Market conditions drive changing corporate strategies

EDITOR'S NOTE: In part two of Jim Kane's analysis of current market conditions, he explores how today's environment is forcing new strategies onto government contractors. Click here for part one exploring risk .

Companies have adopted three core strategies over the past decade, but current market conditions are forcing a change to these strategies. What has been successful in the past is no guarantee of success in the future.

The table below summarizes the strategies for both previous and current market conditions. While any core strategy has unique considerations specific to any individual company, the summary and accompanying descriptions provide a first-level view of effective strategies given the changes in risk and reward in the market.

The Maximize Size strategy has served larger companies well. These enterprises have leveraged their size to achieve economies of scale and to offer comprehensive, cost-effective solutions well matched to the unique requirements of their government customers.

They have pursued large-scale acquisitions to drive additional growth and achieve further economies of scale. These companies might refine their strategy so as to maximize their strength rather than their size. The refinement is to shift emphasis from economies of scale to what I call “economies of strength”, specifically their financial resources and technical depth. Deep pockets and a strong bench can enable these companies to prosper, albeit likely at lower margins.

The Differentiation strategy comes in several flavors and has been successful for many mid-tier and smaller companies. Differentiation through thought leadership will continue to be an effective strategy for those companies that have been successful at it. These are typically smaller companies focused on areas where competitors are few, reputation is critical, and value to the customer is high.

This is a select group of companies willing to sacrifice high growth for high margins. There will be challenges for these companies given budget constraints, but the relatively inelastic demand of customers for their unique capabilities will serve them well.

Differentiation through cost leadership will become an increasingly difficult strategy.

Companies employing this strategy have emphasized operational efficiency and/or high-volume pricing to position themselves as the Walmarts of the government market. This strategy will still work for those companies, but it will be harder to execute and will require a new level of creativity for both pricing and service delivery to remain an effective strategy.

Differentiation though technical leadership can be a successful strategy more so for companies that have not primarily served the government market rather than for those that have concentrated on government-focused products and technologies.

Companies that have strong, unique technical capabilities in cloud, smart phones and mobile computing, cyber, big data and predictive analysis, and virtualization have a strong strategic position to leverage. In contrast, companies whose strategic focus has been technical and product leadership to address government-unique requirements might consider retooling and/or merger and acquisition alternatives.

Differentiation through domain leadership has seen its day and is no longer an effective strategy, with the exception of a few unique, smaller agencies. This was an effective strategy when the market was moving from systems integrators to solutions providers. However there is plenty of domain knowledge and subject matter expertise available – it’s essentially a commodity. These companies face the most challenging strategic choice and may want to consider a new basis of differentiation.

If a company is not big and has no strong, unique capability that could be the basis of differentiation then the strategic outlook is more challenging, if not bleak. The best strategy may well be to cash out now through acquisition while the company still has some value rather than to expect the company can somehow ride out the current situation. Stronger competitors will simply squeeze these companies, forcing them either to settle for even smaller market share or eventually exit the market.

A new strategy for some companies is “enter market” or “expand penetration”.

The current technology drivers suggest there are significant opportunities for commercial companies to enter this market and leverage their technologies for significant growth. Consider the consulting firms that primarily had served commercial clients but during the past decade brought their commercial business expertise as solutions providers to the government market. The government’s emphasis in 2001- 2004 on enterprise architecture, business process re-engineering and the President’s Management Agenda was a perfect match to these companies. For example, Accenture grew from a very minor presence in the federal market in 2002 to #25 on Washington Technology’s 2012 Top 100 Rankings with revenue from prime contracts of $1.25 billion.

Is now the time for a next generation of commercially focused companies to enter the market?

The best engineers have an understanding and appreciation of the underlying science. Show me a top electronic engineer and I’ll show you someone who really understands the underlying physics. 

In a similar vein, the best business executives have an understanding and appreciation of the underlying economics of the markets they serve and the companies they lead. Having that understanding has never been more critical than it is today to lead companies successfully in the dynamic and challenging federal market.