Outsmart!

IT’S A SMART, SMART, SMART, SMART WORLD

What you are about to read is about real business life, namely, outsmarting the competition. As eminent scientist Charles Darwin might put it, businesses breed beyond available customers; companies with successful strategies have a better chance of survival; and successful enterprises force out weaker ones, creating whole new business models. In other words, the businesses that succeed not only survive but grow, gaining more of the supply of customers and forcing their rivals to adapt ordie.

“Chaos Is an Opportunity”

Change is the very essence of business, of course — hence, its Darwinianimperatives. We live in a time of innovation and expansion — a world of smart and smarter strategic options. The catch is that the prize will go to the smartest competitor: In whatever field you’re playing, you must outsmart your rivals. Shrewd competitors can stake out new territory, define the boundaries and even set new rules for the game.

Peter Drucker, the late, great management thinker, was famous for declaring in the fairly peaceful 1980s, “Chaos is an opportunity, not a threat.”

Winners in the Growth Race

Taken together, the following companies represent what is really working in business today.

Businesses with exceptional growth rates are a fascinating lot, creative companies with unusual strategies that combine an irresistible promise to customers with an enviable record for delivering it.

Outsmarting the competition requires more than intelligence, experience and business sense; you also have to be quick, flexible and ready to adapt to the transforming world. The penalty for failure is Darwinianextinction, but the prize for success is survival, growth and the rich rewards of a life spent in the brave new world of business.

COMPETE BY SEEING WHAT OTHERS DON’T

Panos Panay is a guitarist who never made it but a talent agent who did — and he has never forgotten how tough it is for hungry musicians to connect with the promoters who might hire them.

Panay founded Sonicbids in Boston. The business ranks 88th on Inc. magazine’s list of the top 5,000 privately owned businesses in theUnited States. Launched in 2001, Sonicbids had revenue of $248,000 in2003, $3 million in 2005 and $8 million in 2007.

Making use of technology, Panay figured out how to connect thousands of aspiring musicians and small bands with promoters who needed their talents. Sonicbids is akin to a musical matchmaker. Some 10,000 promoters use the site to connect with Sonicbids’ 120,000 musician members, a quarter of whom are from abroad.

In the process, Panay offers both the promoters and the musicians a proactive customer-service operation, which is, in effect, the character and personality of the business.

An Expanding Vision

Panay has proved both his capacity for difficult work and his ability to see what others don’t. And his vision does not stop with the music business. He has only begun to tap what he sees as another neglected market. Jugglers and magicians have already signed up as members of Sonicbids, and Panay has had inquiries from actors, supermodels and freelance writers. He suspects that speakers might be interested too.

Lessons From Sonicbids

Here are six ideas that spring from Panos Panay’s success with Sonicbids:

Connect the dots. Opportunities lurk in neglected fields everywhere, especially where people take dysfunction as the expected way of life. You can look within your own industry for the same kind of opportunity Panaydiscovered.

Scale quickly. Scale is important when you are building any kind of community-based business. But achieving scale is not just about signing up people. Your service has to offer value to all participants.

Pay attention to service. High-tech businesses still require much human interaction. Panay points out that a little human touch can help define the character and feel of your business.

Don’t stop thinking about tomorrow. Panay’s plans for expansion and his visionary notion of how large his neglected field might be are both bold and sensible.

COMPETE BY THINKING OUTSIDE THE BUBBLE

MinuteClinicgives patients — and insurance companies — an alternative to the emergency room. It is a classic example of a company whose founders recognized a significant unmet consumer need and seized the opportunity by borrowing an idea from a seemingly unrelated industry.

What began as a notion for a few partners in Minneapolis eight years ago has blossomed into a coast-to-coast operation serving more than 500,000 customers a year. And when CVS Caremark Corp. bought the company in 2007, the all-cash payoff for the founders was $170 million.

Why do some people easily spot opportunities where others see only obstacles if they see anything? The answer begins with the human penchant for living in a bubble — an airtight cocoon of assumptions, beliefs or worldviews.

Inventive Minds

The good thing about business bubbles is that they invite inventive minds to stick pins in them. MinuteClinic’s founders are bubble bursters, creative guerrillas who thrive on outsmarting complacent companies in industries that run on tired ideas. The MinuteClinic story is a lesson in outsmarting competitors by trying ideas that they think have nothing to do with their industry.

Here’s how MinuteClinic works: The company’s kiosks are open seven days a week for a total of at least 72 hours. The kiosks clearly post the ailments that can be treated there, along with the fees. Generally, one nurse practitioner staffs each kiosk. Only verifiable, quickly identifiable illnesses are treated.

Jiffy Lube had the insight that you don’t need a fully trained mechanic to change the oil in your car. Until MinuteClinic’s founders came along, no one in the healthcare field would have dreamed that they could learn anything from the grubby business of auto maintenance.

What MinuteClinic saw that others either didn’t see or simply ignored were the fault lines in the healthcare delivery system. MinuteClinic addresses some of the system’s dysfunctions by biting off the easiest, least complex chunk of the health care market.

Lessons From MinuteClinic

Here are some lessons MinuteClinic’s founders learned along the way:

• Widen your lens.Retailing offered an obvious alternative to physicians’ offices and hospital emergency rooms: Mini-clinics could give shots, treat sore throats and prescribe flu medicine without a doctor on the premises.

• Make friends.MinuteClinic has gone to great pains to reach out to physicians and hospitals to explain its operations and earn their trust. MinuteClinic is reaping thousands of referrals from overworked full-service clinics and hospital emergency rooms.

• Execute on the change.For MinuteClinic, execution means building a company that delivers both high-quality health care and a high standard of service, and changes have to be made in people, processes and technology to get the job done.
• Redefine the culture.MinuteClinic’s Michael C. Howe recognized that nurse practitioners are,by nature, caring, empathetic individuals, but they are not in there tail business. His understanding of the distinction led him to create a customer-centric culture that is exemplified by a program to teachMinuteClinic nurses to welcome complaints as a way of improving theirservice.

COMPETE BY USING ALL YOU KNOW

In 2004, Michael Golden presided over the Kohler Co.’s cabinetry division. He knew nothing about the arms industry. When he was invited to become president and chief executive of Smith & Wesson (S&W), a 150-year-old firearms manufacturer that was in dire straits at the time, he took the job.

After Golden had been runningS&W for less than three years, he had already achieved extraordinary results. The company’s revenues had soared from $100million in 2003 to $237 million in 2007. From its nadir of $1 a share, the stock had soared to about $23.

How did Golden bring about the turnaround? By leveraging everything he’d learned from more than two decades in business. In one way or another, all the strategies employed at S&W — the new processes he put in place, the thinking that led to an acquisition and a leap into new markets — were an outgrowth of events encountered and actions taken in his previous corporate life. His achievement shows how using everything you know can help you outsmart your rivals.

Grander Goals

Smith& Wesson was both venerable and storied — but one of its problems was that it had forgotten or simply ignored the lessons of its own history. The strategy of Golden’s predecessors had been to dominate a niche market, focusing entirely on handguns in the United States. Golden had much grander goals. Overall, he wanted to push the brand to ever-greater heights of recognition and approval so that it would support and advance all the company’s projects.

At nearly every turn, Golden applied lessons learned at previous jobs. January 2007, Golden announced the purchase of Thompson/Center Arms, a $65 million gun maker. Now, he’s looking into businesses such as home security and law-enforcement products such as body armor.

Golden is intent on making the most of S&W’s powerful brand. “I think we would be cheating shareholders and the employees if we didn’t enhance the brand,” he says. “But my number-one responsibility is to protect it.” So far, he’s done amazingly well on both counts.

Lessons From Smith & Wesson

Here are four lessons that can be taken away from Golden’s experiences at S&W:

• Hunt (the right) heads. Golden had the perfect set of experiences — in both manufacturing and turnarounds — to prepare for the challenges at S&W.

• Find what’s truly valuable.Golden knew that S&W was a much-respected name in the gun world. Heinsisted on extensive research to uncover what he perceived to beS&W’s most valuable asset — its brand. What he found helped him tomake a sharp turn in S&W’s course.

• Squeeze nickels.Golden introduced new manufacturing techniques to reduce expenses andraise productivity. But he combined his understanding of dollars andcents with a skill for demand creation. The combination producedsimultaneous high productivity and job creation.
• Walk and talk.Golden had the intelligence and business training to make the rightmoves in terms of reorganizing the sales force, hiring talented aidesand leveraging the brand. He was both a no-nonsense, results-orientedboss and an empathic, open-minded leader — a walk-around guy.

HOW TO THINK OUTSIDE YOUR INDUSTRY’S BUBBLE Here are some questions that can help you think outside the bubble: Do you know where the breakdowns occur in your industry? Can you turn these breakdowns into a major business opportunity?   Are you looking beyond your industry to discern how to deliver more value to your customers?   If your business is not performing well, where are the breakdowns occurring and what management disciplines must you apply to fix your systemic problems?   Can you see an opportunity to meet a neglected need by widening your company’s frame of reference?   Is the focus of your business narrow enough to enable you to target markets and build the capabilities needed to serve those markets? ~

COMPETE BY CHANGING YOUR FRAME OF REFERENCE

JeffreyHousenbold, an eBay vice president with an MBA from Harvard, became CEO of Shutterfly, based in Redwood City, Calif., in January 2005. At the time, the company billed itself as just an online photo finisher. But within two years, Housenbold had turned Shutterfly into something much bigger and smarter — an Internet-based social-expression and personal-publishing service.

Housenbold had found one of the prime secrets of business growth: changing his business’s frame of reference to expand its identity and compete on a new and much larger field.

Housenbold’s insight called for a complete makeover of Shutterfly, which led to a sales explosion. In 2007 alone, revenues were projected to increase 45 to 50 percent, to more than $138million. The company was on track to reach 7 million orders in 2007, a37 percent jump from 5.1 million in 2006 and nearly double the 3.6million orders received in 2005.

Building a Solid Community

Housenbolddiscovered the makings of a solid community at Shutterfly. Its clients are amazingly loyal — 77 percent of the company’s revenue comes from active customers, who currently number more than 2 million. Housenboldreimagined the company’s frame of reference, expanding it from photofinishing to a full range of products and services.

Housenboldenvisioned Shutterfly as the premium lifestyle brand in the online photo-finishing business. But even as he widened his lens, Housenboldstayed focused on his primary business.

Many of the company’s innovations have sprung directly from Housenbold’s finely tuned sense of community. That sense of community extends to his employees, whom he views as fellow innovators.

Housenbold’sperformance was not a one-man show, of course. Others contributed their ideas. But it was Housenbold’s ability to view the company in a broader context that encompassed societal trends and provided the springboard for Shutterfly’s hugely successful reincarnation.

Lessons From Shutterfly

Here are a few things that can be learned from Shutterfly’s success:

• Look at the bigger picture.How is the industry changing, and how can you change your frame of reference to compete on a wider field where you could develop an edge?

• Build a community, but tend to business.Much supposedly smart venture money is flowing into community-basedInternet businesses, which derive their profits solely from advertising. A less risky business model includes marketing some of the thousands of products and services that can be sold to Internet communities. Shutterfly has achieved success through a fully integrated vertical operation.

• Widen your lens, but narrow your focus. Web sites that focus on a single market do better than those that spread themselves around, no matter how big they are.

• Organize for ideas.The ability to view your company in a new frame of reference is not limited to the executive ranks. Shutterfly has created a culture that puts a high value on employee suggestions.
• Persist in your quest.It takes courage to move out of your familiar boundaries and play a bigger game on a new field. But success belongs only to those with the courage to stand by their convictions and risk failure all the way.

COMPETE BY DOING EVERYTHING YOURSELF

Engineer Dan Johnson started a company in 1992 in Loveland, Colo., called Special ApplicationRobotics, which made tools that could substitute for humans in the dismantling of nuclear reactors. By spring 2003, Johnson’s company had outgrown his Loveland garage and was now a 12-person operation. But with revenues having topped out at $12 million in 2001, S.A. Robotics was deeply in debt. Forced to seek help, Johnson found it in his old friend Mike Cappello, another engineer.

Cappello became co-owner and chief executive of S.A. Robotics. Within four years, revenues had skyrocketed 2000 percent to greater than $17 million a year, the work force had expanded to 140 and the company was fighting off venture capital investors.

Admittedly, in this era of outsourcing, the one-stop shop business model seems old-fashioned. For a company to do it all, a great deal of internal discipline and substantial capital investment in labor-saving machinery and software is needed. It also requires a full measure of ingenuity and courage.

S.A.Robotics designs and manufactures its own technology. In this way, the company can be sure that everything that goes into its products is upto the stringent demands of the hard and perilous work they are made to do.

The company’s success would have been impossible if it hadn’t been able to hire and retain talented, highly motivated employees. Cappello keeps his people happy by encouraging them to speak their mind, giving them a chance to work on challenging projects from start to finish and making them feel like important parts of a proud, can-do culture.

Alluding to the fact that S.A. Roboticshas just two shareholders (Johnson and Cappello), Cappello is proud to note, “What we have here is a very capital-intensive business going through an exponential growth with absolutely no injection capital. All the growth was funded out of operating revenues.

Lessons From S.A. Robotics

Here are three lessons others can learn from the leaders at S.A. Robotics:

• Control what matters.If you manufacture a complex, customized product, the need for controlis clear. The key is to know what you are really good at, what makesyou distinctive, and therefore, what you need to keep in-house.

• Hire the best and keep them.That S.A. Robotics has managed to achieve near zero attrition is attribute to the culture Cappello and Johnson have put in place and to the high-quality work they provide to their people.
• Don’t build to sell.A business with a life and purpose of its own will have a better shot at success over the long term. Some investors would never buy a company that was built just to be sold. ~

COMPETE BY TAPPING THE SUCCESS OF OTHERS

Eager to protect his new iPod’s shiny white surface and scratchable screen, Jeff Grady tried to buy a carrying case, but no such item existed. So Grady made his own case out of plastic. Other iPod owners admired his case and wanted their own.

Grady obliged: He refined the design of his case, found a manufacturer, started the company DigitalLifestyle Outfitters (DLI), launched a Web site and, within weeks, mastered a new specialty — supplying iPod owners with accessories that apple itself had either overlooked or dismissed as unworthy of its techie brains. In 2006, selling 100 ancillary products, DLI grossed $84million. In three years, Grady’s company has grown by an astonishing4,385 percent. That growth attracted the attention of PhilipsElectronics, which acquired DLI in 2007.

Every so often, a new product or old brand is so novel or exciting that it creates a groundswell, a mystique, a whole subcult of loyal customers avid to buy anything related to the sacred brand.

People who identify with hot brands create secondary markets for business people agile enough to piggyback on the original company’s success. Piggybackers almost certainly benefit their target companies (and themselves) far more often than not.

Jibbitz Jewels

Jibbitzis another company that has mastered this accelerated strategy. Sheri and Rich Schmelzer outsmarted the competition because they had vision. Sheri looked down at her daughters’ Croc-shod feet and saw an unmet need.

On a whim, Sheri stuck a silk flower through a hole in one of the clogs. She liked the effect and so did her daughters. By the time her husband Rich arrived home that evening, his whole family was wearing Crocs decorated with all sorts of baubles. He wasted no time in patenting the idea, organizing a company and coming up with a name for his wife’s whimsy. Their company and decorations would be called Jibbitz, a homage to Sheri’s nickname, Flibberty jibbet.

Sheri and Rich set up a production line in the basement, charging $2.50 perJibbitz. But as news of the decorations spread through Boulder, the multiplying orders forced them to move the operation to an office and hire some help. The Schmelzers took Jibbitz online. Then stores took notice of the market that was developing under their noses and began placing their own orders. The office gave way to a huge warehouse, and the manufacturing process was farmed out to a Chinese company.

Sheri Schmelzer, a stay-at-home mom in Boulder, Colo., was crazy about Crocs, the soft-resin clogs that mold to the wearer’s feet.

Creating a Phenomenon

The Jibbitz phenomenon, of course, was riding the bow wave of the giant crocs fad, and more Crocs wearers were clamoring to decorate their shoes. Sheri cranked out designs and Rich rode herd on the company’s expansion. Rich knew full well that piggybacking on a fad could last only as long as the fad itself. So even amid the mushrooming demand for Jibbitz-enhanced Crocs, he and Sheri were developing a new line of products. Eventually, the Schmelzers moved beyond products with holes to introduce a line of charms for cell phones and bracelets.

By summer 2006, the company had 40 employees. Jibbitz were being offered in 3,300 stores in the United States and hundreds more in Europe and the Middle East. More than 6 million pieces had been sold. On October 3rd, Crocs announced the purchase of Jibbitz for $10 million in cash.

Jibbitzhas since become a subsidiary of Crocs. It all came about because of Sheri’s imagination and Rich’s opportunistic eye for tapping the success of others and riding the Crocs’ groundswell to fame and fortune.

Lessons From Jibbitz

Here are five lessons companies can learn from the founders of Jibbitz:

• You can have too much of a good thing.Rich Schmelzer understood that without the infrastructure to handlepotential demand efficiently, he had to limit his commitments tocustomers.

• Think big. From the beginning, Jibbitz’s growth potential was limited only by the soaring growth of Crocs itself, but not all new ventures are so lucky.

• Don’t neglect your infrastructure. Jibbitz held its payroll to just 40 employees even as it grew in overseas markets and outsourced production to China. Keep yourorganization’s structure simple; that way, if you do need to add people, you can do it easily.

• Think targeted marketing.One way Rich Schmelzer kept operations under control was by relying on word-of-mouth marketing and Jibbitz.com; he avoided spending on traditional advertising.
• Take the long view.Even as Sheri and Rich Schmelzer were trying to cope with the runaway success of their Crocs decorations, they were planning Jibbitz product extensions into anklets, wristbands and cell phone charms. ~

COMPETE BY CREATING ORDER OUT OF CHAOS

DeanSummers managed a chain of retail electronics stores. Glenn Laumeisterwas a specialist in applying technology to solve complex business problems. Together they created an enterprise that would bring order and sanity to the chaos that was the parts business. They called it Partsearch Technologies.

From day one, Partsearch was dedicated to helping retailers, repairmen and consumers thread through a maze containing literally millions of parts. It was a market that had never bothered to organize itself; every manufacturer’s parts list was configured differently. So Partsearch developed a catalog in which each model of home appliances and electronic goods was presented with a list of all its parts. Obvious, right? Yet it had never been done before.

Opportunities in a Chaotic Market

Today,the Partsearch catalog is not limited to retailers: Individual consumers, manufacturers and service shops turn to Partsearch for help. In 2006, the company had revenues of $63.7 million-plus an astounding compound annual growth rate since 2001 of 85 percent. And it all happened because two guys recognized the opportunity presented by a chaotic market.

Laumeister had a hard time convincing manufacturers that helping to create an efficient, consumer-friendly parts supply chain was worth their time. Finally, he sold a few retailers on the notion, and they, in turn, pressured manufacturers to get onboard.

Now that Best Buy and other major retailers have signed on and Partsearch has built a substantial customer base, only a few manufacturers continue to withhold their parts lists from Partsearch.

Partsearch has applied advanced information technology to reinvent the process of ordering and fulfillment, thus making sense of a market that had been running badly on automatic. Laumeister’s overarching vision for his company is nothing less than to become “the glue that holds the whole parts business together.”

Lessons From Partsearch

Here are a few lessons that can be learned from the founders of Partsearch:

• Choose the right chaos to tame.Laumeister’s background was in creating and operating high-techcompanies, and he knew how to use information technology to solvecomplex problems. Fixing the dysfunctional, disorganized parts marketwas a challenge suited to his skills.

• Look for fragmentation.Fragmented industries — those in which there are many operating partsthat do not work well together — provide some of the best opportunitiesfor high-growth strategies.

• Go for scale.If you can achieve scale early in the development of your business, youcan become the resource of choice. The combination of ease of access,almost unlimited choice and competitive pricing is hard to beat.

• Overcome inertia.Manufacturers wouldn’t cooperate with Partsearch until retailerspressured them, so Laumeister found a way to begin his catalog withoutthe manufacturers and let Best Buy take the lead in converting them.

• Expect and look for more complexity.When Laumeister started out with Partsearch, his goal was to make iteasier for customers to find a part. Things got more complicated whenhe realized that some customers were ordering the wrong parts for thejob they wanted to do. He trained his call-center representatives to beon the lookout for such callers and to help them order correctly.
• Pair value with values.There is something liberating and inspiring about a business that makesa real contribution to society, not just for the owners and leaders,but for employees and customers as well.

THE SMARTEST COMPANIES

There are certainly differences between the smartest companies and the”incumbents” that operate in traditional ways. Here are a few of them:

• Ambition matters.Companies that outsmart the competition look for dramatic growth, whileincumbent businesses are content with incremental growth.

• Intuition reigns.Companies that outsmart the competition make strategic choices basedlargely on intuition, whereas incumbent businesses often get boggeddown in research and analysis.

• Focus prevails. Businesses that outsmart their competitors stay focused on what they do best.

• Customers rule.Companies that outsmart their competitors focus on how they can betterserve customers; incumbent companies focus on their competitors. ~

COMPETE BY SIMPLIFYING COMPLEXITY

Together, Becky Minard and Paal Gisholt have built SmartPak, a business dedicated to horses, health and simplicity. By creating preselected, premeasured and prepackaged medications and supplements for individual horses, and shipping them out in daily dosing packets, the pair has removed all the complexity that used to prevent animals from regaining or maintaining health.

Knowing that day-of-the-week pill containers help people track their drugs and dosages, Minard set out to design something similar for horses. What resulted was an easy-to-open plastic container with multiple wells, each containing the correct quantity of powders or pills and labeled with the horse’s name.

Launching a Business

When Minard talked with Gisholt about launching a business based on her invention, he was enthusiastic. Using her skills as a marketer and his as a venture capitalist, they got to work. They further honed the packaging concept, came up with a name for their invention (SmartPak)and began raising the money needed to start production.

SmartPak.com was launched in June 2000. Today the couple presides over a nationwide $40 million business that encompasses nutritional supplements and gear for dogs as well as horses. The company’s volume is soaring — up 46percent in 2006 alone.

Minard and Gisholt have achieved outstanding business success by finding an ingenious way to simplify complexity.

SmartPakhas found ways to stay competitive with the companies that supply supplements the old-fashioned way, in buckets. How have they managed to do it?

Simplification Proposition Gisholt and Minard have paid close attention to customer service too. Three out of four orders are handled online. Gisholt and Minard established a call centre manned by extremely well-qualified people.”We use information technology for every single thing we can,” Gisholt says, “not just to improve productivity, but to lift our quality and prevent error.”

Gisholtwent to UPS with a simplification proposition that the shipping company couldn’t refuse. With SmartPak’s help, the UPS truck making 20different delivery stops a month to hand over 30 separate packages of supplements is now able to make the same deliveries in just two stops.UPS gave SmartPak the break on shipping rates it needed to hold down prices.

Gisholt went to the manufacturers of their products as well. “We convinced the suppliers there would be a substantial amount of incremental income for them because of our auto ship mode,” Gisholt says, “and they have shared some of those gains with us.”

Lessons From SmartPak

Here are three lessons learned by the leaders at SmartPak:

• Don’t just cut your own costs. Do the same for your suppliers.

• Beef up your culture.Gisholt and Minard first choose horse-smart call-center people; then they train them and give them a chance to make decisions on their ownand learn from their mistakes.
• Develop an appetite for technology. If ever there was a company committed to leveraging technology in the service of simplicity, it is SmartPak.

Businesses that outsmart competitors stay focused on what they do best, while incumbent companies are often searching for new ideas and end up losing their sense of purpose in the process. Can incumbent businesses adapt and learn to behave as smart companies do? The answer is yes.

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