One of the biggest challenges facing business strategists is how to grow profitably. Should one grow by stealing market share from weaker competitors? By edging into adjacent markets or incrementally improving existing products and technology? Through acquisition, bolting on new organizations to get big fast? By placing a big bet on some new market or technology “white space?” Or is there another, better way to grow without risking stagnation, or overpaying for an acquisition, or swinging for the fence and striking out dramatically?
One alternative that we’ve found works well is an approach we call “lily pad strategy.” It combines the big vision of the “swing for the fence” approach with the incrementalism and relatively lower risk of edge-out strategies.
To understand how and why it works, though, it’s worth first exploring the workings and pitfalls of some conventional growth strategies:
- “Duking it out” to grow market share: The most bloody-fisted of growth strategies, this tactic is also pretty reliable provided one has sufficient zeal for customer intimacy, understanding of competitor capabilities, and the patience and funds to hang in while the hand-to-hand combat takes place. The battlefield here is generally a combination of new offerings, pricing or bundling strategies, exploitation of major competitive fall-downs in services, or some combination thereof. For example, in the early 1980s, GE enjoyed a dominant position in the U.S. market for refrigerator compressors, but had grown complacent and allowed costs and quality problems to blossom; Mitsubishi, watching carefully, took them on with higher-quality, lower-cost pumps and halved GE’s market share over the next 10 years.
- Expand into market, product, or value chain adjacencies: This approach is generally seen as the most practical and low-risk option. Here, a company looks at markets that are “adjacent” to those it currently serves and attempts to insert itself where profits are higher or customer needs remain unmet, using the credibility and access afforded by its core market. In value-chain migration, a variation on the adjacency strategy, a supplier of components such as integrated circuits might approach its customers with the offer to sell subsystems containing their proprietary ICs, thereby moving from component supplier to subsystems supplier. Corning’s move from substrate panels for LCD displays into Gorilla Glass® cover screens for handheld phones is an excellent adjacency success story.
- Acquire the growth: In many instances, companies buy their way into bigness. TransDigm Group, for example, has completed roughly 30 deals since going public in 2006, growing from CEO Nick Howley’s initial $50 million investment into a company with $11.6 billion market cap. Johnson and Johnson is another adept acquirer, making dozens of early-stage investments in small companies with the option to acquire them down the road, which they often do. But for smaller or less experienced players, growth through acquisition can be perilous. In many cases, companies pay way too much, eliminating any possibility of ever getting their money’s worth.
- “Swing for the fences” with big innovations: In the early 1980s, Ford was in a terrible spot. Profits were non-existent, and Honda and Toyota were stealing share aggressively. Ford’s products were, to be fair, mediocre – remember the Granada? Ford’s CEO realized that desperate measures were needed, went to the head of R&D, and said, in essence: “Here’s the company’s last $4B. Make me a winning car.” The R&D team benchmarked every bolt and screw of competing Japanese vehicles and conceived a new car, the Taurus. Over the next 10 years, the Taurus saved Ford, dramatically increasing sales in the passenger car category and generating nearly all its profits. But for every success story like Ford, there are dozens of swing-for-the-fence innovations that failed: RJR’s smokeless cigarette; Apple’s Newton; “New” Coke.
Each of these strategies has its strengths, but each too has significant drawbacks: stealing share and growth through adjacencies are reliable tactics but rarely produce truly exciting results; growth through acquisition and white-space innovation, on the other hand, can lead to big leaps in growth, but they’re risky. So, where do you turn if you want to grow, but none of these approaches really seems to make sense?
One of the biggest challenges facing business strategists is how to grow profitably.
Lily pad strategy is an answer to this challenge. In the lily pad model, a company takes a series of planned moves from one business position to another, successively reducing the commercial and technical risk of getting to the “next big thing.” Individual steps – lily pads – are designed to be places of relative safety with opportunities for rich learning and sometimes even self-funding. In the course of progressing from lily pad to lily pad, the company develops market knowledge and competitive advantage without ever having to face the exposure involved in swinging directly for the fences, and stands a much greater chance of reaching their end goal unscathed.
The lily pad process has four fundamental steps:
- Identify the ultimate objective. More than 30 years ago in his classic Innovation and Entrepreneurship, Peter Drucker discussed several types of market events that tend to signify major opportunities for innovation and growth: discontinuous changes in context (such as the move to 24/7 retailing), major process or product “hitches” (such as the cover scratching experienced by early smart phone users), demographic shifts (such as the aging of the US population), technological changes, changes in fashion or attitudes, and what he termed “unexpected good news.” While the specific techniques used to spot major growth realms aren’t within the scope of this article, suffice to say that when these ideas are combined with a rich sense of a company’s deepest capabilities, they can be very effective in finding big, exciting, and valuable – but sometimes daunting – opportunities for growth.
- Identify and catalog all the knowable commercial and technical risks. Obviously, it is always hard to know what you don’t know. In most cases, however, there are clearly major risks associated with the “big thing.” There may be no experience with potential customers; in other cases, the business model is completely foreign. For example, we recently identified an interesting technology opportunity that required strong technical sales capability in order to succeed. Today, our client has virtually none. Clearly, directly pursuing this opportunity without building a credible capability in technical sales would be deadly, but fortunately, the ultimate opportunity is 7-10 years away.
- Design a series of lily pad “hops.” These hops may involve internal capability building, partnering, or even modest acquisitions, but the goal is meaningful reduction of commercial and technical risk, while still aiming for the ultimate objective. For example, one way for the company above to reduce its commercial risk would be to establish a technical sales support group for one of its current businesses. The purpose of this lily pad would be to learn how to staff, run, measure, and grow a technical sales organization but within the environment – and protection – of an existing business.
- Take the first hop. In most cases, this will be a small, low-risk step. If you have been thoughtful in creating it, it will be low-cost, and possibly profitable (one of our colleagues refers to this first move as “holding up a gas station on your way to rob the bank”). After sitting on it for a while, you will have significantly reduced one of your major commercial or technical risks and be ready to move on. In some cases, timing will demand that you follow more than one path, so it makes sense to plot a series of parallel and interlinked lily pads. For example, if one of your lily pads involves the acquisition of a company and that company is available now, not later, you may need to do the acquisition in parallel with other risk reduction steps.
One excellent example of lily pad strategy in action is Corning Incorporated and its now-hugely-profitable LCD business. When LCD devices – calculators, watches, etc. – first became available in the 1970s, early marketing work showed that TVs and CRTs could one day become LCD flat panels, and that Corning might well provide a critical enabling technology. So, Corning began the 20-year wait for “one day” to arrive.
They were not idle in the interim, however; they sold precision flat glass for every conceivable kind of LCD device, a whole host of applications that had nothing to do with TV or laptops. The lily pads on which they alighted sustained technology development, provided time for Corning to understand the market, and generated some much-needed cash to sustain the business. Today, Corning’s LCD glass business generates billions of dollars in free cash flow. Had Corning directly pursued LCD TV from the beginning, the product would have been dead 15 years ago, but by adopting a lily pad strategy, their product endured 20 years of up-and-down investment and is now wildly successful.
In the course of progressing from the lily pad to lily pad, the company develops market knowledge and competitive advantage without ever having to face the exposure involved in swinging directly for the fences, and stands a much greater chance of reaching their end goal unscathed.
So, the idea seems simple. Is it too simple? Can it actually work? At its most fundamental level, the lily pad strategy is the essence of entrepreneurial strategy: Establish a vision, plot a path of relatively low-risk, low-investment, high-learning steps. If things do not go as well as expected, rest on the current lily pad and replot your course. If things go badly, retreat to the previous lily pad. If things go unexpectedly well, accelerate your hopping or jump over some lily pads to achieve the vision even more quickly. The trick is to have a clear vision of the ultimate prize and a sense of the key risks; be creative about lily pads that can advance your learning while minimizing the investment and effort required; remain flexible and willing to adapt your plan as reality unfolds.