Thursday, May 17, 2007

The Chisholm Trail

One summer, I drove the back roads through central Oklahoma. Quite a few of the cities along the way had museums dedicated to the Chisholm Trail. I visited several of these museums.

The Chisholm Trail was the path that cowboys used to move cattle from the south of Texas to Abilene, Kansas, back in the late 1800s. In Abilene, the cattle were placed on trains, where they were shipped back east for food. At its peak, nearly a million head of cattle took the Chisholm Trail to Abilene in a single year. As many as 5,000 cowboys a day would get their payday at the end of the trail.

With all of the books and movies and songs about the Chisholm Trail, you’d think that this phenomenon went on for decades and that cowboys made a lifetime career out of moving cattle up the trail. However, after going through several Chisholm Trail museums, I heard over and over again that it was a short-lived phenomenon. In fact, the original Chisholm Trail to Abilene was really only a major factor for four years—from 1868 to 1872.

The problem was that those same train tracks which made it possible to get the cattle to population centers of the east, were also the same train tracks which brought people from the east who wanted to settle in Kansas. These new settlers started up ranches, which they surrounded with barbwire fences, making it hard to get the cattle into Abilene. Then the new settlers started to complain that the Texas cattle were bringing diseases to their ranch livestock and that the rowdy cowboys were a bad influence on the community.

This started a phenomenon of pushing the trail further west every few years to an even more remote outpost, in order to get around the settlers who kept building further west. Eventually, the process ended completely when a rail line was built all the way to south Texas.

Many things can immediately look like great ideas. Take, for example, the Chisholm Trail. At the time, cattle in the north and east cost over $40 a head. Cattle in Texas could be had for only $4 a head. Even though you needed to spend a bit of money to get the cattle to the north and east, you could still make a fortune on Texas cattle if you could find a way to get them to the population centers in a reasonable manner. This made the Chisholm Trail to the Abilene train depot look like a “no brainer.”

Unfortunately, those trains—which the cattle-drivers and cowboys saw as their means to a fortune—were also the means to their demise. The good news was that the trains sent the cattle east. The bad news was that the trains sent civilization west. The civilization pushing west would try to abolish the cattle drives, making them take ever longer and less profitable paths to get the job done. Eventually, those trains did the entire transportation directly from the south of Texas, making cattle-drivers and cowboys obsolete.

The same phenomenon often happens in business. Someone will come up with a new idea or new technology which immediately looks great. People will latch onto the new idea or technology thinking it will provide a lifetime of great profits. Unfortunately, over time people find out that these “good” ideas also come with some “bad” consequences. Many times, the bad can eventually outweigh the good, causing disastrous results instead of prosperous results over the long haul.

This is the principle of “unintended consequences.” The idea is that we can often see the initial consequences of an action, which look great, such as the positive consequence for cattle-drivers of getting cattle to the Abilene train station. However, we often stop our examination with the initial consequence and do not look for the secondary and tertiary consequences. Many times, the secondary and tertiary consequences are not as favorable (like trains bringing back settlers, or trains eventually making the whole journey without cattle-drivers).

When the initial intended consequences are combined with all of the unintended consequences, what started out as a great idea may turn out to be a bad idea. Therefore, when building a strategy, always take time to fully test out its viability by looking for all of the possible unintended consequences which could arise out of your strategy.

Unintended consequences tend to come from one of three sources:

1) Your Competition
2) Your Customers
3) Yourself

We will look at each of these in detail.

1) Unintended Consequences From Your Competition
In an earlier blog (see “Bombs Start Wars”), we talked about the concept that if you come up with a strategy which starts taking significant market share away from competition, do not expect the competition to stand still. Instead, expect them to react in a manner to regain their market share. Depending upon the unintended consequences of how they react, your market share gains could be very short-lived and in fact you may end up in a worse situation than you were before.

The easiest example would be a strategy to lower prices in order to gain market share. At first, it sounds great. I lower prices. I gain market share from the higher-priced competition. I make more money.

Unfortunately, the competition may respond by resetting their prices below your new prices. This could start a nasty price war in which everyone eventually ends up with about the same share they had at the beginning, but far fewer profits, because the prices they charge are so much lower.

Another example would be if you go after taking share from a competitor’s most profitable product, and they respond with the unintended consequence of going after your most profitable product. You might gain a little more profit from your new venture, but not enough to make up for the losses on your formerly most profitable product.

Never assume that competition will stand still. Always factor in unintended consequences from the competition when you have a strategy which will hurt them.

2) Unintended Consequences From Your Consumers
Consumers are very crafty about finding ways to get the best value for their money. Sometimes, your initial actions, which you think will lead to getting more consumer money have the unintended consequence of leading to getting less of their money.

For example, let us assume that you are a retailer known for having consistently low everyday prices. You then decide that you can get some incremental business (and profits) by holding an occasional sale. At first, this works great. But then come the unintended consequences: eventually your consumers figure out that if they wait for a sale, they can get a better deal. So your everyday business goes down and your sale business goes up. In the end, you have about the same amount of business you had before, except that a greater proportion of it comes at the lower margin sale price. So in the end, all you have done is lower the amount of gross margin made at the cash register (due to selling more at the lower sales margin) while increasing your cost by adding the costs of running the sales. You are worse off than before.

Another example: gas stations thought they were providing a great service by allowing customers to pay for their gas right at the pump with a credit card. The hope was that customers would love the convenience and flock to the station (and they might buy a little bit more gas at each fill-up if they were buying it on credit). First came the unintended consequence that practically every competitor put in the same convenience, causing it to no longer be a unique differential to cause people to switch to you. The second unintended consequence came when customers who paid at the pump no longer came into the store to buy the high margin snacks and convenience items. So now, the gas stations were selling perhaps a little bit more of the low margin gas, but were selling less of the high margin convenience items. I’m not sure that provided a good return on the investment in those new gas pumps.

3) Unintended Consequences From Yourself
Sometimes we can be our own worst enemy and cause our own unintended consequences. For example, what we do favorably with one part of our product mix could hurt other parts of our product mix. This has happened to consumer electronics retailers, who in the desire to increase sales dramatically dropped the prices on their electronics products. When the prices dropped to so low, it made the extended warranties much less valuable. The extended warranties were providing most of the profits. Now the retailers are scrambling to find a replacement for the extended warranty profits.

Sometimes a company can destroy its own image. For example, if your firm is has a successful high-end fashion image and you think you can get some incremental profits by reaching out to a broader audience, you may end up destroying that image. The elite fashion taste-makers may no longer find your brand appealing, because it has lost its exclusivity. It may now be seen as to “common” to them, and the tastemakers could abandon you for a different brand. And when the tastemakers abandon you, the other eventually will as well and you will be left with nothing. The unintentional consequence of trying to appeal to a broader audience could leave you appealing to no audience.

Almost every strategic action causes a change in the marketplace. Some of those changes are easily predictable. Others may be less obvious. The less obvious consequences of your change may be the most important ones. Try to discover these potential unintended consequences before embarking on your strategy. Otherwise, you may end up with undesirable, unintended results.

There are always unknowns when blazing a new trail, be it the Chisholm Trail or a new strategic trail. Just because you cannot predict all of the potential outcomes should not deter you from blazing the new trail. If you wait until everything is known, then it is often too late. However, one should never blaze a new trail blindly. Prepare yourself for unintended consequences in advance.

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