Tuesday, August 26, 2014

Strategic Planning Analogy #535: Only the Experienced Need Apply?

Of all the Help Wanted ads out there, I think the most inconsistent ones come from the advertising industry. They wax on about how they want a diverse workforce. They say that creative minds can come from any background and that they want to find all that diversity of creativity in order to serve their clients. Therefore, they claim to be open to looking at people from all walks of life to fill their job openings.

However, at the bottom of the advertising agency help wanted ads they always say that only people with 6 years or longer experience in an ad agency should apply for the job. Some say you need at least 10 years of ad agency experience.

How can you hire a diverse group of creative people from all walks of life if you only look in one place (inside other ad agencies)?

I pointed this inconsistency out to an ad agent executive who was hiring people, and her response was, “Yeah, we tend to do that.”

She didn’t say it was wrong, or a mistake, or apologize for it. She only admitted the hypocrisy was true.

It makes you wonder how an industry so full of professional advertising copywriters could write such bad Help Wanted ads.

I understand that there are some benefits to hiring people who already have experience within that industry. But there are also some drawbacks. This is especially true if the key criterion for success is diversity in creative thought.

If you keep drawing your talent out the same pool of candidates, who are trained in doing things the same way, you are never going to get diversity. It’s like inbreeding. That leads to nothing but disease.

And if everyone is creative in exactly the same way, is that truly creativity or is it just repetition of the way things have always been done in the past?

I think a similar dilemma can occur in strategic planning. Great strategic planners are skilled in strategic thinking. This is a skill somewhat akin to creativity. It is a particular way of approaching problems that really isn’t related to a particular industry. Strategic thinkers can come from all sorts of diverse backgrounds.

Yet, when you look at Help Wanted ads for strategic planners, they almost always put a high premium on finding people who spent a large part of their career within the industry of the hiring company. Just because I spent a long period of time in an industry does not mean that I can think strategically about that industry.

Strategic thinking is either a skill that you have or a skill you do not have. If you have it, then you can help a business with its strategy, pretty much no matter what industry it is in or where your background is. Conversely, if you don’t have the skill, then you cannot help the business do strategy, even if you have decades of experience in that industry.

So why do so many firms look for strategists within the industry pool rather than the strategic thinking pool?

The principle here is that if the critical success factor in strategic planners is strategic thinking, then hiring companies should put a higher priority on finding strategic thinkers then on finding people who know their industry.

Yes, I know…everyone will tell you that their industry is different. It has all sorts of quirks and idiosyncrasies, so you need to hire someone familiar with all of that.

Well, I’m here to tell you that it is a lot easier for a person gifted in strategic thinking to figure out your industry than it is for an industry veteran to learn strategic thinking if they are not naturally gifted in it. So go with best thinkers, regardless of their industry, because they can usually pick up the industry part pretty quickly once they are hired.

It reminds me of an old saying in the retail industry: “It’s better to hire someone naturally gifted in customer service and teach them retailing than to hire a retail veteran who doesn’t get customer service.” The idea is similar. If you get people with the right natural skills for success, you can teach them the industry. But if the natural skills are missing, then industry knowledge isn’t very useful.

Change Agents
I think this principal is especially true for strategic planners because of their common role as change agents. It often falls to the strategic planner the responsibility of figuring out how to change a business, so that it no longer continues the status quo.

This change can take many forms:

  1. Diversification or transformation from a declining industry to a growth industry.
  2. Reinventing the business model to be more in tune with a changing environment.
  3. Looking for ways to positively differentiate one’s business from the competition by doing something different than what everyone else is doing.
  4. Looking for competitive “white spaces” or “blue oceans”, i.e., new places where industries have not previously operated.
In all these cases, intimacy with the status quo is not of much use, because success is created by leaving the status quo to move in a new direction. If fact, too much experience in the status quo might blind you to all the new possibilities. Spending too much time perfecting one way of doing things may make it harder to think of other ways to do it.

By contrast, hiring a strategic thinker with a more diverse background may be better able to envision new ways to break away from the status quo. Because they are not bound by conventional industry wisdom, they are freer to envision better possibilities for change.

The Innovator’s Dilemma
In The Innovator’s Dilemma, Clayton Christensen talks about how most industries are revolutionized by those outside the industry rather than those on the inside. Those currently in the industry tend to focus on how to do the status quo better. Those from outside the industry look for radical new ways to better serve the customer. The outsiders then become the agents of change.

In the transformation from analog businesses to digital, it is the rare exception of a company that successfully maintained its leadership both before and after the transformation. Instead, the typical path was that the incumbent was replaced by an outsider.

The leaders in travel agencies were replaced by outsiders like Orbitz and Expedia. Kodak was replaced in imaging by outside firms like Apple and Instagram. Status quo brick and mortar retailers are losing out to outsiders like Amazon. One of the rare exceptions would be Staples, who is transferring its leadership from one space to the other. The rarity of exceptions tends to prove the case.

Given the preponderance of evidence that change tends to originate on the outside, why would you want to hire a change agent (strategist) whose majority of experience is from the inside? Looking outside seems to make sense.

When hiring a strategic planner, there is often a bias to hire someone with industry experience. This can be a mistake for three reasons. First, strategic thinking for a strategist is a more critical skill than industry knowledge. Therefore, hire for strategic thinking and then teach them the industry.

Second, strategic planners are often the agents of change. Experience in the past is not very relevant when looking for ways to reinvent for the future. In fact, it may be a hindrance.

Third, history shows us that most revolutionary change comes from industry outsiders rather than insiders. Therefore, it can make sense to bring some of those outsiders into your company, so that you can better adapt to revolutionary change.

You probably don’t want an entire company to be filled with outsiders, but if there is any place where outsider thinking is beneficial, I would think it would be in strategic planning. Therefore, be careful of what you ask for in your Help Wanted ad. You may get what you ask for rather than what you really need.

Wednesday, August 13, 2014

Strategic Planning Analogy #534: You’re Older Than You Feel

According to a study reported in the Psychonomic Bulletin and Review in 2006, adults tend to feel younger than their chronological age. Beginning around age 25, people start reporting a sense that they don’t feel as old as they really are.

The gap between their subjective and chronological age continually increases between age 25 and 40. By the time adults are 40, most adults report feeling about 20% younger than they really are. This 20% gap tends to remain for most of the remainder of their years.

So if we are “only as old as we feel,” then I guess we’re not that old.

Perception is a powerful thing. If we feel younger than we actually are, then we will act younger than perhaps we should. This could lead to foolish behavior and get us a trip to the emergency room at the hospital.

I dare say that the same phenomenon can occur in the business world. I think a lot of executives feel that their company (or business model) is not as old as it really is.

There’s this sense that maturity doesn’t apply to their business. They feel like their industry is still young and growing and that their company is still a growing youngster, too.

But let’s face it. Businesses and industries have life cycles, just like humans. They may start out young and growing, but eventually they reach maturity and then decline. You may not always feel like your company is progressing through these life stages, but it is. And it is probably further along on this path than you think.

The problem is when you manage your company based on the way you feel about its age rather than what its age really is. Each stage of a business’ life requires a different type of strategy. If your company has reached maturity and you still feel like you are in your growth phase, you will be using the wrong strategy. And just as adults when not acting their chronological age can do foolish things that get them into the hospital, managers who do not manage to their business’ actual life stage age can get their companies into serious difficulties.

The principle here is that although the growth phase of an industry may appear to be the most fun and most desirable, the truth of the matter is that in most mature economies, most of the industries are mature as well. Therefore, most of us should be focusing on mature industry strategies.

IBIS World Data
This was really brought home to me when I was looking at a report produced by IBIS World. IBIS World produces reports on a wide variety of industries. To give a perspective, each report shows where that industry fits on the industry life cycle. They do this with a comparative scatter plot showing where about 700 industries fit on the life cycle path. I’ve put a sample of one of these charts in this blog.

As you can see in this chart, the largest number of industry dots are in the mature phase. And although the later growth phase gets the next largest number of dots, the decline phase is not all that far behind. Early growth has the fewest number of dots.

This chart shows just how old most industries are. Mature and decline together dominate the landscape.

The Disconnect
Yet when one looks at business literature and strategic discussions, it seems that the topic of growth dominates. There appears to be a disconnect between the reality of maturity and the desire to act as if maturity has not yet occurred.  Just as our society is preoccupied with youth culture, our businesses are preoccupied with younger business stages.

We may feel younger, but the disconnect between that perception and reality can get us in trouble. Talking like we are in the growth phase or acting like we are in the growth phase does not alter the reality that for many of you, you are already in the mature or declining phase. And by not acting your age, you could be doing your business a disservice.

The Downside of Not Acting Your Age
Here is a list of the major negative consequences from managing to growth when you should be managing for maturity.

1.     Overinvesting in the industry: Because you over-estimate the growth and life expectancy of your industry, you tend to value investment opportunities within the industry as higher than they really are.  This leads to paying too much for bad deals. Hence, you destroy value by overinvesting in areas where the returns will never cover the cost of capital.

2.     Working too hard to grow the top line: If you think there’s still a lot of growth in the industry, then you will have high expectations for what your own growth should be within that industry. However, in maturity, those high growth expectations may be quite unrealistic. Therefore, the only way to hit those high sales goals is to start a price war rampage in order to steal sales from the other mature competitors. This destroys the profit margin for you and the entire industry. If competitors follow your downward pricing, you may not end up with any additional business—just lower margins. But even if competition does not follow you in this downward spiral and you get some of their sales, you may still end up as less profitable because of how you destroyed the margins in order to get the business.

3.     Under-investing in future business models:  If you think there is still a lot of growth and vitality in the current business, then you will see little incentive to investigate or invest in the next big thing that will make your status quo obsolete. The problem is that your business model’s obsolescence is probably a lot closer than you think. By ignoring that, you will be unprepared for when that day comes. You will end up like Kodak, who saw their entire world fall apart because they delayed making the transition from analog film to digital imaging until it was too late. For more on Kodak, look here.

So, as you can see, acting as if your business is younger than it really is is not a small issue. At best, it will cause you to destroy value. At worst it will cause you to destroy the company.

A Better Approach
To avoid these negative consequences, consider the following:

1.     Continually monitor your life cycle using objective tools: Don’t rely on your feelings. They can deceive you. Use objective tools to monitor your path through the business life cycles.

2.     Act Your Age: If you are in maturity, then use the appropriate strategies for maturity such as:

a.      Moving the focus from top-line growth to process efficiency and cost control.
b.     Focus on reaping the maximum return from prior industry investments rather than creating new ones.
c.      Consider shifting emphasis to pockets where maturity is further away, such as emerging nations.
d.     Examine the relative merits of consolidating the industry versus selling out to someone else who wants to consolidate the industry.
e.      Invest in the next big thing that will replace the status quo.

I love what I see in the packaged food industry. P&G realized that its corporate culture and business model were optimized for growth industries. P&G also realized that its food products portfolio had moved on to maturity. Therefore, it sold its mature food businesses to other companies, like Pinnacle Foods. It was a win-win. It freed up money so that P&G could invest in growing industries like health and beauty. And, since Pinnacle Foods has a corporate culture designed to excel in mature businesses, the food businesses were under better management.

In fact, it worked so well that P&G is considering a more massive divestiture of brands.

The business world is a dynamic place, where new business models replace the old. As a result, businesses do not stay in the growth phase forever. Maturity and decline occur. Unfortunately, many business leaders think their business model is younger than it really is. This leads them to manage for growth when they should be managing for maturity. By using the wrong strategies (growth strategies instead of mature strategies), these leaders destroy value. The better move is to align your strategy with the reality of where your business model lies in its life cycle.

You can use this disconnect to your advantage. If you know that your business is in maturity or decline and someone else still thinks it is in its growth phase, you can sell your business to them for more than you think it is worth.

Tuesday, July 22, 2014

Strategic Planning Analogy #533: Planning the Periphery

Last week I got bumped off an airplane in exchange for a ticket voucher discount for a future trip. I thought that was a pretty good deal until I tried to redeem it.

The airlines said I had to redeem it on their online site. Unfortunately, there was a flaw in the website making it impossible for me to redeem the voucher online. As a result, I had to call the airline on the phone.

After a terrible phone experience, I finally got an email notification of my transaction. There were two parts of the email that irritated me. First, they still had not corrected the problem. Second, they charged me a $25 service fee for using the phone to do my booking.

So I had to call the airlines a second time. It struck me that this was a pretty good deal for the airlines. By creating incompetency on their website and on the phone, they were able to create numerous $25 services fees they would not otherwise receive.

They were getting rewarded for incompetence as my travel voucher was becoming less of a deal.

Airlines have an interesting pricing strategy. They sell the seat ticket at unsustainably low prices and then make up the difference by charging all sorts of associated fees, like the $25 I had to pay for calling them on a telephone. They have other extra fees for things like luggage, earlier pre-boarding, seats with slightly more legroom, pillows, blankets, meals and a host of other things.

How did it get to this point? Well, the core business of selling a seat to get you from one airport to another became commoditized. Let’s face it. There is very little difference between the standard seat experience in one airline over another. If you closed your eyes, you’d never be able to determine which airline you were flying.

I remember one time flying from London to Germany. I was about to go up the boarding steps to the airplane door when I noticed that the steps had the wrong airline logo on them. At first I thought that I might be boarding the wrong plane. But then an airline employee came along with a magnetic sign with the right airline logo. He put in on top of the other logo. Voila! Suddenly I was going up the proper airline set of stairs.

But that’s how it is. The standard airline service is so commoditized that you could slap any logo on it and it wouldn’t make a difference.

And we all know what happens when a core service becomes commoditized. The only way to create a preference is by lowing the price. So all the airlines lowered ticket prices to unsustainably low levels.

Since the airlines could no longer make a profit on the seats, they had to get the money somewhere else. That’s why I had to pay $25 to make a phone call to complain about a defective website.

And the point of this blog is that nearly every industry is moving in a direction towards this airline pricing model. Core businesses in numerous sectors are becoming commoditized. If you cannot come up with ways to make money on the periphery of your business (like charging for phone calls), you will have an unsustainable business model.

The principle here is that in industry after industry, the core business is becoming commoditized. The commoditization is causing core businesses to be priced as a “loss leader.” To remain viable, one has to get nearly all of the profit from non-core elements on the periphery. So, ironically, one’s strategy may need to be more focused on the periphery than the core if one wants to succeed.  So much for all that literature on “sticking to one’s core.”

Fast Food Example
This is not just an airline problem. Look at the fast food industry. The basic hamburger is commoditized. All the major fast food restaurants sell the core hamburger at a loss.

With the core product priced at a loss, the only way to make money is by focusing on the periphery. So McDonald’s adds fancy coffees and fruit smoothies. They all start putting a slice or two of bacon on everything so that they can charge a premium price. They push the higher margin fries and beverages. They try to get you to upsize to a larger combo meal and to add a dessert.

This is their version of what the airlines do. They come up with all sorts of peripheral things to charge you for, because the core item on the menu (the hamburger) can no longer make it on its own.

Or how about the cable TV industry?  Cable TV in the US is commoditized. They all give you essentially the same channels in the same way. When watching your favorite show on TV, the viewing experience is identical, regardless of the cable company piping it to your screen.

As a result, US cable TV companies can no longer price their core TV business at a profit. The only way to earn a profit is by focusing on the periphery—phone service and internet service. Cable TV service has become a loss leader in order to sell the periphery.

In a similar fashion, phone companies sell talking over the phone at a loss and have to make it up on peripheral services like data transfer.

In social media, it is quite common for companies to give away the core business for free and then try to recoup their losses in sales of peripheral features to peripheral customers (think of LinkedIn). It’s called the “Freemium” model. It is very common in gaming, where the core game is free and you pay for periphery features which help in the game experience.

It’s common for digital companies to use the word “monetization.” It is their way of saying that they have to give away the core for free in order to build out network to a critical mass. So, to make a profit, you have to create a secondary strategy for collecting cash—the “monetization.”

When you try to buy something at the store, they try to get you to pick up impulse items at the checkout, get the extended warranty, add on the optional extras, get a matching belt for the pants, and so on. Why? Because the core products are not profitable. The money is made on the peripheral goods. Even big ticket items like cars are sold this way.

I could go on and on, but you get the idea.

So what should a strategist do? Well, first one can try to fight the commoditization by creating uniqueness at the core. It can be difficult, but some can succeed. I’ve talked about this in a prior blog. The problem is that if everyone starts adding the same “uniqueness”, then that becomes a commodity as well.

Therefore, one should seriously consider the periphery while developing the core strategy. The periphery strategy may be even more important than the core strategy. After all, if the core truly is commoditized, all you need to do is copy industry best practices and build scale to get credibility at the core.

It is in the periphery where you not only get a chance to make extra margin. It is also the place where you have the best shot at creating differential advantages. The periphery is where you have a shot at creating a sustainable reason to be preferred over the competition.

For example, Comcast has a reputation for absolutely horrible customer service. A cable TV competitor can take the peripheral element of customer service and create a meaningful advantage over Comcast. Southwest Airlines has created an advantage by treating the peripheral business of baggage differently from its competitors.

Apple tries to get around commoditization in smartphones through the unique peripheral features in the closed system it attaches to its phones. All along, it has been the closed systems circling on the periphery (like iTunes) which have made all the Apple innovations truly successful.

So the periphery may not be at the core of the industry, but it is probably at the core of what helps you to win and make a profit. So treat it accordingly when doing your planning.

There is a tendency for the core business of all industries to become commoditized and/or become a loss leader in price. As a result, if your strategy only focuses on the core, you will most likely never achieve sufficient profitability to make your business a financial success. Real profit tends to come from the periphery, where there are more opportunities to enhance your margins. As an added bonus, the periphery also often is the best place to create meaningful differentiation. With all those potential benefits coming from the periphery, one should not leave the periphery to chance. It needs strategic planning emphasis as much as the core, if not more.

I know a lot of social media companies have a singular focus on building out the core. They say they will get around to figuring out how to monetize it later. That’s like saying I have a great strategy, except that it does not provide me with a differentiating position or a way to make a profit. You’d never settle for a strategy like that. Why would you settle for a business like that?

Friday, July 11, 2014

Is the Christensen Halo Slipping?

Christensen Criticism
Harvard Professor Clayton Christensen is considered by many to be one of the modern great minds of business theory. His 1997 book, The Innovator’s Dilemma, was called by the Economist magazine in 2011 one of the six most important business books ever written. That’s high praise.

However, in the June 23, 2014 edition of the New Yorker magazine, fellow Harvard professor Jill Lepore writes a scathing criticism of Christensen’s seminal work (read it here). Perhaps in an attempt to overcome the damning nature of that New Yorker article, the July-August edition of Harvard magazine has a glowing defense of Christensen’s work (read it here).

The Criticism
So what does Lepore say about Christensen’s work that is so damning? Basically she says two things:

  1. The facts don’t back up Christensen’s theory.

  1. Even if the theory is true, it is relatively useless because it does not predict what type of behavior to take. In other words, there is no advantage to knowing the theory, because it only can explain the past, not predict the future. It is like someone who can tell you in great detail why the stock market did what it did yesterday, but has no clue about what it will do tomorrow. Lepore backs up this claim by pointing out that Christensen’s venture capital fund designed to exploit his theories from the Innovator’s Dilemma was a failure.
Although Lepore’s argument may not be as rock solid as she wants you to believe it to be, it is still very damning to Christensen’s legacy.

Another Chink in the Armor
I first started having my doubts over the “genius” of Christensen back in 2011, when I read an article of his latest “discovery” on the Harvard Working Knowledge website (read it here). I was flabbergasted that Christensen thought he had come up with another brilliant new insight, which looked to me like something that could have come out of an introductory marketing textbook.

He was acting as if he invented marketing. It reminded me of something a radio DJ recently said: “Miley Cyrus acts as if she invented sex.” It makes a person look silly when they act as if they invented something that everyone else knows has been around a long time.

I started thinking, how could Christensen be such a genius in understanding how businesses rise and fall if he hasn’t a basic understanding of marketing? I wrote a blog on the topic here.

Stay Away From Extremes
The reality is that Christensen is not as bad a bum as Lepore says nor as much a genius as Harvard magazine says. And even if much of what Christensen said is not new (a lot of the Innovator’s Dilemma ideas harken back to earlier work by others, such as Schumpeter’s “creative destruction” a half century earlier) it is still valuable work, because it got people to focus on an important topic.

My Core Learnings
My interpretation of the key takeaways from the innovator’s dilemma thinking is this:

  1. Business leaders have a vested interest (and bias) towards protecting and growing their key sources of profitability. 
  1. This causes them to:
    1. Go on the offensive by continually making incremental improvements to their key sources of profitability.
    2. Go on the defense by aggressively counteracting any direct competitive threat to their key sources of profitability.
  1. Unfortunately, the biggest threats are usually indirect, coming from radically different solutions which are unlike the status quo.
  1. Incremental improvements to the status quo won’t save them from the radical new innovation (for example, you can never make carbon paper incrementally better enough to overcome the threat of photocopy machines). And because the attack is indirect, the innovation is relatively immune from the traditional defense.
  1. The best response is to move away from the status quo and embrace its radical replacement. However, to do so requires destroying much of the current profitability within the status quo. That is a difficult undertaking to get approval for. As a result, the future usually goes to the one with no vested interest in the status quo.
  1. The key takeaway: The new is going to destroy the old. If you let someone else destroy your old, you are left with nothing (think Kodak and film). If you destroy your old, at least you have a chance of being left with the new. So overcome your fear of creating your own obsolescence, because obsolescence is inevitable and it’s better if you do it to yourself than to have it done by others.
These six takeaways are highly valuable, even if not new. The problem is that people have read far too much more into this concept. And that is when you get into trouble. Knowing that the new will eventually replace the old does not mean that you can always correctly know which new thing is going to do the replacing. Most new things fail. Therefore, one has to be very careful when making choices about what new things to bet on. And that is where the true genius lies.

Final Thoughts
We get into a lot of trouble when we label people as business messiahs. Eventually, they will not live up to all the hype and will disappoint us. But that doesn’t mean that we should throw away everything associated with them. Useful ideas are still useful, no matter the source. Just don’t read too much into them and think that a single idea solves everything.

Monday, July 7, 2014

Strategic Planning Analogy #532: Planning for Others

Years ago, I worked for one of the largest grocery wholesalers in the world. They were very proud of being the best place for small, independent grocers to get their food supply. This wholesaler continued to put its effort behind becoming even better at supplying groceries to small independent grocers.

There was only one problem. Small, independent grocers were disappearing at an alarming rate. The growth of large supermarket chains and Walmart Supercenters were squeezing the small independent grocers out of business. And many of the more successful, larger independents were being acquired by the large supermarket chains.

As a result, the customer base for this wholesaler was shrinking away. It really doesn’t matter how proud you are of serving your customer if your customer is disappearing. Being the best at serving a non-existent customer isn’t much to be proud of.

Strategists and business leaders work very hard to position themselves for success. They find a place where they can win and then work diligently to improve their ability to deliver that winning position.

The problem is that businesses do not operate in a vacuum. A company’s success is also dependent upon external factors, like customers and suppliers. If your customers and suppliers are going out of business, it really doesn’t matter all that much how well you are executing your strategy. In spite of all your internal efforts to greatness, your strategy will fail if your external partners fail.

In the story, the company I worked for was trying ever harder to perfect a business model designed to service small independent grocers. As the small independent grocer was shrinking away, so was the relevance of the wholesaler’s strategy. Better execution of that strategy would not ultimately turn things around. Even a perfect wholesaler for small independents will fail if its customers go away.

This is true for any organization which relies on having suppliers and customers (which would include nearly all organizations). For your plan to succeed, you need those partners to succeed.

The principle here is that our planning efforts must not just myopically focus internally on our own company. We need to broaden our planning to create strategies to ensure the success of our partners, be they suppliers or customers. If we do not actively plan to help others, then our own well designed and well executed internal strategy may collapse.

We should not rely on luck that our partners will do okay. We should actively plan for their well-being along with our own.

Department Stores
This is not a new concept. Department store owners in the 19th century spent a lot of time away from their stores and focused on boosting the economy of their local community. Why? They knew that if the local economy was strong, the sales at their department stores would be strong. Conversely, if their cities became weak and the population shrank, then their department store sales would shrink.

Therefore, the department store owners spent a significant amount of their planning time planning for their cities. They wouldn’t take the health of their customer base for granted. External planning for the city was as important as internal planning for the department store.

Automotive Industry
Early in the 20th century, Henry Ford did something similar for the automotive industry when he dramatically raised wages for his factory workers. There were many reasons why Henry Ford dramatically raised factory wages, but one reason was very relevant to our discussion: You needed a middle class income to afford a Ford automobile.

By setting a new wage standard, Ford was moving factory wages to middle class levels. Therefore, as others followed Ford’s wage example, Ford was dramatically increasing the number of people able to afford to buy one of his cars. Ford was proactively planning his customers.

Over the decades, the automotive industry seemed to forget this principle. The industry started squeezing their suppliers harder and harder. They didn’t care how much they were hurting the suppliers as long as it helped their internal bottom line. And then came the great recession and the suppliers started going bankrupt. On top of that, the great tsunami hit Japan around the same time, wiping out even more suppliers to the automotive industry.

Because the automakers did not adequately plan alternative sources of supply or other backup provisions, they suffered along with their suppliers. Assembly lines were shut down for extended periods.

Modern Technology
As we all know, modern technology is very disruptive to the status quo. Suppliers and customers appear and disappear rapidly. Being a great traditional travel agent didn’t mean much when their customer base disappeared and went directly to web travel sites. Building a near-monopoly in phone books isn’t worth much if nobody is demanding them due to superior digital information alternatives.

So What Should You Do?
There are three strategic alternatives when planning for your partners. The first is to alter your internal strategy to improve the health of your partners. For example, the grocery wholesaler I worked for knew that the small independent grocer would be stronger if it could be placed in retail formats that competed less directly with Walmart and the big chains. Therefore, they developed these types of formats and reinvented a portion of their wholesale operations to optimize under these new formats. It was a different way of doing business than in the past, but it created a business model that was better for both the independent retailer and its wholesaler.

The second alternative is to alter your strategy to move to where your partners are moving. Netflix redesigned its strategy when customers who wanted DVDs in the mail were moving to getting their movies from the internet. By shifting quickly to an internet option, Netflix migrated at the same pace as their customers, so they were able to keep them connected to the Netflix brand.

The third alternative is play the end game. As a market shrinks, you can consolidate what is left and then cut costs until one can make a profit. This is happening in many processed foods, where growth has disappeared. The original players, like Proctor & Gamble have gotten out of the business and moved to newer growth businesses. In their place are companies like Pinnacle Foods, who are buying up all these brands and playing an endgame.

The grocery wholesale company in the story also played an endgame with many of the traditional independent grocers who were left and did not migrate to the new formats. Although there are far fewer of these independents, the wholesaler has less competition for their business, so it can still create a meaningful business with them.

Common Approaches
Regardless of the strategic outcome, there are common approaches to success.

1)     Don’t just look internally at optimizing your own piece of the puzzle. Optimize the whole puzzle.
2)     Keep an eye on the external environment to understand when market shifts not only impact you, but also your partners.
3)     Treat your partners as partners, not enemies. Be willing to plan jointly and share information for the betterment of all.
4)     Be willing to abandon or modify a strategy when customers and suppliers are at risk of going away.

Businesses do not operate in a vacuum. Therefore, their strategies should not be developed in a vacuum, either. Don’t just plan your internal affairs. Consider plans for your customers and suppliers as well. And if they are moving away from your core business, you may need to change your business to follow them. After all, a “perfect” strategy for a customer who ceases to exist is really not perfect at all.

If you develop a win-lose proposition with your partners, eventually your partners will go away. Instead, build a win-win situation with your partners. That way, you can feed off each other’s success and succeed together for a long time.