Sunday, April 22, 2007

"We Suck Less" Is Not a Strategy

I worked with a retail company one time that had two problems:

    • It’s main product was becoming obsolete, with worldwide demand dropping at a significant rate.

    • It charged more for the product than just about anyone else, without providing any meaningful differentiation to justify the higher price.

A strategic plan was developed to radically transform the retailer into a relatively new concept—one with potentially high growth, but also high risk, because the concept was unproven. The president of the company decided that the risk of transformation was too high, so he decided instead to fix the current business model.

He built a team of people who worked very hard with him to improve the company. They made the stores nicer and more inviting. They added a little bit of variety to the product offering. They added some efficiencies behind the scenes. The stores were very nice.

This plan to “fix” the chain, however, had a couple of serious problems:

    • The chain was still highly dependent on a product that was becoming obsolete.

    • The chain still charged more for the product than just about anyone else.

    • The changes overall increased the cost of doing business without increasing demand for the product.

It didn’t take long for the employees to realize that taking an obsolete, non-competitively priced product and putting it in a nicer store would not solve the problem. In private, they referred to the president’s vision as the “we suck less” strategy. Yes, the stores were better, but the proposition to the customer still “sucked.”

Needless to say, that retail chain is no longer in existence today.

Over the course of time, many businesses find themselves in a situation where their current business model becomes broken. Sometimes the threats to the business model come from the outside. Take, for example what the growth of the internet and digital Web 2.0 capabilities have done to destroy many traditional business models, from industries as diverse as newspapers, magazines, travel agencies, stock trading, advertising agencies, the music industry, or insurance, just to name a few.

Other times, the threat comes from the inside. Lack of controls, insufficient investment, quality control issues, not shifting with your customer’s changing needs, and poor service can also destroy a company’s business model.

Once one realizes that there is a problem, one’s first inclination is to try to fix the problem. Fixing usually involves trying to make the bad things better. Operational excellence or getting to parity with the best in the business becomes the new goal. Eventually these goals to get better are treated as the company’s strategy.

Getting better is not a real strategy. Becoming “less bad” does not make you a winner. To say you “suck less” does not give potential customers a compelling reason to prefer you over the competition. In the story above, all that getting better achieved was to raise the cost structure and speed up the chain’s demise.

In my prior blog (see “Tearing Down The House”), I talked about how it can be a mistake to tear apart a good strategy and throw it away, just because it may have a few flaws in it. The tragic consequences of such a major disruption can cause more problems than the flaws that one was trying to fix. Small changes which reinforce the current strategy would tend to be a better course of action in those cases.

This principle, however, only works if a company is already on rather solid ground with respect to its market positioning and consumer acceptance. As you may recall, the companies I referred to in the prior blog were JC Penney and Kohl’s—two companies already on rather solid ground. If your company is poorly positioned, has a negative image, or is seen as an inferior alternative to someone else, then this principle does not apply.

In those cases, just “getting better” is not enough. Making a rotten apple less rotten does not make it tasty. In a prior blog (see “Rule of 1.5”) we talked about how industries tend to consolidate to a point where only one or two players in a given space are strong enough to earn a decent return on investment. If you improve your position from being 5th best in a space to being 4th best, you are still not good enough to unseat the leader.

Your financial woes will not go away with that type of effort, because you are investing in an area where the marketplace will not give you sufficient credit to justify the expense. The question in the back of their head will be, “If you are as good as you say you are, then why are you not the leader? Since you are not the leader, it must not be as good as you say.” Their conclusion will be that even if you now suck less, you must still suck.

Your only real alternative is to change yourself into something different. You need to find a different, neighboring space where you can reposition yourself as the leader. This is not about taking who you are and making better. This is about taking who you are and making it different; making it uniquely superior in some fashion, based on a different mix of attributes than those used in the prior space. Instead of being about improvement, it is about transformation.

For example, if low price is the defining attribute of the segment you are in and you have a relatively high cost structure, you can never effectively win in that segment. However, there may be a neighboring segment where there are a sufficient number of consumers looking for something similar, except that quality and service is more important to them than price. If no business currently has a solid lock on the quality/service angle, then perhaps you can transform yourself and migrate to that new position and become #1 in that neighboring space.

The idea is to change who you are compared to in the minds of the customer (and on which attributes they compare you). Rather than having people compare you to others who are better at providing lower prices, get them to compare you to others who are inferior at providing quality/service.

In the example used in the story above, just such a proposal was made. A strategy was developed to transform the retailer from being product-based (where it had a distinct disadvantage) into something that was more lifestyle based (where it had an opportunity to invent a new type of retail format in relatively uncontested space).

Unfortunately, this proposal was rejected and instead the “we suck less” alternative strategy was put in place. Why? In the near term, transformational strategies tend to require more resources (time, money, people) and have a longer payback. There also appears to be greater risk, because one is moving away from the historical foundation of the business. By contrast, an incremental improvement program can look more practical for the immediate future.

Unfortunately, you cannot indefinitely postpone the inevitable, and the “we suck less” approach never leads to long-term success. Usually, this harsh reality comes sooner than you think (see “The Room is Smaller than you Think”). In the story above, it only took two years under “we suck less” before the company was sold at a loss.

In reality, the higher risk is not in transforming the company. Instead, the higher risk is in the “we suck less” strategy, because it nearly always fails—and usually fairly rapidly. At least with a transformation strategy, you have a shot.

JC Penney was not always the successful company it is today. There were many lean years when some people thought the company might not survive. It was a mediocre performer at the low price end of the fashion continuum. However, instead of trying to become better at the Price First-Fashion Second space, it decided to transform itself into what it saw as a better space: Fashion First-Price Second. There were a few tense years in the middle of the transition, but now that it has successfully crossed over to the other side, JC Penney is showing great results and is back on an aggressive growth strategy.

Once, I was working with different company that had an inferior position in the marketplace. I was trying to convince the President of the Company to take on a transformation of the business, but his basic response was “I don’t have time for that now. I’m too busy trying to fix the company.” At that point, those words “we suck less” came back to my mind.

Unless you are already a leader, getting better is not a winning strategy. Being good at what you do is merely the minimum table stakes needed to get in the game. If you want to win, you must go beyond merely being good (or even as good as the industry leader) and seek out points of differentiation and superiority.

It takes patience to transform a company. Not all stakeholders have that kind of patience. That is one of the benefits of going private, which many firms are doing. In the private environment, it is often easier to push through a transformational agenda.

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