Over the course of my career, I’ve been lucky enough to work with hundreds of companies in a wide range of industries. Early on, I got to watch the father of the supercomputer, Seymour Cray, in the midst of his pioneering efforts to build the world’s fastest supercomputer, a feat that was never achieved due to his untimely passing.
Later in my career, I had a front row seat watching several business legends try to roll up the website development industry. While they were successful, their joy was short-lived due to the burst of the dot-com bubble, which sapped our customers of the venture capital they needed to pay our bills.
In between, I’ve seen countless successful as well as other not-so-successful companies. Stepping back and comparing the winners and the losers reveals that the losers often fell into one of five common traps.
Problem #1: They scaled too fast. While many had brilliant leaders and novel ideas, they simply spent too much too soon. Driven by passion and the certitude of success, they invested far too much in infrastructure, people, and inventory, and were left without enough runway to wait for the market to develop. This is a far too common problem. In the Startup Genome Project, researchers from Stanford and UC Berkeley found that as many as 70 percent of startups scale prematurely.
Solution: Don’t go for broke, and take the time to stress-test your plans using a wide range of differing assumptions.
Problem #2: They suffered from first mover disadvantage. In Originals, Adam Grant does a fantastic job dispelling the myth of first mover advantage. While eager entrepreneurs often rush to be the first to market, research shows that they are often far less successful than latecomers. Before the iPad, there was the Apple Newton, but the product was complicated and the market wasn’t quite ready.
Solution: Sometimes it’s best to slow down and let the market materialize before placing a big bet.
Problem #3: They got stuck in the middle. In Competitive Strategy, Michael Porter set forth two generic business strategies: differentiation and cost leadership. A company employing a cost leadership strategy wins by providing customers the lowest cost products or services. Conversely, under a differentiation strategy, a company provides a unique product or service that commands premium pricing and higher margins. Unfortunately, many companies with differentiation strategies hold on to high price structures and outdated value propositions for far too long, getting stuck in the middle between more differentiated and other lower cost offerings.
Solution: Constantly monitor shifts in competitor offerings and prices in order to ensure that your prices reflect the value customers place on your offering. If not, adjust prices as well as your cost structure accordingly.
Problem #4: They were one-trick ponies. The founders of these companies often started with the goal of addressing a specific customer need. They identified that need from the outside-in—observing a customer in action, identifying a problem, and developing a solution. As demand dried up, the management team tried to generate new sources of revenue using an inside-out strategy: they spent more time hypothesizing problems around conference room tables than taking the time necessary to truly understand their customers. This resulted in offerings that weren’t valued by customers and the companies never developed new sources of revenue.
Solution: Spend time actively observing your customers in their own environment in order to identify pain points that they may simply take for granted. Alternatively, zoom-out to reframe customer needs and identify potential new offerings.
Problem #5: They had too much customer concentration. The natural tendency of many companies is to commit more and more resources to the largest, most profitable customers. At best, this customer concentration erodes business value. At worst, it threatens the business’s viability.
Solution: Great companies recognize this risk and fight hard to commit resources to smaller customers—even when those smaller customers generate lower margins.
If your business is suffering from poor cash flow, slow inventory turns, slowing growth rates, or customer losses, pause and consider whether those trends are the result of one of these five traps. If so, implementing the solutions noted can help alleviate the pain as well as help you build a strong company with enduring value.
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