Wednesday, June 8, 2016

Strategy Planning Analogy #562: Bowlers Vs. Golfers



THE STORY
Last fall, when Jordan Spieth won the FedEx Cup of golfing, he earned $10 million. That’s a lot of money for a golfing match. It’s not typical. The winner of a typical game during the golfing season makes only about $1.5 million. In the 2014-15 golf season, Jordan Spieth won $22 million from all his playing in golf tournaments.

By contrast, professional bowlers earn a lot less. The winner of a major bowling event earns about $25,000 (one-sixtieth of a major golf tournament). Top money makers on the pro bowling tour only earn about $250,000 for the whole year. In the first 56 years of the PBA (Professional Bowler’s Association) history—through 2013—only 40 bowlers made more than $1 million during their entire career. When you get past the top ten bowlers, the average yearly earnings from professional bowling is only about $6,500. And you have to pay all your own travel and living expenses. (You can read more about the plight of bowlers here and here.)

What’s going on here? Pro golfers and pro bowlers are both athletes; they both play as individuals on a tour; they both try to get a ball to roll to a desired target; they both have to practice thousands of hours to master their craft; they both play games also played by millions of average Americans. So why do golfers make so much more than bowlers?

I thought there was a movement to promote equal pay for equal work. It seems to me that the work of professional bowlers and golfers is roughly equal. Shouldn’t the pay be the same?

THE ANALOGY
The problem is that tournaments can only pay out a percentage of what they earn, and bowling tournaments earn a lot less than golf tournaments. Golf has the advantage of appealing to affluent men, a category difficult to target by marketers. As a result, companies are willing to pay a fortune to sponsor or advertise on golf tournaments. By contrast, bowling fans are not a coveted group by marketers. In fact, the PBA was so debt-ridden that it was purchased in 2000 for only $5 million, less than the cost of a minor league baseball team.

The economics don’t favor the bowler. There isn’t enough money available to pay them any more. As a result, poor professional golfers can earn a lot more than the best professional bowlers.

This problem is very similar to what happens in any business. The amount of money a company can earn is based largely on the pool of money available in the industry in which the company operates. If you are operating in a great place (like an athlete in golf), your chances for success are high. If you are operating in a poor place (like an athlete in bowling), your chances for success are practically non-existent, even if you work as hard at bowling as a golfer does at golf.

At one time, the recorded music industry was like golf, earning huge amounts of money. Mediocre bands could still make a decent living off recorded music. Now, the pool of money available for recorded music has shrunk dramatically. Only the top performers can earn a decent living off of recorded music.

Therefore, one comes to the conclusion that it is more important for businesses to determine where to play than to determine how to get better at playing their game. And determining where to play is a key role for strategic planning.

THE PRINCIPLE
The principle here is that hard work only has a huge payout if you are working in a space that can afford to make huge payouts. The problem is that I see so many businesses focus all their effort on trying to “get better” rather than trying to be in the “right place”.

Their strategists focus on things like:
  •      How do I lower costs?
  •           How do I improve the business process to make it more efficient?
  •          How do I speed up my output (or get to market faster)?
  •           How do I use R&D to improve the features of my output?

They end up focusing on things like Lean or TQM or other such process improvement disciplines. This is like a professional bowler spending all his time trying to figure out how to become a better bowler.

The problem is that no matter how much a bowler improves his ability to bowl, he will never be making the big money. He would have been better off spending those thousands of hours of practice on golfing.

Similarly, no matter how much a company focuses on operational improvements, the odds of getting a great reward on that effort are minimal if you are operating in a business space that is not profitable. Doing the wrong thing more effectively is still doing the wrong thing.

This is why Michael Porter, in his seminal article in the Harvard Business Review called “What is Strategy?” (Nov.-Dec. 1996) said that operational effectiveness is not a strategy.

If you really want to do strategy, you have to focus on something else.

Ask the Right Questions
The first place to start is by asking the right questions. The first question is this: What business should I be in? The second question is this: How can I win in this business?

As a young athletic boy, one should first ask a similar question: What sport should I be in? How one answers that question can have a major impact on lifetime earnings. In fact, there may be no other decision a young athlete can make that will have a greater impact on success. If a lot of professional bowlers had seriously pondered this question in a rational way when they were young, they might have decided to focus on golf rather than bowling.

Similarly, the choice of where a business decides to play is critical. Your answer to that question can have a greater impact on future success than anything else you ever do.

For example, Textron and Berkshire Hathaway both started out in the textile industry in the US. They could have just stayed in that industry and tried to do the best that they could at operating in the US textiles industry. Their strategy could have focused on how to be faster, cheaper, better at playing there.

But they did not. Both companies stopped to ask that critical question: What business should I be in? As it turns out, the US textile industry was a relatively awful place to play. It was sort of like the “bowling” of the business world. There just wasn’t a lot of money to be made in that space.

As a result, Textron and Berkshire Hathaway diversified and moved into better business areas. Their portfolios include businesses in the “golfing” areas of the business world, far removed from textiles. Stopping to take time to ask the critical question allowed them to become large, successful entities. Had they not stopped to ask the question, and stayed in US textiles, neither company would probably exist today.

In an earlier blog, I referenced a study by McKinsey which said that the largest factor in a company’s success is determined by the nature of the industry the company decides to play in. So companies should spend time deciding where to play.

As critical as this question is, I find a lot of companies don’t stop to do this. They are so focused on getting better at where they are, they never stop to ask if they should be operating somewhere else. This error can ruin a company more than almost anything else they do.

This is not a one-time decision. Industries change; prospects change (as we saw in recorded music). You have to periodically reassess if it is time to shift the business portfolio. GE has been so successful for so long because they continually ask this question and periodically shift accordingly.

A successful choice in the past will not protect you forever. Analog photography was great for Kodak for years, but eventually the time came to switch businesses. By not doing so, Kodak’s doom was inevitable. There was no amount of operational improvement that could save them in analog photography.

Focus on the Right Efforts
This leads to the second issue—what strategists should focus on once the right business is chosen. Although operational improvements have an impact, strategists can make a greater impact if they focus on something else. Rather than focusing on how to do things better, they should focus on how to do things differently.

If you do things just like everyone else, there is no reason for someone prefer your offering. They will see you as pretty much the same thing, so they will pick whatever is cheaper. However, if you are doing things differently, you can create a point of differentiation, a reason to be preferred. If you are preferred, you can often charge a premium price.

Moving from an environment of extreme discounting to premium pricing may do far more for the bottom line than all those operational improvements put together. I speak more about the need for differentiation in a prior blog.

SUMMARY
Operational improvement is not a strategy. Strategy is about finding the right place to play and about how to win in that space by doing things differently. If your strategic planning efforts overlook these two areas and only focus on operational improvements, you may end up perfecting the obsolete.

FINAL THOUGHTS
Ask yourself: Is my business space more like bowling or more like golf? If it’s more like bowling, it may be time to change sports.

Wednesday, May 11, 2016

New Strategy Book (for FREE!)


I just finished by latest book on strategic planning, called Tripped Up By Distractions. I want you to have it for free.

To get the book in ebook format, go to: http://www.lulu.com/shop/gerald-nanninga/tripped-up-by-distractions/ebook/product-22690860.html.

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If you want to see all of my strategy books in either ebook or pdf form, go to: http://geraldnanninga.webs.com/blog-books

Thanks again to all the thousands of people who have read my other books. I hope you like this one, too.

Friday, April 22, 2016

Failures #3: Crystal Pepsi

INTRODUCTION

In the last two blogs (here and here), we looked at (in general) an article USA Today published entitled “The 18 worst product flops of all time.” These flops included:

1. Edsel by Ford Motor Co.
2. Touch of Yogurt Shampoo by Bristol-Myers Squibb
3. Apple Lisa by Apple
4. New Coke by Coca-Cola
5. Premier smokeless cigarettes by RJ Reynolds
6. Maxwell House Brewed Coffee by Philip Morris Companies
7. Harley Davidson perfume by Harley Davidson Motor Co.
8. Coors Rocky Mountain Sparkling Water by Adolph Coors Co.
9. Crystal Pepsi by Pepsico
10. The Newton MessagePad by Apple
11. Persil Power by Unilever
12. Arch Deluxe by McDonald’s
13. Breakfast Mates by the Kellogg Co.
14. WOW! Chips by Pepsico
15. Hot Wheels and Barbie computers by Mattel
16. EZ Squirt (colored) Ketchup by Heinz
17. TouchPad by HP
18. Google Glass by Google

In this blog we will focus on only one of these flops: Crystal Pepsi (#9).

LEARNINGS FROM CRYSTAL PEPSI

The major innovation for Crystal Pepsi (introduced in 1992), was that the color was taken out of the cola to make it clear. The novelty of drinking clear cola succeeded for a short period, but once the fad ended, sales vaporized. What went wrong?

Learning #1: Just Because You Can, Doesn’t Mean You Should
First of all, we need to understand that not everything new and different is desirable. Just because an engineer can make something happen doesn’t mean it should be done (no matter how much it would please the engineer). Being able to take the color out of a cola might be a cool magic trick, but where is the lasting benefit to the consumer?

Does taking out the color:  
  • Improve the taste? No.
  • Improve the drinkability? No.
  • Improve the formula? No.
  • Lower the Price? No.
About the only lasting benefit of Crystal Pepsi was that the caffeine was taken out. But Pepsi already had caffeine free versions (since 1982), and you don’t need to take the color out to take the caffeine out. So this really wasn’t much of a lasting benefit…just a novelty.

I remember when digital wristwatches first came out. Because they were digital, it was possible to engineer them to do all sorts of things that the old analog watches couldn’t do. Therefore, many had a buch of additional functions added, like stopwatch, 24 hour military time, etc. They fell victim to to adding features, just because they could.

The problem was that the designers only put a couple of buttons on the watch, making it almost impossible to figure out what combination of button pressings were needed to make the functions work. Worse yet, all that confusion also made it nearly impossible to figure out how to set the watch for the correct time.

It was like the old VCR players that always blinked "12:00" because nobody could figure out how to set the timer. You could tolerate that on a VCR, because the video tapes could still run without a working clock display. But a watch without a working clock display is worthless. The manufacturers would have been better off putting in fewer features so that the primary function—telling time—would have been easier.

In Today’s digital era, the temptation to do more innovation than necessary is probably greater than ever before. You can alter the code to make digital products do almost anything. The only limit is your imagination.

However, instead of using your imagination as the limit, you should use practicality as your limit. If the added feature gets in the way, confuses the customer, or does not provide lasting/desired benefits, don’t do it. Tell the engineers to back off.

Just as the trick of taking the color out of cola did not lead to success, many computer engineering tricks may not lead to success, either.

Lesson #2: Image Works Both Ways
An innovation can improve the image of a brand. It can make a brand appear more up-to-date, cooler, more visionary, more desirable. Apple has used the innovations of the iPod, the iPhone and the iPad to enhance its image in this way.

Unfortunately, some “innovations” work on image in the opposite direction. Inappropriate innovations can make a brand appear out-of-touch, silly, or incompotent. Taking the color out of cola was a negative image producer. The so-called benefit was silly. Nobody was aking for it (out of touch). Will I appear out-of-touch and silly if I drink Crystal Pepsi?

Other potential negative image factors in Crystal Pepsi:
  • A clear cola appears less potent than a colored cola. Who wants a perceived diluted cola? 
  • What was done to take out the color? Were harsh chemicals used or added? Did they put bleach in the cola? Clear colas may be more dangerous to drink.
  • Was the core formula changed? Failure #2 was New Coke, where Coke fans were outraged because the traditional Coke formula was changed. Couldn’t the same outrage occur here?

Innovations can create many undesired secondary consequences which outweigh the slight benefits of poor innovations. Be sure to look for these undesired secondary consequences before introducing the product.

Lesson #3: Hidden Innovations Rarely Inspire
The whole trick of Crystal Pepsi was in seeing the color taken out of the cola. Unfortunately, most colas are sold in cans and are usually consumed right from the can. You cannot see the “clearness” of the cola inside the can. What good is a benefit you never see or cannot discern during consumption?

If you innovate, make sure the innovation is visible and discernable. Oxydol detergent had the benefit of bleach already inside the detergent. However, you couldn’t see the bleach, so consumers couldn’t feel the benefit. Then Proctor & Gamble put little green crystals in Oxydol and told people that the crystals were “proof” that Oxydol was different, and the difference was bleach. After that, Oxydol became the #1 detergent in America (until Proctor & Gamble decided to make Tide #1).

So, if you bother to innovate, make sure the customer knows and provide some sort of visual confirmation to remind them of the innovation. Intel was hidden inside computers and not getting much credit for their innovations. So Intel made computer manufacturers put stickers on the outside of the computer to let people know that there was Intel inside that computer. This greatly improved the image benefits from Intel innovations.

SUMMARY

Crystal Pepsi teaches us that:
  •  Just because an innovation is possible does not mean that it is desirable;
  • Poor innovations can damage a brand image at least as much as a good innovation can improve an image.
  • To get the full impact of an innovation, it must be obvious to the consumer.


FINAL THOUGHTS

Not all crystals are created equal. The green crystals of Oxydol were beneficial. The crystal clear of Crystal Pepsi was not. So choose wisely when you innovate.

Wednesday, April 20, 2016

Failures #2: Leaping the Right Distance

INTRODUCTION

In the last blog, we looked at an article in USA Today article entitled “The 18 worst product flops of all time.” These flops included:

1. Edsel by Ford Motor Co.
2. Touch of Yogurt Shampoo by Bristol-Myers Squibb
3. Apple Lisa by Apple
4. New Coke by Coca-Cola
5. Premier smokeless cigarettes by RJ Reynolds
6. Maxwell House Brewed Coffee by Philip Morris Companies
7. Harley Davidson perfume by Harley Davidson Motor Co.
8. Coors Rocky Mountain Sparkling Water by Adolph Coors Co.
9. Crystal Pepsi by Pepsico
10. The Newton MessagePad by Apple
11. Persil Power by Unilever
12. Arch Deluxe by McDonald’s
13. Breakfast Mates by the Kellogg Co.
14. WOW! Chips by Pepsico
15. Hot Wheels and Barbie computers by Mattel
16. EZ Squirt (colored) Ketchup by Heinz
17. TouchPad by HP
18. Google Glass by Google

We looked at three lessons to be learned from these flops. In this blog, we will look at another lesson to learn: The need to leap the right distance.

LEAPING THE RIGHT DISTANCE

Innovation is a lot like taking a leap into the future. But, as the USA Today article shows, not all leaps are successful. Think of it as being like leaping over a deep canyon. If you can leap from land to land, you succeed. But if you miss, you fall down into the canyon and fail.

Here’s the problem. The canyon of innovation is too wide to cross in one leap. Therefore, to successfully get across the canyon, you need to leap onto a small mesa in the middle of the canyon. Miss on either side of the mesa (too short or too long) and you fail. This is illustrated in the picture below. As we will see, many of the 18 flops failed in part by not leaping the proper distance.

1) Leap Too Short
The first reason for an innovation flop is to leap too short. This happens when your innovation improvements are incrementally too small to matter. Sure, it might be a little nicer or newer or better, but not enough to justify switching, particularly if you are charging an innovation premium price.

The Edsel (flop #1) was a nice car, but the innovations were minor compared to the hype, and the innovations were not enough to justify the premium price. The leap was too short.

Kellogg’s Breakfast Mates (#13) combined cereal, milk and a spoon into one “convenient” package. However, a test showed that the Breakfast Mate was only about a second faster to prepare than regular boxes of cereal with a normal carton of milk. In addition, convenience to the customer meant eating on the go, and you could not prepare and eat Breakfast Mate on the go. Finally, it cost a lot more per serving than the old way. In other words, Breakfast Mates leaped too short. It was not enough of a convenience innovation. The right leap would have been to go to breakfast bars—more convenient to prepare (just unwrap), more convenient to eat (on the go), and not as big a premium.


McDonald’s Arch Deluxe (#12) was a better burger than the regular one, but not enough better to justify the price or to get people to switch from better-burger restaurants. They did not leap enough and build really better burgers worth going out of your way for, like Five Guys.

Apple’s Lisa Computer (#3) was a fine computer for its time, designed for the business market. The problem was that it was not superior enough to justify a $10,000 price. Also, it was not superior enough to grab the attention of software developers to make programs for it. The switching costs for businesses was high and the leap was not big enough to justify the switch.

2) Leap Too Far
Just as bad a mistake as leaping too short is to leap too far. If you innovate beyond the ability of consumers to embrace or beyond the capabilities of technology, then you will fail as well.

The Apple Newton (#10) personal hand-held computing device came out in 1993, before the pervasiveness of the internet. Thanks to that, and the limits of technology at the time, the Newton was not a very powerful device. It tried to be the equivalent of the smartphone before technology, applications, and consumers were ready. It was a leap too far, by almost 20 years.

Premier Smokeless Cigarettes (#5), back in 1988, was also a leap too far. The market had not yet banned traditional smoking as much as today and the technology wasn’t good enough to make Premier Smokeless Cigarettes a pleasurable smoking experience. It took about 25 years before the technology and consumer sentiments caught up to make electronic smoking successful.

One might argue that Google Glass (#18) was also a leap too far. Concerns over privacy and functionality made it perhaps ahead of its time.

3) Leap Too Late
The problem when timing an innovation leap is that if you wait until the innovation is fully accepted, you are no longer imitating…you are following. True innovation has some risks, because you are trying to establish a market that doesn’t quite yet exist. If you wait for the innovation to get a firmly established by someone else, it is typically that someone else who reaps the benefit. They become the brand know for the innovation and get the first mover advantage.

This was the main problem for Hewlett Packard’s Touch Pad (#17). HP waited until Apple made tablets their own with the iPad. HP’s Touch Pad was not meaningfully enough better hardware to unseat Apple. In addition, Apple owned the apps, content business and digital store, where everything was designed to work on the iPad.

Hence, HP failed due to waiting to late.

SUMMARY

Innovation is a leap into the future. If you make your leap too short, you will not create enough differentiation for success. If you make your leap too long, you will get ahead of the customer and technology, which are not ready for success. If you make your leap too late, you become a lesser also-ran rather than a leader. Therefore, when on the path of innovation, plan you leap carefully (length and timing).

FINAL THOUGHTS


Jumping is not the same as leaping, because you end up in the same place as you started when you jump. So, just because you are furiously doing something doesn’t mean you are leaping to innovation. You may only be jumping in place.

Monday, April 18, 2016

Failures #1: 18 Colossal Failures

INTRODUCTION

On April 16, 2016, USA Today had an article entitled “The 18 worst product flops of all time.” It was based on a study conducted by 24/7Wall St. to determine which were the most colossal new product failures since 1950. The 18 flops, and my interpretation of primary causes of the flop, are as follows:

1. Edsel by Ford Motor Co.
Key Mistakes:
·   Insufficient New Benefits
·   Too Expensive

2. Touch of Yogurt Shampoo by Bristol-Myers Squibb
Key Mistakes:
·   Confused Customers
·   Eaten by Mistake

3. Apple Lisa by Apple
Key Mistakes:
·   Too Expensive

4. New Coke by Coca-Cola
Key Mistakes:
·   Misunderstood its Brand
·   Trying to Win by Imitation

5. Premier smokeless cigarettes by RJ Reynolds
Key Mistakes:
·   Innovated Too Soon
·   Questionable Benefits

6. Maxwell House Brewed Coffee by Philip Morris Companies
Key Mistakes:
·   Confused Customers
·   Innovated Too Soon

7. Harley Davidson perfume by Harley Davidson Motor Co.
Key Mistakes:
·   Brand Extension Too Far

8. Coors Rocky Mountain Sparkling Water by Adolph Coors Co.
Key Mistakes:
·   Branding Issues

9. Crystal Pepsi by Pepsico
Key Mistakes:
·   Insufficient Benefits
·   Novelty/Fad

10. The Newton MessagePad by Apple
Key Mistakes:
·   Innovated Too Soon

11. Persil Power by Unilever
Key Mistakes:
·   Defective

12. Arch Deluxe by McDonald’s
Key Mistakes:
·   Insufficient Benefits

13. Breakfast Mates by the Kellogg Co.
Key Mistakes:
·   Insufficient Benefits

14. WOW! Chips by Pepsico
Key Mistakes:
·   Defective Product

15. Hot Wheels and Barbie computers by Mattel
Key Mistakes:
·   Defective Product

16. EZ Squirt (colored) Ketchup by Heinz
Key Mistakes:
·   Defective Product
·   Novelty/Fad

17. TouchPad by HP
Key Mistakes:
·   Innovated Too Soon

18. Google Glass by Google
Key Mistakes:
·   Pros overwhelmed by Cons

Over the next few blogs, we will look at some of the lessons to be learned from these failures, so that you can avoid them.

LESSONS LEARNED

Lesson #1: Innovation is Not a Panacea
These 18 innovation flops were huge, causing losses in the millions of dollars. Yes, they may have been outlyers, since most flops are less colossal. But that doesn’t mean that flops are rare. The article claimed that about 40% of new product introductions are flops.

I believe that the 40% failure number underestimates the problem. A lot of what is considered a “new product” isn’t really much of an innovation. It can be just a minor brand extension, like adding a new flavor or size. It is a low risk/low reward bet on a minor tweak. It is not a truly innovative new product.

If you only look at truly innovative new products, the failure rate is much higher—over half.

I know a lot of companies have a strategy based on some variation of “winning via innovation.” The idea is that future success will come from merely introducing new products. The problem is that if over half of innovations fail (and some fail spectacularly), innovation is not automatically going to lead to success.

Just because you innovate doesn’t mean you’ll win. If fact, the odds point in the other direction.

Innovation is more like a tool than a strategy.

Tools are great, but only if used to achieve a viable strategic purpose. For example, cost control is a great tool but not a strategy. It is meaningless to have the lowest cost of production if you are producing something nobody wants. The strategy must first tell you what is desired. Then, cost control can be chosen as a tool to help make it a reality.

Similarly, it is useless to innovate if you are creating innovations which will flop. Just because something is new does not mean it is the right thing to produce. Innovation only succeeds if you are using it as a tool to implement a greater strategy—a strategy which takes into account all the greater issues like image, branding, positioning, switching costs, consumer trends & habits, etc.

The strategy is the vision of what will win. Innovation and cost control are just some of the many tools you can use to achieve the vision.

Make sure your strategy embraces desirable outcomes rather than just embracing a particular business tool, like innovation.

Lesson #2: Don’t Mess With The Mouth
A friend of mine in consumer research used to say that consumers are particularly sensitive regarding anything that goes in the mouth. They may be forgiving of shortfalls and miscues in other areas, but they expect something a lot closer to perfection when it comes to things put in the mouth. Mess up on things put in the mouth and you will pay a heavy price.

This makes sense, since:
  • Health issues are at greater stake;
  • Image Issues are at greater stake (You really are what you eat, including the brand image of what’s eaten).
This seems to be verified by the results. If you look at the list of 18 flops, half of them (nine) are items put in the mouth. If you count the fact that people were mistakenly eating the Yogurt Shampoo, it becomes 10 items.

The lesson here is that if you are innovating around items that go in the mouth, be especially careful. People take these more seriously.

Lesson #3: Innovations Need to Work
Some innovations fail because the new product was defective. WOW! chips caused “abdominal cramping and loose stools,” not something desired in a snack food. Persil Power laundry detergent destroyed clothes at high temperatures. The Hot Wheels and Barbie names were put on computers which didn’t work. It’s no wonder why these innovations failed.

You may start with a great idea. But, if the actual product does not deliver on that idea, then the idea is irrelevant. Make sure the product delivers on the promises.

SUMMARY

Innovation is not a panacea for success. On the contrary, random innovation is probably more likely to fail. To minimize failure, innovation needs to be seen as a tool to create a larger strategy. In addition, the innovation needs to live up to the requirements of the strategy and not be defective. Finally, one needs to be extra careful when innovating around products which go in the mouth.

FINAL THOUGHTS

This is just the beginning. Two more blogs on innovation are to follow.