Ep. 27 - The Inflection Point Cycle, Part 3
Welcome back to another exciting episode of Boosting Business Value! In Part 3 of our miniseries, hosts Jason Tuzinkewich and Dr. David Gruder dive deep into the pivotal inflection point that can make or break businesses: the Fruition Phase. The Fruition Phase is all about optimization, where creativity takes on a new focus. With this, Jason and Dr. David explore the keys to establishing cash flow consistency, maximizing margins, and achieving durable growth. They discuss the importance of systematizing processes and avoiding pitfalls like "corporate ADD" and "status quo addiction." But that's not all. Jason and Dr. David dive into why leadership must undergo a transformation during this phase, and why recognizing when to pivot is crucial for long-term success. They also touch on behavioral accounting, a powerful tool that connects people, value creation, and profitability. Tune in now and discover the secrets to long-term business growth.
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The Inflection Point Cycle, Part 3
Successfully Navigating Your Business's Second Inflection Point: The Fruition Phase
We are in part three of our mini-series on the three inflection points that all businesses must master to achieve durability and long-term growth. In this episode, we are going to dive into the inflection point that I have to confess, I am the worst at. We are going to talk about the fruition phase. For those of you who are new to the show, I have here with me, as always, my partner in crime and trustee colleague, Dr. David Gruder. He is Blue Sky's Business Life Cycle, Exit Planning, and Post-Acquisition Psychologist. David, take it away.
Thank you. We will start this episode the way that we are in each of these segments in this mini-series on inflection points, which is just a quick review of what an inflection point is and what the inflection points are that we are covering. An inflection point is a major functional pivot point where strategy organization tactics and leadership requirements must change from what they were in the last inflection point, in the last phase of the cycle.
The whole notion of inflection points is that they aren't one-and-done. That the inflection point cycle is perpetual in durable businesses. We go through the phases of innovation fruition and bifurcation over and over again in successive cycles. In the next episode, the final episode in this mini-series, we will be covering bifurcation which is ambidexterity and we will get into that. However, in this episode, we are focusing on the fruition inflection point and phase in this inflection point cycle.
Thank you for that recap. That's wonderful. Let's get into the specifics. When we talk about having this inflection from innovation to fruition, what are we talking about? What's going on here? At the end of the day, this will be a confession of, “Why do I suck at it?” Starting, the fruition phase is all about optimization. I love getting into the fruition phase. I just am not great once we are there. Tell us, as we talk about optimization, what are we talking about in completing this fruition phase?
What we are doing in this fruition phase is we are refocusing away from the dynamic aspect of the first phase, the innovation phase in favor of focusing on consistency, continuity, and quality of delivery. I am going to take issue with what you said about yourself because you are amazing. One of your superpowers is installing consistent frameworks for organizational consistency.
You may not be the one that's thrilled with being the implementer of those things, and I can certainly say I'm not thrilled with being the implementer of those things although you and I, in my judgment, are perfectly capable of doing those. That's not where our juice lives but I know that a portion of your juice and superpower is in installing the mechanisms that allow optimization to occur.
Yes, and I appreciate that. Thank you so much. That's very touching to hear. You are right. The creation, the installation, and the innovation of the processes that allow for successful fruition are well within what I love. It's the day-to-day. Once they are installed, then we go into this next thing focusing only on small incremental improvements.
It's like, “Can I break something and build anew?” which is how and why I found the professions that I have been in, and why I love doing what we do at Blue Sky. It’s because we get to come in and do the creation and implementation. We train people who are better attuned to managing throughout fruition. I let them do that piece and I can go away and do more innovation.
I resemble that completely as well. Part of optimization is systematizing processes so that everyone is on the same page. Everyone is doing things “the same way.” The reason that I'm putting the same way in quotes is that we would hope that each person is sticking to the procedures and the mechanisms. Also, they are implementing those things in their authentic way as long as their authenticity is not running counter to the procedures. We are not talking about this micromanaging conformity here. What we are talking about is a framework that everyone is on the same page about using, and that's the systematization of the processes that everyone is going to be utilizing.
This is great because it points back to what you said at the very beginning where the central theme of successfully managing fruition is consistency, continuity, and quality. We add equality and expectation. I'd love to point anybody new to our show back to the episode we did on Kaizen because Kaizen still exists in fruition. We are continuing to improve. We are just not making bold, dynamic, huge, or big changes to the system.
The central theme of successfully managing fruition is consistency, continuity, and quality expectation.
Now, we are making the system incrementally a little bit better each time and once you have got that process down, you can start to automate. You can start to take the human element out of all the pieces of this process where a human component does not contribute to a better output. This is where we try to get things so consistent that we can put a robot on the line, take the critical thinking element of a human, and put them back to something that's better utilizing their capacity for that critical thought while ensuring the continuity and quality through whatever the product or service is that we are delivering.
It’s very important, especially in the emerging AI/robotics phase that we are now well on our way into the marketplace and in technology development. Those are the optimization focuses that we wanted to touch on in this episode and the other thing that happens during the fruition phase is its variety of optimization, but we have broken it out into its category that we are calling profitizing. Whereas optimization is about getting consistency and procedures down the path, profitizing involves a couple of things. One of those is establishing cashflow consistency in the broader context of a durable growth curve.
It means that during the fruition phase, the focus having to do with profitizing is on creating a level of consistent reliability in revenues coming in. To connect this explicitly with the first phase, the innovation phase, in this phase, you are burning through cash reserves because you haven't brought what you are innovating to the market yet so you are burning through reserves. That's what that phase focuses on. In the profitizing phase, you stop burning. It's not about burning. It's about making sure that everything that's being done establishes cashflow consistency and growing amounts of cashflow so that you are on a durable upswing curve in your profitizing of what you have brought to the market.
Everything in fruition has to be up to the right. I like to say the fruition phase is the portion of this cycle where all the bills get paid. You are paying for the innovation that was done to create this product or service but you also know that every product and service has a finite lifetime in the market. First, you pay the bills for the innovation. You put a little bit of money in the bank, and then you start to pay forward the reserves for the next phase which is bifurcation where we are going to start burning through some cash.
The nice thing about bifurcation is you are still capitalizing, you are still in fruition on the existing product as it starts to twilight, and you are spending money so that burn isn't as painful as the first one. However, all the bills get paid in profitizing. With establishing cashflow consistency and durable growth, you also have to pay a lot of attention to margins.
If you tie the financial side, the profitizing side with the optimization side, they are both trying to achieve the same end. You are using the optimization and the incremental improvements of production, the systematization and automation of the delivery of your product and service to make it cost less to deliver a product or service.
You are maximizing your economies of scale because now, you are producing and distributing at scale. You can purchase in bigger quantities. Whatever resources you have, you are using more of them so you can start to get those cost savings on the resource side, but also, you are getting that scale benefit on the production and delivery side.
Yes. I realize we probably should at least acknowledge that there are times during this phase when something that's called mezzanine funding is needed but generally, mezzanine funding is for having a cashflow cushion so that you can continue to optimize and continue to be on the profitizing curve. Hopefully, you won't need mezzanine funding, however, during this phase no doubt.
For those of you who aren't finance people, a mezzanine funding, think about a credit card on the scale of millions of dollars. It's the highest interest debt that a business can take but it's debt that doesn't mind being subordinate to normal bank financing or to warrants, ventures, and things of that nature that you may do in your capital stream. It's debt that can come in quickly. It can come in second, and it's going to cost you.
It does save the day when it's necessary, but it's the financing of a later resort. Again, the more times you have gone through the cycle, the easier it is. The very first time when you are starting a business and you burnt all that cash in innovation without anything except your investors keeping the cushion, that's when mez comes in handy to allow you to capitalize your resources and get that first phase of fruition. However, ideally by the second phase of fruition, you won't need it because you have been able to save some reserves to get you through the burn of bifurcation.
Not to belabor this, but to anchor this and make this real world. A classic situation that will sometimes call for mezzanine funding is where you have gone into the fruition phase and you are early into it. As you were saying Jason, you haven't built up your reserves yet and this massive order from a big chain comes in. You may have the capacity to fill the order but you don't have the funding to cover the costs of fulfilling that large an order at the frontend.
However, if you have contracted that order correctly, at the backend, you will have made so much profit from that huge order that paying back the mezzanine funding to aid with cashflow at the beginning is a no-brainer. It’s because your profit margins are so good and you will have plenty of profit left over after paying back the mezzanine funding.
There are so many cases where you hit explosive growth or where you think you are driving a Peugeot and next thing you know, you are in a rocket ship. Making sure that you have capital and finance options in those eventualities is important and that's where mez does its thing beautifully.
This is part of why eliminating waste during the fruition phase is so important. It's easy to get intoxicated when profits start coming in. When revenue levels start reaching the point where you are more than covering your costs because then the intoxication factor could cause you to increase your waste rather than reduce it. Also, it's important to reduce or eliminate waste during the fruition phase because the more you do that, the more you are able to build your nest egg for the next phase, the bifurcation phase.
The last piece of this profitizing phase is when we talked about the innovation phase, it's all inward-looking right? We are all looking at this product and perfecting the product or service we are going to bring out to the world. We have done enough peeking out the windows to be confident that there's a market out there, but we are not worried about our competition. We are not worried about our buyer avatar. We are not worried too much about any of those things until we are going to sell them to them.
In this fruition phase, you have to be looking out more than in. You are still looking a lot into quality improvement and optimization, but you have to be spending a lot of time looking at, “How do you fit? What's your competitive advantage? What are competitors doing to try to knock you down as you are trying to take market share? What is the buyer's response? How do you have to navigate those waters to ensure that your proposal's competitive advantage and value delivery align with their reception of your advantage and value delivery?
There's a lot of tweaking and adjusting within the marketplace as well as within your delivery cycle to make sure that you are the option of choice for your clients and that you are delivering on your promises. Whether your promise is to be a low-cost leader, to be the top quality leader, or to be the top service leader, you can never do all three. However, you can usually do two pretty well if you are paying attention. You have to decide what your promise is as you begin this fruition and then spend a lot of time getting the voice of the consumer and assessing your competitive marketplace to ensure that you are delivering on that promise.
What I will piggyback on as a point of emphasis is that before you and I get into all of the dimensions of what doesn't happen during the fruition phase, the preface that I want to offer about that is that what doesn't happen is creativity doesn't vanish during the fruition phase. In the fruition phase, creativity is laser-focused solely on for wishing dimensions that we have been touching on.
There's a lot of creativity that is involved and needs to be brought to bear as you refine your avatar profile based on market response in the fruition phase. Don't think that fruition means kicking out creativity. It is necessary for the fruition phase, but it needs to be very narrow and focused on what the creative energy is devoted to. With that said, what else doesn't happen during the fruition phase?
This is a big caveat. What we mean by right, is we just finished describing a whole bunch of, but if fruition is done right, big changes do not happen in this phase. A whole bunch of incremental small tweaks happen throughout this phase but big changes happen during innovation or bifurcation. They don't happen during the fruition phase.
I love the point that you talked about that creativity doesn't die. It gets focused. It's an entirely different type of creativity. It's a critical creative skill to excel in fruition, but it's an entirely different type of creativity than what we have in innovation. That's great to understand because I have heard of several different industries or practices where creativity goes to die.
I like to say that about all my accountant friends because it's fun to pick on my account and friends, but no. There's always a home for creativity in excellence. There are a lot of different types of creativity. I appreciate you bringing that up. As we talk about big changes don't happen, the idea of expanding into entirely new markets is not a piece of fruition. It's a subset of the bifurcation because this is a major change, and it takes major adjustments to this uniform process that you are optimizing in fruition.
In fruition, you are looking at one market and capitalizing on it. As growth starts to decline and you recognize that this is a product or service that's going to start twilight, you then have to look at options there. Finding new markets to penetrate and finding new use cases for your product and service can give it extra gas to life. It can even give it another growth curve but this is bifurcation because this is, again, starting to make big changes and get creative in the blow it up and build it better way and not in that uniform, optimized, and very focused creative fashion that makes excellence and fruition what it is.
It was so well said that the last point that we want to make about what doesn't happen during the fruition phase is a no-brainer. What you are not doing during the fruition phase is developing and rolling out new products or services. That comes in the phase we are going to go into in the next episode. It doesn't happen in this phase because if you try to develop and roll out new products or services during the fruition phase, you will not optimize and profitize. You will get spread too thin and that's not good for the business' highest interests during the fruition phase.
That is where we stop with what doesn't happen during the fruition phase, but as a sneak peek behind the scenes, a critical outtake is, “I wanted to put the fun in here,” and Dr. Gruder told me that it was wrong that some people can have fun and fruition. I am just not one of them. Let's move on with that little segue into the big challenges and threats, and how we address and overcome these threats before they become obstacles when we are talking about this finite portion of the cycle, which is the fruition phase.
The first one is that this requires an entirely different leadership paradigm than the invasion phase does. In Innovation, you are talking about developing something brand new or something much better than what exists. You are talking about burn rate and failing forward quickly. We are talking about this massive dynamic mindset that has to have comfort in not having profit, cash burn, and in these teams that have multidisciplinary communication and no silos.
It has to be a fast-moving aggressive and very resource-overlapping type of mentality. In order to manage that, you have to almost be comfortable leading through chaos. The leadership style that it takes to excel in the fruition phase is antithetical to all of that. This is leadership that is driving towards consistency and the smallest incremental changes possible. In a huge way, the major focus is improved margins and profitability.
Making that change from the excellence and leadership that drives success in innovation to the excellence in leadership that drives success in fruition is the difference between the sun being down and the sun coming up. It's huge and catastrophic. There are very few people in the world who can successfully do both durably. There are people who can do both pretty well for a short period of time but one is the other of those capabilities and foci are not within their passion skill set or in their position of excellence. This almost requires an entirely different leadership team or at least, a shuffling of the cards as to what that leadership team is responsible for.
What you are saying is so spot on. It's so important because we have seen this over and over again where there have been founders or initial CEOs who have shown and excelled during the initial launch phase of the business during the innovation phase. Once the business gets into this fruition part of the cycle, they are out of their element and only a fraction of those CEOs are interested in and capable of pivoting their leadership approach to the right match with the fruition phase. Whereas, more leaders and founders than not don't pivot well into that.
We have seen CEOs get kicked out by their board during this phase because the CEO didn't have the clarity or had too much ego investment to own up to the fact that they were right matched for the previous phase and they are not right matched for the current phase. If the owner is wide awake about these things and was the initial CEO, the owner doesn't go away because the owner won't need to go away if they recognize that they need to bring in a different type of CEO for the fruition phase and the owner gets to continue to excel with their superpowers, but not as the CEO during this phase.
I want to jump in real quick because I want to hear what you have to say about financial management in this fruition phase. However, the thing that's important is when you have an exceptional leader for innovation and you get to the fruition phase, and they are no longer the exceptional leader for that phase and you kick them out, you just crippled yourself for the bifurcation phase that we know is coming up.
A clear-eyed assessment of this cycle and an understanding that every piece comes back around is important because that's where you can say, “Now, I am no longer innovating. I'm going to step back from the helm. I might guide operations. I might become laser-focused on optimizing the creation that I help bring to life, but I'm not going to be driving the bus for growth because I'm not the leader for that. We need that person in there now and I will step back up to the helm in the innovation segment of our operation when we get back to bifurcating.” We will see that other leader there too. We need two different leaders at that point. Being opaque about this cycle can cut your legs off at the kneecaps if you are not careful because you could lose great leadership and talent that you will need a little bit further down the road.
Being opaque about this inflection cycle can really cut your legs off at the kneecaps if you're not careful because you could lose great leadership and talent that you'll need a little bit further down the road.
One of the classic textbook examples of how not to do this happened with Apple because you had Steve Jobs was the innovator who got Apple off the ground and then. After all, the things that we are talking about right now are not handled in a good way in Apple Jobs got booted. Only a few years later came back into the company because the fruition phase had led into the next phase, the bifurcation phase and they needed his brilliance again.
In an ideal situation, he would never have been booted out and there are lots of reasons why that ended up happening but we don't want to recommend to you that you go that type of route. As an owner, stay with the company, but be wide awake enough to recognize the exact things that Jason was describing so that you can shift your role knowing that you are going come back into primacy again during the bifurcation phase.
The other big challenge or threat in the fruition phase has to do with not doing your accounting properly and what I don't mean by properly is what everyone thinks about when they think of accounting, the bean-counting version of accounting. The fruition phase version of accounting is vital and my bias is it's vital throughout the entire lifespan of a business, but it becomes exceedingly important in the fruition phase is behavioral accounting.
It's called behavioral accounting. It's called value creation accounting. It's a form of accounting that connects personnel contributions, personnel value creation, and personnel accountability with revenue and profits. When you get that integration between what people generally think of as accounting with the actual behaviors, functions, and productivity of individuals and teams in the business in the value creation process, you get a magic formula for the growth curve that needs to happen during the fruition phase.
You just served up a big parfait. There are a lot of layers to what you talked about here. We might have to come back to an episode digging through that but right now, I'm getting hungry so let's bring it home. Let's talk about our key takeaways.
We have two key takeaways we want to touch on. The first of those is during the fruition phase, the thing that's crucial to avoid is what I as a recovering psychologist refer to as corporate ADD, the next shiny object thing. The Attention Deficit Disorder that companies can get into when they are tempted to go in a new direction during the fruition phase.
If they are tempted to go in a new direction, bookmark it. Do some initial brainstorming about it if you want to so that you are locked and loaded when you go into the bifurcation phase that follows the fruition phase, but corporate ADD during the fruition phase is off-limits. It's not functional and helpful at all. At the same time, what's not helpful because, in the fruition phase, you are optimizing and profitizing. You are focusing on elevating the efficiency of everything.
What that can lead to is status quo addiction and the status quo addiction has to be mitigated because if it's not mitigated during the fruition phase, when you move into the bifurcation phase next, the brakes are going to be put on in the next round of innovation. It’s because people will have become addicted to the status quo and they won't want to move on from that.
You are taking away both of my extremes here. This is no fun but it does happen to be a great lead into what I thought was a key takeaway from this which is this phase is all about inertia. In order to successfully navigate fruition, you are creating a level of organizational inertia that is required. You are slowing down the rate of change. You are making those changes smaller and more incremental. You are not moving fast in the changing arena with regard to the delivery of products and services.
In order to successfully navigate fruition, you're creating a level of organizational inertia that is required.
Also, you are doing that so that you can move fast in scale, growth, and profitization. It's not that the whole company comes to a stop. It's that the change component establishes inertia through processes, systems, and automatization so that you can move that growth energy into profit. The trick with that is inertia that status quo addiction that you mentioned gets so cozy. “I want to come in every day and know what's expected of me. I'm going to punch in. I'm going to do my thing. I'm going to punch out. I'm not going to have to think about change.”
That gets way too comfortable when the product or service starts to reach the end of its useful life. In the beginning, you want to instill this operational inertia in order to get the most and maximize your profitability and margin of expansion. Also, get every piece of juice you can out of the ripe fruit that you created in innovation, but then you have to be capable, and this is where we talk about having leaders who can slide in and out of these roles.
You have to have an organizational capability to let go of a portion of that when you bifurcate because there's going to be a subset of your team. It’s not the whole team and not the whole organization, but the special little subset within your organization that is going to have to be able to burn, that is going to have to be able to change, and that is going to have to be able to be antithetical to all of the success factors of fruition.
This phase is all about that inertia, which is a blessing and a curse but again, just like the leadership changes and the paradigm shifts that go through these inflection points, if you are cognizant of them. If you have a good management strategy, and you have a way of recognizing the inflection points and jumping into them with wide-open eyes knowing what to expect, you will be much better able to navigate those waters.
On behalf of the ever-insightful and articulate Jason Tuzinkewich and myself, we thank you for reading this episode. We invite you as always to click on the subscribe button so you can be notified immediately when we release future episodes. We do always look forward to reading your thoughts, questions, topic suggestions, and other requests you might have because that's how we get ideas for things to cover or people to interview in future episodes.
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