The Mindset Your Company Needs to Grow Organically

M&A is central to many companies’ growth strategies. But you can’t grow by acquisition alone. Companies with more organic growth generate higher shareholder returns than those relying on acquisitions alone. But organic growth remains elusive. It’s been easier to go from big to bigger through M&A than new to big through entrepreneurship.

That failure is not due to a lack of trying. Companies dedicate vast amounts of time, money, and effort to organic growth. The problem is that many companies have the wrong “operating system” for organic growth.

For most companies, both M&A and organic growth are managed like rocket launches. An enormous amount of planning goes into anticipating every possible scenario and removing every possible risk. Once launched, the opportunity is micro-managed to ensure that everything goes according to plan.

This might have worked in the past when markets moved incrementally. But in a global business environment that is changing exponentially, the market moves too quickly. Too much is simply unpredictable. The solution is to shift the mindset from “rocket launch” to “laboratory”. You need to be constantly experimenting, adapting, and learning — rather than analyzing, planning, and optimizing.

In our work with dozens of large companies on growth and transformation strategies, we’ve found a set of principles and practices that create an operating system for growth. The system draws on the most successful model of value creation in the last century — the ecosystem of Silicon Valley, adapted for application by large organizations. The key elements are (1) startups with fully dedicated cofounders, (2) a growth board of investors, and (3) an agile team focused on capturing learnings, building capabilities, and clearing roadblocks.

There are three key shifts that established companies need to make in order to adopt this operating system and embark on the journey of organic growth:

Quest Like a Founder (Not a Manager)

The first step is to find a founder’s quest. This means finding a problem that is worth solving, that inspires you, and for which you can create an unfair advantage. What makes this a quest is that there is likely no product currently on the market or no existing demand from consumers. As a result, market research will show a small Total Addressable Market (TAM). But successful founders instead focus on the Total Addressable Problem (TAP). Instead of looking at how much market share they can get for products that already exist, they look at how much market they can create by solving problems that already exist.

As an example, a consumer packaged goods company was concerned that millennials weren’t buying as much of one product as their parents did. They were losing share — not to other brands selling the same component, but to other people and providers delivering an integrated solution, such as on-demand apps or mom-and-pop shops. The company’s initial focus was figuring out “how do we regain share with millennials?” But that’s a TAM view of the world. Shifting to a TAP view of the world, they realized that there may be business opportunities in the B2B space, by partnering with those on-demand apps and mom-and-pop shops.

Managers focus on maximizing one’s share of the market for existing products. Founders focus on finding new markets to solve existing but underserved problems.

Test Like an Entrepreneur (Not an Engineer)

The second step is to test like an entrepreneur. Once you have found a large total addressable problem, you can’t just launch a product and hope for the best. You also can’t think like an engineer and try to remove every possible risk or uncertainty. You have to experiment to validate the problem, the solution, and the business model to bring it to market.

As you are testing, it’s vital to watch out for what we call “innovation theater” — convincing yourself and others that you are on the right track as a justification for decisions made in the past. You need to be relentless in your testing to find the actual commercial truth, so that you can inform the decisions that need to be made in the present and the future.

For example, a financial services institution was interested in building new solutions within their lending business. Like other lenders after the financial crisis, the institution had become conservative with its lending practices. But through a series of rapid, low-cost experiments, they were able to identify a lucrative niche in personal lending and an innovative product that had high value for consumers and excellent risk-adjusted returns for the institution.

The entire process from post-it note to launching the product in the market took under 12 months, less than one-third of the time the division’s previous new product launch required. Critical to this rapid time to market was a culture of “radical candor” on the team to stay focused on what the market was saying, rather than what they wanted to believe, or what validated their prior assumptions.

Invest Like a VC (Not a Banker)

Most companies invest in new growth opportunities like bankers. They want to be sure they get their return on investment. They will take the certainty of an incremental return over the possibility of an exponential return. Venture capitalists, on the other hand, have a portfolio mindset, knowing that not every investment will generate a positive return. But they look to the overall value of the portfolio and make sure that every investment generates learning to improve the return on that portfolio.

One of the ways the financial institution was able to accelerate its time to market was by launching multiple experiments simultaneously. They knew that most of them would fail, generating incremental losses. But the one that ultimately succeeded generated exponential gains, which more than compensated for the expense of the other experiments.

We recognize that this is a very different way of thinking and working for established companies. But our experience is that after an initial period of discomfort and unfamiliarity, it unleashes an enormous amount of energy, enthusiasm, and creativity.

There is another advantage as well. In our experience, the most important factor in the success of any acquisition is timing. Even the right deal will fail if you are too early or too late. This portfolio approach to organic growth enables companies to create a testing ground for potential M&A strategies. The real-world learning and ear-to-the-ground experience means you not only get the opportunity right, but you also know when the timing is right. The result is better organic growth and a better success rate for M&A.

Originally published in HBR by Mark Bonchek, David Kidder, and Anne Berkowitch

The Most Successful Brands Focus on Users - Not Buyers

What makes a brand successful in the digital age? A joint study by SAP, Siegel+Gale, and Shift Thinking suggests that digital brands don’t just do things differently; they also think differently. Where traditional brands focus on positioning their brands in the minds of their customers, digital brands focus on positioning their brands in the lives of their customers. Furthermore, they engage customers more as users than as buyers, shifting their investments from pre-purchase promotion and sales to post-purchase renewal and advocacy.

As part of our study, we conducted an online survey of more than 5,000 U.S. consumers and asked them about 50 different brands, both digital and traditional. We asked them about their perception, usage, preference, and advocacy for the brands. We also supplemented the survey with well-known brand rankings, Net Promoter Scores (NPS), and an analysis of their marketing expenditures and strategies.

We found distinct differences between legacy/traditional brands and newcomer/digital brands. For example, consider the following “brand twins” – pairs of legacy and newcomer brands that compete in the same industry. In every case, the legacy brand rated higher on the statement “Is a brand that people look up to.” But the newcomer brands all rated higher on the statement “Makes my life easier.”

  • Airbnb vs. Hilton/Marriott
  • Dollar Shave vs. Gillette
  • Red Bull vs. Coca-Cola
  • Venmo vs. American Express/Visa
  • Tesla vs. BMW

There were similar differences in how people’s brand perceptions are formed and reinforced. Respondents were more likely to hear about legacy brands through advertising and traditional media, compared to digital brands which are more often discovered via social media and direct word of mouth.

Overall, we found two distinct clusters, which we have categorized as purchase brands and usage brands:

  • Purchase brands focus on creating demand to buy the product, while usage brands focus on creating demand for the useof the product. Consider the makeup department of a department store. The whole focus is getting you to buy the product with samples and professional makeovers. By contrast, Sephora and Ulta provide instruction, community, and services to help people feel confident in being able to use the makeup themselves when they get home.
  • Purchase brands emphasize promotion; usage brands emphasize advocacy. Vail Resorts remade their entire marketing strategy with a program called EpicMix. It’s a social network for skiers that uses gamification, performance data, and photos as social currencies that skiers want to share with their friends. Most other ski resorts focus on promoting their snow-making abilities and giving discounts on lift tickets.
  • Purchase brands worry about what they say to customers; usage brands worry about what customers say to each other. For example, where traditional hotels put more emphasis on the content in their advertising, Airbnb puts a greater emphasis on the content generated and shared by hosts and guests about their experiences.
  • Purchase brands try to shape what people think about the brand along the path to purchase; usage brands influence how people experience the brand at every touchpoint. Apple Stores are an example of this shift, from the removal of a checkout area at the front of the store to the prominence of the Genius Bar. Where other stores are focused on making a purchase, Apple Stores are about having an experience.

The simple view would be that traditional brands are purchase brands and digital brands are usage brands. But there are exceptions, including brands like Visa, FedEx, Lego, and Costco, which exhibit many of the characteristics of usage brands. We suspect that the nature of their products, culture, and business model leads them to more of a usage mentality. They think of customers less as one-time buyers and more as users or members with an ongoing relationship.

The difference between purchase and usage brands can be seen through the lens of the “moments of truth” method that has become a cornerstone of customer experience design. Purchase brands focus on the “moments of truth” that happen before the transaction, such as researching, shopping, and buying the product. By contrast, usage brands focus on the moments of truth that happen after the transaction, whether in delivery, service, education, or sharing.

The benefits of shifting from purchase to usage are reinforced by our research. Survey respondents show more loyalty to usage brands. They had stronger advocacy in the form of spontaneous recommendations to others. And they showed a higher preference for usage brands over competitors, not just in making the purchase but in a willingness to pay a premium in price. On average, the usage brands were willing to pay a 7% premium, were 8% less likely to switch, and were more than twice as likely to make a spontaneous recommendation of the brand.

Golf coaches have long known what marketers are figuring out: the best way to hit the ball is to focus on the swing and follow-through.

Companies looking to exploit the branding potential unlocked by core digital technologies need to make the shift in their engagement with customers – from purchase to usage. These changes fundamentally require rethinking strategy, organization, investment, and measurement. In many organizations, marketing comes after product development. But a usage mindset requires a closer relationship between marketing and product development because the brand and experience are increasingly one and the same. Typically at purchase brands, customer service and loyalty take a back seat to marketing campaigns and lead generation. Usage brands, by contrast, elevate customer service and loyalty from resource-starved cost-centers to key drivers of growth and profitability.

The role and investments in advertising must also change to shift toward a usage model. Purchase brands try to create differentiation in brand perception in the hope it will influence consideration and purchase. But usage brands are focused on how their products will make a customer’s life better. The role of advertising for a usage brand becomes getting useful content and experiences into the hands of customers. The message becomes “Look how we can make your life better now, before you’ve even spent any money with us. Just think how much more we can do if you become a customer and use our product or service.”

The shift from purchase to usage has implications for measurement as well. Ad impressions are valuable, but what matters most is engagement. Usage brands look at engagement through a much wider aperture. They recognize that some of the most meaningful activity happens outside the sales funnel. Do people find the content created by the brand to be relevant and useful? Are people actually using the product? Are people spontaneously talking about the brand or product? A usage brand marketer would rather have a five-star rating in their online reviews than win an advertising award at Cannes.

More broadly, the shift from purchase to usage suggests that we need to rethink how we measure brand equity. We’ve all seen the annual brand ratings put out by the top firms. But they measure how much a brand is worth to investors more than consumers. Furthermore, their focus is on how people perceive the brand rather than how they experience the brand. Companies that get too focused on winning in the ratings will find themselves ultimately losing in the marketplace.

Although our survey emphasized B2C brands, we believe the Purchase and Usage mindsets are equally, or even more, relevant for B2B brands. Business solutions tend to have longer life cycles than consumer products and there is an even greater opportunity to deliver value outside the sales funnel. In addition, many B2B companies are moving to cloud-based services with membership and subscription-based business models. With these models, the purchase is just the beginning of a long-term relationship. The economics are driven primarily by renewals rather than by initial purchase. In turn, renewal rates are driven not by what buyers think about the brand, but what users experience of the product or service. The key is to think about prospects not as buyers, but as future users.

Originally published in HBR by Mark Bonchek and Vivek Bapat

How Blockchain will Enable Starbucks to (finally) Create its own Currency

How Blockchain will Enable Starbucks to (finally) Create its own Currency

For years, Starbucks has dreamt of creating its own branded currency. But the reality has fallen short of the vision. But blockchain-based currencies and platforms like Simple Token will enable Starbucks — and countless other brands — to create their own branded currencies easily and affordably.

What Creativity in Marketing Looks Like Today

What Creativity in Marketing Looks Like Today

Historically, the term “marketing creative” has been associated with the words and pictures that go into ad campaigns. But marketing, like other corporate functions, has become more complex and rigorous. Marketers need to master data analytics, customer experience, and product design. These changing roles require a new way of thinking about creativity in marketing.