Steve Huey’s Blog

The best saying when it comes to “Cannibalization” is “Cannibalize yourself before someone cannibalizes you!  If I had to some up the single argument which has caused me the most personal anguish cannibalization is it!

Just so we are on the same page – Cannibalization in this case does not mean eating people it has to do with the introduction of a product or service that eats in to a company’s primary revenue stream. 

Many companies have faced this issue in the past – some famously have clung to their antiquated business model or product and rode it into the ground. A few examples: The Recording Industry for not embracing digital downloading; The Movie Industry in resisting but ultimately embracing the VCR; and even in my own career as EarthLink did not want to offer an Email only subscription for fear it would increase the cancellation of people paying $21.95 per month for dial up when they currently had high speed access and were keeping their dial up account only to maintain their email address.  Hey people figure this stuff out!

So what is the problem here?  Why should you embrace new products that could ultimately cost you sales in your primary business?  Single answer is that if a new product comes along or business model that greatly lowers the value proposition of your current product or if the new “thing” adds more value to a certain segment of your current customers, then someone will offer the service to your customer and your customer (at least a portion) will buy it from them and leave you.  Bottom line is that a portion of your clients are gone as soon as the new option becomes available.  The big questions are how many and how soon?

As a leader of a start-up you it is rare indeed that your new business will face the challenge of cannibalization – but if you are selling into a market where your product risks cannibalizing your potential client’s primary revenue stream you need to consider these issues and combat them.

Here are my three steps to confronting/battling those who bring up cannibalization as a reason NOT to adopt your new product, service, or business model:

1. Show that the change will happen and what effect it will ultimately have on the business if adopted by competitors (The Doom Case).  Make no mistake it is not a question of “if” but “when”.
2. Create the financial models to show the impact of new product adoption allowing for cannibalization to occur.
3. Demonstrate or provide a plan on how the business can be changed where by the new product if adopted could boost the business without destroying the entire revenue stream (This is the action plan behind the business case in step two).
4. Give anecdotal examples of how cannibalization issues have affected similar businesses.

A word of warning – this is BIG risk stuff – Do your homework!  In my experience the change usually does not happen as quickly as you think (so you have more time to milk the old model or products) and there is not perfect information (so your customers will not immediately change to the new model or product). 

Also, pray that you are not working for the Encyclopedia Britannica as Microsoft rolls out Encarta where a $1,300 set of books are replaced with a $50 and then free online version offering greater quality.  That spells GAME OVER!

Now that you have your key business driver whether it is subscribers, page views, boxes stored, clients served or product listings, focus on driving that metric.  How do you focus well may I suggest the following five ways:

1. Communicate the key driver and the goal to each and every person in your company.  Every person should know what the key metric is what your goal is and what you attained in the past.
2. Post the goal around your shop – write it out so each team member is constantly reminded of the goal.
3. Repeat the goal and the current status at every function, meeting, or gathering.
4. Ask for the teams help in reaching the goal – they have great ideas ask them to think.
5. Become the walking embodiment of the goal by discussing the goal each day with someone on your team.
6. Reflect on the goal and your plans to achieve it everyday (do this alone in a quiet place and do so by thinking about what you are doing and what could be done).  (Bonus method – 6 not 5 as previously indicated)

You will find that soon the goal will be achieved and you will be setting a new higher goal.  Look you have heard this before so why am I telling you this again?  You are busy – being pushed to your limit with the needs of your company.  You are being pulled in the direction others want to take you.  Stop!  Dig in your heals and pay attention to what drives your company.  Focus and you will reap the rewards of that focus.

What one key metric drives your business?  Every business has one.  A few of mine have been; listings, enrollments, downloads, subscribers.  Notice I did not say; sales, revenue, profits, EBITDA.  Yes I track these too but the underlying metrics move the business forward.

Identify these key metrics and focus on them – set a goal for them make them come alive in the minds of your team.  Make sure that the key driver creates the value for your clients and your business.

One of my mentors tells me that his key metric is subscribers.  No care for revenue as he is building a “Tribe” (if you do not know what I am talking about run out and buy Seth Godin’s book Tribe).  You see he has identified what creates enterprise value for his shareholders (I think he is the only shareholder).

Once you have identified the key value driver focus on it relentlessly  no matter what it is.  Yes you have to watch your cash and your sales and etc etc.  Many people only watch those things and then end up focusing on the wrong value drivers or too many “Key Metrics” and end up creating nothing remarkable.  Google originally wanted to be the best search engine period.  Amazon in the begining wanted to focus on expanding the books it had the ability to sell you.  Jack Daniels focused on distilling whiskey.

Find your value driver and focus on it!

Are you still doing business like you did yesterday?  If so you should stop and think a minute.  Most businesses do not evolve.  How many times do you hear of the little garage business killing the giants?  I will answer for you – all the time. 

It has been said that the sum of all technical knowledge doubles every two years (2006 stat) and will double every 72 hours by the end of 2010.  It has also been said that the sum of all human knowledge doubles every five years (2001 stat) who knows what that time frame is now.  The fact of the matter is that business as part of the human experience is changing so quickly that it is hard for us working adults to remember life before email, the Internet, texting, and social networking.

The only way to address the changing environment is to take a pause from your daily routines – even if you are a start-up and think about how you are doing business and try to understand how your clients are shifting and responding to the change taking place.  Are they changing as fast?  Are they being left behind?  Can you help them change faster?  To help them move faster do you need to change.

One fact is that by doing business the way you did it yesterday will not help you address the needs of tomorrow.

In today’s world Transparency is essential.  Why?  Because transparency builds trust.  Trust is absolutely important in building relationships and relationships are the cornerstone of a solid business. 

Who needs to know?  Your employees – that is easy.  Your investors – that is important.  Your clients – that may be controversial.  It is easy to understand that your employees need to know because you rely on them to help the company grow and reach its goals.  It is important that your investors know what is going on or they will not continue to back your company.  Your clients?  I would put forth that if you keep your clients informed and they really understand how you are doing, they will support you and help you be successful as well. 

You gain transparency by sharing information.  You gain transparency by communicating to your stakeholders.  Communication is the key to transparency!  Try sharing information with all these stakeholders and see how your transparency will build trust, deepen relationships, and help your business grow.

Add more value than you take!

That is it – the secret to all living.  If you can create more value you will get more value.  Think about it – if you give more love you will be loved.  If you are friendly more often – more often people will be friendly to you.

In business you should seek to add value to your clients and partners – if you create a lot of value you can charge a lot of money (capture a lot of value) for your services.  If you run a business that has pricing pressure and you can barely pay your bills then you are not creating value.  EBay created value by creating the world’s largest garage sale.  Sears created value by bringing goods to the American farm families and captured much value fifty years ago only to be replaced by Wal-Mart who created economies of scale value.  Microsoft created value by placing software infrastructure in the hands of programmers and later by placing productivity software in the hands of “Office” workers.

Create more value than you consume and your life, and that of your business endeavor will be easy!

In order for ANY business to take place there has to be some level of trust.  Trust must be established for a vendor to sell anything to a customer, for an accountant to prepare the taxes of a client, for an entrepreneur to raise $1 from an investor.

If you cannot establish TRUST then any business relationship is doomed.  If you lose trust you need to stop everything and repair the situation and once trust is fully lost then the chance of a go forward relationship is largely lost as well.

Work to build it – work to keep it – if you do you will be able to maintain the relationships necessary to be successful.

You know what it is like – you are in the trenches – slugging it out – fighting day to day.  Someone in the organization stops the bus.  No, you can’t move forward – someone has dug in.  What do you do?  I would like to relate this story of a local Kentucky hero – General George S. Patton. The story is taken from the book, “Tuned In” by Craig Stull, Phil Myers, & David Meerman Scott is a passage about a scene in the movie Patton based on a real event.It seems that the entire U.S. Seventh Army gets critically held up in the heat of battle by a cart pulling donkey.  The donkey is blocking a bridge while an MP is pleading with the Donkey and the donkey’s owner to move so the Seventh can cross the bridge and get out of harm’s way.

The entire Seventh Army is at a standstill due to this “mule headed” donkey.

Up pulls Patton, he jumps from his jeep and in one swift motion pulls his ivory handled revolver – shoots the donkey in the head and has it flung from the bridge thus removing the obstacle.

This is a great story that illustrates the point that swift decisive action is sometimes called for and that of a great success principle of personally taking decisive action to remove obstacles to fulfill one’s mission.  I ran into this very issue this week in my current business.  In two cases members of my team took on the role of the MP and not that of Patton.  Be the general take decisive action and “shoot the donkey”!

 Simple Priorities is a start-up must have.  This is an old lesson from my days as a Wendy’s manager – always have a simple set of priorities to help the team understand what they should do.  At Wendy’s the priorities were hanging on the wall and I never “Got it” until late in my career there (I think I was almost 20 at the time).The simple priorities that Wendy’s set were represented by “QSC” or Quality, Service, and Cleanliness.  Most people applied the phrase incorrectly in asking “how’s your QSC?”  Really what Wendy’s management had set was a simple list of priorities in that first and foremost serve a quality product, then serve that quality product fast and with a smile, and then keep your restaurant clean.  Poor managers would be sweeping the floor when they had customers waiting forever in line or they would serve you fast but forget your frys in the drive through.  Good managers would have a dirty store but serve you really fresh food quickly.  Usually the customer is ok waiting a few seconds longer to get fresh frys or can put up with a dirty parking lot if they are getting the right food fast but how mad do you get when you get old frys or the wrong sandwich.  And I bet you never say “Gee that’s OK that I didn’t get any napkins with my kid’s frosty.  I am so glad I waited for five minutes so the manager could pick up the trash from the parking lot.” – NEVER!

It is EASY, CLEAR priorities, QSC in Wendy’s case, that help you and your team deliver a consistent client experience and for your team to focus on doing the things that create the greatest value for the client.  So for our IT team QSC equals:

1. Keep the servers running.
2. Take care of Client technical issues.
3. Develop next version of web interface.

for Marketing QSC =

1. Promote the client’s programs
2. Promote the company

Simple priorities help everyone on the team to act in a coordinated way to deliver great results.

 The answer is that they can be all three but need not be bad or ugly.  Reorganizations of your company, are they something that needs to be done and how frequently?  I recently had lunch with a good friend who was still at a company I had run at one point.  The company had recently been reorganized and we were discussing the merits of the re-org.  He made a great statement that caught my attention and made me think more.  “If your business has not been re-org’d in the past 18 to 24 months with lay-offs then you should do it.”  What he meant and I agree is that if you have not re-imagined your business and moved to change the business to better serve your customers or improve overall efficiency then you should.

As a business leader you should think about how your organization’s structure works and how it can be better all the time.  Re-organizing your company can be a very good thing.  Usually what makes it bad is the execution on the change.  So I offer the following tips for carrying out a re-organization that is neither bad nor ugly:

• Base the changes on the needs of the customer not on weaknesses in staff. I made the mistake of changing an organization once because I was protecting a weak manager. Don’t do it as that action will come back to haunt you.
• Seek the guidance of only key managers and be careful that the managers don’t have a big stake in the game or their help will be biased.
• Communicate the reasons behind the re-organization clearly up front and then tell the team again. Have the message down and have it come straight from you. Answer the questions openly and honestly. If the reasons for the change are clear you will gain buy-in more rapidly.
• Immediately move to discuss how the organizational change affects each person and their role in the company. The faster you can do this the faster the company will heal and move forward.
• If asked will there be more changes – answer that there will be additional changes if you can serve the customer better.

One last thing I would have you consider.  Changing your organization every other week is just as destructive.  No one settles in to their role.  No one buys in to the goals – there is a lack of accountability and every team member starts waiting for the next re-organization.  So as will all things balance must be achieved.

There are probably thousands of books written about leading change.  Most managers stink at it – but if you embrace this as part of your longer term planning process you can make re-organizations Good not Bad and Ugly.