What makes a market leader? (4/7)

In this fourth post of the series we cover the most critical and painful step taken by all the market leaders in our research - getting the right team in place.

Every company that made a breakthrough in performance ascribed it to making significant changes to the team, at the top level and at the level below it. This did not necessarily mean wholesale changes, and all companies emphasised the importance of retaining experience, but it did mean changes in important management positions.

A typical story involved losing one or two senior people who were strong, talented individuals who nevertheless caused problems in the team. For smaller companies this was often the original entrepreneurs, for bigger organisations it was senior directors and managers.

In many circumstances CEOs perceived a high level of risk in losing an individual, such as the fact that they were high performers or that losing them might mean losing other people that respected them or worked for them.

However, although the decision was always a tough one, it was invariably seen as an obvious one. In fact the biggest regret that successful companies had was not making changes to the team more quickly.

And this is not wisdom in retrospect. Everyone we spoke to who made changes to the team said that at the time they knew what they should do but delayed taking the painful step.

In contrast to some established theories we did not see a clear pattern of “first who, then what”. The new team did make changes but never to the cause. All of the companies who made a breakthrough had the same basic and underlying cause before and after the team was in place. The changes that came with the new team were primarily in the culture and capability of the business. Changes to the product or service on offer were about focusing and refinement rather than fundamental redirection.

Finally, the right team did not always mean a completely balanced team. We saw a clear pattern among the leaders of skewing attitudes and skills of senior people towards what was distinctive about each company. For example, one successful software business deliberately skewed its team towards developers and away from marketers. And in many cases it was deliberately left to the support people to supply the capabilities to balance their leaders’ skill gaps and deficiencies. The common and essential precondition for the team was its alignment to the cause.

In our next post, the other major action market leaders took to make a performance breakthrough - creation of breathing space.

Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (3/7)

In this series we cover the characteristics of market leading companies, actions and practices that distinguish them from their more mediocre counterparts. This is determined from direct research with CEOs of more than 100 companies.

In this post we look in more detail at the first of these characteristics: relentless focus on the cause.

The most striking common characteristic that distinguished the leaders in our research was their almost religious focus on the purpose of the company, or the "cause". The cause was something the leaders were passionate about, what they knew they were good at and it was always simple, specific and easily described.

This wasn’t a blind following of faith. These leaders were very sensitive to and aware of customer needs, and many researched and responded to customer needs very actively, but only within the confines of the cause. The commitment didn’t waver but was informed by rational testing and ego-free listening. We like to make a comparison here with the (now maligned theory of the) two sides of the brain. A person (read business) is only able to fulfill her potential if she uses the full capability of her brain (read senior team): she needs to engage both the right (passionate, creative) side and the left (analytic, rational) side. Right-only may deliver short term buzz but is unsustainable and leads to disaster; left only leads to sustainable mediocrity, which is probably worse.

One popular management theory is that success comes from listening closely to the needs of one tightly-defined customer group and designing an offer that serves those needs. Our findings were very different on two counts. First, the successful companies started by establishing what they stood for, then found who valued it, and what they valued about it. Secondly, though some leaders had one tightly defined customer group, many others had a variety of customers that differed greatly from one another.

In explaining their propositions, leaders described what was distinctive and beneficial, rather than what was better. Indeed, comparison with and paranoia about competitors was more the preoccupation of the followers. Leaders were conscious of competitors but only as a prompt to keep their thinking “edgy” and to look for the next challenge. No leader described itself unprompted as “best” or “world class”.

Every market leader surveyed had made mistakes and strayed from their cause at some stage. Reasons were always understandable (providing add-on services for a special customer, pet projects of vital people), but straying was always regretted no matter what the reason; leaders learned the lesson quickly and got back on track.

There was no common pattern of how leaders came to define their cause and focus upon it in the first place. This varied from building on personal hobbies and previous experience, through packaging for general use a successful one-off service that the company came across by chance, to more formal market analyses. However, even the leaders that had performed a sophisticated analysis used the emotional (what turns us on) when deciding where to look, before the scientific testing (what is the opportunity and does the business case stack up).

A final word on what focus really means - leaders could tell they were genuinely focused when they were turning away attractive, profitable opportunities – discarding the unattractive is easy; the challenge is turning away attractive business that is outside the focus.

In our next post, we cover the big step people took to make a breakthrough in performance: tough action to get the right team in place.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (2/7)

In this seven-post series, based on direct research with more than 100 companies, we review five distinctive characteristics of market leading companies and the common steps they took to get to leadership positions. In this post, we summarise these five characteristics and share some unexpected findings.

All the market leading companies shared an enduring theme that existed at the time they made breakthroughs to leadership and remained thereafter - "Relentless focus on the cause"

Relentless focus on the cause

“Focus” is a cliché that is often taken to mean the dedication of services to one tightly-defined customer group; but for our survey leaders, focus was about what we call “the cause” – the essential function of the company, what it is good at and excited about; literally what the company is for. For Metro, it is digestible news for urbanites; for Innocent, it is tasty, healthy drinks. It needs to be something for which the company has a passion but at the same time can challenge and justify rationally and commercially in the cold light of day.

We think of the cause like the (now maligned) description of the two sides of the brain. It needs a passionate, creative (right) side and a rational, analytic (left) side. Without the rational, the company is destined for disaster, even if it enjoys a flurry of success; without the passion, it is destined for mediocrity.

Leaders have relentless focus on this cause, in that they will sacrifice anything which is irrelevant to it. Every one of them could point to profitable business that they turned away because it wasn't part of the cause.


When asked about the time they made a breakthrough to leadership, our market-leading CEOs described two strong themes: "tough action to get the right team in place" and "creation of breathing space.

Tough action to get the right team in place

When asked for the most memorable action they took just before a major performance breakthrough, one answer came through consistently: "we changed the team". No company in our sample made a sustained breakthrough in performance without changing at least one member of its senior team. In fact, the change was generally two or three people from the senior team, often the CEO himself, and an equivalent proportion from the level below. The team changes had two further common characteristics. First, changes were based on attitude (are we in it together) and not aptitude (are you experienced); second, every CEO regretted not making the change earlier.

Creation of breathing space

The second action successful companies took to make a performance breakthrough, was to find a way to remove the day-to-day financial and time pressure so that management was not continually fire fighting. This was one area where there was a distinctive difference between smaller companies, where lack of breathing space was commonly about cash and customer servicing, and larger ones, where it was commonly about complexity of systems and reporting. In the vast majority of cases, however, lack of breathing space had been self-imposed.

Once companies had made a performance breakthrough, two characteristics were shared by those who sustained it: "clear, uncompromising behaviour boundaries" and "staying uncomfortable".

Clear, uncompromising behaviour boundaries

With a breakthrough in performance, comes growth and an influx of talented new people. To retain control of the business, but still give a larger group of people room to perform, our market leaders employed very clear behaviour boundaries – inside the behavioural boundary people were given room to develop, perform and make decisions, but stepping outside the boundary was, literally, not tolerated.

Staying uncomfortable

Our successful, sustained market leaders perceived their greatest single threat to be complacency. They were conscious of the competitive danger of standing still, but also of the need to provide interest and challenges to their talented middle management. CEOs took it as a personal mission to put their team back on the tightrope and keep challenging the business.

So there we have it, five common characteristics of market leading companies, that we will expand on in turn in the remaining five posts of this series.

Before we finish this post however, it is worth looking at at some findings of the study that we didn't expect, and which are inconsistent with some received wisdom.

1. Listening to customers was vital but it followed, not led, the cause - none of our market leaders worked up their cause by starting with a big customer research exercise. They all took great pains to test market demand for their services, but they only tested the things they were already passionate about
2. Rationality went hand-in-hand with faith. In fact, rationality seemed to be much more dominant in the companies that had always been followers or had seen leadership slip away
3. Leaders were easily understood, sometimes so simple that we thought we'd missed something; followers were more hazy and complex
4. All the leaders made big mistakes along the way and readily acknowledged that they would likely continue making mistakes
5. Everyone performed strategic planning, but leaders went about it in a consistently different way, by being challenging about the future rather than the classic share growth approach adopted by followers
6. MDs of successful companies came across as much less egotistic than their less successful counterparts. We actually counted the mentions of "I" in early interviews, until the pattern became obvious of humility of the leading company CEOs versus almost defensive egotism in the followers.

In our next post, more on the common thread of all of our market leading companies - "relentless focus on the cause".


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

What makes a market leader? (1/7)

Market leaders make a lot more money than followers. The average return on investment for a company with five per cent market share is 10%, with twenty per cent share this grows to 27%, at forty per cent share RoI is almost 40% (source: PIMS survey of 3,000 US businesses). The personal and career benefits of creating or running a market leading company are equally clear, and go without saying.

Given the attractiveness of market leadership, a number of questions come to mind:

Are there any consistent characteristics that distinguish market leaders from followers?

What do leaders typically do to break through and become the obvious provider in their market?

What big problems do leaders need to overcome along the way?

Once they become leaders, what new problems do they face and what do they do about them?

In this 7-post series, we will answer these questions, based on a two-year piece of direct insider-research with MDs and CEOs of more than 100 companies. Companies include impressive but rarely-covered household names such as Innocent, Expedia and Metro, and cover the full range of sizes, performance and stage of development.

Most of the market leaders we researched had moved from being followers to being leaders or had started from scratch to become the leader in their sector. We therefore captured the changes needed to make the transition. We also covered the other side of the coin: companies that had not managed to make the leap and companies that had seen their previous leadership position start to fall away. The characteristics which distinguished these various groups one from another gave us confidence that the leaders had not simply been lucky.

The output of this research challenges established views about what it takes to succeed, and lays out what is central to success, and what is peripheral. In this series we outline the findings, which dispel some management myths and uncover some surprising new themes.

In our next post: the five common characteristics present in all market leaders that were missing in followers.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (4/4)

In the first three posts of this four post series we described ten "cognitive traps": ways in which we think that can cause us to make damaging decisions without realising it.

The good news is that there are some decent tools to challenge these traps. We explain our two favourite approaches below, as lessons from science and sport.

1. A lesson from science – treat your beliefs as a hypothesis to be challenged

True science is not about test-tubes, double-blind tests and professors with moon-shaped glasses and speech impediments. It is about starting with a premise that you believe may be true – a hypothesis – and challenging it to see if you are right, or more likely, where you are wrong. Under this definition, you are more likely to see science from a good plumber trying to work out why your central heating makes a knocking noise than you are from a PhD nutritionist with research sponsored by High5, trying to persuade you that High5 is better than Powerade. The plumber is the scientist, challenging his hypothesis in search of the truth; the nutritionist is no more than a fundamentalist seeking and selecting evidence to support his initial position. Unfortunately, when we get attached to our ideas, the cognitive traps make us act more like the nutritionist than the plumber.

This is why the true scientist needs to adopt a mindset of challenging the hypothesis with data, and to have no belief that the hypothesis is true until the challenges show it to be so. Some practitioners even go as far as setting up a formal challenge in the form of an antithesis, an alternative hypothesis that is posited as a more accurate or insightful version of reality. This approach isn’t confined to the material and commercial – the Catholic Church appoints a devil’s advocate to provide the rigour of challenging its most important decision, the legal system applies the rigours of having separate representatives of both sides of the case.

So, how to apply this? Treat your belief as a hypothesis and challenge it, if necessary with your own devil’s advocate, to whom you give the seniority and power to challenge your decisions. And honestly expect your hypothesis to change as the evidence emerges.

Applying this lesson from science stops us being blind to the evidence at hand, but it doesn’t help us predict a future that is much more random that we think it is, or stop us being over-confident in our ability to predict it. To prepare for this, we take a lesson from sport.

2. A lesson from sport – prepare for a range of scenarios

A lesson learned by those of us who have been on the wrong end of a drubbing on the sports field or, more seriously, have experienced military action, is that no plan survives contact with the enemy. Whether you are a batsman facing a spin bowler about to treat you to one of his box of tricks, or a tennis player trying to decide if your opponent is stretched enough for you to approach the net without being passed or lobbed, you have to be able to cope with a range of scenarios. It doesn’t mean that your core game plan needs to be dictated by the opponent and environment, but it does mean that you need to be prepared for the range of scenarios that might play out. If you can’t deal with the high ball, you can guarantee that a good opponent will be sending up bombs for you to panic under all afternoon.

In business, the normal corporate downside scenario is maybe a 5% or 10% decline versus base case, which isn’t really a scenario at all, but more of a smaller version of the base case. A more useful scenario is to work out how we would still thrive if sales fell by 30% or 50%, or how we would grow if competitive substitute product X gained critical mass. How would we deal with costs? Where would we still invest, or even increase investment? Which divisions would we let go? What resources would we try to acquire? What we are not doing here is trying to create a plan for every single situation that might come about. What we are doing is stretching our thinking, in order to understand those common things we need to do to thrive in whatever scenario might come about, and preparing ourselves to respond to the inevitable unpredictability.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (3/4)

In our first two posts in this series, we discussed how "cognitive traps" help us fool ourselves into thinking we're making rational decisions, when the opposite is true. We covered six common traps and their sometimes disastrous consequences. In this post we cover the final four of our ten traps.

Trap 7: “Overconfidence in calibration”

In this trap, people under-estimate the potential range of possible outcomes. In particular, people are often not sufficiently pessimistic with downside scenarios and/or attach too low a likelihood to major problems and pitfalls.

This issue is rife in business planning and financial projections. The more discrete and separate a business unit, the more visible is the variability; groups of partially-related businesses can appear easier to predict just because of the averaging of different under- and over-performing units. We often see business plans that overall are at or slightly below target, but consist of component businesses that show enormous variations from the original projections. For some reason, we as managers believe in our ability to perform within a tight range of projected expectations, despite this consistent evidence to the contrary.

Trap 8: “The fallacy of conjunction”

This is a trap in which people overestimate the likelihood that a series of highly likely events will all occur, and conversely underestimate the likelihood that at least one of a series of unlikely events will occur.

This leads management to believe that its mid-case scenario (which consists of all those highly likely events) is much more likely to happen that it actually is. The corollary is that it is reasonably likely that at least one of the many highly improbable, left-field, events will occur, and management will correspondingly be less likely to be ready for it.

We see this fallacy most often, again, in business planning, where a great deal of thought and preparation is given to the central scenario in the business plan, which from historic experience very rarely turns out to be true. It is why we at Latitude see business planning as a helpful process to prepare for possible futures, but see business plans as simply a means to this end.

Trap 9: “Failure of invariance”

This trap recognises that people are risk averse when prospects are positive but risk-seeking when they are negative. In a famous experiment, the vast majority of participants preferred a 100% chance of winning 500 pounds versus a 50% chance of winning 1,000 pounds. The same group preferred a 50% chance of losing 1,000 pounds versus a 100% chance of losing 500 pounds.

Companies approaching distress or who have experienced the initial failings of an investment seem to follow this risk-seeking tendency by trying ever more unlikely approaches to getting back their original money. It is almost always more rational and loss-minimising to write off sunk cost or a percent of equity, and to look at each decision on its own merits without the need to regain lost ground. Using share options as a reward mechanism can exacerbate this problem by actually making the risk-seeking rational for the individual manager, incentivising to act against the best interests of other stakeholders.

The other side of this coin, risk aversion when the company is ahead, is also very common and can lead to tremendous lost opportunity in new areas of business. This can be such a strong mindset in the team that created the company’s success that changing a winning team can sometimes be the only solution when seeking continued growth.

Trap 10: “Bystander apathy”

In this trap, people abdicate individual responsibility when they are in a crowd. Sometimes it is the apathy that stops anyone in a large crowd stopping a mugging; sometimes it is abdicating individual judgement to the perceived wisdom of the crowd. It seems that the risk of taking the contrarian path and being wrong is worse than being the anonymous lemming going over the cliff with all the others.

We see this in the various fads and booms that we fail to understand but cannot afford to miss out on. The recent “arbitrage” profits experienced in the world of private equity from ever growing P/E ratios is an example. Every Investment Director we spoke to when we surveyed them about this in 2006 knew that the P/E growth would need to stop at some stage, and admitted to stretching beyond managements’ business plans to make the investment case for purchase. But no-one felt they could afford not to keep investing. Everyone could see problems coming, and knew what would happen if they were left holding the baby when P/Es inevitably started shrinking, but to stop investing was to step out of the game.

There are numerous other cognitive traps, such as contamination effects from irrelevant data and scope neglect where we don’t minimise harm; but you probably already get the drift – people aren’t as rational as they think they are and they make irrational and potentially harmful decisions without realising it.

In our fourth and final post in this series, we suggest two ways of combating these cognitive traps, used for years in science and sport, in an attempt to throw some good sense and rationality back into the mix.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (2/4)

In the first post of this series, we explained how "cognitive traps" trick us into making irrational, and potentially harmful, decisions without realising it. We explained traps one and two, and their damaging business and financial consequences. We will cover ten such traps in this series, and conclude the series with some suggested methods of staying rational, and countering what seems an inevitability of falling into the traps.

In this post, we cover traps three to six, and their consequences.

Trap 3: “Availability bias”

This trap causes people to base decisions on information that is to hand, usually in their memories, versus the information that they actually need, like the car driver who loses his keys at night and only looks for them under lamp posts.

We see this at its most dangerous in Board or management workshops where the day is being run on the basis that all of the important knowledge is in the room. We have even heard facilitators use this we-have-everything-in-our-heads-already as a key premise for the entire strategy that emerges.

This cognitive trap also biases us to recency and proximity – we don’t look back far enough for similar patterns or warning signs, and we don’t look far afield enough for analogous evidence of failure or success.

Trap 4: “Confirmation bias”

This trap causes people look for evidence to prove what they believe to be true, rather than looking for evidence to challenge it: why Tories read the Telegraph and Socialists read the Guardian.

We see this bias at its most damaging in investment cases for acquisitions and in business cases for investment of money and time into new ventures or projects. Even when employing a third party professional to assess the acquisition, venture or project, the investor or business manager will actually ask for affirmation or substantiation – “I’m just looking for confirmation of my hypothesis” - rather than “Challenge me and tell me where I’m wrong”.

Trap 5: “The affect heuristic”

This trap causes people to allow their beliefs and value judgements to interfere with a rational assessment of costs and benefits.

We find this most dangerous at either of two extremes: on the one hand where the decision maker is very passionate about a subject, or on the other where he is once-bitten-twice-shy.

In the former case, whilst we find it critical that managers be passionate about their products or services, this passion can blind the person to reality, and can be impossible to address without introducing a very senior individual with authority to challenge assertions with information.

In the once-bitten-twice-shy case, we have seen private equity companies abandon entire sectors following one painful loss, and refuse to entertain the most solid business case that shares even the remotest common characteristics of historic loss-makers.

Trap 6: “The problem of induction”

Induction is the process of generating a general rule from a series of observations. In the absence of clear indisputable deductive relationships, induction can be all a person has to go on. The problem of induction is that the brain will look for neat patterns and will try to create a general rule even if it is based on insufficient information.

In acquisitions, people can over-estimate the performance and prospects of a company by seeing how satisfied its customers are. This creates an overly-positive pattern from what is essentially a self-selecting group: non-customers and disgruntled ex-customers need including for the full picture. Another example of poor induction is where management projects forward on the basis of a new product’s first year’s sales and forget to consider that this first year was a golden year, where everyone without the product bought one and would never need another.

A very common area where induction knows no bounds is in the practice of regression: correlating one factor against another to create what superficially appears to be a causal relationship. For example, it is possible to infer high price sensitivity when analysing price-volume relationships, and miss the over-riding effect of heavily marketed promotions that commonly coincide with lower prices. I was humbled to the limitations of correlation when an analyst working for me at my former company determined an almost 100% correlation between pallet demand and GDP. We started to doubt the causality when the analyst realised that she had used the wrong source data and correlated UK pallet demand with Polish GDP numbers. Our confidence in the causality was damaged further when the correlation with the "correct" driver, UK GDP, was about 30% lower.

In our next post, four more cognitive traps, after which we will conclude the series with some suggested counter-measures.


Copyright Latitude 2009. All rights reserved.

Latitude Partners Ltd
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

How we regularly make poor strategic decisions without even realising, and what to do about it (1/4)

The shocking financial consequences of how we think

Niall Ferguson’s best-selling and televised “Ascent of Money” covers beautifully the evolution of the financial system from ancient Mesopotamia to today. It is a superb book that relates the crucial role of financial tools in the growth and decline of empires and dynasties. Ironically, in amongst this excellence, the chapter that resonates most strongly is the afterword. This is called, suitably and contemporaneously, The Descent of Money.

The theme of that chapter, and this post, is how our hard-wired thought processes cause us to make decisions with a mindset that was useful for our evolution, but that in business and finance is destructive and irrational. He lists a series of cognitive traps - ways in which we make poor decisions without realising it.

We at Latitude recognised every single one of these traps, both in ourselves and in the companies we support and review. We could also relate to the considerable damage that each one could cause if unchecked.

We illustrate some of these common traps in this post and the next two posts in this series. The terminology is complex, but the ideas are simple and you will recognise every one. Even becoming aware that they exist should help avoid their destructive consequences. In our fourth and final post of the series, we attempt to go one step further in helping to steer clear of trouble and distress by proposing two well-tested answers that have been used by science and sport from their outset.

Cognitive traps 1 & 2

Trap 1: “Extending the present”

In this trap, the individual assumes that the present is good guide to the future; much better than examination of previous experience illustrates.

We see this at its most common in business planning where future revenues and costs are based on the present, plus or minus a small percentage. The reliable rule that we apply to such plans is that they will usually be wrong, though the future profit out-turn may end up being more-or-less the same with good management and a little luck. The alternative to extending the present – acknowledging that we are much less knowledgeable about the future than we think we are - is a more uncomfortable state of affairs; but this more realistic mindset can lead us to adopt valuable approaches such as scenario planning, which make us much readier for when the unforeseen does happen.

Trap 2: “Hindsight bias”

Hindsight Bias is the trap that causes people to attach greater probabilities to events after they happened than they did before they happened. Whereas in Extending the Present, people assume the present is a better guide to the future than it actually is, with Hindsight Bias, people over-rate the past as a reliable guide to the future.

When we attempt to learn lessons from the past, we must therefore make sure we cover the failures as well as the successes. For example, we can blithely look at many successful companies and conclude that they were much more focused in the services they offered than their more mediocre counterparts; that service or product focus is a pre-requisite for success in all market-leading companies. We could use this to conclude that we should rid ourselves of all products, services or skills except those that are part of this single core. However, if we look at the failures, we see that many of those companies were also very focused, but the successful ones were the minority that just happened to focus on the right thing. Looking at the full set of information, we would conclude that focus with no contingency plan is a high risk strategy, which more often than not will fail.

Hindsight Bias also leads us to project forward assuming that the models and mechanisms that worked in the past have a high probability of working in the future. We forget, or don’t realise, that what actually happened was the one of a myriad of possibilities that happened to be supported by the circumstances of the time. Stepping into the present, those myriad possibilities still exist and the chances of the future turning out as we project are much less likely than we think.

In our next post: four more common cognitive traps that help us cause destruction without even knowing we've done so.


Copyright Latitude 2009. All rights reserved.

Latitude Partners LLP
19 Bulstrode Street, London W1U 2JN
www.latitude.co.uk

For the full text of this series email steve@latitude.co.uk

Geographic expansion - how to make it work and not lose your shirt (5/5)

If you've read the previous four posts in this series, you will be aware that two-thirds of geographic expansions are either closed or still losing money after two years, and that there are some common steps that the successful expansions take to stack the deck in their favour. In the last three posts, we covered the first three of these steps: preparing the company internally by creating a replicable business model; following the money to choose the right location; and, warming up the market with leads, contacts and relationships before creating a local presence. In this post, we cover the fourth and final step: committing to the chosen location.

Such a commitment is about three things. First, focus on one country or region at a time, and make it successful before moving on to the next; each new location will take up serious management time, and multiple additional locations are major distractions that pull management further back from the required tipping point. Second, don't dabble in markets. Just like learning a new language, you either need to immerse yourself or accept that you will never be credible. Third, take active steps over a major period to bed the business into your global business, for example by using six-month exchange programmes for new recruits at head office.

Lane4 is one of the leading and most successful executive development consultancies in the UK. It has strong demand for services world-wide from global clients. Conscious of the need to retain control over quality and have a commonly-understood way of operating, Lane4 is very deliberate in its new office opening. It has effectively created a queuing system so that one office is opened at a time, every 2-3 years. It has done this successfully in Australia, the US and Switzerland. New offices always contain long-term senior company employees in their management teams. Lane4 even relocated one of its founders to the US office to invest in the offices development and support local academic relationships with his contacts.

This deliberate, committed approach can be contrasted with a famous operational consultancy (unnamed in this post out of respect for interviewees) that experienced a rapid growth in international demand for its services based on a best-selling business book. It opened a series of international offices simultaneously to support overwhelming demand. It made no proactive effort to integrate new staff, though the rapid expansion would have made this unviable anyway. Furthermore, the company's laissez-faire appraisal system reduced the chances of a uniform approach to close to zero. The result was a patchwork of offices with inconsistent approaches, and numerous false starts within many countries. With a series of loss-making international offices and investment write-offs, the company itself closed down after five years of losses, despite the fact that its home office was highly profitable over the period.

Our messages from this five post series are, firstly, that the perils of international expansion should not be under-estimated and, secondly, that there are a series of steps companies can take, that are common to successful expansions we have observed and that can be used to stack the deck emphatically in your favour.

Of course, there are legion other issues to consider in expansion, such as what business model to use, whether to have a physical location, etc. These are determined by the specific circumstances of the particular company, and will be the subject of a future post.

opyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf or to sign up for our monthly newsletter of insights.

Geographic expansion - how to make it work and not lose your shirt (4/5)

In our last two posts we covered the first two steps in stacking the deck in your favour for a profitable expansion into a new geography: preparing your company internally for expansion and selecting the right location to expand into. Once those are done and you have chosen a market, the next step is to prepare the market for entry.

You should never, ever go into a market cold and start from scratch there. If you've followed the previous step, you are following the money and will already have at least one long term client in the new location. But the new market needs more warming up before taking the big step of opening up a local capability. This usually means working local contacts and introductions from head office, so that the MD or salesman of the new office has a ready list of warm relationships before even stepping foot in the new country or region.

These salespeople must also be local with market relationships and contacts, and an intimate knowledge of the local culture. The ideal person will have spent time in your company already, and therefore already knows how you do things.

The MAC Group was a business advisory firm that sold itself for an enormous return in the 1990s to what became Cap Gemini. MAC's expansion followed a very deliberate path with three important steps always taken before entering any new country. First, MAC always followed the money in the form of local demand from long-term clients. Second, MAC's model was to work with business school professors in client projects, and MAC's senior partners always established and warmed up these academic contacts before moving into any new region. Third, MAC's new offices founders were sales-orientated country nationals. The result: MAC grew into a highly-profitable $250m business at the time of its sale.

The success of MAC's deliberate approach can be contrasted with an operational management consultancy that again we won't name for obvious reasons. This consultancy opened a US office on the basis of a very large one-off project for a client. But the company did no further market preparation, and sent in joint office heads that delivered the client project, but they had no sales skills and were not US nationals. After the client project ended, the two founders achieved no further sales and left the company after six months. They were replaced by a US national who had no knowledge of the company. This person in turn sold no further business and returned to the EU head office, with relocation for his family to be employed as a consultant at head office. The US office was closed on his relocation.

We hope these examples illustrate the importance of the third step in our apporach to geographic exansion: spending time and energy warming up a market before committing resources locally, and the likely perils of not doing so.

In our next post will will cover the final stage of profitable geographic expansion - committing yourself to the chosen geography.

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www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf or to sign up for our monthly newsletter of insights.

Geographic expansion - how to make it work and not lose your shirt (3/5)

In our last post we looked at the first step you can take in stacking the geographic expansion deck in your favour: preparing the company internally by using a clear business model that can be replicated easily, multiple times. In this post, we look at the second step: choosing the right commercially attractive location.

We have a mantra for this step; and if we want people to remember one thing from all our findings about geographic expansion it is this mantra: "follow the money". Follow the money means two things. First, it means following demand from existing clients that have major budgets that you expect to be spent on you over a period of years. Second, it means moving into locations that have strong latent demand for your services. These factors both need to be in place. It's just as bad to follow a single client into a backwater as it is to set up in a major corporate centre with no established ongoing client to support you.

"Follow the money" is the demand-side of selecting the right location, but we should also look from the supply-side perspective. That is to choose from locations where you have knowledge, experience and contacts. Failed and loss-making geographic expansions are littered with examples of talented, energetic people starting from scratch in a new location, to abandon the project with few leads and no sales six months later. Even if you are following an existing client, a new location needs this broader base of contacts and internal local knowledge to grow and thrive.

Monitor Company's geographic expansion was based at its core on following the need of long term clients. But if you look at Monitor's network, these client locations are also all major corporate centres. With each of its new offices, Monitor was deliberate in using the knowledge and contacts of nationals of the new location that already worked at the company. At the time of writing, Monitor had established profitable offices in more that 25 locations world-wide. We can contrast Monitor with a supply chain consultancy (which we won't name for obvious reasons) that took the more usual approach to geographic expansion: an enthusaistic individual opened an office on the basis of a one-off client project, but had no knowledge, contacts or experience of the location. After the six-month assignment finished, work dried up; the office was closed two years later with a write-off of more than one million dollars.

Now we have covered the first two steps in improving the chances of profitable expansion: preparing the company and choosing the right location. In our next post, we'll cover the next step to improve the chances of success further: preparing the market.


Copyright Latitude Partners Ltd. All rights reserved.

www.latitude.co.uk

Please email steve@latitude.co.uk for the full pdf.