Featured Article – 2012 August

Navigating Your Business When Markets Shift

Tip Sheet

  • Watch what’s going on around you, in your own industry and in the economy as a whole.
  • Assess your company’s position in your industry at least once a year, and make projections for three to five years into the future.
  • Develop a dynamic revenue growth model, taking into account not only sales of new products but also anticipated erosion/decline in sales of current products.
  • Being the best at what you do is not enough. Besides being better than your competitors, you must stay ahead of them in developing new products and services.

Navigating Your Business When Markets Shift
By Jeff Thommes

Even the most iconic of brands can take a nasty tumble.

“What’s Kodak film?” today’s toddlers will soon be asking.

Borders has gone belly up too, leaving us with one less place to buy books and compact discs.  Soon there may be no market for music recorded on CDs.

Looking for a Blockbuster store to rent videos is like playing “Where’s Waldo.” Once a giant in the industry, Blockbuster filed for bankruptcy in 2010, started 2012 with 1,500 stores and its new owner, Dish Network, plans to close 500 more this year. But why bother going to a store to rent a video? You can order online and see as many movies as you want — on TV, on your iPad, wherever, whenever — for $7.99 a month.

What happened?

In all three cases, there was no problem with the quality of the company’s product. Nor was the pricing out of line. The problem was that neither Kodak nor Borders nor Blockbuster recognized soon enough the changes that were occurring around them. And, when they did recognize those changes, they either made the wrong adjustments, or didn’t adjust at all.

Kodak was founded in 1871. It survived for 131 years, hardly a record, but far longer than most. The lesson here is one that no business owner can afford to ignore: No matter how successful your business appears to be, no matter how highly your brand is regarded, no matter how superior your product seems to be, you must pay attention to megatrends and trends specific to your industry if you hope to enjoy continued prosperity.

No business is immune to external forces, so you must remain vigilant to prevent your company from experiencing an equally ignominious fall. Why did Steven Jobs tell Apple employees and shareholders that, if the company didn’t change dramatically, it would be out of business in two years?

To help keep your business moving forward, let me share some key points in creating a business development model, using well-known businesses as examples and showing how they relate to your business too. Business development includes three distinct areas: industry assessment, product portfolio management and dynamic modeling revenue growth programs.

Industry assessment involves knowing your industry, competitor behavior, customer demands and trends and megatrends. Megatrends are large unstoppable forces that will cause a major shift in your business, whether you’re ready for it or not. Kodak initially fell victim to two megatrends — the digital revolution and globalization, and then the global recession accelerated its fall. Kodak saw the revolution coming; in fact, it invented the digital camera in 1975. But it failed to recognize how digitalization would impact the photography industry. Globalization impacted Kodak too, with competitors cutting into its market and margins, further weakening its financial core.

Similarly, Beane Associates was recently engaged at a failing chain of camera shops. Initially, the company transitioned from selling traditional cameras to digital models, but failed to recognize appropriately competition from internet sales and high-volume discounters. They incorrectly assumed customers would pay a premium for in-store advice. Eventually, the chain filed bankruptcy.

On the other hand, Apple Computers realized in the late 1990s that the market for computers was changing, and that it would have to develop new product revenue streams to remain profitable. Understanding the implications of changes occurring around them enabled Apple executives to successfully plot a bold new direction.

Successful industry assessment requires that you track data and understand trends, and the implications of these for your products and services. There is a tendency in small and mid-sized businesses to leave this research to the marketing department. It’s fine for marketing to have prime responsibility, but the CEO and all other department heads must constantly keep abreast of trends. You have to be looking at least three to five years out, and your assessment must be updated annually, more frequently if possible, to provide a fresh benchmark that tests your investments, progress, resource deployment and business direction.

Not only do business leaders have to understand both megatrends and their industry, they must also practice strong product portfolio management — developing new products, improving their quality, pricing them properly and reducing costs whenever possible. Looking at Kodak again, as new overseas film and camera manufacturers offered high-quality, lower-cost products, Kodak ceded core product margins and market share while choosing to develop more sophisticated “film-like” digital products that required consumers to “process” images through Kodak in a manner similar to traditional film. The result: Kodak increased its debt by investing in high-end products that failed to meet market demand while losing to cost-cutting competition in the traditional film and camera market.

The third step in the business development model is dynamic modeling revenue growth. While actual calculations can be complex, projected sales can be simplified to this equation: historical sales, less historical erosion, plus or minus core growth, plus new product and service contributions. When the numbers are crunched, the likely outcome is that the business will initially have less working capital than anticipated.

Some businesses figure this out better than others. Apple faced challenges similar to Kodak from digitalization and globalization. While home computer sales exploded with new brands, margins tanked but Apple embraced the digital revolution with new products — iTunes, iPod, iPhone, iPad and the like. Its creative legal digital approach to Napster’s success led to 99 cent iTunes reminiscent of the 45 rpm records of a generation ago and helped hasten the demise of the CD-based music market. Apple’s restructuring has lifted profitable sales to nearly 18 times 2002 levels.

The fall of Kodak reminds me of “Other People’s Money,” the 1991 film in which Danny DeVito, starring as Lawrence Garfield, AKA Larry the Liquidator, famously proclaimed:  “I’m sure that the last buggy whip company in America made the best damn buggy whips in the world.”

How true that can be. Having a superior product enables a business to outlast its competition. However, if you do not adapt to the situations around you to remain relevant to your market, you risk going the way of the buggy whip manufacturer.