Monday, March 5, 2007

Weathering the Storm

When I was in elementary school, the city I lived in decided to have a kite flying contest. Each elementary school would have their own contest, and the winners from each school would compete against each other at a later contest. The trick was that all the kites had to be home made.

I procrastinated and didn’t start to build a kite until the night before the contest. It was too late to go out and buy a bunch of materials, so I tried to fashion a kite out of what I could find around the house. I found some sticks that were too short and a thin plastic bag that dry-cleaners put over suits. I taped the sticks together so they would be long enough and hung a piece of the dry cleaning bag over the sticks. Because the bag was clear, you could see the messy glue marks I used to glue it together. It was ugly, but I figured it would probably fly…at least I hoped so.

The next day, the school put all of the kites on display prior to the flying contest. My kite was by far the ugliest. Other people had made their kites out of paper and had drawn beautiful designs on them. They were all works of art. By contrast, my kite looked like Charlie Brown’s Christmas tree--pathetic.

Then it came time to fly the kites. At first, I was having a little trouble getting mine into the air. But then something happened…it started to rain. The more it rained, the more difficult it was for the beautiful paper kites to stay in the air. They started absorbing the water and got too heavy to fly. My plastic kite could withstand the weather. Although I did not win the contest, I placed high enough to continue to the next level.

Everyone would like to see their business soar and win, just as I wanted to do with my kite. In the desire to win, people often try to design the “perfect” strategy, with a perfect offering that is beautiful over all dimensions. The reasoning is simple. In a competitive marketplace, the best should win. Therefore, if I build the best, it should win.

The problem is that on the path to the future, one will encounter many storms. If you commit all of your resources to perfection too soon, you will not have anything in reserve to weather the storm. The rains will come and you will be too weak to fight back because your initial over-commitment to perfection leaves you nothing to fall back on. You will be like those paper kites in the rain.

In the early stages, it is better to focus not on perfection, but rather on how to weather the early storms. If your strategic design is good enough to play and you have built into your design the ability to weather the storms, then you have created a strategy that gets you to the next level. And in the beginning, that is the best strategy.

My plastic kite was certainly not the best, but it was good enough, and it was designed to weather the storm. That gave me the opportunity to get to the next level, something the beautiful kites could not do.

The principle here is to understand what the appropriate strategies are for different stages in an industry’s life cycle. What people often forget is that in the early stages of the evolution of an industry, the goal is not to try to win it all. Instead the goal is to be good enough to get to the next level. In the early stages of an industry’s evolution, it can be very risky if you try to seek perfection too soon:

1) It can slow you down in the march to outgrowing the competition with infrastructure and economies of scale (perfecting your small piece of the industry rather than growing to be a big piece of the industry).

2) It can lock you too soon into a direction that may not be the ultimate solution once the industry matures (At the beginning, it is difficult to guess what ultimate perfection at maturity will look like. You will most likely make the wrong guess.)

3) It can eat up all of your financial resources, leaving you without a war chest—and most likely leave you with a higher cost structure than competition—when the real market share battle begins later in the consolidation phase (market share battles are expensive and you can not win these battles without a way to sustain heavy financial blows).

In the early stages of an industry, it can be a higher than average profit situation. The relative lack of competition combined with the novelty of the new solution usually creates high margin opportunities. With these higher margins, one may be tempted to plow the money back into perfecting your little piece of this new industry. It is better, though, at this stage to design a “good enough” go-to-market strategy and use your remaining resources to devise ways to weather the storms when the high margins disappear.

Allow me to give two examples from the retail industry to illustrate my point.

In the early stages of the sporting goods superstore industry there were many small regional players. One regional player was Dick’s; another was Galyan’s. Galyan’s followed the strategy of trying to build perfect stores. They were large, beautiful and a wonder to the eyes, with rock climbing walls and putting greens inside the store. There were “cold rooms” where you could try on a winter jacket to see how well it insulated you. They had everything one could possibly imagine in the world of sporting goods. It was like upscale sporting goods perfection.

Dick’s took a slightly different approach. Yes, it built nice stores—nice enough to give a bit of an upscale flavor. However, it did so in a much less extravagant manner. They weren’t as nice as a Galyan’s, but good enough to portray a positive image. Because of the simpler and less costly approach, Dick’s could open a lot of stores a lot faster than Galyan’s, which is what Dick’s did.

Eventually, growth caused all of these small regional players to start entering each other’s territories. The battle heated up. As they fought each other for market share, profit margins came down. Dick’s was in a stronger position than Galyan’s to weather these storms because:

1) It had about 5 times more stores than Galyan’s. These provided economies of scale as well as more places to earn money that could be poured into the markets facing the toughest battles.

2) It had a lower operating cost structure than Galyan’s. By not striving for perfection, Dick’s was able to cut a lot of costs out of running the stores as opposed to the higher structure at Galyan’s. This meant that Dick’s could survive on a lower base of sales than Galyan’s. Therefore, in a battle for share, Dick’s could outlast Galyan’s.

In the end, Dick’s bought out Galyan’s in 2004. Even though Galyan’s had the more perfect stores, it could not survive to the next level. Dick’s strategy was designed to get to the next level. Now that the consolidation process is starting to come to an end in the Sporting Goods superstore industry, Dick’s is emerging as a leading survivor. Now Dick’s can start focusing on making improvements on the path to perfection.

The second example is Bed, Bath & Beyond versus Linens ‘N Things. In the early stages, it was my opinion (as an outsider) that Linens ‘N Things had the more perfect store. However, while Linens ‘N Things was perfecting the store, Bed Bath & Beyond took a different strategy:

1) They built stores as fast as one possibly could in all of the right locations. They weren’t as nice as Linens ‘N Things, but they were good enough.

2) They were merciless in cutting expenses to the bone, even eliminating most advertising except for the occasional 20% off coupon. At the time, they claimed that having the most stores on highly traveled roads was the best advertising.

As a result, Bed Bath & Beyond was best able to weather the storms when times got tough. Its mass and low cost structure won out over the “more perfect” Linens ‘N Things stores. After winning this first round, then Bed Bath & Beyond turned their attention to making the stores more perfect. Now its stores are every bit as good as Linens ‘N Things, if not better.

The moral of the story is that Linens ‘N Things first strived for perfection and ended up a marginal player who had so many financial problems that it went private. By contrast, Bed Bath & Beyond ignored perfection at first and build a company capable of weathering the storms. It later added perfection and is doing wonderfully.

The proper strategy depends on where you are in the life cycle of your industry. In the early stages, the goal should not be to strive for perfection, but rather to strive to get to the next level. In the early stages, being “good enough” is good enough. Once you survive to the next level is the time to start worrying about perfection.

The original Wal-Mart stores, built back in the early 1960s, were pretty pathetic, like my kite. Instead of looking for retail perfection, they focused on building a world class distribution network. That distribution network allowed Wal-Mart to survive the consolidation of that industry. Once they became a survivor, they were able to grow to become what they are today. Most people would say that their stores still are far from perfect, but they seem to have soared above everyone else, anyway.


  1. Is this what happened to Radio Shack's Incredible Universe?

  2. To a large extent, yes I agree that this is what happened to Incredible Universe.

    But there was another thing going on. Radio Shack misunderstood what the key success factor was in larger stores. They thought the key was selection, when in fact the largest key to success in larger stores is that they were more cost efficient to operate. Because Radio Shack did not understand this, they did not make Incredible Universe very cost efficient.