This is a condensed version of an article that appeared in Rotman Magazine, published by the University of Toronto's Rotman School of Management.
Corporate America has been sitting on record levels of cash and liquid assets. The nonfinancial companies in the S&P 500 have, by one estimate, about $1.1-trillion on their balance sheets. General Electric alone has a war chest of more than $80-billion, and Microsoft has $53-billion. What's behind the apparent reluctance to invest in expansion and potential new ventures? The list of purported reasons is long and varied: pessimism toward the leadership in Washington, D.C., especially given the gridlock surrounding the federal debt; anemic consumer confidence, exacerbated by a stubbornly high unemployment rate; the mounting economic problems in Europe; the possibility of a global liquidity crisis; fears of a double-dip recession; and so on.
Hesitation to spend in the face of these challenges is understandable. Yet, the cash on companies balance sheets may also indicate a failure of imagination – or insight –about the nature and size of the innovations they will need in order to compete in the future. In our research, we have found that a crucial factor that determines tomorrow's winners is that they continually invest in opportunities based on big-enough market insights, or BEMIs.
What exactly is a BEMI? Simply put, it's a substantial insight that enables a company to build a major business with the potential of considerable growth over a number of years. It might even lead to a game-changing product or service that totally rewrites the rules of a given market. Think of how Netflix was able to leapfrog Blockbuster by realizing that, as movies became available in lightweight DVDs as opposed to bulky VHS cassettes, it could set up an efficient mail-order operation with a lower cost structure, enabling the elimination of pesky late fees that had become a major annoyance for many consumers. Time and again, that kind of insight has separated the top companies from the also-rans in various industries, everything from consumer goods to healthcare to entertainment.
It's crucial to note that BEMIs will rarely lead to a growth surge over the short term. That's because today's winners have already anticipated the current business environment. The real opportunities lie in seeing where a market is likely to head over a longer time horizon. In our experience, attacking incumbents head-on under stable business conditions is hardly a wise strategy. Rather, the more effective approach is to look for major trends that could potentially upset those conditions in some significant way.
An important caveat here is that size matters a lot. The BEMI must be "big enough," depending on a particular organization. Consider how two companies – Samsung and Ovideon Inc. – each acted on the BEMI that advancements in plasma and liquid crystal display (LCD) technologies would lead to the development of flat-panel TVs with crystal-clear pictures that were also thin and lightweight. This level of improvement would entice viewers to not only replace their conventional sets, but to use them in more and different ways. Samsung, the Korean consumer electronics giant, had to win big, so it bet big. It does its own TV manufacturing in order to control both quality and costs for its high-volume operations, and so far the huge investment has paid off. In 2009, the company controlled about 17 per cent of the total market, shipping more than 27 million LCD models and more than three million plasma sets.
In comparison, Ovideon's share of the market is minuscule, but that's just fine with the start-up from Aurora, Illinois. Ovideon doesn't need to move huge volumes because it outsources its manufacturing and concentrates on small market niches, such as applications in offices and public spaces like airports. So, for both Samsung and Ovideon, foresight into the evolution of flat-panel TVs has been a BEMI, but in strikingly different ways.
Spotting BEMIs is an inherently difficult task. Companies can't think about what the business environment looks like today because that will give them just a two-year horizon, at most. Instead they have to envision how things will likely be different in tomorrow's world, and that process by nature is imprecise. At a recent shareholder meeting for Amazon.com, CEO Jeff Bezos explained how major innovations require much experimentation early on. "We started working on Kindle almost seven years ago," he said, referring to Amazon's popular e-book reader. "If you place enough of those bets and if you place them early enough, none of them are ever betting the company. By the time you are betting the company, it means you haven't invented for too long."
With Bezos' words in mind, executives should be asking themselves questions along the lines of these: What opportunities will arise from the emerging era of cloud computing? How might our company take advantage of intelligent infrastructures that enable cities to reduce energy consumption, manage traffic congestion, and connect people more efficiently? What does the "Arab spring" mean for businesses? And it's not just major trends themselves but also the ancillary effects they trigger. Consider Novo Nordisk, which years ago recognized that the growing affluence and more sedentary lifestyle of people in China and other emerging countries would lead to a rise in the incidence of diabetes there. Thanks to that BEMI, Novo Nordisk has become the leader in the global insulin market, accounting for more than 50 per cent of worldwide sales.
To be sure, not every company has been hoarding cash instead of investing in potential BEMIs. Whole Foods, for instance, has recently begun rolling out pilot "Wellness Clubs" at some of its natural and organic foods supermarkets. Through that initiative, consumers who join and pay a fee will receive nutritional education, membership in a dining club, and discounts on foods that meet certain dietary criteria.
Only time will tell whether such initiatives will develop into major avenues of growth. But the point is that companies should be investing today to sow the seeds for future success. As Bill Gates once famously said, "The only big companies that succeed will be those that obsolete their own products before somebody else does." That said, it must be asked – what's your BEMI, and what are you currently doing to pursue that opportunity?
Paul Nunes is senior executive director of research at the Accenture Institute for High Performance in Boston. Tim Breene held many senior executive positions during his career, including that of chief strategy officer at Accenture. They are the authors of Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There (Harvard Business Review Press, 2011).