Your Executive Newsletter with Sun Wu.
Executives’ Growth Checklist, Apple’s Bulletproof Value Network, and FedEx Dumps Amazon
Friday, June 14th, 2019
For most business organizations, growth occupies a good chunk of their agenda, driving much of what they do every day and what they plan for the future. Yes, there are some companies that intentionally choose to stay small, but the norm is that you must grow in order to maximize value for your shareholders.

You know, the old "grow big or go home" idea.

My recommendation has always been to measure growth efforts at the "earnings" level, rather than just "revenues" as most analysts and business writers do. This is something that we intuitively know and do in our companies, but for some reason, revenue has become the universal standard to measure growth.

Focusing on revenues when you plan your growth options, however, ignores important aspects about how organizations work.

To start, growing your top line doesn’t always mean that you’re growing your bottom line, because some revenues cost more than others.

Second, a focus on revenues neglects the importance of cost optimizations as a potential source of growth.

For me the rule is deceptively simple: if you measure your management targets in profits, then your efforts (to meet your targets) should also be measured by the same metrics, profits.

Makes sense, right?

When it comes to growth, you only have a few options, and we have outlined those in detail in the book and on our website. Those options are:

1. Market Penetration: That means selling more of your existing products to your existing customers or targeting new customer "segments" within the markets you already operate.

2. Market Development: Selling your existing products to new markets in the countries where you operate, or to new markets internationally.

3. Product Improvements: That is, improving your products serving existing customers. Why is this a source of growth? .. because you need to minimize customer churn, otherwise your growth efforts would have to make up for the erosion of your core business.

4. Product Development: Creating new products and services to target existing customers or to enter new markets.

5. Optimization of Revenues: Increasing revenues through alternative pricing options or new business models for your existing products.

6. Optimization of Costs: Reducing costs through the optimization of your business’s operations and eliminating inefficient uses of cash.

7. Inorganic Growth: Leveraging other companies’ assets through synergistic mergers, acquisitions or strategic alliances.

Those options have all been included in the strategy mindmap, which can be downloaded from our website.

Your job is exploring how this list relates to YOUR organization and make decisions about which of these options would deliver the most growth to your bottom line (aka "net income").

To see how this works, let’s take a company we all know: Apple, and see how this list can help identify growth opportunities for them.

Apple’s Growth Checklist
Let’s start with market penetration: can Apple sell more products to their existing customers or target new customer segments with their existing products?

This is a growth path they have been aggressively pursuing over the last few years. More notably, over the last five years, they have increasingly become more of a service company making a lot of its revenues through recurrent payments and subscription fees.

They have been adding new services like Apple Music, iCloud, Apple Books, Apple Pay and Applecare+, which squeeze more money out of their existing customers’ wallets, and have also negotiated juicy licensing fees with companies like Google and The Weather Channel to be the exclusive providers of services to Apple’s devices.

On the other hand, they have also been trying to penetrate other customer segments; for example, they offer Apple Music for students at a 50% discount.

This is one area that may still have some growth potential for them, developing pricing options and membership packages to target specific niche segments as a way to bring non-consumers of Apple’s products into its ecosystem and locked them in for the long run.

Next, we want to check on the potential to develop "new markets" for Apple products. For example, could they repackage iPads and sell them as dashboards to Tesla and other Electric Vehicle (EV) manufacturers?

Or are there other countries (or cities) with groups of people who fit Apple’s target customer demographics, where Apple hasn’t fully penetrated yet?

The next item is our growth checklist is product improvements, and this is probably the most challenging for Apple as smartphones and computers have already reached a point where people are not that much willing to pay higher prices for better, faster and bigger devices.

Apple has done a great job at keeping the lead as the premium gadget maker, but as the market saturates and the features they offer get commoditized, Apple is increasingly feeling the need to come up with new home runs to maintain the level of profits they are used to.

CEO Tim Cook has displayed brilliant management of Apple’s balance sheet and supply chain; however, we are yet to see whether he can bring the goods when it comes to innovation and the development of new, successful, products.

In terms of cost optimizations, Apple has also been doing a terrific job, going as far as to negotiate the price of the screws, plastic parts and even the cobalt that goes into its mobile devices with its suppliers’ suppliers, in order to keep its costs down and maintain its profit margins.

Moving one, the optimization of revenues is another area where Apple could find new sources of growth by creating new pricing options that can convert non-consumers into consumers as we explained above.

Finally, acquisitions is another area where Apple has been quite busy recently, having completed around 25 over the last six months alone!

Acquisitions are probably what Apple will rely on to keep its technology lead, as the company currently sits on a pile of cash with more than $25 billion in its balance sheet.

What is evident from this simplistic analysis, is that Apple may be running out of options to keep its growth trajectory, and it desperately needs the next big thing or that growth story will be a sad one soon.

Now forget about Apple and focus on the truly important question here: how does this list of growth options apply to YOUR organization?
Apple Bulletproofs its Value Network
Speaking about Apple, we reported this week through our social media that Foxconn, Apple’s largest iPhone assembly partner, is ready to move its manufacturing operations out of China if trade war tensions continue to escalate.

A point this story highlights is why the concept of building a "Value Network" is way more powerful for strategy than the classic idea of having a
Value Chain.

Let me explain.

On its most basic definition, a Value Chain describes how a business’s Assets, People and Processes are used to produce that business’s particular Value Proposition.

As a business concept, the value chain tries to explain how a series of inputs are transformed into a series of products and services by an organization’s internal capabilities.
But the whole Value Chain concept, by definition, is an appreciation of the "internal" capabilities of an organization which, intentionally, doesn’t take into account how that company interact and work with other companies to satisfy the needs of its customers.

The Value Network, on the other hand, is a concept that captures these relationships perfectly. The way it was originally introduced by Clayton Christensen was as "a collection of upstream suppliers, downstream channels to market, and ancillary providers that support a common business model within an industry."
Nowadays, as markets and competition get atomized up and downstream in most industries, the relationships that you have with key vendors and partners, and how effectively you all synchronize with each other become competitive advantages (or disadvantages) on their own, and by association their capabilities become your own.

For example, when two companies collide in any market, it becomes a competition of Value Networks, not Value Chains, because each company will try to craft the partnerships and supply chain they need to optimize its business model while trying to block competitors from accessing those same partners and vendors.

In my opinion, the idea of a Value Chain is up for an update, and although it helps understand a company’s internal capabilities, the concept doesn’t provide the scope we need to plan strategy in today’s fast-moving markets where agility and synchronized collaboration is more important than owning, or not owning, stuff.

Having said that, I’m proposing to get rid of the Value Chain as a concept in the next edition of the book, and instead propose a framework to build a strategy in terms of a Value Network, where vendors and partners work and interact with a company's internal resources to produce a particular outcome.

Let me know what you think.
FedEx Ditches Amazon for Good
It was announced last week that FedEx decided not to renew its express shipping agreement with Amazon in the US, an obvious response to Amazon increasingly becoming a strong contender in the parcel delivery business.

I couldn’t agree more with FedEx’s decision. As soon as you see powerful buyers becoming a credible threat you have to do something about it, and in this case, FedEx just decided not to help a potential rival to succeed in one of its biggest markets.

In the end, Amazon only represents a small portion of Fedex’s revenues, but saying no to a $200 million deal (per year) should send a clear signal that FedEx is beefing up and that they ain’t no game.

How do you think this will evolve? Any guess?
Want me to cover other companies in this newsletter?
If you want me to cover particular companies in future editions of this newsletter just let me know and I will create a few alerts to keep tabs on them.

Some of you have complained (although you called them "suggestions") that I keep covering a small handful of companies in this newsletter, you know, the usual suspects: Walmart, Amazon, Apple, Google, Tesla, etc., etc., but that’s in part because I want to make concepts understandable to a wider audience.

My bad.

I’m taking this feedback seriously and will try to add some variations as we move forward, so please send me your suggestions.

Enough for now. Sayonara amigos.

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