It has become bromidic to observe that we’ve moved from a linear growth market, ever up and to the right, to one of flat demand (did someone say, “growth is dead?”). We are, in short, in a battle for market share.
Welcome to the rest of the economy.
That’s the bad news and the good news. It turns out the “rest of the economy” actually knows quite a bit about surviving and even thriving in a battle-for-market-share environment. Just think about it: How fast does demand for food, personal care products, retail banking, utilities, or transportation grow? Basically with growth in (a) GDP and (b) population. In the very low single-digits, in other words.
But just by virtue of my listing those sectors, you’ve already begun to realize, and imagine, how particular companies in those areas can work on out-growing their sector. Food? Be Whole Foods. Personal care? Be Gillette. Retail banking?
Be Countrywide or Washington Mutual. (Actually this is one at the bullseye center of the economy where you better tread ever so gingerly.) But you get the idea.
That’s why a recent article in Strategy + Business is useful. (S+B is published by the former Booz & Co. consulting firm, which had to have been one of the most unfortunate names known to man until they were acquired by PwC and renamed “Strategy &,” which confirms that you should never jump to conclusions about the worst possible name.) The article is Growing When Your Industry Doesn’t, and here’s how it starts:
If we had a nickel for every executive who appeared on CNBC and blamed his or her company’s inability to grow on a weakness in the market, we’d be richer than Croesus. Of course, there’s a reason this explanation for uninspiring performance is so common: It’s readily available. At any given time, roughly half of all industries are growing below the level of GDP. And it’s only natural to blame something external for one’s problems.
The trouble is, a weak market isn’t a valid excuse. Plenty of companies that achieve above-average shareholder returns compete in average or below-average industries.
In other words, it’s up to you as leaders of your firm to figure out a way to achieve superior performance in industries “that aren’t doing anything special—that are just bumping along with the economy,” as they put it.
It turns out superior performance not only can but has been achieved regularly in every industry—so much so that the success of individual companies turns out to have essentially zero correlation with what industry they’re in:
The authors call this “Industry Irrelevance,” and here’s how they illustrate it:
Looking at this it’s hard to discern all but the most imaginary pattern between hot and cold industries and hot and cold performance of individual firms. Essentially I summarize it thus:
- Companies in industries growing below the global GDP growth rate represent 33% of each of the four quartiles of total shareholder returns, plus or minus 3%. And
- Companies in industries growing above the global GDP growth rate represent 67% of each of the four quartiles of total shareholder returns, plus or minus 3%.
I dare you to tell the difference between these sectors if I removed the labels from the chart.
So what do these outperforming companies in slow-growth industries actually do differently? One possibility is to capture a supply-side advantage and attempt to corral it largely for themselves. Supply, for law firms, is primarily talent, and the huge numbers of lawyers and their unprecedented degree of mobility means this alternative is essentially foreclosed to us.
The other option is to exploit some sort of demand-side advantage by capturing demand that was previously inaccessible or nonexistent, usually as the result of regulatory or technological changes. Here there may be some opportunities for us. Serving hitherto unserved demand can—and almost invariably will—start on a small scale, but if it’s carefully tended, a virtuous cycle may set in whereby the leader is able to out-invest its competitors, increasing its profitability, enabling more investment to improve profitability further, and so on. Here’s how the authors put it:
Companies in low-growth industries can often turn internal operations and process innovations into sources of competitive advantage, continually improving in those areas and upping the ante for rivals.
They give the examples of Johnson Control’s battery business and of Polaris Industry’s sports vehicle business. Both are inherently low-growth markets. Johnson Controls’ efforts were sparked by a crisis when its largest battery customer, Sears, cut it off in the early 1990′s and the division leaders realized they had to restructure the business from the ground up, “stripping out operational complexity and attacking inefficiencies of every type.” [Think there might be a few opportunities there in your law firm?—Bruce]
Soon enough, the Johnson Controls battery business was the industry front-runner with a 25% cost advantage over rivals, which enabled it to offer better prices and warranties than rivals. Pretax profit has grown 17% per year for the past decade, pretty spiffy for a slow growth industry.
As for Polaris, its new CEO in 2008 drastically increased its spending on its engineering staff while cutting all other operational costs and, within a few years, had one of the lowest cost bases in the industry and a wide lineup of sports vehicles at different price points with different seating capacities different configurations, running on different power systems including diesel and electric. Its revenue growth has been 27%/year since 2008 compared with 8% for its rivals (including Honda and Kawasaki, not exactly thought of as dysfunctional or inept organizations).
Our authors conclude thus:
What does all this mean, if you’re a CEO in a slow-growing industry? It means you shouldn’t go looking for a “better” industry, one that’s growing more rapidly than yours. Embrace your own segment. Counterintuitive as it sounds, the opportunity to get great returns for shareholders is probably better where you are than in a market that’s growing by double digits. You can make those better returns come to you by figuring out where you have an advantage, or might gain one, in terms of cost, service, selection, or a disruptive new product. Make an increase in market share your main measure of winning. And finally, once you’ve got the advantage, keep on doing what you need to do to extend it. The nature of any market is that the opportunity is finite. It’s you or them.
Bringing this back to Law Land:
– Our opportunities on the supply side to do something no other firm can do are severely constrained, almost nonexistent.
– On the demand side, by contrast, we have a wide open field with a wealth of unexploited opportunities to:
- optimize our business processes;
- get far smarter, more intelligent, more informed, and more data-driven about pricing;
- eliminate waste, duplication, inefficiency, and makework;
- drive work to the least expensive effective level at which it can be done; and last and perhaps most importantly
- engage in continuous improvement, constantly learning from our mistakes.
So what’s stopping you?
Adam Smith, Esq. provides high-end consulting services to the legal profession, you can read the blog here