Thursday, November 13, 2014

Strategic Planning Analogy #541: Necessary for Whom?

I was in a business meeting recently where we somehow got on the topic of Southwest Airlines. I was explaining how Southwest had been so much more profitable than most other airlines for decades because of its unique business model, which in part included the avoidance of the hub and spoke model used by most of its competition.

Someone in the meeting objected to the praise of Southwest. He countered that the traveling world needs a hub and spoke business model. Since the hub and spoke model is necessary, it is not proper to praise a company which avoids this necessity.

In my mind, my reaction was “Necessary for whom?” Is it necessary for some business travelers? Yes. Is it necessary for Southwest? Absolutely not.

Two of the key aspects of strategy are determining WHERE to compete and HOW to compete. Answer these concerns properly and success is more likely. Answer them wrong and success is nearly impossible.

One method businesses use to determine where and how to compete is by looking for necessity of demand. After all, if something is viewed as a necessity and demanded by a large sector of society, it must be a good place to be, right?

Just look at the illegal drug business. The junkies feel that getting their next fix of the drug is the most necessary thing they must do. And the suppliers of those illegal drugs make a lot of money off that perceived necessity.

The problem is that there is not a strong correlation between necessity of demand and profitability. It worked in the illegal drug business. It didn’t work so well for those satisfying the necessity of hub and spoke in the airline business.

Southwest chose its “where to compete” principally in the lower price, non-business portion of the airlines industry. Southwest chose its “how to compete” by doing a number of things differently, including the elimination of the hub and spoke model. These were very profitable choices for Southwest.

In fact, it was a more profitable choice than going after the demands of the business traveler, even though the demand for business travel is higher (and presumably more necessary) than for non-business travel.

Just because something out there in the marketplace is a necessity does not mean that you have an obligation to provide it. Like Southwest, it may be better to avoid it.

The Southwest example illustrates a common situation in business. This is the principle that the highest profits are often found by avoiding the highest demand. This may seem counterintuitive at first, but there is logic behind this point of view.

Why High Demand Items Are Often Not Very Profitable to Supply
There are many factors which tend to lower the profitability of serving many high-demand segments. The first is that high demand segments tend to attract a lot of competition. Businesses like to flock to where the big sales potential lies. But when too many companies are fighting for those sales, the profitability of those sales plummet. Price wars suck the desirability out of those sales. You may be able to get a much higher return going after smaller, less competitive markets.

A second problem is that high demand necessities tend to attract a lot of government regulation. Food and health care are high demand necessities. Many governments get involved in significant regulation how those necessities are supplied. This often takes a lot of the profitability out of the system.

Just look at the results when communism gets involved in the necessity of supplying food. They impose all sorts of regulations and price controls. They often insert themselves into owing a lot of the food businesses. The net result is that businesses pull away and consumers are stuck with shortages and long lines.

A third problem is that high demand needs pull in the masses. And the masses do not always have a lot of discretionary income. They cannot afford to pay as much for their demands as other, smaller segments. You cannot charge more than they are able or willing to pay, no matter how much it costs you to serve them. Just look at the automobile industry. Those selling cars to the masses tend not to do as well as those selling cars in luxury or high performance segments. Customers in the luxury and high performance segments are willing and able to pay a lot more for their cars, making them more profitable, even if the segments are smaller than the mass segment. That's the reason why Tesla decided to start by targeting the high performance end of the electric car business.

When you try to appeal to the masses, you often end up with “average” offerings. Unfortunately, there will always be competitors who specialize in targeting the smaller niches. The specialists will offer items that are cheaper, or of higher quality, or of higher prestige, or of higher functionality. These more profitable niches will eat away at your mass market, leaving you with some of the less profitable middle ground. This is what Southwest did when it specialized in the profitable low price, non-business segment (and firms like Virgin Airlines and Net Jets at the high end), leaving the other airlines fighting over the unprofitable middle.

Fourth, high demand areas are often in fairly mature businesses. Mature and aging businesses, by their very nature, tend not to be as profitable as businesses in their younger, faster growing stage. Look at Procter & Gamble. They completely divested out of the food business (an extremely high demand business). Why? Because it did not have high prospects for future growth and profitability. It was too mature.

Instead, P&G has been pouring money into beauty care. You can say that food is a necessity and beauty care is a more discretionary luxury (less necessary). Yet, beauty care is where P&G have better prospects for growth and profitability. P&G is doing a great job of choosing where and how to compete, even if it means walking away from a lot of high demand products. 

Choose Wisely
As a business, you have choices. Strategy is about helping you make better choices. Those choices need to consider more than just the size or necessity of demand. They also need to look at the profitability within that demand. Smaller segments can often be better strategic choices.

In most businesses, there is no law that says that you have to target unprofitable segments. Even if you think that a particular function is necessary to make the world work, that doesn’t mean you have to serve it. It’s okay to walk away from some businesses and leave it to someone else.

Others may have business models better suited to those situations. Keep in mind that when P&G has been divesting all of its non-desired businesses, it has been finding buyers for those businesses. Many of those buyers are companies who do things differently from P&G and are better suited for wringing value out of mature, slow growth businesses.

Is There a Moral Obligation?
There may indeed be some moral issues here. Is it right to only serve the profitable rich and ignore the masses? Can we ignore the poor because they are unprofitable? Businesses work within a society and they have some obligations to that society. But they also have obligations to shareholders, debt holders and employees.

If businesses choose to or are forced to take on bad business models, this is bad for everyone. If they cannot make an adequate return, employees lose their jobs, and equity/debt holders don’t get a return. More importantly, the companies don’t make any profits which can be used for charity or for taxes to governments to help solve these issues.

Strong, healthy businesses are in a better position to provide jobs and provide funding for social issues. Then the question turns from business models to social accountability.

Strategy is ultimately about making choices, such as where and how to compete. These few strategic choices can have a bigger impact on business success than almost any other thing you do. Choosing what not to do is usually more important than choosing what you do. And some of the things you should not be doing are perhaps serving large “high necessity” demands. It’s okay to walk away from them and go in a direction better suited to who you are.

When you look at large, mass oriented businesses, there are usually only a small handful of winners (often only one or two). The rest struggle to stay alive. If you are not the winner in that mass space, it is usually better to walk away and switch to leading in a smaller segment. And that’s okay.

Friday, November 7, 2014

Strategic Planning Analogy #540: Three Novelists

Consider three types of novelists.

The first author wrote a great novel once. He liked the book so much that he would rewrite the same book every year. A few parts might be added and subtracted each year and maybe a couple of sections would be updated. But essentially it was the same story. He is currently working on the tenth edition of this book, ten years after the first edition. He is so busy with these updates that he hasn’t had time to ever write a second novel.

The second novelist was all over the map. Each new novel went in an entirely new direction with entirely new characters and subject matters. The writing styles and topics would vary so much between novels that there was no guarantee that if you liked one book that you would like another. And it was difficult to get used to all the new characters all the time.

The third novelist wrote a mystery series. The lead character detective was the same in all the books, surrounded by a familiar cast of characters. Although the style was familiar in each book, the plots in each book in the series had enough novelty to keep them unique and interesting. Over time, the lead detective came to be thought of like a familiar old friend to the readers, who anxiously waited to hear about his next adventure.

So which author do you think sold the most books?

Strategists are a lot like novelists, except instead of writing novels, we write strategic plans. And I have seen all three of the types of authors mentioned above in strategic plan writing.

The first type of author is often found in companies with a rigid, but unimaginative annual planning process. Every year, they go through the same boring process. Each business unit submits what they want to do, which is essentially the status quo. Then all the “same as ususal” business unit plans are rolled up together, creating a broad affirmation of the status quo.  Although it may appear as if the annual process is creating a new plan every year, it is really just slightly re-editing the same plan, year after year after year. We’ll call this the “One Book” approach to strategy.

The second type of author is like companies who switch their strategic planning personnel a lot or use a lot of different strategy consultants. As each new author of the strategy walks into the role, they try to put their unique stamp on the process to prove their worth. As a result, each new strategic plan is a radically different approach, totally unconnected to the plans of the past. The company’s role in each plan is so different, that it is hard to imagine that it is the same character. We’ll call this the “Annual Reinvention” approach.

The third type of strategy author (who is like the one who wrote the mystery series) falls somewhere in between the first two. Unlike the Annual Reinvention approach, there is the continuity between each successive plan. It builds on the character’s past and works with its habitual strengths and weaknesses. Yet, unlike the One Book approach, each plan is a new story for the new reality being confronted. We’ll call this the “Series” approach.

And just as novelists who write series tend to sell the most books, strategists who take a “Series” approach tend to have the most successful strategies.

The principle here is that an individual annual plan is not an isolated event, but one book within a series. Or, to use another metaphor, it is like a single screen shot from the middle of a movie. If you keep repeating the same screen shot for the entire movie, you have a lousy movie (like the “One Book” approach). Similarly, if you radically change the plot of the movie for each successive screen shot, you have a lousy movie (like the “Annual Reinvention” approach). Great movie scenes build from what came before and point to the changes ahead (like the “Series” approach). So when writing your individual plans, think like a series writer.

The Problems with the One Book Approach
The biggest problem with the one book approach is that it assumes a static environment—no changes. If you assume the future will be just like the past, then what worked in the past will also work in the future. Therefore, continuation of the status quo makes sense; reissuing the same basic plan every year makes sense.

However, we all know that the future will not be identical to the past. There are too many elements of change to allow history to continue as before. Change can come from a multitude of sources, from inside the business to inside the industry to outside the industry. Changing government administrations, changing technologies, changing competitive landscapes, changing economic conditions, changing customer moods, and a host of other areas all serve to alter the marketplace in which you compete.

Therefore, the same strategy book from 10 years ago will not work today, even if you update it a bit each year. A continuation of the status quo will lead to ruin.

The role of the strategist has to be more than just a scribe who takes the status quo words from each business unit and just writes them down verbatim into the annual plan. No, the strategist needs to add value to the process by:

  1. Helping the business units see how the future is going to be different from the past.
  2. Helping the business units discover the best ways to adapt to the new future.
  3. Helping the corporation see big picture of how all the individual business units line up against the changing future, creating a need to alter the business unit portfolio. In a changing future, the best role for a particular business unit may be to shut it down (no longer relevant), and that type of advice will rarely come from the business unit itself when submitting its plan.
The Problems with the Annual Reinvention Approach
The opposite approach from one book—the total strategic reinvention—isn’t much better. It creates a whole lot of action, but it never leads to very much benefit, because the direction of the action changes every year.

A key part of strategy is positioning. To win in the marketplace, you have to stand for something—your position. Winning such a position takes time and consistency. If you keep changing your position each year to something radically different, then you really end up standing for nothing.

When you change who you want to be all the time, your employees get confused about what you stand for, so they don’t know what to do. Worse yet, your employees may take the attitude that “this too shall pass” so they will ignore the latest strategic initiative. After all, why work hard on implementing something if you know that next year the company will want to implement something else? Neither confusion nor apathy in the employee ranks creates an effective strategy implementation program.

And then there are the customers. If your customers get confused about what you stand for, they will never know if you are the right solution for their problem. It is like the author who radically changes her style from book to book. You never know if the next book will fit your preferences.

It takes time to build the competencies and capabilities necessary to pull off a strategy. If you keep changing the strategy, your competencies and capabilities will never be at optimal levels for the strategy of the moment. By contrast, if you keep a relatively consistent direction over many years, you can develop competencies and capabilities which will make you best at delivering your position and blow away the competition.

The Benefits of the Series Approach
The series approach takes the best from each extreme while eliminating the worst. First, it understands that a company has a heritage, a past, a preconceived reputation in the marketplace. You are not working from a blank slate each year. You are building on what came before. This has an impact on what the best future path should be. Like the mystery series of novels, you have the same lead detective in each book, and the prior novels in the series impact what you can effectively do with the character in future novels. Yes, the character can change and grow up, but too many radical changes from book to book ruin the series.

So continuity is important. Build from past strengths. Ignoring your strategic heritage while looking forward is a dangerous path.

On the other hand, the series approach doesn’t re-write the same plot each year. It understands that the marketplace is continually changing, so you need a new story line to adapt to the change. It is the idea of being able to adapt what already makes you great to the new realities of the future.

Just as each murder in the mystery series requires a different solution, each year has its own strategic problems to solve. The variety in plots keeps the individual story in each book in the series fresh and relevant. Yet each solution relies on the historic strengths of the recurring detective. The same should be true of your strategic plans.

Strategic plans are like novels. And the best strategic plans tend to be like individual novels within a series. First, they provide continuity between the stories in order to take advantage of the past and build competencies and capabilities for the future. Second, each novel’s story is different, because times change.

I’m currently helping a company with its new five-year strategic plan, and the starting off point is its prior five-year plan. You have to look backwards before you can look forwards.

Monday, October 13, 2014

Strategic Planning Analogy #539: Great Players Make Lousy Coaches

Have you ever noticed that top athletes usually make for lousy coaches?

The reasoning behind this is simple. The great athletes have natural skill and abilities far above the norm for the sport. They are naturally good because they are naturally gifted. It all comes too naturally for them. They don’t even really have to think about it. They just naturally perform well.

As a result, top athletic performers have no real connection with the struggles of the average athlete. The top athletes never had those kind of struggles. They never had to think about how to overcome them.

As a result, the top athletes are relatively clueless as to how to coach the average player through all of this. Their coaching can sound a little silly to the average player when they say things like:

“Just hit the ball to where you want it to go, like I used to do.”
“Just run a little faster, like the speeds I used to go.”
“React faster to the action around you, like I did.”
“I don’t know how I did it. I just did. So you do it, too.”

That’s why average players usually make better coaches. They’ve had to struggle. They’ve had to think of ways to overcome the struggles. They’ve had to find ways to motivate themselves when times were tough. They’ve had to listen more closely to the teaching of their coaches. They’ve had to try a lot of different approaches to the game in order to find their edge.

The journey of the average player is usually a better learning ground for gaining the skills needed to be a coach. So don’t hire the superstar player to coach your team. Hire average.

The CEO is sort of like the coach of a team. Sometimes when looking for the next CEO, we look for the replacement among the best performers in the company. Since they are such great performers, then they will be a great CEO, right?

But that’s like saying the best athlete will be the best coach. It is not necessarily true and is most likely a false assumption.

Therefore, we need to be very careful when choosing our business leaders. The pool of our best performers may not be the best place to look.

The principle here is that different roles require different core competencies. Therefore, excelling in one role may make you unsuitable for another role if the needed competencies are radically different between the two roles.

For simplicity’s sake, we will illustrate this principle by dividing a company’s work force into three layers: The Frontline, Mid-Management, and Leaders. As we will see, excelling at one lever does not ensure success at another level.

The Frontline
The frontline is where the basic work of the business occurs—the manufacturing of the manufacturers or the service of the service industries. Success at the frontline is all about doing your task and hitting your numbers. If you have a specialty, success is about being the best at doing that specialized work.

Therefore, the core competencies to excel at the frontline are twofold: a) understanding your task, and b) doing it at the speed and quality required (if not better). Do that well, and you will be a frontline superstar.

Mid-management is the connection between the leaders and the frontline. Mid-management tries to appease the leaders by making sure the expectations of the leaders are met by the frontline.

Therefore, the core competencies to excel at mid-management are to: a) understand what the leaders want, b) motivate the front line to get it done, and c) report the results back to top management. Do that well, and you will be a mid-management superstar.

Leaders run the company. Their job is to decide what the company should be doing and make sure the business has the competencies, capabilities and resources to pull it off.

The core competencies of leaders are: a) Vision, b) Communication, and c) Appeasing all the conflicting demands of the various stakeholders (shareholders, bankers, employees, the community, etc.). Do this, and you are a superstar leader.

The Difficulty of Moving Between Layers
Although these are very simplified descriptions, they do show how each layer in an organization is different. The core competencies are different as well.

The top frontline performers are great doers of a task. But that doesn’t mean they will continue to be top performers if promoted to mid-management. Mid-managers are not expected to be great doers of a task. They are expected to be able to motivate large numbers of other people to do a task. That’s a different skill entirely.

It is like automatically expecting an athlete who was naturally great at throwing to be naturally great at teaching others to throw. As we saw above, that tends not to be the case. And so is the case in the business world.

Since the top frontline person succeeded by doing, they tend to revert to that when a mid-manager. The result is unhealthy micro-managing—an attempt to continue doing rather than motivating.

Similarly, if you find a top mid-manager, that does not necessarily mean that they will excel at leadership. Mid-managers excel at getting someone else’s goal accomplished. Leaders, by contrast, are the ones that have to dream up what is to be accomplished.

The skills needed to get a task accomplished are far different from the skills needed to determine what should be accomplished. Therefore, promoting a top mid-management performer to leadership does not guarantee success.

Therefore, when a top mid-management performer is promoted to leadership, they resort back to their old skills of getting someone else’s vision accomplished. So they take the vision already in place and keep pushing that agenda, even if that agenda is no longer relevant. They don’t change the vision with the times, because they weren’t skilled at that vision thing. So the company becomes obsolete and dies.

Relevancy for Strategy
Great strategies rely on great insights, great vision, and an ability to think outside the box. These are not qualities needed to be a superstar at the frontline or mid-management. Therefore, if you promote from the top of the frontline and mid-management ranks to get your top leadership and strategic leadership, there’s a very good chance you will not get those necessary qualities. Therefore, you run the risk of having lousy strategies.

It drives me crazy when I see companies promote people into key strategy positions who do not have the core competencies for strategy. They may be great at budgeting, financial models, implementation, or operations, but that doesn’t mean they have a clue about insights and visioning.

There are three ways to mitigate this problem, First, hire for the part. If you want a great leader at the top or in strategy, hire people with the skills needed for that part. Instead of looking backward to see how well a candidate was at doing or implementing, look forward to see how they are at visioning and insights. So what if they were only mediocre at doing or implementing, so long as they are great at what the new role requires.

Second, train your leaders to be better at the skills of leadership. There are ways to make people better at the skills of visioning and insight. Invest in your leaders to shore up these key competencies.

Third, don’t be afraid to bring in the experts. There are all sorts of strategy experts out there who would be happy to consult with you. They have the proper skills. Take advantage of them.

Just because one is a top performer at one level of an organization does not mean that person will excel when promoted to the next level. Since the core competencies needed at the new level are different than the former, there is probably a greater likelihood that the person will no longer be a top performer after the promotion. To minimize this problem:

  1. Promote people based on the new skills rather than the old.
  2. Train people to become better at the new skills.
  3. Hire experts/consultants to help.

Don’t hire a superstar athlete when what you need is a superstar coach.

Thursday, October 9, 2014

Strategic Planning Analogy #538: Three Questions (Part 3)

We have a persistent cat. When it wants to go outside, it is determined to go outside. However, we do not let the cat out when the weather is really bad, such as a thunderstorm or a blizzard.

When the cat wants to go out, it meows by the door. If the weather is bad, we show it the bad weather through the window and tell the cat it cannot go out.

This will satisfy the cat for about five minutes. Then it will go back to the door and meow again. We show it the bad weather and say no. This again satisfies the cat for about five minutes. And then the cycle repeats itself, over and over again.

It reminds me of the old definition of insanity: Insanity is doing the same thing over and over expecting a different result.

The cat kept going to the door, expecting a different result (to be let out). However, because the situation had not changed (the weather outside was still bad) the results did not change (cat still not let out). The only way the outcome would change is if the situation changed (the weather improved).

It sounds simple, but the cat didn’t get it. Sometimes I think business leaders are a lot like that cat. They want an improvement in their financial outcomes, similar to a cat wanting to go outside. They go to their financial dashboard, just like the cat went to the door, to see if their desire will come true.

The dashboard says that the outcomes haven’t come true. That satisfies the executives for a short while, but then they keep going back to check the numbers—over and over again—and the numbers do not change.

The problem is that the company has not done anything significantly different in the way it approaches the marketplace. And as long as nothing significantly different has been done, one should not expect significantly different results. So we’re back to the definition of insanity.

To get out of this loop, we need to emphasize doing things differently to create a more positive outcome.

This is the third of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

  1. What problem are you trying to solve?
  2. Why should the customer naturally prefer your solution over the alternatives?
  3. What are you doing differently to prove your superiority?

In the first two blogs (here and here) we looked at the first two questions. We saw that success comes from focusing on solutions and developing preference as the best solution. In this blog we will be looking at the third question and further understanding how to create that preference.

The Formula for Success
The key idea comes from the following truism:

a)     As long as you are seen as similar to the alternatives, you will never be seen as better than the alternatives.
b)     As long as you are not seen as a better than the alternative, you will not be chosen as preferred.
c)     Therefore, the formula for preference is as follows:
a.      First, create an obvious, meaningful difference between yourself and the competition.
b.     Second, use this difference to prove superiority over the competition.
c.      Third, use this superiority to create a purchasing preference over the competition.

Everything breaks down if you skip the first step. You have to start with differences. Otherwise you have no foundation for proving superiority. After all, how can you believe something is superior if you perceive it to be the same as the alternative? And without the perception of superiority, there is no reason to expect a natural preference.

So if you want better results in the future, you have to start by focusing on doing things differently. After all, as we saw in the analogy, if you don’t do something different, you shouldn’t expect different results.

But we’re not talking here about just any difference. We a looking for differences which will help the marketplace perceive us as superior.

One of my favorite stories is that of Oxydol detergent. Oxydol was the first laundry detergent to add bleach to its formula. That was supposed to be the change which created a perception of superiority. But it wasn’t working.

The problem was that consumers were having a hard time perceiving the difference. Oxydol looked exactly like the competition. You used it in your laundry exactly like the competition. Nothing felt different. Therefore, consumers concluded it wasn’t really meaningfully different. The net result was that consumers had no natural reason to see Oxydol as superior or preferable.

So Procter & Gamble put useless green crystals into the detergent. Now Oxydol looked different than the competition. Proctor and Gamble attached this difference to the fact that they had bleach in their formula and the competition did not.

Since the consumers now believed Oxydol was different, and that the difference made Oxydol superior, they began to prefer Oxydol. From that point on, Oxydol became the #1 laundry detergent in the US. It stayed #1 until Proctor & Gamble decided to shift its emphasis to making Tide #1.

So creating the perception of a difference made all the difference in creating superiority and then preference.

Followers, By Definition, Are Not Leaders
If all you do is follow and imitate the leader, you will never be seen as different in a superior way. If any difference is seen at all from your imitation, it would be that you are similar, except for being smaller and weaker and not the leading brand. That is not the formula to success.

If you want to be seen as better than the leader, you must do the opposite: stop imitating and do something differently.

Think about Dodge Ram trucks. They used to be a minor player in the world of trucks, way behind the Ford F-150 and Chevrolet Silverado. They were seen as just like the other guys only smaller, weaker and not the leading brand—the formula of death.

So Dodge abandoned imitation and went for differentiation. Instead of making their trucks look like Ford and Chevy trucks, they made them look more like the cabs of a big, industrial semi truck. To add to the differentiation, they put engines in these trucks that were manufactured by the same people who built engines for semis. Then the marking experts at Dodge used these differences to create the impression of superiority with a particular truck-buying segment.

It took some time to change the perception, but eventually it worked. Now Dodge Ram trucks have skyrocketed in sales and have captured a meaningful share of the market. And because they captured that share with natural preference build on differentiation rather than on bribery, the business is more profitable.

So, if you want different (better) results like Dodge Ram, you first have to do something different.

To succeed in the marketplace, one needs answers to three questions:

  1. What problem are you trying to solve?
  2. Why should the customer naturally prefer your solution over the alternatives?
  3. What are you doing differently to prove your superiority?

Regarding the third question, everything hinges on building positive differentiation. It is the differentiation which allows customers the ability to no longer classify you as the same as everyone else. You can use this to say that your difference is what makes you superior. Then you can turn this superiority into preference. And that’s how you win.

What are you doing differently from everyone else?

Wednesday, October 8, 2014

Strategic Planning Analogy #537: Three Questions (Part 2)

For as long as anyone can remember, there had been the ice brigade at the US Congress building. The 29 employees with this job had the responsibility of making sure every congressional office had a bucket of ice by its door before 9AM every morning.

Nobody remembers when it started, but the tradition pre-dates air conditioning and mini-refrigerators. The idea was that Washington, DC can get very hot. Ice could be used in a number of ways to help counter the heat, either externally or internally.

Of course, now that congress has air conditioning, mini-fridges and other ways to conquer the heat, those ice cubes were less necessary. Yet they still came, every day, like clockwork. Many of the ice buckets were just thrown away each day by congress people who did not want it.

Finally, in 1994, Republicans took over control of Congress and started a program to eliminate waste. They saw the ice delivery program as an unnecessary waste and the practice stopped May 1, 1995.

Another waste looked at during this time was the fact that even though every elevator in the building had self-service buttons which anyone was capable of pushing, each elevator had a paid employee to operate those buttons.

Time changes things. Something which may have made perfect sense in the past may be foolish today. Yes, there was a time long, long ago when ice deliveries to congressional offices made sense. But times changed, making that no longer necessary or even particularly desired. Yet the practice continued for decades.

Similarly, when elevators were first invented, it made sense to have elevator operators. But the elevator technology advanced over time to the point where elevator operators had become unnecessary and obsolete. Yet they were still there, working away in congressional elevators.

We may see these as silly and obvious examples of being out of touch with the changing times. Surely, our business would not get that out of touch with the changes in the world around us, would it?

Well, there are business bankruptcies every day, and many of those bankruptcies are due to the fact that a company did not adequately adapt to the changing times. The digital revolution made a lot of analog businesses look rather silly and out of touch—leading to many bankruptcies. For example, Kodak was an expert at analog film. But in a world of digital imaging, they seemed as necessary as elevator operators or ice deliverers in congress. The social revolution is having a similar impact.

Therefore, we must always be on guard to ensure that the times are not passing us by and making us silly relics of the past. Even congress eventually figured this out and did something about the relics around them. I assure you that the marketplace will act quicker than congress. 

This is the second of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

  1. What problem are you trying to solve?
  2. Why should the customer naturally prefer your solution over the alternatives?
  3. What are you doing differently to prove your superiority?

In the first blog, we looked at the first question. We saw that successful companies focus on solutions rather than products. Multiple products can be focused on the same solution, and multiple solutions can be had for the same product. Therefore, if you want to win in the marketplace, you need a strategy concerning which problem you want your product to solve.

Now we will turn our attention to the second question. Once one comes to understand that consumers choose based on which product is best at solving their problem, one realizes that the goal of their company must be to supply the best solution to their customer segment. In other words, you need to get a consumer segment to prefer your solution over all of the alternatives.

Understanding the Alternatives
If you want to be the preferred alternative, then you had better understand who the alternatives are. As we saw in the last blog, alternatives can come from products quite unlike your own. For example, many luxury brands can solve the problem of providing prestige or status. This could be anything from fashion clothing to automobiles to the latest technology to trophy wives to the liquor you drink to exotic vacations to yachts to whatever.

The point is that being the best at your particular product may not make you preferred if other products are better at solving the underlying problem.

For example, there is a big difference between the way high school students act today versus when I was in high school. The underlying problem for most high schoolers has not changed over the years. They are still looking for ways to achieve status and fit in with the cool group. The preferred solution, however, has changed.

In my day, clothing was a key way of solving this problem. If you wore the right status clothes, you got an edge in achieving status and fitting in with the cool group. Today, however, clothing is not the preferred solution. Just look at firms like Abercrombie & Fitch who built their entire strategy around being the best status clothing for high schoolers. These firms are doing poorly in the marketplace because students are looking for status somewhere other than in clothing.

Instead, students have found that having the coolest technology is the preferred solution over coolest clothes. In order to afford the coolest technology, students have shifted their clothing purchases to value brands like H&M or Forever 21. In fact, I just read where thrift stores are a hot place for teens and young adults. So now, clothing is looked at as a place to solve the problem of saving money in order to afford cool technology rather than as a solution for cool.

This leaves Abercrombie & Fitch out in the cold. Even if they are the coolest clothing retailer, it is irrelevant if the preferred cool solution is from technology, not clothes.

So understand the full spectrum of options for your customer. If your offering is not preferred over these alternatives, either change your offering or change your solution. Even Abercrombie & Fitch is starting to figure this out and is repositioning its Hollister brand to be less of a cool solution to more of a stretching your money solution.

Staying Relevant
Since times change, technology changes, competition changes and consumers change, one has to continually monitor the marketplace to ensure that your solution remains the preferred alternative.

For example, think of all the ways the smartphone and all its apps have changed people’s expectations and behaviors. Much of this new behavior is because the smartphone and its apps are being seen as preferred solutions over the older ways of doing things. If mobile is not a part of your solution, you may becoming as relevant as ice men at congress or Kodak in imaging.

Alternative If You Are Not Naturally Preferred
Let’s say you have not created a clear preference for your solution. Perhaps you have parity with the leaders or near-parity. You may think that’s pretty good.

But here’s the problem: if you cannot win them over with natural superiority, then you have to win them over with artificial superiority, which I call bribery. I don’t mean the illegal type of bribery. I just mean you have to sweeten the value by offering large discounts or added goodies. In other words, you are essentially paying them to pick you, because the natural offering alone is not enough to create preference.

And we all know what those discounts and added goodies do to our profitability formula. They transfer the benefit from us to the customer. There had better be an awful lot of price elasticity in order to cover the loss of profits per item. Unfortunately, in a highly competitive marketplace, the competition will tend to match your bribery, so no advantage is had anyway. You just lowered the profitability for the entire industry.

The goal here is not to be preferred by EVERYBODY. That is unrealistic since people are seeking value in different ways. You cannot be the best at pleasing everyone with the same offering. Trying to please everyone usually means you are preferred by no one.

Therefore, the goal is to choose a consumer segment for whom you can create the preferred solution. The chosen segment should be large enough to satisfy your requirements.

Of the three important questions, the second one is “Why should the customer naturally prefer your solution over the alternatives?” Preference is important because without natural preference, you have to lower profits through bribery in order to lure business. Worse yet, your solution may be so irrelevant that even bribery will not be enough to create preference.

Since times change, you have to be constantly on the lookout to ensure that your solution remains preferable through time. Otherwise, you may need to change your offering or change your solution.

Superiority is determined in the mind of the customer, not in your laboratory. When determining whether you are the preferred alternative, ask your customer segment, not your employees.