Monday, April 9, 2007

Vacuums are for Cleaning Floors, not for Strategy

When my children were young, I got a notice that an amateur astronomy club was going to set up their telescopes at a local park and let children look through their telescopes. That sounded like a pretty good idea to me, so I took my children to the park that night.

There was a wide variety of telescopes at the park with many different types of designs. I noticed that the really nice telescopes were attached to a motor. The amateur astronomers would make all sorts of adjustments to the motors before turning them on.

I had never seen a motor like that on a portable telescope before, so I asked one of the astronomers what the motor was for. He told me that the problem in looking far out into space is that everything is moving. The stars are moving, the planets are orbiting, and the earth is rotating.

Because everything is moving, if you keep the telescope in a stationary position, objects will drift out of view in the telescope. The only way to keep the item in sight is to put the telescope on a motor which adjusts the angle of the telescope at the same rate (but opposite direction) at which the earth is rotating. That way, your target remains in your sites.

The motor came in handy, because it took time for all of the children to look through that telescope and see the rings of Saturn. Without the motor, the children at the back of the line would not have seen anything when they looked through the telescope, because it would have moved out of view.

In strategy, one sets goals that are off in the distance. Looking for the right distant goal is similar to trying to find the right planet off in the distance in a telescope. Another similarity with astronomy is the fact that in your strategic environment, everything is constantly moving. Consumers are not standing still. Competition is not standing still. Your strategic initiatives are making it so that you are not standing still, either.

Because everything is in constant motion, it is easy to lose site of your goal. If you do not make continual adjustments to counteract the changing environment, you can drift off in the wrong direction. Just as the motor on the telescope counteracts the movement around it, you need to make frequent adjustments to counteract the movement around your business environment.

Strategies are based on assumptions. In general, the more accurate one’s assumptions, the more likely one will develop a sound strategy. Unfortunately, many strategies are based on assumptions developed in a vacuum. The environment is assumed to be unchanging. How the world exists today is how it is expected to exist forever. There is no allowance for anything new to enter into that vacuum.

As a result, a strategy is created which may have been right for a point in time when the strategy was developed, but is not appropriate by the time the strategy is put into place. Like the unmoving telescope in a moving world, it ends up pointing you in the wrong direction.

There are many factors which naturally occur to upset the strategic vacuum. Some of these would be as follows:

1) If you start taking meaningful market share from others, they will retaliate. (see blog "Bombs Start Wars" )

2) New products (especially in the field of technology) tend to start off as expensive items for a small group of enthusiasts, but over time the product gets less expensive and moves to the masses.

3) If you are successful, others will imitate you.

4) Industries which start out highly fragmented eventually consolidate into a small handful of large firms (see blog "Rule of 1.5" )

4) As prices drop, the most efficient business model has the advantage.

5) When you are new, the novelty of your offering will create excitement. Once the novelty wears off, consumers will become more demanding.

6) Even if you are first, if you move slowly, a fast follower can overtake you.

An example of what happens if you build your strategy in the vacuum is the story of Iridium: cell phones via satellite. In the early 1990’s cell phones were rare, the phones were ugly and bulky, and the costs to use them were very high. Motorola looked at this environment and assumed that it would not change very much. They assumed that:

1) The costs to use cell phones would remain high.

2) The land-based cell phone companies would continue to be highly fragmented and localized.

3) The limited acceptance of cell phones (due in part to the high operating expense) and the continued fragmentation would make it difficult to justify the costs involved in putting up cell towers all over the place. Hence, land-based coverage would be very spotty and localized. Cell phones based on this model would have very limited usefulness to someone who travels outside their localized area. Most areas would be dead zones where the phones from their company would not work.

Consequently, if these assumptions are true, the idea of putting about 70 or so satellites in space to create a global cell phone coverage by a single firm sounded plausible. And based on these assumptions, the company Iridium was born. Sure, it would take a lot of time and cost a lot of money to set up all of the satellites, but people might pay a premium to get the widespread coverage. And after all, if the prices for the alternative stay high, this model could be competitively priced.

Unfortunately for Motorola and Iridium, the original assumptions, created in a vacuum, were quickly made obsolete. The environment changed quickly in ways that could have been foreseen, based on the general trends listed above. The fragmented companies consolidated, prices came down quickly, mass acceptance created the justification for cell towers all over the nation, and the ugly cell phones became small and sleek.

By comparison, Iridium was very expensive, it had large, ugly phones, and its management was not set up for a highly competitive mass consumer marketing approach. As a result, the Iridium service launched on November 1, 1998 and went into Chapter 11 bankruptcy on August 13, 1999. Its satellite network, which cost about $6 billion to put into place, was eventually purchased out of bankruptcy by a group of private investors in 2001 for about $25 million.

Motorola had failed to adjust its telescope to the changing environment and Iridium ended up way off the mark. That is the danger of building assumptions in a vacuum. The world changes too much. Remember, vacuums are for cleaning floors, not for building strategies. Since many of the changes in the environment follow patterns, you can incorporate those patterns into your original assumptions.

Because we live in a constantly changing world, there are two things to keep in mind when developing a strategy. First, before embarking on a strategy, do a stress test on the original assumptions to see if they are accurately taking into account likely future changes to the environment. If your strategy only succeeds if nothing in the environment changes, than your strategy could be in for serious trouble.

Second, as you move along your strategic path, occasionally go back and reassess the environment to see if the original assumptions still hold true. If things have changed, then see what adjustments you need to change in your strategy in order to still succeed.

One of the problems with telescopes is that they focus on a very narrow point in space. To create a viable strategy, one needs to see the bigger picture—things that fall outside what the telescope sees.

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