Why The Trends You Ride Are The Biggest Choices In Strategy

It’s not enough to see the writing on the wall – you must act on it before competitors do.

More than a decade ago, Norwegian media group Schibsted made a remarkable decision: to offer classified ads – its newspapers’ main source of revenue – online for free. The company had been investing steadily in Internet assets, but it realized that to establish a pan-European digital stronghold it had to raise the stakes. During a 2005 presentation to a prospective French partner, Schibsted executives pointed out that existing European classifieds sites had limited traffic. “The market is up for grabs,” they said, “and we intend to get it.”

At about the same time, the boards of other leading publishers were also weighing the prospect of a digital future. No doubt, like Schibsted, they even debated hypothetical scenarios in which Internet start-ups siphoned off the lucrative print classified ads. Maybe these scenarios appeared insufficiently alarming – or maybe the prospect seemed too dangerous for executives to actively confront. In any case, very few newspaper companies followed Schibsted’s path.

Since then, much of the print media business has been shattered by digital disruption. Schibsted, meanwhile, has a booming business, with more than 80% of its earnings coming from online classifieds. From the vantage point of today, it’s easy to talk about who read the trend right. Things are far murkier in the midst of a disruption’s early stages. In the 1980s, steel giants famously underestimated the potential of mini-mills. In the 1980s and 1990s, the personal computer sideswiped minicomputer makers. More recently, web retailers, and digital lodging and car travel services have threatened to put their physical counterparts out of business.

The fact is, incumbents often find themselves on the wrong side of big trends. No matter how strong their balance sheets and market share – and sometimes because of those very factors – established organizations often struggle to mount a timely response to trends, especially ones that threaten their industry leadership.

Companies rarely translate trends they identify into practical ‘investable pockets’

Almost every strategy process pays at least lip service to trends. Boards invite industry experts to explain their visions of the future. Blockchains, clouds, and hyper loops are duly discussed. Or maybe your CEO visited Silicon Valley and returned inspired by innovation, agility, and jeans culture. Strategy teams will dutifully prepare industry analyses to tick the trend box. But, more often than not, companies don’t build the capabilities or lay out the specific actions to capitalize on the trends they identify. They rarely translate trends into practical “investable pockets” and decisively shift resources to capture the opportunities.

This can be a costly mistake. Trends are the most important determinants of companies’ performance relative to the broader corporate universe. About 50% of a business’s position on the Power Curve of economic profit is determined by what’s happening in its industry. What’s more, the trend lines in your industry and the geographies where you operate together account for 25% of your odds of moving up or down on the Power Curve.

Trends are the ground moving beneath your feet. They will move you up (or down) even before you take any strategic actions. For that reason, getting ahead of trends is easily the single most important strategic choice you make. Sir Martin Sorrell, CEO of marketing conglomerate WPP, describes this as looking for “open doors” in identifying areas for investment. “It doesn’t matter how clever you are,” he says, “if you’re pushing on a closed door it’s much more difficult.”

Zero in on growth markets

Your industry’s trajectory is the biggest factor shaping your odds of outperformance, as my co-author Martin Hirt explains in this blog. But geography also plays an important role. Can you easily find Tianjin on a map? What about Chengdu? Chongqing? If you can’t, you probably don’t know that more than 50% of global GDP growth over the next decade is projected to come from 230 Chinese cities, including those three. Over-indexing on exposure to fast-growing markets can give your company a big advantage. My McKinsey colleague (and co-author) Sven Smit showed in his book Granularity of Growth (some of whose insights are summarized in this article) that 80% of the variance in companies’ growth performance is explained by their choices of the markets in which they operate combined with M&A.

Interestingly, our research found that businesses headquartered in emerging markets not only benefit from growth trends there but also deliver stronger growth performance in developed markets. This underscores the importance of investing heavily in rapidly advancing economies. In 2012, for example, the newly appointed CEO of Philips, Frans van Houten, launched an initiative to make China a “second home market” for the company. The move resulted in accelerated growth and substantially strengthened the Philips’ competitiveness, especially against local rivals in China.

But it’s not enough to pick the right geographies – you need to have a granular perspective on where growth is occurring. That means focusing on the right customers and the right micro-segments, and reallocating resources based on the differentiated growth prospects and trends of these sub-categories. One major computer manufacturer took granularity to extraordinary lengths in China. The company examined 680 major cities, grouped into 21 clusters, and prioritized not only cities but malls and store locations within these malls. Just by reallocating sales and marketing spending based on this analysis, the company accelerated growth by 50%.

The need for privileged insights

Companies that are most successful at catching big trends monitor market shifts and forces as part of regular management performance reviews. Rather than using sporadic deep dives, often based on internal accounting data and standard market reports, they employ comprehensive analytics such as industry-level performance comparisons and disaggregations, portfolio benchmark and growth MRIs.

To differentiate yourself from competitors, you need proprietary insights that go from high-level trends all the way down to investable pockets – specific and addressable business opportunities. Sometimes, developing such insights demands acquiring proprietary data. This is why, for decades, B2C companies have been investing in loyalty programs that give them detailed consumer data in return for price discounts. Supermarkets are now able to segment customers according to several dimensions at a time: geography, demography, basket size, shop frequency, promotion participation, and premium product mix, among others. As a result, they can personalize their marketing campaigns, tailor product ranges by store, understand which categories are more or less price-sensitive, see which brands carry more loyalty, and conduct A/B testing on online channels. While the macro trend might say “retail is shifting toward online,” it’s the granular view of the customer and investable pockets that determines whether your shift is effective.

Colliding macro and micro insights can help you identify which trends are real and which are just hype or fads. In 2010, wooden shipping-pallet supplier CHEP was under threat from newcomer iGPS, which introduced plastic, RFID-enabled pallets. Investors believed the innovation would mark the end of wooden pallets and encouraged CHEP to move to plastic. But CHEP dug deeper into the trend and found that the shift was driven by increased automation in manufacturing that required pallets to fit stricter dimensions. The company also discovered that plastic was suitable for only a niche set of customers. Instead of adopting the more expensive plastic option, CHEP addressed the underlying customer need and invested in stricter quality and repair processes. Its margin suffered slightly; iGPS, meanwhile, ended up filing for bankruptcy.

Looking closely at trends changes the conversation in the strategy room in another important way. No longer does all credit accrue to management and all blame go to external factors when looking at performance. You might be an express courier while e-commerce is booming, or you may be a television broadcaster and your audience is moving to streaming video. Now, you can see how much of your company’s movement along the Power Curve stems from factors related to your industry and geographies, and how much comes from your team’s achievements.

How does your team gain privileged insights about trends? What do you find to be the biggest obstacles in acting on trends? I’d love to hear your thoughts. 

Sources: https://www.linkedin.com/pulse/why-trends-you-ride-biggest-choices-strategy-chris-bradley/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s