Are you choosing high growth or low growth?

How often do we make a conscious decision to put ourselves in the path of opportunity? Do you consider this when choosing your type of business or market segment?

I spent years in the investment world, and one thing I can tell you is that around 85% of your returns are determined by the asset class that you choose to allocate money towards. For example, if you choose stock, bonds, or real estate as one of your asset classes, your portfolio manager, company, track record and all the research will lend little towards your return. Ultimately it’s the inherent return of that asset class that determines the majority of what you return.

What does this have to do with business? You have to consider similar things when selecting a marketplace or industry for business opportunities. In the 80’s and 90’s, reading all the financial magazines made it evident that mutual funds were gaining popularity with the masses, making it apparent that a mutual fund would help us grow our investment firm, and it did immensely.

Our software company grew out of an awareness of the value desired and created by innovative software, and how it was becoming the backbone of businesses. We’re experiencing strong growth during tough times. Is it because we’re just that good at sales, or is it because the sector we chose to play in?

green” movement or phone applications?  How about all of this government spending taking place? If the sector you are in is not a high growth industry, and isn’t headed that direction, have you considered changing your direction?

Have you ever noticed how things work in cycles with observable patterns? As someone whose strength is observing and seeing patterns, I find it helpful to know that these patterns exist and to see if this awareness generates some form of opportunity. This may be because I have that entrepreneurial instinct that draws out this intrigue, but whatever the case, they seem to pop up everywhere.

You can find these patterns in the stock market, football teams, the weather, time to market saturation for products, and a multitude of other things. For example, look at the stock market over a long period of time. You will see that over time the price to earnings ratio (PE) tends to expand and contract over a longer time horizon than the normal business cycle.

From 1903 to around 1920, you should notice a contraction of PE from around 24 to 5. From 1920 to 1930, the PE surged from 5 to 28. From 1930 to 1950, it contracted back to 9. From 1950 to 1969, it expanded from that 9 to about 23. Then from 1969 to around 1980, it dropped back down to 7. From 1980 to 2000, you should see it surge up to 42 (can you say bubble?). We have been on a PE contraction since then. The sad news, as you can see from the pattern, is that a long uptrend does not typically start until the price to earnings ratio falls into the single digits.

Being a University of Tennessee football fan, I observe the patterns there also. As fans, we have high expectations every season, which makes it difficult to see the patterns. However, you can go back to the 1960s and see a good decade for the UT program. The 1970s were tough. The 1980s bounced around with big ups and downs. The 1990s were great, and the decade of the 2000s has been sad. You would think from this, the current decade will improve.

If you listen to the news, you would think we have been on a warming trend from the past 100 years. Actually, we have been on a warming trend since the late 1970s. In the mid-70s, all the major news stories reported how the average temperatures had been dropping since the 1950s, so we would all starve to death because of crop failures. Last winter, we had snow on the ground in Knoxville, TN for over three weeks. Typically, snow only stays on the ground here for a couple of days, and this was the first time since I started living here in 1981 that this has happened. Could this be the start of something new?

Finally, notice the trend of how breakthrough technological inventions saturate the market. In a general sense, the automobile, television, and radio each took about 30 to 40 years to fully saturate the market. The VCR took at least 15 years. The internet reached saturation after around 8 to 10 years, and it only took Facebook around 3 years once it opened up to everyone.

This pattern is obvious, and we will see new products, services, and software tools reach full penetration within a year in the near future. This results from how connected everyone has become, and this connectivity continues to increase. I would say that at some point in the near future, products and especially software will reach full market saturation within weeks and even days.

What patterns do you see around you? Will these patterns affect your business? Are there opportunities in those patterns or just the satisfaction of knowing this is just one of those cycles and will eventually change?

On my trip to Canada for the EO Conference, Peter Thomas, who I introduced in the last blog, (founded Century 21 in Canada and took it to 9 billion in sales) spoke to us about the S Curve.

I spent many years in the investment world and back in the early nineties I went thought the Chartered Financial Analyst (CFA) program. We discussed the S curve in depth, which depicts the life cycle of a business. With the S tilted forward a little, you can see how a growing company starts out flat for a bit, then takes strong spurt upward and then levels off and starts to decline. This is the life cycle of most businesses, usually lasting 5 to 7 years. Hang on for a second if you think this may not be relevant to you.

Peter demonstrated that if you add the S curves on top of each other (as shown below) and draw a line between them, it shows the steep declining cycle that happens over and over again in companies with a long history. What do these companies do to keep from going out of business during these declines? They have to make changes and inject something different, something new, something innovative, to start the cycle over again. If not…what happens?

 Peter talked about how we can use this analogy in life as well. This really got me thinking, and I have spent the past week pondering how many areas of our life this theory applies too. Think about relationships and marriage. How many do you see that are short lived, that only make one S curve cycle. How many go through multiple S curve cycles? Do the longer ones add something different, something new or innovative into them? 

Think about the S curve as it applies to our other interests in life…our workouts, our diet, our favorite sport or team and even our friends. I can only imagine how many more excited fans we’ll see this year for the TN Volunteers football program with the new, young, energetic coach Lane Kiffin at the helm. What is it in our workouts, our diet, or our relationships that we can add to keep them on an upward growth curve?

If you are a business, what are you doing if you are starting to round out the top of the S? Are you looking at new markets, new products, a strategic partner, a new leader, technological innovation, or going to the web? We all know that change happens around us and we also need to change with the times!

This week when I was reading about all the trouble that Netflix is experiencing with their pricing, it got me thinking about all of their success and how they got their start.  Did you know that back in 2000, Netflix founder Reed Hastings went to Blockbuster and proposed running an online brand for them?  They laughed at him, so he went out on his own.  Now look at all that has transpired.  Blockbuster is going sneakers up, while Netflix has become the single largest source of web traffic in North America this year.

How the tables turn, wouldn’t you say?!  It’s fun to see the little guy with the big idea get brushed off by the big corporation, then go on to dominate or even wipe out that very corporation that blew him off.   Repeatedly in my career I’ve seen changes in technology push out the well established businesses that wouldn’t evolve with the new technology.  Consider for a moment the evolution of music: from the LP to the 8 Track Tape, then on to the cassette, the CD and now the mp3.  Take a look around, it’s everywhere.  When was the last time you had to use a pay phone?  How many books did you download on Amazon instead of buying from Borders?

So why is it that these well established businesses can’t (or won’t) grasp this and get on board with new age technology?  Technology is a game changer and they’re simply not playing?  Do they lack the competency, the strategy, are they blind, complacent or just plain unaware?  Do you think you’re immune to it?

Back in my investment days I thought about this often as businesses described by those same adjectives failed to progress into the new age. Surprisingly, however, it was also happening to businesses filled with smart, competent, strategic and visionary people. 

In the late 90’s Clayton Christensen published a a book called The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.  He talked about how even good business practices, like focusing on the best customers and investing in technology, can’t prevent new technology entrants from sneaking up on you.  The reason is that new technologies are rejected from your best customers, and if you’re listening to them, you reject them, too.

In addition, when you’re a big guy in the market, in order to grow your business you have to have things that are meaningful in real dollars.  If a new location can make you $20M in new revenue, it won’t make that big of a difference if you’re already doing $20B in annual revenue.

So how do we prevent it from happening to us?

To begin with, listening to your customer’s is good, but excessive customer focus distracts a company from looking at new markets and products/services of the future.  Unless becoming the next Blockbuster or Borders is the objective, paying attention to where all the attention is going is something to consider.

In my next blog I will get into more detail on the rules that Christensen discussed on how managers can know when to listen to customers and when to invest in what might be a low payoff technology now, but could potentially turn into your core business.