Some thoughtful work by John Hagel in this article in which he suggests that economies are increasingly divided by two dynamics – those sectors that are scaling, and those that are shattering. As those dynamics become more radical, the pressures they exert on businesses are also becoming more extreme.
“If you’re in a part of the economy that’s fragmenting, growth will become increasingly challenging. Ultimately you’ll find yourself trapped in a spiral of shrinking share and eroding economics” he observes. “On the other hand, if you’re in a part of the economy that’s concentrating, growth can be amplified and sustained by riding the waves that are driving concentration.”
Hagel’s observations reinforce findings from McKinsey about large-company growth that I referenced here:
- Top-line growth is vital for survival. A company whose revenue increased more slowly than GDP was five times more likely to succumb to acquisition than a company that expanded more rapidly.
- Company growth is driven largely by market growth in the industry segments where it competes and by the revenues gained through mergers and acquisitions. Together, they account for nearly 80 percent of the growth differences among large companies.
- Market share fluctuations by contrast account for only around 20 percent of growth differences among large companies.
For brands that depend on scale, one dynamic matters. Winner-takes-all.
Scaled players will find themselves locked in competitions where the stakes are shifting more and more quickly towards winner-takes-all. The brands that will triumph in these circumstances are those who not only edge other big players out but who, at the same time, can draw into their eco-system more and more of the fragmented players at the other end of the marketplace spectrum.
That will happen because small players in these fragmenting sectors are looking to leverage the big brand’s presence and market strength. Their contributions add not only to the offerings of the large brands but also to its critical mass. They are in effect the new supply chain.
Radical market adjacency
In this interesting study of Amazon’s success formula, Haydn Shaughnessy talks through how companies like Amazon and Apple have harnessed critical shifts to make their size work to their greatest advantage. Big data has enabled these companies to pursue ‘radical adjacency’ – to use their knowledge and deep understanding of customer patterns and priorities to pursue opportunities in what were once seen as separated and divergent markets. By encouraging small players to add their offerings to the mix they have been able to deliver on that adjacency model and retain ownership of the consumer.
In so doing, they have created integrated and continually expanding super-platforms that now vie with each other for market domination. The ecosystem of participants that feeds that growth is also a powerful advocacy community because they see it as in their best interests to promote the super-platform. They have been enticed by the huge potential for global market access, fame and unprecedented exposure.
As this race for lifestyle convergence accelerates, cloud computing has also redefined the whole infrastructure of delivery, enabling super-platforms to be more agile and responsive. According to Shaughnessy, “Whereas many other companies are still stuck in an innovation mindset – how can I improve my product or invent a new one – Apple and Amazon are proliferating options and giving themselves the opportunity to respond to fluctuating market conditions.”
This new super-platform model re-interprets the portfolio strategy, integrating business rules, participants and devices in ways that redefine how markets work and how people get to market. Success will be decided not just by how big companies proliferate and link their total offering, but when, at what price and to what effect for the consumer.
Is that where it ends? I suspect not. News from another major portfolio player, P&G, this week points to how this accumulation process might evolve. According to P&G Chairman-CEO A.G. Lafley, the company plans to divest, discontinue or merge more than half of its brands globally as it restructures to focus on its top 70 to 80 brands. Those keeper brands account for 90% of company sales and over 95% of profit over the past three years, while the brands that will be shed have seen sales and profits decline and have margins that are less than half the company average.
Some interesting implications can be read into this development if one extrapolates the idea out to the super-platforms. It suggests, for example, that the hunt for critical mass in high growth markets could, in time, give way to a search for critical focus as pressure mounts to increase profitability. In complete contradiction to that desire, Amazon’s push to flatten profits might suggest a quickening of commodity pricing across the offerings of super-platforms in the pursuit of greater volumes. Together those trends suggest a looming rock-and-a-hard-place situation for brands in fragmenting sectors looking to grow via these broader ecosystems.
What does this mean for small brands?
Whilst I agree wholeheartedly with his reading of the competitive dynamics facing concentrating parts of the economy, Hagel is more optimistic than I am about the future of small brands as they pin their hopes on big platforms. They will continue to proliferate and amplify their value, albeit within limits, he says, providing they focus their capabilities to a point of singularity and are prepared to continue adapting. My view is that will not be enough. Rather these contributor brands will have to balance what others see as incessant efficiency demands for below-average pricing with the need to achieve high volumes and margins in order to avoid being cast as under-performers and relegated. (Remembering of course that relegation can be just a tweak of the algorithm or the removal of a “Buy” button away.)
Key message for small brands looking to tie themselves to big engines: all that beckons is not good for you – because, as Michael Hyatt rightly observed this week in reference to a statement by John McDermott, “Owners make rules, not tenants.” My advice if you’re a small brand with a business strategy focused on a super-platform? Have a plan to grow with them. Have a plan to grow without them. And keep an open mind.