Roger Martin on Why You Can’t Analyze Your Way to Growth

Here is an excerpt from an article written by Roger Martin for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.

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This post is part of the HBR Insight Center Growing the Top Line.

The biggest enemy of top-line growth is analysis and its best friend is appreciation.

Sure, in a small minority of companies and industries, like the smartphone business these days, there is explosive growth, and if an analysis is done of past trends, it shows lots of opportunity for top-line growth.

But in the majority of businesses, if the available data are crunched, it shows a slowly growing industry — one growing with GDP or population. That generally convinces the company in question that there aren’t really opportunities for top-line growth, and that in turn becomes a self-fulfilling prophecy.

The fundamental reason is that analysis of data is all about the past. Data analysis crunches the past and extrapolates it into the future. And the past does not include opportunities that exist but have not yet happened. So, analysis conspicuously excludes ways to serve customers that have not been tried or imagined or ways to turn non-customers into customers.

Thus the more we rely on data analysis, the more it will tell a dour story on top-line growth — and not give particularly useful insights. The data analysis of P&G’s home care business — hard surface cleaners, dish and dishwater detergents — would have indicated that there weren’t many opportunities for top-line growth circa 2000. These categories were growing at something between population growth and GDP growth, clearly candidates for harvesting or maybe sale.

If instead, the core tool is not analysis but rather appreciation —deep appreciation of the consumer’s life — what makes it hard or easy; what makes her (in this category) happy or sad — there is the opportunity to imagine possibilities that do not exist.

For instance, suppose your consumers have to clean floors. It’s easy enough to appreciate that mopping a floor is a fairly miserable task. Think about what it involves: getting out and filling a bucket, dragging the bucket around and repeatedly jamming the mop in and out of it, and then dumping out and cleaning the bucket. If you appreciate your floor-cleaning customers, you’ll be looking to help them avoid having to go through this experience every time they have to clean a floor — because not every floor will need such a heavy-duty approach. It was out of this appreciation-triggered insight that the electrostatic Swiffer anti-mop was born and produced massive top-line growth, approaching $1 billion in sales in a decade.

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Organizationally and behaviorally, analysis and appreciation are two very different things. Analysis is distant, done in office towers far from the consumer. It requires lots of quantitative proficiency but very little experience in the business in question. It depends on data-mining: finding data sources to crunch, often from data suppliers to the industry. Appreciation is intimate, done in close proximity to the consumer. It requires qualitative proficiency and deeper experience in the business. It requires the manufacture of unique data, rather than the use of data that already exists.

In my experience, most organizations have more of the former capabilities and behaviors than of the latter and hence most struggle with top-line growth. The biggest issue isn’t the absence of top-line growth opportunities but rather the lack of belief that they exist. And that is driven by the dominance of analysis over appreciation.

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To read the complete article, please click here.

Roger Martin (www.rogerlmartin.com) is the Dean of the Rotman School of Management at the University of Toronto in Canada. He is the author, most recently, of Fixing the Game. For more information, including events with Roger, click here.

How and Why Market Anomalies and Incongruities Can Reveal 10 Clues to Business Opportunity

Illustration by Stefanie Augustine

Here is an excerpt from another outstanding article that appears in strategy+business magazine, published by Booz & Company. In it, Donald Sull shares his insights concerning how and why market anomalies and incongruities may point the way to the next breakthrough strategy, thence to a wealth of business opportunities. To check out a wealth of free online resources and obtain more information about this magazine, please click here.

Here are the first four “clues.” To read the complete article, please click here.

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During their heyday in the late 19th and early 20th centuries, transatlantic cruise lines such as the Hamburg America Line and the White Star Line transported tens of millions of passengers between Europe and the United States. By the 1960s, however, their business was being threatened by the rise of a disruptive new enterprise, namely, nonstop transatlantic flights. As it happened, the cruise ship lines had one potential strategy with which to save their business: vacation cruises. Starting in the 1930s, some of these lines had sailed to the Caribbean during the winter, thus using their boats when rough seas made the Atlantic impassable. And in 1964, when a new port was opened in Miami, Fla., the pleasure cruise business began to boom.

But the great cruise lines missed this breakthrough opportunity. They saw their profitability fall while dozens of startups, including Royal Caribbean and Carnival, retrofitted existing ships to offer pleasure cruises and built an entirely new travel and leisure category that continues to grow today.

Managers and entrepreneurs walk past lucrative opportunities all the time, and later kick themselves when someone else exploits the strategy they overlooked. Why does this happen? It’s often because of the natural human tendency known to psychologists as confirmation bias: People tend to notice data that confirms their existing attitudes and beliefs, and ignore or discredit information that challenges them.

Although it is difficult to overcome confirmation bias, it is not impossible. Managers can increase their skill at spotting hidden opportunities by learning to pay attention to the subtle clues all around them. These are often contradictions, incongruities, and anomalies that don’t jibe with most of the prevailing assumptions about what should happen. Here is my own “top 10” field guide to clues for hidden breakthrough opportunities, observed in a wide variety of industries, countries, and markets. If you find yourself noticing one or more of them, a major opportunity for growth could be lurking behind it.

1.    This product should already exist (but it doesn’t). As the accessories editor for Mademoiselle magazine in the early 1990s, Kate Brosnahan spotted a gap in the handbag market between functional bags that lacked style and extremely expensive but impractical designer bags from Hermès or Gucci. Brosnahan quit her job, and with her partner Andy Spade, founded Kate Spade LLC, which produced fabric handbags combining functionality and fashion. These attracted the attention of celebrities such as Gwyneth Paltrow and Julia Roberts. Many well-known product innovations — including the airplane, the mobile phone, and the tablet computer — began similarly, as products that people felt should already exist.

2.    This customer experience doesn’t have to be time-consuming, arduous, expensive, or annoying (but it is). Consumer irritation is a reliable indicator of a potential opportunity, because people will typically pay to make it go away. Reed Hastings, for example, founded Netflix Inc. after receiving a US$40 late fee for a rented videocassette of Apollo 13 that he had misplaced. Charles Schwab created the largest low-cost brokerage house because he was fed up with paying the commissions of conventional stockbrokers. Scott Cook got the idea for Quicken after watching his wife grow frustrated tracking their finances by hand.

3.    This resource could be worth something (but it is still priced low). Sometimes an asset is underpriced because only a few people recognize its potential. When a low-cost airline such as easyJet or Ryanair announces its intention to fly to a new airport, real estate investors often leap to buy vacation property nearby. They rightfully expect a jump in real estate values. Similarly, the founders of Infosys Technologies Ltd., India’s pioneering provider of outsourced information technology services, were among the first to recognize that Indian engineers, working for very low salaries, could provide great value to multinational clients. The company earned high profits on the spread between what they charged clients and what they paid local engineers.

4.    This discovery must be good for something (but it’s not clear what that is). Researchers sometimes recognize that they have stumbled on a promising resource or technology without knowing the best uses for it right away. The resulting search for a problem to solve can lead to great profitability. One example was the founding of the ArthroCare Corporation, a $355 million producer of medical devices based on a process called coblation, which uses radio frequency energy to dissolve damaged tissue with minimal effect on surrounding parts of the body. Medical scientist Hira Thapliyal, who codiscovered this process, founded a company to offer it for cardiac surgery, but that market turned out to be too small and competitive to support a new venture. Undeterred, he looked for other potential uses, and found one in orthopedics, where there are more than 2 million arthroscopic surgeries per year.

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Incongruities like these can offer a critical clue about where your assumptions no longer match reality. From there, you are more likely to uncover the kinds of opportunities that you might otherwise have missed — and that your competitors still don’t recognize. Start by asking yourself, What are the most unexpected things happening in our business right now? Which competitors are doing better than expected? Which customers are behaving in ways we hadn’t anticipated? Take yourself through the list of top 10 clues. Leaders who consistently notice and explore anomalies increase the odds of spotting emerging opportunities before their rivals.
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To read the complete article, please click here.

Donald Sull is a professor of strategic and international management at the London Business School, where he is also the faculty director for executive education. His books include Why Good Companies Go Bad, Revival of the Fittest, and most recently, The Upside of Turbulence: Seizing Opportunity in an Uncertain World.

3 Questions to Ask Before Adopting That Best Practice

 

Here is another valuable Management Tip of the Day from Harvard Business Review. To sign up for a free subscription to any/all HBR newsletters, please click here.

Best practices are alluring. If other companies have already determined the best way to do something, why not just do what they did? But before you run off to collect best practices from the leader in your industry, ask these three questions:

• What are the downsides? Implementing a practice that worked elsewhere isn’t necessarily a slam dunk. Think through the potential disadvantages and figure out how to mitigate them.

• Is success truly attributable to the benchmark practice? There are many reasons a company succeeds. It is unlikely that emulating one practice of an industry leader will give your company the same success.

• Are the conditions similar at your organization? For best practices to be transferrable, businesses need to have key similarities: strategy, business model, and workforce.

Today’s Management Tip was adapted from Harvard Business Review on Making Smart Decisions.

To check out the book and join the discussion, please click here.

 

Michael E. Raynor: An interview by Bob Morris

Michael Raynor

Michael E. Raynor, Director, Deloitte Consulting LLP, provides consulting services to senior executives in the world’s leading corporations across a wide range of industries. In his client projects and research, Michael explores the challenges of corporate strategy, innovation and growth. However, as he once observed, ”Case studies of past results are a weak foundation for predicting future outcomes. And the increasingly popular ‘fail fast to learn soon’ approach to innovation can work, but is also unnecessarily wasteful.”

 His first book, The Innovator’s Solution, coauthored with Professor Clayton M. Christensen, has been on The Wall Street Journal and The New York Times bestseller lists, and won several “best book of the year” awards in 2003. His second book, The Strategy Paradox, was released by Currency/Doubleday in February 2007. In 2007, strategy+business magazine named it one of its top five picks in strategy, and BusinessWeek named The Strategy Paradox one of 2007′s 10 Best Business Books.

His third book, The Innovator’s Manifesto published by Crown Business (2011), is now available and has already garnered much attention from the media. 

In addition, Michael has published extensively in managerial and academic journals and has taught in the MBA and Executive Education programs at the Richard Ivey School of Business at the University of Western Ontario in London, Canada, and at the IMD Business School in Lausanne, Switzerland. Michael has a doctorate from the Harvard Business School, a master’s degree in business administration from the Ivey School of Business, and an undergraduate degree in philosophy from Harvard University. He lives in Mississauga, Ontario, Canada.

Here is an excerpt. To read the complete interview, please click here.

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Morris: Before discussing any of your books, a few general questions. First, throughout your life thus far, who has had the greatest influence on your personal growth? Please explain.

Raynor: Like many other people, I had a number of teachers early and life and, luckily, throughout my educational career who took and interest in my work and encouraged me to follow what was most interesting to me.  I can go all the way back to Grade 7 and Grenville Bray in small-town Ontario, through to John Aimers in high school, Alan  Sidelle as an undergraduate, Don LeCraw as a graduate student, and Tom Eisenmann as a Doctoral candidate.  Each step along the way these people have broadened my horizons and taught me important lessons about the world and about myself.  I’m grateful for your question, as this is the first time all those folks have been mentioned in one place.

Morris: Greatest impact on your professional development?

Raynor: I think without question my collaboration with Clayton Christensen has been a defining element of my career.  The opportunity to understand deeply and assist in the development of a critically important set of ideas on innovation has been a real privilege.

Morris: Was there a turning point (if not an epiphany) years ago that you set you on the career course that you continue to follow?

Raynor: I guess I’d have to say the realization that my longtime plan to go to law school was simply a default setting.  Moving into business after my undergraduate degree was an unexpected turn, but it was, for someone with my experience, the “road less traveled”, and as Robert Frost put it, “…that has made all the difference.”

Morris: To what extent has your formal education proven invaluable to what you have accomplished thus far?

Raynor: It would be difficult to overstate the importance of my formal training.  In my research and writing I try to apply the scientific method as rigorously as I can; my model has long been Stephen J. Gould, the late Harvard professor and paleontologist.  His mantra was “no compromises”, and I’ve done my best to adhere to that, while still trying to be accessible and practical.  That’s an especially tough circle to square, but it is a goal that fires my imagination.  And it is one that would be, literally, unimaginable without the extent and nature of the schooling I’ve received.

Morris: In recent years, there has been severe criticism of M.B.A. programs, even those offered by the most prestigious business schools. In your opinion, what is the single area in which there is the greatest need for immediate improvement? Any suggestions?

Raynor: For me, it’s the ability to think critically and clearly about the nature of the arguments being made and the evidence adduced in business schools and, more importantly, in the popular management books – of which there are many!  The key is not necessarily logical thinking:  very few serious thinkers make elemental errors of logic when connecting a premise to a conclusion.  Rather, deeper questions such as the rules of evidence, the meaning of probabilistic claims, and need to accept the incompleteness of our data the insufficiency of the advice we can offer – yet still act – often go unexamined.  Something as relatively straight-forward as distinguishing between “explanation” and “prediction” is almost always overlooked, yet it is fundamental to the nature of research and prescriptions for action.  If students understood more deeply these issues I think the marketplace for ideas would quickly become much more efficient, and the signal-to-noise ratio would improve dramatically.

Morris: To what extent (if any) are the challenges that your clients face now significantly different from those of (let’s say) 3-5 years ago?

Raynor: I don’t think the basic issues ever really change.  For me, the four fundamental issues are (1) Innovation (2) Growth (3) Performance and (4) Uncertainty.  Those categories are not necessarily mutually exclusive or collectively exhaustive, but they have for me been a very helpful organizing framework.  How one addresses these questions might change in important ways depending on such contingencies as whether the global economy is in recession or not, but true theories for each of these will have within them the ingredients required to deal with transitory exigencies.  Keeping one’s eye on the evergreen questions is part of not getting misled or even duped by fads and fancies.

Morris: In your opinion, what will be the single greatest challenge that CEOs will face during (let’s say) the next 3-5 years? Any advice?

Raynor: My best estimate is that it will be one of the four identified above – and getting the leadership agenda “right” will mean having the right level of emphasis on each.  I’m willing to bet innovation and growth will be first and second priorities, but I’m not prepared to say which is which.

Morris: Please explain the relevance of Joseph Schumpeter’s concept of “creative destruction” to the modern business world.

Raynor: Economist Joseph Schumpeter’s signal contribution to economics was to put innovation at the core of economic development.  He saw beyond the field’s obsession with marginal cost analysis and price-based competition, understanding that this fixation was merely a function of the ability to model such features of the landscape cleanly, with little regard for their ultimately secondary, and perhaps even trivial, role in shaping competition among firms. In Schumpeter’s words:

“[I]n capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization…– competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” [i]

Schumpeter memorably labeled the outcome of this type of competition “creative destruction,” a term that has become for many synonymous with innovation.

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To read the complete interview, please click here.

Michael Raynor cordially invites you to check out the resources at this website: www.michaelraynor.com

Notes: 

[i] Schumpeter, Joseph A. (1942).  Capitalism, Socialism and Democracy.  This quotation from pp.84-86 of the Harper Colophon edition of 1975.