Learning from Failure (Part 2) – ‘The Middle Seat Strategy’ – Stuck in No Man’s Land

Imagine a scenario wherein the company’s senior executives are unable to logically answer the question “What will the company NOT do?”- if so, there is a high probability that the company is ‘Stuck in No Man’s Land’ or is following, what I call is the ‘Middle Seat Strategy’. The name ‘Middle Seat Strategy’ came rather organically to me for the following two reasons (1) The pain of the company is similar to being in the middle seat in a long haul flight (2) The airline industry is rich with examples across geographies and time periods wherein they have fallen prey to this failure – which also points to the fact that this failure type is not well understood (ahead of the point of no return). For startups, following the ‘Middle Seat’ is a recipe for disaster which most often manifests from the over-confidence combined with a lack of strategic thinking from the senior management and the board. On the flip side, company’s wherein senior executives can answer this question well are the most successful (knowing the limitations of their business model is a ‘super power’). Having seen this failure play out from close quarters, I plan to use this blog, in the spirit of learning from failure, to expose this pitfall before the company pulls itself to a point of no return.

Consider the following example – The company has been the darling of early-stage investors as it grows into an early leadership position on the back of a strong customer value proposition – investor money has come in easy as there is nobody else with industry experience or execution capability. The company’s core value proposition is focused on providing convenience – for example, an airline that connects multiple cities through a hub and spoke model, business class offering, great food, lounge access, multiple distribution channels etc. This ‘high service/high price’ offering attracts lot of happy early customers. The business scales as more investor money pours in and the management ambition runs harder and broader. Growing a ‘high service’ offering comes with its scaling pains but the company focused on its brand and hence, throws more resources at the problem – larger call centre, better business class seats, etc (read higher cost per unit). Sooner than later, the company has achieved high penetration in the target customer segment and the growth is slowing down. The management understands that a large group of customers is price-sensitive and hence, drops prices to re-ignite growth while also cutting down on some of the services. Reduced services leave the core customer disgruntled driving higher customer churn. While growth is back on track, unit economics go for a toss (cost structure has not fundamentally changed to cater to this new customer segment) and the company is fast running out of money. In the meanwhile, there are competitors that have figured out how to profitably service the price-sensitive customer with a low-frills offering and there is another player that is focusing on service-sensitive customers – both these players find investor capital and grow rapidly with high capital efficiency. The company finds itself in ‘No Man’s Land’ or the ‘Middle Seat’- any decrease in revenue will push investors away and/or trigger a down round or growth will come with unsustainable economics (further reducing startup life) while ‘focused’ competition is taking customers away. In my (little experience), the outcome of this failure has mostly been fatal!

Circumstances in which this failure plays out (- this is not an exhaustive list)

  1. ‘Rapid growth keeps important and hard questions at bay’ – Early rapid growth in an industry hides in plain sight the challenges in the business model – unless thought through carefully, growth, driven by investor capital, can drive the company along the wrong path.
  2. ‘Leadership for the sake of it or for a reason’ – The company, in very early stages of the evolution of the industry, declares itself the market leader without really understanding how does leadership translate into sustainable competitive advantage. While investors prefer to back the leader for a very long time till they see through the ‘leadership without any advantage’ sign on the wall. At this point, raising money becomes difficult. Over a period of time, new competitors launch with Good Strategy (clear ‘trade-offs’) to serve the unmet demand – these players now find it relatively easy to raise capital.
  3. ‘All competition is useless’ – The company does not experience ‘real’ competition for a long time. In the early stages it is highly likely that competitors are also using a ‘Middle Seat’ strategy and the company’s execution is stronger than the rest – and hence, the management is never forced to make any ‘choices’ or is even asked the question ‘What will you NOT do?’ till its quite late. As a consequence, the muscle to take or by policy make trade-offs is never formed or exercised. When real competition does arrive its already too late!
  4. ‘Customer experience over Cost structure’ – Often this management has poor understanding of the key cost drivers in the business – they continue to hope and pray for ‘economies of scale’ to kick in Or will continue to incur more costs to keep up with the customer service requirements – customers are happy but the economics suffer. If the company doesn’t alter its value chain or focus on optimizing costs, it will run out of capital.
  5. ‘We can do it all’ – the management team treats any trade-offs or focus or limitations as business model weaknesses rather than core tenets of good strategy

How do you protect againt this failure?

  1. Understand the tenets of good strategy – Rapid growth IS NOT EQUAL to good strategy – ‘trade-offs’ and ‘focus’ lie at the heart of good strategy and not just rapid growth (makes for another long blog!)
  2. Respect the limitations of the company’s business model – if the market for a ‘high service’ airline is saturated then look to enter international markets rather than attack a segment which will leave the company unprofitable forever and/or digruntle your core customer.
  3. Answer the question “What will the company NOT do?” – tap into your board or mentors if you cannot answer this question.

To Summarize –

  1. ‘Tradeoffs’ and not Growth form the tenets of good strategy
  2. The ability to logically answer ‘What will the company NOT do?’ is a SUPER POWER – build on it. (- if you can do this and are running a consumer internet startup, please do give me a shout). Hone this skill set – requires effort, rapid experimentation and risk taking to make clear data led strategic decisions.
  3. Founders with core industry experience are more susceptible and hence should be even more careful
  4. Everything starts from nothing!

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