How to keep the business alive: 4 hidden traps to escape

Originally published in Економічна Правда

Growth is never too easy, especially in times of fast changes. Even successful companies face sudden and unpredictable difficulties by achieving it. Time-tested business models are losing their competitive advantages. Disruptive technologies seem to appear out of nowhere. Those companies that are so good at what has made them successful fall a victim to their own success. Why is this happening and how not to get into this trap?

1. Resources of the company depend on expectations of investors and current customers

The owners and shareholders of business usually set the standard expected return and payback period of the company, i.e. specify the way the company uses its resources, put the main filter in choosing the investment strategy and attractive projects. This is the way an investment culture is formed, which is also spread to lower levels. Even if the investment culture is not formalized, the employees of the company being responsible for searching, selection and implementation of projects that create new products and promising areas, always rely on existing decision-making criteria.

It is natural that people avoid grey zones, so employees prefer to choose those projects that they are familiar with, can clearly calculate the figures, predict outcomes, assess the risks and provide the information to management. These are the decisions that employees are actually ready to take the responsibility for, the reason is that their reward and careers actually depend on the final result of the suggested projects. That is why extraordinary ideas and innovative projects are usually rejected by mid-ranking executives and their management.

On the other hand, the market can be lost by investing to the products that cover the needs of the current customers. However, it is not save to follow the regular clients, as they usually do not think in terms of disruptive technologies (mistake made by Blackberry, Nokia, Kodak, Xerox), they often do not know what they want, and, which is the most important, companies do not consider the needs of not-yet-customers, i.e. those potential customers who do not use their products or services yet due to some restrictions (success of Airbnb, Uber). Accordingly, if the strategy of the company is formed solely taking into account the current customers requirements, it can become a certain blocker for development of other innovative products, which could expand the market share of the company or even open new high-income opportunities.

2. Trying to analyze the non-existing markets

What do we usually think about by analyzing the investment projects? We think about market, customers, quantity of customers, and, first of all, about everything which relates the sale of the produced products. We try to predict the precise market models and strategies. However, when we talk about originally innovative products that create the new markets (Skype), solve the problems that no one ever tried to solve (penicillin), or technologies that create new possibilities (Internet, GPS), the building a model of market and sales behavior becomes so much abstract that it instinctively takes us far away from making investment decisions in favor of such projects. After all, the more abstractive the project is, the more uncontrolled and risky we feel, which makes sense.   

The non-existing markets cannot be actually analyzed. This is the case when the non-traditional logic of assessing the investment attractiveness and risks of projects is used, e.i. testing of hypotheses as well as iterative approach to their implementation, which minimizes the capital at risk and reduces the specific uncertainties at assumptions being the background for the project at each stage. That is, instead of making calculations of how deep the innovative product market can be or instead of building a detailed financial model of cash flow, we should focus on quality analysis of key assumptions at each stage of the project (idea - prototype - MVP - market entry - scaling) as well as consider the possibility to test it as soon as possible.

3. Small markets cannot provide profitable growth for a large company

The negative impact of business scaling is that it is much easier for small companies to take advantages of growth opportunities at small markets. That is, the smaller the company, the less it is limited by the size of potential markets while choosing the projects to invest, as well as the more flexible it is by changing the existing business model.

 In other words, investment projects that have, at a first glance, low sales are not of much interest for large companies, as the relative share of their profitability in the business is very small, while require the same attention and time for implementation as the big projects do. That is why there is a paradox of disruptive and breakthrough innovations - projects that change the rules of the game and create new markets are mostly born in small teams and are rejected by large companies.

4. Continuous technological improvement of the product

This trap relates to the continuous development of technology and non-stop improvements of the existing products at the market, which leads to changing the consumers’ demands. Accordingly, the consumers' perceptions of quality standards are changing, and companies are forced to improve their products to retain customers. This circle is locked by the wish of companies to beat the market and offer something even more technological, which results in constant changing of quality standards towards the complexity of products.

But the trap is that the technology may not meet the market requirements. That is, users are not able to keep up with the progress and can not master all technological innovations. It results in so called overquality, the accumulation of which becomes at some point so critical that customers better use more convenient and simple products.

The paradox of overquality eventually leads to change of quality criteria by consumers, and instead of high technological characteristics and functionality of the product, they prefer reliability, affordability, convenience and price. This is how mono-products appear (Trello, Monobank), that significantly change the structure of the market.

Dmytro Shestakov