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How to become a $2 billion Company?

Ok…lets broaden this a little…how do you become a Star Company?

In short, you must exhibit two core attributes:

1. You are a leader in a market niche; and

2. Your market niche is growing fast

It is the combined effect that makes for a great opportunity. A star company’s products are preferred by the customers in its niche. Therefore, the business should be more profitable than others who are not the leader. You not only can command higher prices, but also operate at lower costs (due to the economies of scale).

A few key points:

  • There can only be ONE LEADER.
  • There must be a gap in the market (existing players overlooked, judged too small, or just not equipped)
  • There must be a market in the gap (large enough to support a star company opportunity)
  • To be really successful you should not just be number one in your niche, but the first in a fast-growth niche

Ok. So lets dig into this a little. What are the steps to being the first to lead in a fast-growth niche market?

Step 1: Clearly separate your new niche from everyone else

A new niche will be tiny relative to the main market. That’s ok. Ideally, you don’t want to be addressing the same market with the same problems, only with a slightly better solution. Imitation, even of a highly profitable and savvy player, won’t lead to a star business.

Examples might include servicing small-to-medium companies with an online Software-as-a-Service model versus servicing large enterprise with an on-premise solution (ok, I know…I’m a little biased with this example). It could also involve taking a technology from one market segment and applying it to another…like taking physical credit card fraud detection from HNC/Fair Isaac’s on-premise Falcon software product (with adaptive analytics, which provide dynamic, real-time self-calibration of fraud detection models) and applying a similar concept to rapidly detecting suspicious website activity (including hijack threats, automated programs for password guessing, mass registration of accounts to game incentive programs, scraping customer data off of the website to perpetrate identity theft, and other fraudulent activities).

Step 2: Operate in a high-growth niche

Ideally 20-30% CAGR (calculated annual growth rate). This means that you must estimate the future market growth in you niche. One caveat….that even more vital than the growth rate is how long it lasts.

Step 3: Target your customers

Your customer’s needs must be clearly different in profile from the customer needs in the main market. It’s possible that you can meet the same needs of the same customers serviced by the incumbents in the main market…but it’s more challenging (finding customers who drink both Dr. Pepper and Coke, for example). Also, the narrower the target customer focus, the easier it is to market the offering.

Step 4: Define the benefits of the new niche

What is your offering doing that is better for the target customers?

What do you offer that the main market is NOT offering?

What have you subtracted from the main market…or what are they offering that you do not?

You cannot create a new star company without creating a new category with a sharply different basket of benefits from the main market (this could even involve subtracting benefits in the main market that lowers costs).

Step 5: Ensure profitable variation

If you can’t operate in the new niche more profitably than the main market, then you don’t have a star. Period.

Step 6: Identify/name the niche category carefully

Make the new market category name easy to understand. You should define it…because you are the first, right?! Have a clear idea of who can become the niche competitors (as opposed to firms in the main market). Your profitability will be determined by whether you remain the niche leader and by how much. Ensure that your formula is difficult to copy. And as each day passes, aim to increase the depth and reach of your formula and its difference from potential rivals. A good niche name is short, easy to understand, unique, and will be used by all competitors to describe the niche.

Step 7: Name your brand such that it complements the niche category name

Short, memorable, easy to recognize.

Think “Energy Drink”…a niche category marketed to drinkers are between the ages of 13 and 35 years old, with males being approximately 65% of the market. The brand, ”Red Bull”….the most popular energy drink in the world, with 3 billion cans sold each year, equating to about 50% of the market.

Ways to Accelerate Growth

  1. Raise the target growth rate: Whatever your target is, increase it. A leadership position commands it…and you should never grow less fast than your category
  2. Expand geographically: Aim to conquer the world
  3. Innovate with new value: Provide your neglected group of customers with new deals that they love, year after year.
  4. Innovate with new products: Not a multitude of minor products…but rather one or two blockbusters (few, big, and core).
  5. Innovate with new channels: Larger volume using distribution networks
  6. Innovate with new customers: Once you reach critical mass, you can take your core products and adapt them to new customers who are most like your existing customers. Examples include gradually moving upmarket.
  7. Incremental acquisitions: Useful if they are small and very close to the existing core market. Example could involve acquiring distributors in several countries. However, sometimes it may be best to forget acquisitions and focus on innovation in the base business.
  8. Hire the absolute best: People who have worked in fast-growth markets, who match the venture’s DNA, who keep raising the bar for the company.
  9. Invest, invest, and invest: In people and marketing…and get to cash-flow breakeven as soon as possible. This probably means that you accept lower profits to build a dominant market position at first (as long as you remain cash-positive).

Key Metrics Along The Way?

  1. The new category doesn’t turn out to be sufficiently different from the main market
  2. You can’t build a group of enthusiastic customers who are identifiably different from the main market
  3. The company isn’t growing very fast (after the initial launch/burst, things don’t grow each month)
  4. It isn’t profitable…the projected break-even keeps receding

Lastly, stars are not just for entrepreneurs. Stars are for everyone. If you are not working in a star venture, look around and find one to work for. Ideally, one that’s just getting started, has just a handful of employees, but is expanding fast.

[Note: Bruce Henderson, founder of the Boston Consulting Group in 1963, defined the two attributes of a star company.]

Posted in Leadership.


One Response

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  1. Jim Dietz says

    This pretty much describes the business strategy for Teradata that is probably reaching the $2B mark this year. Know though that it took 25+ years, several distractions of mergers and spin outs, and a passionate workforce that kept the missionary zeal for the “niche market” of data warehousing.

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