And the bubble has popped! A delightful crash in our shareholder value of around $40 has (as it seems at this point in time) ruined our chances of winning the class competition. And it wasn’t just our company either, our whole industry has crashed. This has just been game theory 101, but I suppose that’s just the free market system right? Everyone in our industry is aggressively vying for the top position, and as a result, no one is getting it.
In our industry the main way the two major players have got ahead has been to introduce more bikes in more markets, charge really competitive prices and have very quality products. Then the way to recoup the costs is to rely on the massive quantities of sales. But this is no longer working because instead of only two players using this strategy (admittedly at the expense of the share price of the other four teams) everyone has adopted it, and we failed to see it coming. Anyone with half a brain would have predicted this, so perhaps we had a quarter, but it’s always easy to connect the dots in hindsight, and we did connect them, we just didn’t predict the full violence impact of this problem. We have effectively found the maximum demand we can squeeze from of our market with this strategy of everyone effectively producing the same, medium priced, high quality, same-spec bikes. What we need is a change. We mustn’t fall into the trap of simply doing more of the same and now that we own half of the companies in the industry, we must make sure no team in our industry is left behind. Instead of standing on each other, we need to work as a team to build the whole industry, all while avoiding any illegal collusion. So the problem I’m going to focus on is fixing the mess I have help to make.
To an extent I’m happy we failed. Naturally I don’t like the feeling, but failure is like exercise, and perhaps this will bring us back into the trenches as opposed to solely higher level thinking that disregards business essentials. Our biggest success (13m profit) followed our first failure, and our biggest failure followed our biggest success. By being generous with our spending, not really having to worry about cashflow or clawing for every dollar of profit, I would bet money that over confidence had a lot to do with why we faltered - and why as CFO I fail to grow our SHV, and instead decimated it. Despite this feeling of failure that sharply contrasts my previous confidence in my ability, I am quite happy to be pushed off my high-horse now, rather than in a few years time when real money is on the line and the ground is a lot harder. I enjoy the feeling of fast tracking my learning, and a key insight that I have gained is not to forget the basics and to stay hungry. As soon as we took our eye off the ball we’d already lost it.
Baghai, Smit & Viguerie (2009) said that “companies can grow in three basic ways: by gaining market share, by participating in fast-growing markets, and by acquiring”. We’ve done all the acquisitions we possibly can, so we’re left to reinvent our strategy for the third time in the simulation. We must now begin to reallocate resource based on our insights of where growth pockets will be, not where they are now (Baghai, Smit & Viguerie, 2009) by turning “the oceans of data available to us into islands of insight”. This means that we need to look to the data and find our way around the highly competitive industry of our industry. We should keep in mind the idea of “zero-based budgeting” by Baghai, Smit & Viguerie (2009) which “requires managers to justify each expense rather than incrementally increasing the budget year after year” – something that we have increasingly failed to do. The insight we have unearthed from the data in our industry (Brazil) as well as everyone else’s, is that all teams are running under the assumption that the center of each segment is the best place to aim, despite the five other bikes that you’ll land on by placing a product there. So although the concentration of customers is the densest at the center of each segment, there is plenty of potential in the outer reaches.
I plan to work with the other teams in our industry (avoiding collusion of course) to make everyone more successful. By not forgetting the basics of business we must not compete ourselves out of the market. By helping other teams in our sector to achieve better results and also a better grade, we can help ourselves too. I’m grateful that this mistake only bit me in my virtual pocket, not my real one. This week I have done some serious learning.
Baghai, M., Smit, S., & Viguerie, P. (2009). Is your growth strategy flying blind? Harvard Business Review, 87(5), 86-96.
Davenport, T. H. (2006). Competing on analytics. Harvard Business Review, 84(1), 98-107.