry to food ingredients, as yet other examples of this valley phenomenon. Being a valued, but upstream, part-by-part as needed supplier, even of critical components, does not guarantee you anything other than single digit % cut of final product/service sales and therefore growth at, or some small level above, GDP.

What to do? One could try to buy one’s way to size to exit out of the valley, but with cost and concomitant risk. Organic growth? As mentioned above, success does indeed breed competition, but in my view that is not the primary reason that growth slows. What slows growth is two things; 1) the original vein of gold that is the niche being mined peters out, gets saturated, viz., there are only so many customers in the world with that particular need because their markets mature, and 2) more insidiously, one’s strength becomes the very barrier to growth.

The ability to be a great problem solver leads one to adopt a reactive, fast-follower model; which means a risk-averse decision-making culture develops. The fact that clients often seek you out to solve their problems reinforces the reactive mindset, so a strong strategic marketing function never develops, meaning a risk-averse culture develops. The focus grows toward strengthening the company via direct customer problem solving, so over time this the blind spot of this culture build is largely unintentional and multi-directional. Focusing intensely on the customer first means that innovation is defined by the client, which is largely incremental to their needs, leaving one open to being blindsided by disruptive solutions. It also means that the organization does not develop the mental muscle needed to seek and find mass market opportunities that can be addressed through organizational prowess.

As our third graph above attempts to show; companies with sufficient longevity will cross not one but three death valleys; the first as startup seeking to move beyond pilot to commercial, the second, in moving from specialty market to mass market, and the third, surviving challenges and disruption to their core market. Truly long-lived companies, those >100 years in age often have stories of surviving multiple disruptive challenges.

The challenge we primarily discuss today is the 2nd, middle market challenge; namely finding a growth path out of an established, successful, but no longer fast-growing market. Not an easy task as we mentioned that those that have come before and have traversed the valley are not about to let another join them and routinely hunt in this valley.

More importantly though is recognizing that the skill sets that got you here, namely, fast follower agility, technical prowess, building customer trust for them to come to you with problems to solve, acute problem solving skills, are not those that enable you to see a new mass market opportunity.  In fact, it becomes an institutional blind spot.

I’m a big believer that many organizations contain within themselves the ability to unlock new growth opportunities. That this ability lies in the taken for granted and otherwise hidden strengths that are used day in and day out in the operations of their business, so much so that it becomes part of the fabric of the organization and hidden in plain view. The hidden power of know-how.

The answer to unlocking is two-fold. The first is developing an outside-in view of the marketplace; essentially inverting your view of the world. The second is taking systematic inventory of all the capabilities you use to bring your product/service to market.  An oldie but goodie of a corporate example in this arena is the Fujifilm story; transforming from a color film company to a cosmetics supplier, medical imaging, and more recently, healthcare and pharmaceuticals; moving from strength to strength and combining new strengths to create a new synergy to focus on a new market.

Source: Fujifilm

What Fujifilm realized is that even as color film and cameras were being replaced by digital; they could take stock of their core business knowhow and figure out how to monetize that knowhow. For example, making color film required being able to precisely deposit 20-24 layers of different chemicals 1 um thick onto film moving at 300 feet per second in total darkness! It required knowledge of chemistry, processing, and quality control knowledge that could be recombined in different ways to enter into new, unfamiliar, but growing (not dying) markets. 

This ability and willingness to combine two strengths to create a new third to focus on a new market I believe unearths real innovation potential; potential that lies at the interface of an imposed juxtaposition, i.e., forcing incongruencies to collide, e.g., combining Strength/Technology 1 + Strength/Technology 2 towards Market Scenario 3; a three-ball collision. We’ll likely have more to say in upcoming essays.

For now, an interesting book to look for more detail on this is, Innovating out of Crisis, by Shigetaka Komori, the former CEO of Fujifilm. It is long on advice and observations about business from someone who rose through the corporate ranks—by the time he became CEO in 2003, he’d been at Fujifilm for 40 years. Two things stand out to me in my read: 1) long before your core market gives out on you, there are warning signs on the edge. People in headquarters might not see it, but those in farflung divisions notice that sales in peripheral products/services erode as slow but significant tectonic shifts occur in how the marketplace functions, and 2) the fastest way to implement innovation (hopefully before a crisis) starts from the inside out (as stated above); first taking stock of leverage-able assets like process knowhow that can be pointed into new markets by finding incumbent participants that value your fresh perspective and capabilities to help them compete more effectively.

Outside-in innovation, i.e., Open Innovation, which is something that we like to talk a lot about here, is not mutually exclusive to Inside-out innovation, i.e., repurposing Knowhow, but in my humble opinion, many corporate strategists pursue fail to adequately consider the latter in pursuit of the former, when combining both can be incredibly synergistic.  Hopefully more on this later, stay tuned.