Wednesday, July 20, 2016

Strategy Planning Analogy #565: Not Enough Monkeys


THE STORY
There’s an old saying (originally attributed to Thomas Henry Huxley) that goes roughly like this: “If you get enough monkeys sitting at enough keyboards, one of them, by random chance will write the next Shakespearian play.” While that may be theoretically true, there’s a problem with that logic.

The problem is with the word “enough.” In order to get random tapping on a keyboards to come out as a coherent Shakespearian play, you need a lot of monkeys sitting at a lot of keyboards.

How many? I would guess at least a million times more monkeys than exist on the entire planet sitting at more chairs and with more keyboards than exist on the planet.

So, while the statement may be theoretically true, from a practical matter it is worthless.


THE ANALOGY
The big word in strategy today is “innovation.” People want strategies which make them leaders in innovation. And if that’s what people want, you can rest assured that countless numbers of consultants will come out of the woodwork saying they have a way to make you a leader in innovation.

A lot of these consultants have a theory similar to the story about the monkeys. They say that if you have enough experiments taking place, one of them will turn out to be a big hit. That’s like saying if you have enough monkeys, you can write a great play.

The problem is that many of these consultants don’t get very specific about how many experiments is “enough.” The reason they don’t get very specific is because they don’t want you to know your real odds for success. Like the story with the monkeys, the only way to guarantee that you will have a successful innovation is by doing a lot of experiments. And by a lot, I mean more experiments than you could possibly ever do over several lifetimes.

Look at the social media space. How many truly successful bone fide outstanding and hugely profitable innovations have there been in social media? 20? 50? 100? 1,000? Even if you are generous and say there have been a thousand big innovations, compare that to how many people on the planet have been experimenting around the world in this space.

There’s probably at least tens of millions of people world-wide who have tried on average dozens of experiments in the social media space. That would put us at about 1 in 500,000 being a hit. And I think that’s a very generous number. Do you think you can do 500,000 experiments in order to guarantee a winner?

So, while this type of response to innovation is theoretically possible, it is worthless on a practical level.


THE PRINCIPLE
The principle here is the difference between randomness and purposefulness. Randomness is about producing large quantities and hoping you beat the odds. Purposefulness is about focusing on ways to intentionally improve your odds in a meaningful way. Randomness is about repeating a lot of fast failures (and I do mean “a lot”). Purposefulness is about focusing on places where failure is less likely to occur.

Here are some characteristics of purposeful innovation:

#1: Purposeful innovation plays off your strengths
Even if you do beat the odds and by chance stumble upon a great innovative idea, you still don’t have a hit on your hands. You still have to develop it, bring it to market, and win versus others with similar ideas. The odds of random success at all five levels (ideation, development, operations, distribution and marketing) is really not in your favor.

As I alluded to in an earlier blog, even if you have a one in a million idea, there can be more than a million experiments in that space, so you have to fight to win against others with almost the same idea. The idea alone is not enough.

So if you want to succeed, you need to play to your strengths. Look for innovation only in places where you have competitive advantages in all of these areas. This means that you need to shut off innovation wherever your differentiating advantages do not apply.

This will narrow the innovation scope very quickly. But it will also increase your success very quickly.

Another option is to take away resources from random innovation and apply them to building competitive advantages. The more advantages you have, the better your odds of creating an innovative hit that will win.

I remember touring the area in Austin Texas where a lot of innovation start-ups were located. They all looked about the same to me. None of them were building differentiation capabilities. They were all just pulling all-nighters to get lines of code written. How do you expect to beat the odds if you are not doing anything meaningfully superior?

#2: Purposeful innovation looks for superior solutions to real problems
A lot of innovation focuses on applying the coolest new technologies in a spectacular way. These may be the types of innovations that make other engineers jealous of what you’re working on, but that doesn’t mean the rest of the world will care.

Consumers are looking for superior solutions to existing problems at reasonable prices. You need to ask yourself these questions:
  1.  Once the coolness wears off (and it will, sooner than you think), is there any real substance to your innovation?
  2. Is this just a short-lived fad?
  3. What existing problem does my innovation solve? Does it solve the problem better than current options? It is superior enough to be worth the price you need to charge? Is it superior enough to overcome the barriers to switching from current solutions and networks?
  4. Will consumers intuitively get what you’re trying to offer or will it be confusing and hard to explain? (Hint: If it takes more than a sentence or two to explain the superiority of your innovation, it probably won’t catch on.)

So the place to start is by finding where customers are complaining the loudest about the stress points in their lives. Then, you focus on looking for better ways eliminate these stress points. This means putting solution solving ahead of just looking at what the latest technology can do.

#3: Purposeful innovation avoids imitation
Facebook has been very successful. But that doesn’t mean that a copycat of Facebook will also be successful. That innovation has already been done. That market has already been captured.

Even if your innovative imitation of Facebook is a little bit better, it still won’t win. The network effect will keep people from switching for only minor improvements.

Almost by definition, true innovation is not a close copy of what already exists. It is doing something different. The blue ocean approach says it is easier to succeed in places where there is no established market/solution than one which has already been staked out by a host of competitors.

Imitation may be a sign of flattery, but it usually is not a path to success, especially when you need to get people to switch networks.


SUMMARY
Great innovations can often lead to success. Unfortunately, most experiments in innovation will be failures. The odds of randomly stumbling into innovation success are about as likely as having a monkey randomly write a play on a keyboard. Rather than rushing off to do as many experiments as possible, it is wiser to take a moment first to determine a strategic focus for your efforts. Narrow the scope to improve the odds. This is purposeful innovation. Purposeful innovation narrows the scope by: 1) Looking in places that take advantage of competitive strengths; 2) Looking in places where you can provide a superior solution to current problems consumers are complaining about; 3) Not looking to imitate what’s basically already out there.


FINAL THOUGHTS
Good fishermen know that you are more likely to catch fish if you fish in locations where there are more fish to be caught. They don’t just randomly fish anywhere. They go where the odds are better. Innovators should do the same thing.


Tuesday, July 5, 2016

Strategy Planning Analogy #564: The Attack of Gravity


THE STORY
I have a skateboard park near my home where lots of young boys like to hang out. The primary attraction at the skateboard park is a giant U-shaped surface. The idea is to start at the top of one end of the “U” and skate down & back up the other side of the “U”.

It sounds easy enough, but these boys have a tendency to fall off their skateboards. As it turns out, the location the skateboards prefer is not on top of the “U” but at the bottom. That’s where all the skateboards congregate after the boys fall off of them.

They are victims of the law of gravity. The boys try to fight it, but the skateboards willingly give in to the gravitational pull to the bottom of the “U”. But then again, if skateboarding were easy, there wouldn’t be any challenge to the sport.

THE ANALOGY
Lately, it seems like retailers have become more like skateboards. They all want to fall down to the bottom of the “U”. In this case, it is the gravity of pricing which is pulling them down. All the retailers seem to want to be on or near the bottom of the range of prices.

In the past, retail pricing was more like when a boy is guiding the skateboard, trying to defy gravity and get as high in the air as possible. Similarly, retail management in the past would guide the stores on paths towards pricing as high as they could get away with. But now it is more like when the boy falls off the skateboard. The retail pricing falls to the bottom like an unmanned skateboard.

And there the stores lay, all clustered at the bottom of the pricing range. And although that may be good for the consumer, that’s not a good thing for the retailers.

THE PRINCIPLE
If you want people to prefer your offering, then you have to give them a reason to prefer you. There needs to be something in your offering that makes it special enough to cause people to see a justifiable reason to prefer it over the alternatives. That won’t happen if every option looks the same. Similarity makes all the options undistinguishable from each other. There is no reason to prefer one over the other when you cannot distinguish one from the other. Therefore, a key aspect of strategy is to find one’s point of preferred differentiation.

The problem is that business gravity tends to pull everyone down into an indistinguishable sameness. As soon as one firm finds a positive differentiation, everyone copies it. They chase each other on prices until everyone is at the bottom. They all get stuck in a heap at the bottom of the “U” looking about the same.

To fight the business gravity, firms need to apply the principles of differentiation. We will look at three of these principles.

#1: A Difference Needs to be Meaningful
Marginal differences do not motivate behavior. Consumers are creatures of habit. If you want to change their habits, you have to make your differentiation large enough to grab their attention and overcome the resistance to change.

When I was in the grocery business, the general rule was that if you wanted to get people to shift based on price, then your average prices would need to be at least 7% lower than the competition. Otherwise, the price differential is not enough to succeed. You don’t look different enough to create preference on price.

The problem is that in commodity retailing, pretty much all retailers are now within about 7% of each other on price. Wal-Mart’s original popularity was based on the fact that their prices were significantly lower than the prevailing “normal” prices. That caused people to shift to them in droves.

Now, Wal-Mart prices are considered to be the “normal” price. Their prices are no longer seen as abnormally lower than the marketplace. They are the marketplace price…no big deal. They set the market norm which others come pretty close to matching. No wonder Wal-Mart has stagnated. Their level of difference in their prices is no longer meaningful. When your level of differentiation is no longer meaningful, it is no longer a point of strategic differentiation.

#2: Successful Differences tend to be on the Fringe, Not the Core
Such a phenomenon is typical for the core attributes in almost any industry. Because the core attributes are so critical to success, competition won’t let you get a meaningful differentiating advantage there. They will copy the market leader on core attributes to nullify any advantage.

In retailing, the core attributes tend to be product and price. Unless you are a niche retailer, the products and prices between retailers today are not all that different. As a result, it is difficult to create meaningful differentiation at the core. Therefore, if you want to create differentiation, you have to look to the fringe.

And that’s what commodity retailers are doing. Wal-Mart has been investing in improving its service levels and store décor. Even Aldi, a leader in no-frills, low cost retailing, has started a program to upgrade its store décor. After all, if your prices are not that much lower than anyone else, why should customers put up with your low service and bad décor? The trade-off isn’t worth it when the price differential shrinks. So now you can no longer just be the best low price store; you have to be the low price store with the best fringe offering.

So the irony is this: although the core is the reason for consuming an offering, it is the fringe where differentiation tends to be most effective, since it is easier to create differentiation at the fringe than at the core.

#3: Successful Differences tend to be Difficult to Copy
But just as the core can be copied, eventually so can the fringe. So the trick is to try to find the types of differentiations which are the most difficult to copy. This is done by making bold trade-offs.
The trick is to get extremely good in one fringe area (i.e., create a huge differential) by foregoing much investment in other fringe areas. It’s like putting your eggs in one basket.

For example, the core in the airline business is getting a passenger safely to their destination on time. Most airlines are pretty similar with respect to these core features. So to create differentiation, you have to go to the fringe. Southwest Airlines focused on the fringe aspects most popular with pleasure travel and pretty much ignored the fringe directed at business travel. As a result, they are not the most popular business travel airlines, but they have meaningful differentiation that attracts the pleasure traveler.

Had Southwest tried to be equally strong in all fringe areas, they would not have stood out on any fringe area. The beauty of only focusing in one area of fringe is that it allows you to make bold changes to your business model. You can cut out the aspects of the business model where you do not focus so that you can alter your business to be even better at providing the fringe being focused on. This is the idea of making trade-offs.

For example, Southwest Airlines eliminated the hub & spoke approach to scheduling. Although that may not have made business travelers happy, it freed up resources to make it easier for Southwest to win with the pleasure traveler. The beauty is that it is difficult for airlines who did not give up hub and spoke to match Southwest on the fringe which matters to Southwest, because the others did not make the trade-offs necessary to create ability to outdo Southwest in the areas where Southwest chose to differentiate.

So the secret to differentiation is this: pick an area of differentiation which is inherent to the unique way you operate your business model, so much so that those using a more conventional business model cannot match you. Create trade-offs in both the way you operate and the fringe you offer, which make imitation difficult. By working the two in tandem (internal operation and external fringe offering), you can distance yourself from the norm and create meaningful differentiation.

SUMMARY
There is a natural tendency in business for companies to chase the same approaches to the core. Like gravity, they are pulled to the same place. By all looking and acting the same, there is little opportunity to create differentiation. And without meaningful differentiation, there is no reason for a customer to prefer your offering over the alternatives. To get around this, firms need to:
  • Consider how to create differentiation in an aspect of the fringe;
  • Create trade-offs in the business model which allow one to get so good at offering the chosen fringe that others with a more conventional business model cannot effectively copy you. 

FINAL THOUGHTS
This is not just a problem for retailers and airlines. All businesses can fall victim to their industry’s gravity and become indistinguishable from the competition. Differentiation at the fringe is important for all businesses to consider.

Friday, July 1, 2016

Strategy Planning Analogy #563: Strategy by Trickery?


THE STORY
Awhile back I was reading an article about depression. The first half of the article looked at what causes a person to be chronically depressed. It said that based on research, the major difference between the chronically depressed and other people is that the chronically depressed cannot envision a scenario where their situation improves. By contrast, other people can envision the possibility of better times ahead.

That made sense to me, so I decided to read the second half of the article, where they were going to suggest a way to eliminate chronic depression. I expected the article to explain ways for the depressed individual to change their situation so that a better future was more possible. For example, I was expecting suggestions like:

·       Get an education.
·       Get out of unhealthy relationships.
·       Take some risks.

Instead, the article took an entirely different approach. It talked about mental trickery—ways to trick yourself into believing in a better future, even if a better future is not a realistic probability. That might work for a short period, but is that really a long term solution? Suddenly, I was no longer impressed with the article.

THE ANALOGY
Businesses have their own form of depression: depressed sales, depressed earnings, etc. When these types of depressions become chronic, the business is in serious trouble.

I think the cause of chronic depression in business can be similar to what was stated in the article mentioned above: the businesses cannot envision a scenario where the company, in its current state, can improve. After all, if they could imagine a way to improve the current state, they probably would embark on a strategy to do just that.

The remedy, in my opinion, is to change the current state, so that you can find a new path where prosperity is more likely. That could include tasks such as:

·       Changing one’s Position in the marketplace
·       Adding new Capacity or new Competencies
·       Reformulating the Business Model

But instead of this, many companies use an approach more like the one prescribed in the article. They use mental trickery to get themselves to falsely believe that if they just stay the course things will get better. Consequently, they don’t make the changes necessary to reach prosperity. The end result is a failed business.

THE PRINCIPLE
The principle here is that you cannot wish yourself into prosperity. Or, as stated in the title of a book by Sullivan and Harper, “Hope is Not a Method.”

When stated that way, it does sound silly to expect mere wishing or hoping to solve all your problems. But those aren’t the words used by the proponents of this approach. They use trickery and cloak it in terms like “Principles of Leadership.”

I’ve read it in many forms, and it usually goes something like this:       
  • When times are tough, leaders are not allowed to show any signs of pessimism. They need to put on a smiley, optimistic face and deceive their underlings into believing that things are really much better than they appear.
  •  Then the leaders are to tell their people that all they need to do is work a little harder, a little better and the future will become bright again.
  •  Next, the leaders are supposed to set high targets for their people to achieve—a way of showing that the leader believes good results are still possible.

The optimistic pep talk and the high goals are supposed to motivate the team to achieve the impossible and get the business out of its economic depression.

Unfortunately, what we call “the impossible” usually is impossible, and a smiley pep talk full of hope and wishes won’t get the job done.

If your situation is bad, don’t trick your mind (or the minds of your team) into believing the situation is good. The solution is to get out of the bad situation. Find a new situation where the prospects for prosperity are significantly better.

Doing a better job of executing an obsolete strategy does not change the fact that the strategy is still obsolete. For example, no matter how well Kodak executed an analog film business model, it would not win in a world of digital imaging. Rather than work harder on executing a bad strategy, change paths and work on a executing a better strategy.

The solution requires change, and a lot of people are afraid of change. But we shouldn’t let that fear cause us to continue down the current course towards destruction.

Instead of following the prescription above, called “Principles of Leadership”, we should do the following:

·       Be honest with our people and let them know that the current strategy is not valid anymore. Show how a continuation on that path leads to failure.

·       Then, either:
o   Present to the team a valid case for adopting your newer, better strategy; or
o   Get the team involved in building that newer, better strategy itself.

·       Next, get the team to rally behind specific change initiatives needed to get from the current situation to the newer, better scenario.

SUMMARY
Bad times are typically not improved by getting better at doing the same things that got us into the bad situation in the first place. If your strategy is no longer valid, change the strategy. Replace hopes and wishes in the status quo with a serious re-evaluation of how to win in the marketplace and specific change initiatives designed to make the improved strategy a reality.

FINAL THOUGHTS
Denial is never a good approach. As long as we deny the fact that our current strategy is broken, we will never fix it. As they say, the first step in curing alcoholism is to admit that you have a problem. We need to have the courage to say our current strategy has a problem.

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.

To get the book in pdf form, go to: https://app.box.com/s/ikh1anxp94uzxexrm5qwu632o0edtxwo

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.