Coins in the Couch

One of the harsh realities in the coming of age of an economic sector is the loss of external funding for growth.  Growth capital is typically attracted by Cumulative Average Growth Rates (CAGRs) of 20% and above—that’s what makes for a growth sector.  When categories mature, their CAGRs drift down toward single digits, and the growth capital goes elsewhere.  What now can management do?

This is the current state in the technology sector, particulary for enterprise IT.  Growth from now on must be funded internally by productivity improvements in existing processes.  We must extract growth capital, in other words, from our own hide.  We call this strategy finding coins in the couch. 

The good news here is that during the rush of the growth years we generate untold numbers of inefficiencies in virtually every core process that operates at scale in our companies.  As a result we enter the mature category era with spare change lying around everywhere.  This is what makes optimization initiatives initially so attractive.  They have a high probability of being successful because they take place in such a target-rich environment. 

The bad news is that management teams all too often fail to reinvest the coins they extract in future growth initiatives.  Instead they use them to prop up commoditizing businesses by improving their operating margins.  In the short term this produces attractive returns—essentially by robbing innovation to feed investor expectations.  In the long term it results in stagnant entities that get acquired and/or disassembled to be incorporated into more vital and vigorous enterprises.

These management teams have succeeded in extracting resources from context, but they have failed to repurpose them for core.  They ate their seed corn instead of planting next year’s crop. 

The key lesson here is simple: Do not undertake reengineering for productivity efforts until you first declare how you intend to invest the proceeds to create competitive advantage for future returns.  Inefficiencies, in this model, are a source of funds, something like body fat.  You want to use that body fat for energy, not just strip it off through plastic surgery.

Comments

[John Platko]

In this scenario, how does "innovate to neutralize" fit into the equation?

[Geoff Moore]

Great question. “Innovate to neutralize” is a bit on the margin. It does not generate new competitive advantage but rather overcomes existing competitive disadvantage. However, that still creates a net gain in economic return, so it qualifies as a good use for coins in the couch. The thing you want to watch out for is overspending on innovate-to-neutralize in the vain attempt to differentiate.

[John Acheson]

I disagree that squeezing costs out of the value chain is a strategy... This is the destiny of all organizations, you might call it evolution, it's nothing new. I would argue that finding coins in the couch is a tactic, most commonly know as kaizen. Incremental improvement is not a strategy, it's reality. I feel that tactics are part of a larger strategy that one might pursue, such as becoming the low-cost leader. But, that's a tough strategy that allows only one player per industry and if one thinks that finding coins in the couch is a tactic that will lead towards that strategy, that leader may end up like K-Mart. The 2nd cheapest and bankrupt.

On the other hand, if one incorporates finding coins in the couch with a differentiation strategy, this leader should be able to keep up with or beat the competition. The reason being that lowering certain productivity improvements can fund quality and not lower costs.

Be very clear on your strategy and make sure your tactics are aligned. Finding coins in the couch is a tactic, not a strategy.

[John Acheson]

From Guy Kawasaki's blog, "most people will forget the tactical items it takes to succeed. 1. Low-cost production."