Second in a series with Victor Cheng, a San Francisco based business coach, and author of the Recession Proof Business.

Tom:
In an attempt to scratch out precious points in market share, what changes should companies design into their operating strategies?

Victor:
One pattern I’ve seen in the company’s I’ve worked with is that often the easiest market share gains are made in secondary market segments. Assume a business consists of Product lines A, B, and C or customer segments A, B, or C, where A is the largest revenue producing segment, and C is the smallest one.

In a number of cases, I’ve found the easiest way to grow a business and expand sure is in segment C. This is not to say that one should always look at the smallest segment for the most growth. However, I’ve seen this pattern of the “neglected”, smaller segment can sometimes have a counter-cyclical demand and less competitive aspect to it.

So, don’t just look at the biggest parts of your business. Examine the smaller slices too.

Finally, from an operations standpoint, the big thematic change that needs to be made is the willingness to experiment with growth options. If you’re not deliberately willing to seek out and tolerate many low-risk “failures”, it’s highly unlikely you’ll stumble upon the pockets of demand that always emerge in major structural shifts in demand such as the one we’re experiencing now.

You can download a free e-copy of Victor’s book, The Recession-Proof Business. Our conversation continues tomorrow.

I spent some time with Victor Cheng, a San Francisco based business coach, and author of the Recession Proof Business: Lessons from the Greatest Recession Success Stories of All Time. It was an interesting conversation.

Tom:
As we make this slow turn from recession to recovery, what are the biggest mistakes companies make attempting to re-engage their old markets, the ones, by necessity, they have contracted away from?

Victor:
This big mistake is assuming that what used to work pre-recession will work post-recession. The magnitude, severity, and duration of this recession has been significant. It’s my view that the contraction was not merely a correction to an otherwise robust growth trajectory, but rather a structural shift in demand.

The problem with structural shifts in demand is they tend to have far reaching cascade effects that are difficult to spot in advance, and only obvious in hindsight. If a company’s clients have gone away, it’s not a given they may come back. If one product line is no longer relevant in this new economy, it’s quite possible a different product line is now more relevant.

One has to be looking qualitatively and quantitatively for these shifts. The early “clues” that reveal these trends are often either passing remarks clients make about their situation, that foreshadow shifts in spending or unusual shifts in revenue mix across products, services, or customer segments.

It is difficult to reliably extrapolate these small early signs to find the longer term trend, but those who are willing to tolerate getting it wrong sometimes, will have a major first mover advantage to capitalizing on how a re-structured customer demand is expressing itself in the new economy.

You can download a free e-copy of Victor’s book, The Recession-Proof Business. Our conversation continues tomorrow.

Lydia remembered a year ago. “We brought in our Balance Sheets,” she described. “I used to spend time poring over my Income Statement, so understanding the Balance Sheet, I mean, really paying attention to the Balance Sheet, was new to me.”

“Why did we do that?” I asked.

“You said that we could still make a profit and go out of business. That, making a profit was important, but elements on the Balance Sheet could be fatal.”

“So, what did we focus on?”

“Liquidity. Liquidity. Liquidity,” Lydia recited. “Cash, cash flow, accounts receivable, credit.”

“And why did we start working on this two years ago?” I reminded her.

“You said if we got to where we are, now, and needed a Line of Credit, the bank would not give us one. Because banks never give you credit when you need it, they only give you credit when you don’t need it.”

“How will you decide?” I asked. “How will you select the person who has to go?”

Lydia shook her head. “I need them all. I put a hiring freeze in January, and we’ve had some normal attrition. But at this point, if another has to go, we lose capacity. If things continue, we lose functionality.”

“How will you decide?” I repeated. “How will you continue? And here is a challenge. How will you work with a smaller team and not lose capacity?”

Lydia smiled, “Have my cake and eat it, too?”

“Face it, Lydia. This is going to be a long contraction in the business landscape. We have been preparing for two years, and now, it’s here,” I reminded her.

“You are right. This is not a bump in the road,” she admitted. “I know we have to be prepared for an extended downturn.”

“What did we work on first?” I asked.

Thanks to all those who posted comments last Friday in response to our post about forecasting. As promised, I will be sending out a copy of Real World Intelligence to those who participated.
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“We have an idea for a new product line,” Alicia sounded off. “It’s a logical extension of our core product. We all think it will be a winner.”

“How are you going to fund the startup and who are you going to assign to this new project?” I asked.

“Well, that’s a problem. We are currently under a hiring freeze and while we have a budget for Development, actually ramping into production is going to pinch,” she grimaced.

“What are you going to let go of?”

Alicia was a bit surprised. “We hadn’t really discussed shutting anything down.”

“Alicia, the biggest mistake that young companies make is that everything looks like an opportunity. Before long, all their resources are spread thin and their product portfolio is a hodgepodge. They can’t figure out if they are in the shoe business or the construction business.

“To be truly successful, the company has to decide on its focus, and create a discipline around that focus. Especially in times where resources are tight, we have to make sure we have enough staying power. This requires an approach of systematic abandonment. As you adapt to the market, it is important to cut off those projects that are no longer returning value.” -TF

“I try not to think about them,” Gene continued. “We have fifty trucks, they have six trucks in this market. Worse part, they are taking work for way less than us. Sometimes, I think they aren’t here to make money. I think they are here just to make us look like bad guys.”

“So, they are taking work at a lower price to the customer?” I asked.

“Yeah, sometimes, it’s lower than what it costs me. They are buying the work.”

“Let’s look at a couple of things, Gene. First, they don’t have an office over here?”

“No.”

“They don’t have an office over here, so they are using their dispatch people in their home office, using Google maps or something. They are billing people using either credit cards or invoicing from their home office, sending the invoice by fax, email or snail mail.

“They aren’t competing in the Yellow Pages, only on the internet, so their hard advertising costs are less. Gene, I don’t think they are working on a lower margin than you. I think they have figured out a lower cost structure. In fact, even with a lower price to the customer, they may be making more money than you.” -TF

“So, it’s important to be Number One or Number Two in our market. I get that. Third or Fourth place just creates a target. Can we use geography to narrow our market definition? I mean, as a local supplier, we have an advantage. We can honestly say that we are Number One in our local market,” Gene explained.

“Yes, if your market is truly a local market. But, Gene, I gotta tell you, I have seen some trucks rolling around town from a new competitor I haven’t seen before,” I replied.

“Yeah, I know who they are. Their headquarters are on the other side of the state. They don’t do any local advertising. I think they are depending on the internet to get their leads. They show up pretty heavy in search engines. But, still, they’re from out of town.”

“Gene, I visited their yard. They don’t have an office, but they have six trucks in your local market.” -TF

“Yes, we have a couple of competitors, big competitors, but they pretty much leave us alone. We’re much too small in the market to be more than a thorn in their side,” Gene explained.

“So, as the overall market contracts and the Top Competitors’ revenues get pinched, where do you think they will go, to hold on to market share,” I asked.

“Well, we always hope they will fight with each other,” Gene continued.

“Why would the Top Competitor in the market fight with Number Two when they can just come in and take out Number Four or Number Five?”

Gene sat up in his chair, suddenly uncomfortable. “Well, Number Four would be us. And they have always left us alone. After all, we just pick up the crumbs that fall off of their cake. Why would the Top Dog want to come after us?”

“Why would the Top Competitor want to spend a lot of money, energy and resources fighting with Number Two, when they can take your customers without a whimper?” I asked again.

I could see Gene’s eyes tracing this chess game in his mind. “Look, Gene,” I continued. “In any market, when times are good, it’s easy to be Number Four, living off the crumbs. But, when the market gets tight, the only place to be is Number One or Number Two. Number Three and Number Four will have their heads handed to them.” -TF