Rule of 1.5

THE STORY
Having spent ten years living in Green Bay, Wisconsin, you get to hear a lot of Vince Lombardi stories. Vince Lombardi was the famous coach of the Green Bay Packers football team back in the 1960s. In Green Bay, Vince Lombardi is treated almost like a Saint.

It seems like almost every word he ever said is memorialized somewhere in Green Bay. For today’s blog, one particular quote comes to mind:

“Winning isn’t everything…it’s the only thing.”

THE ANALOGY
Over time, nearly all industries consolidate. During this phase, the number of surviving players in an industry rapidly shrinks, as weaker players are no longer able to survive the financial squeeze of consolidation.

Eventually there is virtually no one left in the industry. It is no longer a question of how close you came to winning, or where you placed in the rankings. In this “Winner Takes All” world we live in, if your business does not win, then you most likely cease to exist.

Therefore, the ultimate goal is not to place well as you strive to win. Coming in third is not an option, because there may not even be three financially viable survivors. The winner may be the only viable financial survivor producing an adequate return on investment. Hence, the importance of the saying above: It isn’t just about winning being everything, but it is about the fact that the winners may be the only thing, because it is likely that only the winner comes out thriving after the consolidation phase is over.

THE PRINCIPLE
There used to be a principle in business called the rule of three. This rule said that after an industry consolidates, there are usually three survivors—a leader, a follower, and an innovator. The leader is most profitable, the follower does fine, and the innovator keeps innovating in order to get just enough of an edge to survive.

This was a fine principle a generation ago. However, it seems that these days the survivors are limited to only two. And often, the number two is so much weaker than the number one, that there is no real contest. Therefore, I now refer to the rule of three as the rule of one and a half.

You can see this in the industry I am most familiar with, retailing:

Two surviving consumer electronics chains (one strong, one weak):
Best Buy and Circuit City

Two surviving Housewares/Domestics superstores (one strong, one weak):
Bed Bath and Beyond and Linens ‘N Things

Two surviving Dollar Store formats (One fine, one starting to struggle):
Family Dollar and Dollar General

Two surviving Home Improvement Centers (They are both doing fine only because the industry is so huge):
Home Depot and Lowes

Two surviving Discount Department Store (both are doing fine only because the industry is so huge):
Wal-Mart and Target

Two Warehouse Clubs (one strong, one much weaker)
Costco and Sam’s Club

And the list goes on and on. This does not just apply to retail. Take a look at the airplane industry—a strong Boeing and a weak Airbus. Just about all of your major consumer goods categories are down to about two big players—Coke & Pepsi, Unilever and Proctor & Gamble, General Mills and Kellogg.

It is inevitable. So what should you do about it? Here are some thoughts.

1) Remember the words of Jack Welch: If you cannot be #1 or #2, get out. It’s better to get out early when more people are still deluded into thinking they have a chance to win and the mix of buyers will bid up the process. Take a look at Target Corp. (Formerly Dayton Hudson). Early on, they saw the handwriting on the wall and sold off a big chunk of their southern and western department stores at a great price back in the 1980s. May Company, who waited until the end when there was only one player left to buy them (Federated Stores) did not get as good of a deal.

2) Think like a guerrilla fighter. Since there will only be a couple of positions at the top, most companies will be left fighting for the crumbs that fall of the table. Quit acting like a leader if you have no real shot at being one. Instead, use strategic principles designed for guerrilla fighting.

3) If you cannot be a leader in any of the business spaces already defined, create a brand new category for which you have an opportunity to lead. For example, cable network TNN was not doing well in its former format, so it reinvented itself as “Spike TV”, the #1 network designed for men.

4) If you cannot become #1 on your own, join forces with a network of businesses that are building the #1 network to solve a problem. It’s better to be a small part of a winning team than to be on your own with nothing.

SUMMARY
As industries mature, they go through a period of consolidation. Eventually, only a small handful of major players remain. Sometimes only one or two of the major players makes a decent return on investment. Therefore, when the industry reaches this point, it is important to play to win. And if you cannot win, then play a different game.

FINAL THOUGHTS
I’ve often been asked what is the perfect strategy for a given situation. My answer is that there is no single ideal strategy. No matter what strategic option you look at in a particular industry, you usually find both winners and losers using that same strategy. Stop looking for the ideal strategy and start looking for your ideal strategy. For a select few, the strategy of winners is their ideal strategy. For the rest of us, we need to do something else.