You Don’t Have to Swim Upstream

Posted on January 20, 2010

Salmon are destined to die after swimming upstream. Downturns can make businesses feel like they’re nearing the end too. But companies and their CEOs have the potential to re-invent themselves, depending on their environment. Here are five forces that determine whether your environment is “structurally favorable.”

t’s been a tough year. Maybe a tough two years. Most chief executives and business owners have kept cranking, pounding away in an effort to make things work. I admire that. It shows determination and resolve, and a positive attitude. I’ve logged many years like that as a CEO, over several downturns. But please, just for a bit, leave the front lines and retreat to the general’s tent, take off your helmet and armor, and over a nice salmon dinner, think about strategy.

The tasty salmon makes you think about a salmon, swimming upstream, jumping up waterfalls, fighting fast currents and dodging bears to arrive at its desired destination. There it mates, lots of eggs are laid, and it dies. Yes, dies.

My story sounded pretty good until the egg laying and dying part, didn’t it. I don’t like that part either. But how many businesses are, right now, swimming upstream brilliantly, using their CEOs and management’s smartest tactics, only to die or waste away in the next few years anyway?

If I were a salmon and could choose, I’d rather be a young salmon, where I get to swim downstream. That would be easy, and fast. I’d like that. After the river ended, I’d get to swim in the ocean, where food is abundant, and there are no waterfalls or fast running currents. In the ocean I’d get to grow fat and strong. It’s just the swimming back upstream part that sounds like work, with a disaster looming at the end. Downturns can make businesses in all stages of the lifecycle feel like they’re nearing the end, but the truth is, all businesses/industries are aging and maturing, and move inexorably toward maturation and decline.

Salmon are destined to die after swimming upstream. But businesses and their leaders can change products, industries, geographies and can re-invent themselves. They can change from swimming upstream to swimming downstream, even jump to a different river. But they can only make those big strategic changes if they see the need in time, and only if they have the will and the courage.

Three years ago I left the helm of a company in the wall décor industry after 22 years. Since then, I’ve consulted with quite a number of companies in many different industries. In some industries, it seems that most companies are swimming with the current, and even slow and inefficient swimmers thrive. In others, they seem to be swimming in a neutral environment, where the slow swimmers struggle but live. In still others, the slow swimmers get eaten by bears, and only the strongest survive. Which environment are you in?

Chief executives must step back from the fray and assess whether the line of business they have been in will be an upstream fight, a long cruise, or an easy downstream paddle. If after a careful (and likely painful) analysis of your situation, you come to believe that the industry structure is not in your favor, then you need to significantly modify your business or migrate into a new business or industry. This is not easy, I know.

My favorite analytical tool comes from the work of Michael Porter, in his hallmark book, Competitive Advantage. It was the single biggest “aha” that came from my MBA over 20 years ago. There are five forces that determine whether an industry is “structurally favorable.”

1. The threat of new entrants. Can new businesses be started easily, enter your market and compete with you? Some factors include the size of the learning curve, the capital investment required and the need for deep industry relationships. If it’s difficult and expensive for newcomers to enter the market, that helps protect incumbents like you.

2. The threat of substitutes. If we start by looking at the problem we solve for our customers, we might see that there are several different kinds of solutions. The more substitute solutions, the worse it is for incumbent businesses. The ketchup makers sure lamented the invention of mustard! (Or was it the other way around?)

3. The bargaining power of customers. Big customers with buying clout coupled with plenty of suppliers will push pricing down over time. On the other hand, too few suppliers and too much demand can result in rising prices. Just like OPEC.

4. The bargaining power of suppliers. If your suppliers are few and bigger than you, at capacity or don’t really need your business, your margins will be squeezed from the bottom. Being on the wrong side of number three and four can erase your bottom line.

5. Competitive rivalry. When the four forces above are less favorable for a line of businesses within an industry, companies will begin to compete heavily with each other. Rivalry increases. And the more they compete head to head, the lower the average profits go. That’s swimming upstream, and the slower swimmers get eaten by the bears. The fast swimmers survive, but are too tired to enjoy the journey.

Take some time, maybe after your salmon dinner, and write out a description of your marketplace based on Porter’s five forces. Be honest and realistic. Better still, do the exercise interns to help, digging through trade journals, doing phone interviews and more.

Deciding that your line of business is structurally unfavorable and that your firm is unlikely to prosper is a jarring and depressing conclusion. But it is a low point that will spur you to action. That action might be diversifying, selling your business, quitting your CEO post and joining another industry, or starting to learn about your next line of business. That’s a much better alternative than swimming upstream for a few more years only to lay eggs and die.