Strategy Dynamics Briefing 19: Resources drive each others growth, or limit it

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The flows in and out of a resource (the rates at which it grows or declines) depend on existing resourcesmore sales people should lead to customers being won more quickly, for example.There are two special cases of this dependency that are both very common and important…

What are they?

They are:

  • The current level of a resource can affect its own rate of growth or decline
  • There is often some potential pool of resource from which the active resource is captured

Resources driving their own growth

The best known example of this is word-of-mouth amongst customers. Existing customers who are happy with a product or service tell their friends, who then become customers too. So, the more customers you have, the faster new customers will be won. Returning to the example of Ryanair we are following, it is likely customers happy with the airline’s service will tell others, so it is inevitable that some of the new customers the airline wins each year come from this source.

Briefing 18 showed that the airline would lose customers quickly if there were too few staff, but that will only arise if there are too many customers, creating too much demand for service. Look carefully at the structure below and you will see that the customer loss rate depends on the current number of customers. Whatever the cause, the rate of customer losses is always likely to reflect the number that already exist.

Customer losses depend on the number we have

The role of potential resources

These customers must come from somewhere, and that ‘somewhere’ is the population of people who might be able to use the airline’s services, because it offers flights from near where they live to destinations they might want to travel to. This second figure shows both the word-of-mouth from current customers driving the new customer win-rate, and the constraint that arises from the limited potential population – the lower this potential pool, the more slowly the airline will be able to win more.

Customers come from the pool of potential customers

This combination of self-reinforcing growth of a customer base and the constraining effect of a limited potential market is a very common structure that gives rise to characteristic behavior – S-shaped growth. The next briefing will look at that structure in more detail.

Opportunity share

The important role of the potential customer base leads to an important shift of focus that many firms should consider. Market share has long been a popular indicator for management to worry about, and in mature markets where no further potential exists or could be created, that may be fine. But in most other cases, management should really be considering the share of the potential market they have taken, and how much more might be possible – in other words, what opportunity share they have.

TIPS

  • Identify how much customer growth is coming from word-of-mouth recommendations, and how much could come from that source if you put effort into driving it.
  • Consider whether current demand from existing customers might be creating pressures that cause some to be lost, such as shortage of supply or service capacity. If so, are sales and marketing efforts to win more customers pointless, until such time as you have removed the constraint?
  • Estimate the scale of opportunity for all or part of your business – the size of the potential customer population that might exist. Is that potential mostly used up, and limiting your ability to grow, in which case can you extend what you offer to other potential segments? Or is it still large and mostly unexploited?

Until next time…

 

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It’s not just about customers!

Although customers offer the clearest example of a resource’s growth depending on its own existing and potential level, it is not the only case.

Staff, for example, will likely tell other people if they find it rewarding to work for a particular employer. If their recommendations are strong enough, this can play a significant role in enabling the organization to find and hire the people it needs. When this mechanism is deliberately and strongly designed, it makes a powerful contribution to an organization’s ‘employer brand’ – its recognition in the wider world of its excellence as a place to work. Examples have included Accountancy firm PWC, Google, and the Indian IT provider Infosys. The 2007/08 Infosys Annual Report gives a colorful picture of just how much effort can be put into driving this reputation-based word-of-mouth, and the resulting benefits.

Strategic Management Dynamics book coverStarbucks, on the other hand, showed how easily damaged such self-reinforcing growth can be, amongst both customers and employees, when it struggled to respond to the 2008 recession. Faced with sharply lower profitability, it responded by cutting back sharply on the staff development that had been so fundamental to its success over many years.

This briefing summarises discussion from chapter 4 of Strategic Management Dynamics, pages 179-180

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