X Marks the Scaling Up Spot - 7 Part Strategy (Part 3)
In my last post, I introduced you to some of the work Verne Harnish has done in analyzing thousands of companies that have successfully mastered scaling up. If you haven't yet read that post, please do before reading this post -- you'll need the context to understand what we discuss here.
We looked at what Harnish calls the Seven Strata of Strategy for growing (read: scaling) a business. You can review Mr. Harnish's Seven Strata here. I'll start today's discussion by listing those Seven Strata again:
- Choose the words you want to own in your marketplace
- Offer a unique brand promise
- Make it hurt to break your promise
- Create a one-PHRASE strategy
- Support your one-PHRASE strategy with differentiating actions
- Establish your “X Factor”
- Measure your profit per X
The first factor is what you are or want to be known for in the world, offered up in a few key descriptive words that define your brand. The second requires you to make a promise around the brand -- what you deliver to customers that is unique and special. The third factors ask you to put something at stake to defend your brand promise so that nobody in the company wants to break it.
These first three factors are the essence of creating a value-driven brand promise that people can easily identify. Some iconic brands translate these three factors into their marketing/branding in the form of those pithy statements that stick in your mind -- that's your goal. Here are some examples:
Avis -- "We Try Harder"
BMW -- "The Ultimate Driving Machine"
Apple -- "Think Different"
But these are not simply marketing messages, they are intended to embody the full brand promise in a way that all stakeholders (not just customers) take ownership of. Kevin Leifer, writing for StellaService, a consultancy that helps companies develop their strategic marketing, defines a brand promise as "reflect[ing] careful consideration, courage, and creativity. The bolder and clearer the better. The best brand promises go big, challenge the status quo, and connect with consumers on a deep emotional level."
Ahh, there's the ticket -- your brand promise needs to connect on a deep emotional level. But I'd argue that it is not just about connecting with customers at that level, but with all stakeholders, your entire organization. That is the external mindset necessary to scale up.
The next two factors from the Seven Strata force you to reduce your brand promise into a one-phrase strategy that defines the actions your company takes to embody its' brand promise. The goal here is to set the internal mindset of your organization. It's not a marketing statement or a mission statement. It is a word or short phrase that you build into the mindset of management, employees, board. Harnish uses the example of "Wheels Up" for Southwest Airlines. It evokes a spirit, a commitment, a way of doing one's job that every stakeholder works to embody every day. Another example is "Semper Fi" which embodies the spirit and commitment of every U.S. Marine.
Once you have that internal mindset you define how you embody it. What do you do differently that your entire organization stands behind, thinks about when they do their daily work? This is critical to communicate to investors, because unless you're creating some product or service that is entirely new -- a blue ocean with no competition in sight -- then your value proposition has to be focused on how you do what you do better and different than others in your space. Remember, this is not a marketing strategy. This is an internal mindset that defines how your organization does what you do differently from anyone else.
So these first five Strata define/embody the internal and external mindsets your organization needs if you hope to truly scale-up. That leaves the final two factors -- establishing your X-factor, then measuring it. If you don't have an X-factor, you're probably not a candidate for a massive scale-up (or even a modest one) because the X-factor is what establishes a sustainable competitive advantage. If you are starting the only lemonade stand in a five-mile radius, that may occur to you as a sustainable competitive advantage. But it isn't. Anyone with a few dollars can observe that you seem to be selling a lot of lemonade, then simply start their own stand somewhere in the neighborhood. Or worse, they have more than a few bucks so they open five lemonade stands. Or even worse, they have more than a few bucks, open those five competing lemonade stands, then establish home delivery, or partner with the local pizza place to serve slices with their lemonade.
Get the point?
A competitive advantage worthy of scaling-up requires that your X factor is real, defensible, sustainable. What you do, plus the way you do it differently, has to be difficult for someone else to copy. Investors know that even the most innovative product or service can sometimes be fairly easy to parrot. They know that if you establish a beachhead even in a new market, someone else with more resources can often beat you at your own game. So, in many ways, these last two factors are the most important of the Seven Strata if you want to scale-up. Because without a great X factor, along with a way to measure success, you simply won't be able to scale-up no matter how great your brand promise is or how well your organization embodies it.
Some of the most important work we do in the Entrepreneur$ Bootcamp is identifying your company's X-factor, assessing its' sustainability (defensibility) then honing it until it is truly remarkable. Yes, sometimes an X-factor simply won't measure up under the intensive scrutiny of seasoned investors like George Kenney and I. That's when a pivot may be in order, or a different business strategy, or even a different product or service. Entire books have been written on a sustainable competitive advantage. I can't summarize all of that thinking here. But I can tell you that investors have a sense for whether you have that truly special X-factor or not. It reminds me of the famous comment by Supreme Court Justice Potter Stewart in an obscenity case. "I shall not today attempt to [define obscenity]," he wrote, "but I know it when I see it." That's how seasoned investors sense whether you've got a business that can truly scale-up or not.
Verne Harnish believes that an X-factor must define a competitive advantage of at least 10 times that of the competition. Wow. That's quite a hurdle. But think back to my recent post about scaling-up, recall that only about 1 in 8,000 start-ups will ever do it on a massive scale. There's no shame in building a business that won't ever massively scale up. That does not mean it isn't a great business or worthy of significant investment. So, my advice is to truly delve into whether your business is one that should pitch the notion of scaling-up to investors. Scaling-up is not a requirement to make you worthy of funding. You have many other options as I wrote about in the post linked above in this paragraph. Actually, the worst thing you can do is pitch investors on your scaling-up strategy if your X-factor simply isn't that strong.
But let's say your X factor is truly amazing. What you do as well as how you do it differently is remarkable; you have the look and feel of a company that can massively scale. Great. A lot of investors will probably be really interested in what you've got.
But there's one last thing . . .
Mr. Harnish calls it your "Big Hairy Audacious Goal" or BHAG for short. It has to do with how you define success in terms of a metric -- Profit per X. In other words, if your X factor is truly special, how does it scale? How do you ensure profits (hopefully increasing profits) as you execute on your X factor by growing the company? Your BHAG is the goal. Your Profit per X is the metric you use to reach that goal. If you have each of the other Seven Strata in place, this last factor, this X-factor metric is what you'll share with investors to show that you've truly thought through what it will take to scale. To me, it's the defining factor about scalability, because you can tell me everything else about the Seven Strata, but if you can't tell me how you'll measure success, I'll still be a "no."
In my next post, I'll develop this notion of the X factor with the BHAG to give you a roadmap for a critical assessment of how to develop an argument for investors that your business can scale profitably.
Key Takeaways: Developing your internal and external mindsets is an important part of scaling-up. If your external mindset is not clearly communicated in a memorable way that reaches customers at the emotional level or if your internal mindset does not consistently rally your entire organization to defend your brand promises every day, then scaling-up simply won't happen. But even if you master the mindsets for scaling up, you'll still need an X factor -- a competitive advantage that is sustainable against other market players. You'll also need to communicate that X factor to investors in a way that shows you have thought through the process of setting those "big hairy audacious goals" that push your organization daily towards massive growth. There's nothing wrong with determining that your business won't scale up massively. You may still have a business very worthy of funding. Be realistic. Be truthful with investors. They can sense whether your business will or won't scale, even if they couldn't tell you why at the moment.