Sunday, July 29, 2007

Strategy Without Numbers

With the rise of the internet, the concept of bartering is making a comeback. Rather than using money to buy things, companies are offering up goods and services to swap for other people’s goods and services. There are a number of web sites which help consolidate all of the bartering, including sites like the Freedom Barter Exchange (

There are reports out there claiming that this phenomenon is growing rapidly. One web site claimed that barter sales increased from $40 million in 1991 to over $20 billion in 2000. Of course, that raised a question in my mind. If no money is changing hands, how can you precisely determine the dollar value of what is going on?

If we go back to the days before money, I can imagine that it was more difficult to do any kind of transaction. For example, what if you had extra sheep to offer and you wanted to buy lumber and the one who had lumber did not want any sheep? I would suspect that there was a much longer conversation before any deal could get done.

I suppose that is why the word “barter” in the English language has morphed into a new meaning for haggling over a price, even though currency is eventually used in the transaction.

A large part of the language of business is spoken in currency. We describe businesses in terms of their sales and their profits, using the local currency. However, what would happen, if like in the story above, we were living in a time without money?

I suspect a similar result would happen. Discussions would tend to get longer and more involved, because you couldn’t use the short-cut of currency.

Great strategy is a result of great discussion. If we get too focused on numbers, we may end up short-cutting the discussion. In the process we will end up with a less robust (and less powerful strategy).

Communication typically revolves around a combination of three tools: words, pictures and numbers. In many companies, strategic communication can become dominated by numbers. We may state our goals numerically, like:

- 10% annual sales growth (or profit growth)
- 12% return on equity (or capital or investment)
- A doubling of market share, from 15% to 30%.

There are a lot of problems if your communication focus is dominated by numbers:

1) Numbers provide no insight into how they are to be achieved
2) Numbers focus on accuracy rather than action
3) Numbers tend to narrow the time horizon
4) The “Right” numbers can be achieved for the “Wrong” reasons

This is why is it highly recommended that your strategic planning cycle avoid numbers as much as possible. It should be entirely divorced from the annual budgeting cycle. To quote an article by McKinsey & Co. from 2002, “The best-practice companies we surveyed organized two clearly demarcated meetings: a full day on strategy with each business unit and a shorter meeting, at a different time of year, to set financial targets.”

How much do numbers dominate your strategy meetings? How much would your meetings have to change if you were told you had to do strategy without numbers? Trust me, it can be done. I’ve seen it and as McKinsey pointed out, it is essential is you want to be like the best practice companies.

If you need more convincing, I will discuss in more detail the four problems with having strategy dominated by numbers as mentioned above.

1) Numbers provide no insight into how they are to be achieved
Numbers can be very abstract. They may present some ideals, but that doesn’t mean that they provide any insight. For example, I might have a goal to be 2 feet taller, but that doesn’t mean that I have any idea of how to become two feet taller. Similarly, I say I have a goal to create profits of $10 million, but that doesn’t mean I know how to create those profits. Maybe the goal should be $5 million or $20 million. Until I determine what actions are best for my company, I have no idea what is right or how to get there.

This is a phenomenon I refer to as the Scoreboard versus the Clipboard. You can yell at the numbers on the scoreboard at a basketball game all you want, but it doesn’t change the score. Scores are changed by focusing on the clipboard, where you draw up the activity you want to achieve.

In the same way, if your strategic planning process obsesses on the numerical financials, it can be like yelling at the scoreboard. Instead, strategic discussions should focus on the clipboard, the actions you want to accomplish. To get a focus on the clipboard, you need to severely restrict the urge at your planning meetings to obsess on the scoreboard. For more on this topic see my blog “Scoreboards Vs. Clipboards.”

2) Numbers focus on accuracy rather than action
Strategic planning meetings only last for a relatively short period of time. There is not enough time so that you can waste it in endless discussions over the precision of various numbers. The more time spent arguing about numbers, the less time available to talk about actions—what needs to get done and how to do it. For most strategic discussions, what you really need as a foundation is not a precise number. After all, we are talking about the future. Nobody knows the precise answer anyway. What you need is just enough accuracy to ensure that the strategy is moving in the right general direction. You adjust along the way as information comes in over time.

Trying to get it all precise up front presumes you know more than you really do. Putting an extra decimal point on a guess does not make it any more accurate. It is still a guess. In my experience, the most you typically need to know about trends is the following:

a) Direction – Is the trend going up (getting bigger) or going down (getting smaller)?
b) Magnitude – Is it moving up or down a lot or a little?
c) Speed – Is the trend happening quickly or slowly?

This is usually all you need to know to get the conversation on track to determine what needs to get done. Any more just wastes time. For more on this subject, see my blog “What’s a Few Seconds Among Friends.”

3) Numbers tend to narrow the time horizon
In general, numbers tend to shorten the time horizon of a discussion. If annual budgets are directly connected and part of the strategy cycle, I can assure you that annual budgets will tend to dominate the discussion. This focuses the discussion only one year out. Budgets are important, but they need to be done at a separate time, so that the strategy discussion will look further out.

Numbers can also tend to focus a company to spend too much time looking backwards, since most of the numbers we have are recording events which have already happened. Spending too much time looking backwards is like trying to drive down the freeway by only looking in the rear view mirror.

Yes, we need to understand where we came from to help us know where we are to go, but again, I don’t think a lot of precision will change the discussion all that much. Past direction, magnitude and speed should suffice.

4) The “Right” numbers can be achieved for the “Wrong” reasons
There are multiple ways to hit a high profit number, and many of these ways may run contrary to good strategy:

a) Once can stop investing in the company and take all the money out in profits now. Eventually, a lack of investment will kill a company, just as a lack of nourishment will kill a person.

b) One can significantly increase the price of what you sell and/or significantly decrease the quality of what you sell by cutting corners. This might fool customers for awhile, but eventually they will figure it out and abandon you.

If the focus is only on a numerical end rather than a particular action, or means, then it is likely that some will try to “hit their numbers” by doing things that will destroy a strategy. It has been my experience that if you focus on doing the right things, the right numbers will come. But if you focus just on getting the right numbers, often you do the wrong things, and eventually you will not be able to get the numbers.

That is why one should try, as much as possible, to do strategy without numbers.

Strategic planning works best when it is liberated from a focus on numbers. By eliminating numbers, the conversation shifts to discussion trends and actions. By getting our arms around trends and numbers, we will have stronger direction on what needs to get done and how to do it. And this leads to greater long term success. The annual discussion of numbers should take place at a different point in the calendar.

There’s the old saying that people tend to focus on that for which they are held accountable. You are more likely to create success if accountability focuses on strategic actions rather than abstract numbers.

Thursday, July 26, 2007

Medicating Cats

There are certain things in life which just seem like an exercise in futility. For example, try feeding baby food to a baby when they are not interested in eating. You may succeed in getting all of the food out of the baby food jar, but it is doubtful that much got into the baby’s tummy. Instead, you will find the food all over the baby’s body, all over you, all over the floor, all over the walls and so on.

About the only way to get the baby to eat the food is to fool them by making it into a game. In other words, trickery and deceit is introduced to babies at an early age.

Even worse, try feeding a pill to a cat. They will bite you, claw you, run away and hide in places you cannot get to. Even if you are successful in getting the pill into the cat’s mouth, they have a remarkable way of never swallowing it. They will spit it out at an inopportune time in an inapropriate place (like maybe your face). I’ve tried hiding it in their food, but they will eat all around it and leave the pill bits behind.

My wife finally came up with a way to give a cat a pill—and it only requires two people. First, wrap the cat up as tightly as you possibly can in a towel, sort of like a cocoon, with only the head sticking out. In a cocoon, a cat cannot scratch you or claw its way away from you. All it can do is squirm. So one person’s job is to wrap their arms around the cocoon (sort of like a second cocoon) to stop the squirming.

While the first person is doing this, the second person pries open the cat’s mouth, shoves in the pill, and hold’s the cat’s mouth shut, while stroking its neck to get the swallow reflex to work. And this works two out of three times. (for a link to a humorous story on how to give a pill to a cat, click here.)

Just as babies and cats may resist their food and medication, top business executives may resist doing any serious strategic planning. Yes, the food is good for the baby and the pill is good for the cat, but they still resist. In the same way, strategic planning is good for the business, but the executives still resist.

If you are not careful in how you try to instill planning into your company, you can have a real mess on your hands. Your career could be ripped to shreds. And I do not think you can get away with wrapping an executive into a cocoon in order to get them cooperate.

This is the third in an occasional series of blogs on how to get strategic planning done in organizations which resist the idea. I call it “stealth strategy.” (For the other two blogs, see “Minutes Last Forever” and “Talk it Up.) Just as you sometimes have to trick a baby into eating their nutritious food, sometimes you have to use tricks to get executives to agree to do any strategic planning.

One of the big issues is trying to convince some that the effort is beneficial. This is particularly true for executives who only plan on sticking around for a few years. Their logic usually is as follows: the pain is near-term (mine), but the benefit is long-term (someone else’s). In other words, they have to give up near-term quarterly profitability during their time as leaders in order to invest in a long-term future that will not reap benefits until the next generation of leaders takes over.

Well, with the baby, if they do not want to eat, you substitute something they want to do, such as play. You make the eating into a game. The same is true with top executives. Find out what they would rather do and make strategy a means to that end.

Let’s say, for example, that they are highly motivated by greed. You can pull out studies showing that even if the payback on a strategy is well into the future, if the market believes you can pull it off, they will reward you in the stock price TODAY. You can make those stock options worth plenty more during your watch if you develop a strategic plan that the market buys into, even if it doesn’t come into being until after you are gone. High stock multiples are given to stocks seen as having high potential. A reputation for solid strategic planning increases the likelihood that the market will have confidence in your future potential. Hence, strategic planning = more money to satisfy your greed.

What if the top executive is motivated by things which stroke his or her massive ego? Well, if you want to get on the cover of the business magazines and be seen as a business genius, you have to do some bold moves. Sticking with the same ol’ thing everyone else is doing will not get you any attention. Bold moves into new territories require strategic planning. Not only that, it makes you sound more intelligent when talking to the press or writing your memoirs.

A similar approach is the “legacy” angle. Tell the executive that if they make bold strategic moves, they will be leaving a great legacy which will be talked about for years and years. They can leave behind something to be proud of. Their name will be associated with a great movement, like Henry Ford is associated with automation and the industrial revolution.

The legacy angle also can work on executives who have already made their money and now want to do something meaningful with their lives. What can be more meaningful than leaving a great legacy?

If paranoia and fear tend to motivate the executive (like Larry Ellison of Oracle), then you can use the “Chicken Little” approach. Convince them that “the sky is falling” for their company. In other words, show them how the current strategy is doomed and will not survive until their retirement date. Unless they do strategic planning right now, the demise of the firm will occur under their watch. This is sometimes referred to as the burning platform approach. If you burn the current platform the executive is standing on, they have no choice but to jump. If you convince them the strategic underpinnings to the current business platform are on fire, they will want to do strategic planning in order to know where to jump.

If power is what gets them excited, then you can show how strategic planning can help find ways to create a bigger company to preside over. The bigger the company, the bigger the power base. Strategic planning can also provide a tool to strengthen their leadership. Like the power of Moses leading the children of Israel through the wilderness to the promised land, you can become the powerful leader taking your company to the promised land. It is easier to be a powerful leader when you have somewhere to lead people to.

And then, as in the case of feeding the baby, you can try to make planning fun and entertaining. It can be portrayed as being like a giant chess game. You can make moves against your enemies and win the game better if you think long term (several moves out). Sometimes your top executive has an arch-enemy or rival in the business that they would like to humiliate or get the better of. Strategic planning can help you keep a step ahead of the rival and become more successful than them.

Or, similar to the idea of the cocoon wrap, you can isolate the executive by holding a strategic planning retreat in a remote location. Just as the cocoon makes it hard for the cat to run away and do something else, the remote location makes it hard for the executive to run back to the tyranny of the immediate day to day work and ignore the bigger picture. You can lure them into the remote location with promises of a golf game and then not let them go back until the planning work is done.

Finally, if the executive is lazy, then you can position yourself as the hero. Tell them that if they leave you alone and endorse the strategic planning effort, then you will come up with a plan that can make them look good, even if they had nothing to do with it. you can take the stress out of being a top executive by pointing out the way for them.

Many executives do not see the benefit to spending a lot of time (or any time) doing strategy work. In order to get them to take their strategic medicine, you sometimes have to take an indirect approach. Instead of just pushing the strategic agenda for its own merits, find out what truly motivates the leaders. Then explain how strategic planning will enhance their personal motivations and agendas. In other words, instead of pushing strategic planning as a noble end in and of itself, show that it is a great means to whatever ends are more meaningful to the top executives.

When I was younger, I was talking to the head of Human Resources at the company where I was employed. He was not a big fan of planning. He knew the current strategy would not last much longer. What he told me was, “What does it matter? We’ll all be out of here long before the company falls apart.” Then he realized that I was much younger than him and that the company could indeed fall apart before my career was over. He wished he could take back what he said. As a human resource executive, he should have realized that even if he was content with the current situation, the younger employees might not be. If the next generation is not motivated to stay they will leave, creating a mess for the older executives.

Tuesday, July 24, 2007

Be Like Tom

I’m sure you all know the story of Tam Sawyer and how he convinced others to paint the fence for him. However, I’ll bet it’s been awhile since you heard in Mark Twain’s words. We’ll pick up the story where Tom just about has Ben convinced to beg for the opportunity to paint the fence, when Ben pleads:

”Oh, come now - lemme try. Only just a little - I’d let you, if you was me, Tom.”

“Ben, I’d like to, honest injun; but Aunt Polly - well, Jim wanted to do it, but she wouldn’t let him; Sid wanted to do it, and she wouldn’t let Sid. Now, don’t you see how I’m fixed? If you was to tackle this fence and anything was to happen to it --”

“Oh, shucks, I’ll be just as careful. Now lemme try. Say - I’ll give you the core of my apple.”

“Well, here - No, Ben, no you don’t. I’m afeared --”

“I’ll give you all of it!”

Tom gave up the brush with reluctance in his face, but alacrity in his heart. And while the late steamer Big Missouri worked and sweated in the sun, the retired artist sat on a barrel in the shade close by, dangled his legs munched his apple, and planned the slaughter of more innocents. There was no lack of material; boys happened along every little while; they came to jeer, but remained to whitewash. By the time Ben was fagged out, Tom had traded the next chance to Billy Fisher for a kite in good repair; and when he played out, Johnny Miller bought in for a dead rat and a string to sing it with - and so on, hour after hour.

And when the middle of the afternoon came, from being a poor poverty-stricken boy in the morning, Tom was literally rolling wealth. He had, besides the things before mentioned, twelve marbles, part of a jew’s-harp, a piece of blue bottle-glass to look through, a spoon cannon, a key that wouldn’t unlock anything, a fragment of chalk, a glass stopper of a decanter, a tin soldier, a couple of tadpoles, a kitten with only one eye, a brass door-knob, a dog-collar-but no dog - the handle of a knife, four pieces of orange-peel, and a dilapidated window-sash.

He had had a nice, good, idle time all the while - plenty of company - and the fence had three coats of whitewash on it! If he hadn’t run out of whitewash, he would have bankrupted every boy in the village.

Just like painting fences, not everything in the business world is particularly pleasant. Take selling, for example. Anyone who has spent much time doing cold-calling for sales will tell you that at times it can be a tough way to make a living.

Wouldn’t it be great if you could devise a system like Tom Sawyer, where people would actually pay you for the opportunity to endure a something undesirable, like sitting through a sales pitch? Believe it or not, it is possible.

Today we are going to talk about the idea of altering the location of value in a transaction. Normally, we think of the value we offer as being tied directly to the product or service we are offering. For example, if we are selling automobiles, then we see the primary value as being in the value of the automobile—its performance relative to the price. Or if we are selling a credit card service, we might see the value in how well the card works and how low the interest rate is (or how many airline miles you get with it).

In other words, the customer does not receive the value until after the transaction—once they take ownership of the goods or service. However, what if we turned this on its head and said we want to create value elsewhere—like prior to ownership—and actually get people to gladly pay for the privilege of hearing a sales pitch (even if they end up buying no goods or services).

This is not that far fetched. Allow me to give a few examples.

Every community seems to have its share of “shows,” be it the Auto Show, the Boat Show, the Lawn & Garden Show, or whatever. Some place like a convention center is rented out to a number of vendors in that particular theme, and they ask people to come in and hear sales pitches. And people flock to the convention center by the thousands and pay good money to be given sales pitches. For example, opening day admission to the Miami Boat Show was $28. The Los Angeles Auto Show cost $10.

Not only do people pay for the privilege of hearing sales pitches, they often drive hundreds of miles for the opportunity. In addition, not only does the show get people to pay for the right to hear sales pitches, they usually get local TV stations to give them a ton of free publicity. It’s starting to sound a lot like Tom Sawyer.

And then there is the State Fair, where you pay money so that you can see exhibits where there are sales pitches and where you get the opportunity to pay outrageously high sums of money for greasy food, something you would not otherwise do if not at the fair. If there was ever something which smelled of Tom Sawyer, it would be the State Fair.

Or how about American Express credit cards? While others credit card companies are falling all over themselves to give you credit card deals, like free interest on transfers, airline miles, and cashback rewards, American Express goes the opposite route. They expect you to pay money for the privilege of getting a card. An American Express Platinum Card has a $450 annual fee, whether you use the card or not. And you are stuck paying off the bill in its entirety every month. Getting people to pay for the right to spend even more money when others let you do it for free (and even give you more time to pay it off) sounds like an idea Tom Sawyer would hatch up.

Finally, what about those warehouse clubs, like Costco or Sam’s Club? Depending on the type of membership you get, it can cost $50 to $100 a year to get one at Costco. Think about it—paying money so that the store will allow you to come in and spend money. Millions do. It’s sort of like having to pay money to get a discount coupon (or perhaps pay to whitewash a fence?).

What do all these examples have in common? They have shifted forward the value point in the equation. You don’t have to buy the auto to get the value of the auto. You get the value from the Auto show. The value at a State Fair comes from being a part of a spectacle, rather than the value coming from the food or what the exhibits are pushing. You don’t have to use a credit card to get the value of the card. You get the value from being a member. You don’t get the value from the goods you buy in the store, but the value is in being able to shop a particular store.

Once you realize that you can shift the value to a different location, lots of different opportunities open up—opportunities to get people to pay for things often thought of as being free.

To do so, you have to change people’s perception about what they are experiencing. At a Boat Show, the expectation is no longer to hear a lot of sales pitches (something one usually tries to avoid)—it is to enjoy visiting a world of dream boats and pretty girls—a place to fantasize. Now that has value!

What are some ways to change people’s perception and add value upstream?

1) Provide people with excitement or entertainment. Surround a sales pitch with enough excitement and entertainment and you have a Boat Show or a State Fair.

2) Stroke the ego by making membership at least as important as what the membership offers. That’s what American Express does. As they like to say, “Membership has its privileges.” The more exclusive the club, the more people want to clamor to get in.

3) Provide friendship or a place to hang out with your friends. The value comes through relationships and being with people you enjoy socializing with. The men of Mayberry didn’t hang out at Floyd’s barber shop just for the hair cutting. The value was more in being at the venue than in the service provided there. Even if a better hair cutting value came about, it would take a lot to give up the other value found in the friendship and camaraderie. To abandon Floyd’s would be like abandoning your friends.

We’ve just scratched the surface. Think about ways to apply this to your business.

Value needn’t only be found in the product of service people buy from you. Value can also be added to the way you sell it, the improved image you imbue to people who purchase from you, the entertainment you offer, or the associations you provide. By surrounding your product or service with all of this, you may even get people to pay you money even if they don’t end up buying your good or service. Wouldn’t that make Tom Sawyer envious?

If you are in the business of selling “stuff”, you run the risk of commoditization. Even if you win, you lose because the profitability is sucked out of commodities. However, if you are selling experiences, friendships and ego boosts (and oh, by the way, there might be a product or service purchased in there somewhere), then you can avoid the commodity trap.

Sunday, July 22, 2007

Pricing Pencils


I spent one year in college as an art major. I was in for a rude shock when it came time to purchase my supplies for art class.

A simple little everyday #2 pencil is practically free, but a #2 “ART” pencil costs about as much as a case of regular pencils. Regular college paper is also very cheap, but “ART” paper is priced at a small fortune. And so on it went. All the supplies I was buying looked pretty similar to standard office/school supplies, but because it was labeled as a product for artists, the price was considerably higher.

It was at this point that I started to appreciate the meaning of the term “starving artists.”

Businesses make money by selling something. One of the key strategic questions a business must answer is at what price they are going to sell their goods and services. If you price yourself too high, you may miss out on sales to those who underprice you. Conversely, if you price too low, you are walking away from extra profit potential.

The amount of money the marketplace will allow you to charge for products can depend in part on how you position your product to that marketplace. In the story above, one can see that by positioning a product as suitable to “artists,” one can charge a higher price than if one positions that (or a roughly similar product) as being suitable to the masses.

To the average Joe, a pencil is a commodity—the cheapest one works about as well as an expensive one. Just about any pencil will do. However, to a sketch artist, their livelihood is highly dependent on the quality of their sketches. A bad pencil can ruin the quality of their output. As a result, the downside risk of getting a bad pencil is much higher for the artist than for the average Joe. Therefore, the artist is willing to pay more to avoid the downside risk of getting a bad pencil.

Now it may be true that an artist pencil costs more to make than a regular pencil, because the quality control and the raw materials may be at a higher standard. But here is the important lesson: the price one charges for an artist pencil goes up faster than the costs. Hence, the profit margins are fatter on the artist pencil.

Therefore, when determining one’s pricing strategy, one also needs to look at the positioning strategy, since positions can impact your flexibility in pricing.

The principle here is to link pricing decisions to positioning decisions. There are three types of positionings which tend to lend themselves to fatter pricing margins:

1. For the Passionate People
2. For the Hobbyist
3. For the Professional

We will talk about each of these separately.

1) For the Passionate People
In many businesses, a disproportionate share of total sales come very a very small sub-segment of their buyers. These are often the people with a passion for the product. For example, everyone wears shoes. However, it is a smaller sub-segment of the population who is really passionate about shoes. When compared to the rest of the population, these passionate shoe shoppers:

- Own a lot more shoes (and I mean A LOT more shoes)
- Are more likely to pay full price to get the shoes they want
- Are more likely to buy multiple pairs at the same time
- Tend to buy the nicer, pricier shoe styles rather than just basic lower-end shoes

If you can tap into this shoe passion customer, you have less pricing pressure than if you are trying to cater to the masses. Yes, there may be fewer of them, but the passionate ones more than make up for their size through the amount of purchases they make.

Even take something as mundane as lawn fertilizer, which is mostly just a bunch of common chemicals. There are those who are passionate about having the best lawn in the neighborhood. They will spend outlandish sums of money to satisfy their passion, paying a lot more money for the same basic chemicals.

For almost all categories, there is the passion segment. If you can own it, it can increase your pricing options.

2) For the Hobbyist
It always amazes me how much people will spend on their hobby. Normal, rational people on a low income, who carefully budget every other expenditure to the penny will blow big wads of money on their hobby without blinking an eye. It is as if anything labeled “hobby” is exempt from normal cost consciousness and budgeting.

When you walk into one of those huge Cabela’s outdoor sports enthusiast stores, you begin to realize just how much people are willing to spend in the name of a fishing or hunting hobby. The same is true when you walk into a Golf Galaxy store and see everything a golfer could possibly purchase to improve their golfing hobby. We already mentioned how art hobbyists get stuck paying more to support their hobby.

If I was trying to successfully compete against Home Depot, I would position my store as being the ideal place for the fun “hobby” aspects of home improvement, and try to reposition Home Depot as the dull store for the boring tasks of repair and maintenance. Hobbyists are better customers, price-wise and quantity wise.

The beauty of positioning yourself as a hobby store is that its appeal spreads farther than to just hobbyists. If you have a friend/relative/loved one who has a hobby, you can also be brought into the buying frenzy. When it comes time to buy that hobbyist a present, like for birthdays and Christmas, one is often drawn towards buying something to support their hobby.

A friend of mine likes to ride his Harley Davidson motorcycle. That’s his hobby. He says that every birthday and Christmas he gets a lot of Harley Davidson paraphernalia, or just about anything you can stick a Harley Davidson logo on. My friend says he has a whole room full of this stuff and he really doesn’t need or want any more, but people keep buying it for him, year after year. When the birthday rolls around, you need to buy the product then. You cannot wait for the sale which comes after the birthday is over. Hence, once again, you get a better price when you sell hobby goods.

3) For the Professional
When it comes to selling trucks, a lot of the advertising talks about how the truck is capable of handling the stress put on the truck by professionals. GMC even refers to their trucks as “professional grade.” The commercials for trucks tend to show them off-road, hauling over a ton of cargo, just like the pros would do.

Yet most trucks spend the majority of their time stuck in rush hour traffic on a paved road with virtually nothing in the truck bed. They are not owned by “professionals” who rely on their truck for their livelihood. These people just like the idea of having the same quality of truck as the professionals.

As we said earlier, professional artists are willing to pay more for art supplies, because they cannot afford the downside risk of having sub-standard equipment. The same goes for professionals in most fields. As a result, they are willing to pay more.

But so are the people who aspire to be like a professional. They will pay more to buy the same equipment the pros use. If the NASCAR teams use particular brands of tools or parts, then many NASCAR fans who like to fantasize that they are NASCAR professionals will pay a premium to get those same brands. If professional home builders use DeWalt tools, then I want them as my puttering around the house tools as well.

Even though passion people, hobbyists, and professionals may not be the largest sectors of the customer base, they can often be among the best to target, because:

1) They purchase more units than others (they are the heavy user segment)
2) They tend to buy the more profitable part of the product mix.
3) They tend to be willing to pay more and less likely to wait for sale
4) They can suck others into the buying frenzy either as aspirational purchasers or as friends buying gifts.

Usually, there is only one “lowest cost operator” in a business sector. Everyone else is a higher cost operator. If you are not the lowest cost operator, it will be difficult to win with a strategy of having the lowest prices. Therefore, most operators need excuses for why people would pay more. Having a position of being the best for passion people, hobbyists, or professionals can be that excuse.

Wednesday, July 18, 2007

Fishing for Ideas

Fishing passion must skip generations. My dad loved it and my son loves it, but I never got the fishing bug. In spite of not knowing much about fishing, I think it perfectly illustrates today’s blog principle.

When fishing with a lure, you cast your line out as far as it can go and then you start reeling the line in a little bit. As you reel in your line, it makes the lure on the end of your line start to wiggle like a fish in distress. This movement attracts the attention of fishes in the area who decide to pounce on what they think is a vulnerable fish to eat.

Instead, the fish ends up with its mouth on one of your hooks, so that you can reel it in.
After casting, the experts say that you should not reel in the lure as a steady, mindless motion, but rather reel it in with greater awareness and activity, so that you can make it appear more like a real fish. That will make it a more appealing lure to the real fish.

In the business world, we often go fishing as well. However, instead of looking for fish, companies fish for exciting new business ideas. As mentioned in yesterday’s blog (see "Spalding Water”), fresh new ideas are often desirable, because then you are not competing for business in a space that is already owned by someone else.

To catch a fish with a lure, you need to overcast—that is, cast beyond the point where you are expecting to catch a fish. That way, you have room to wiggle the lure as you reel it back in to where the fish are.

Catching new ideas can often act in a similar manner. First you cast your mind out into a particular idea space—well beyond where you think you will find practical new ideas. Then you pull your mind back a little closer to current reality. As you do so, you let your mind wiggle around and look at all that is around it. As you wiggle around with your mental hooks out, you will find yourself snagging onto an idea. Then you reel it into your boat to see if the idea is a “keeper.”

The principle here is the principle of “the ludicrous extreme.” If you are trying to find the next big thing, you typically will not find it by venturing out only slightly from today’s reality. Incremental movements usually only lead to small incremental benefits. They are not really new ideas, but rather just small variations on what is already available in the marketplace.

That would be like successfully selling vanilla ice cream and incrementally moving to vanilla ice cream with a few chocolate swirls in it. It is only an incremental change, not a game changer, so don’t expect the switch to set the world on fire for your products. However, if you were to have gone out on the edge and been the first to introduce smoothies, then you would have something.

This is like Coke versus Pepsi. While Coke was fiddling around on making incremental variations to cola (Coke with Vanilla, Coke with Lime, etc.), Pepsi was looking out on the edge to see where the fringe beverages were. Pepsi got in early with things like sports drinks (nabbing Gatorade), SoBe drinks, energy drinks (No Fear, Adrenaline Rush), bottled teas (in partnership with Lipton), ready-to-drink coffee (Fappucchino and Double Shot in partnership with Starbucks), and so on. Getting to the leading edge early allowed it to capture or partner with leading brands and be in the best position to benefit when the fringe became mainstream. This has worked out better than the incrementalism at Coke (who has recently been trying to play catch up in these new categories after Pepsi has already claimed a leadership position).

If you want to find the big fish of ideas, you need to look further out on the edges of today’s reality into new territory. Small risks only get you small rewards.

It is on the fringes of today’s acceptable or achievable behavior where you will find glimpses of what might be tomorrow’s big new idea. That’s where the leading edge people are (the one’s who set the new trends which the mainstream eventually follows). That is where the leading edge technological capabilities are (the art of the possible). That is where today’s radical idea is, which will become tomorrow’s mainstream business opportunity.

Remember when only radical fringe extremists, called “tree-huggers” seemed to care about the environment? Now, it is one of the hottest new mainstream growth areas in business. So how do we find the proper fringe area to get the next big idea?

This is a process I call reaching out to the ludicrous extreme. It is taking your mind out in a particular direction as far as it can go. It is ludicrous, because if you cast your mind out too far, you will come up with ideas which are too radical or too impractical and may never come to pass in your lifetime.

However, as with lure fishing, the important location is not where you initially cast, but where your lure is when you start reeling it back in a bit. When you start with the ludicrous extreme, you know you have gone too far. However, it allows you the opportunity to start pulling your mind back through things which have a greater potential for success. Unless you cast your mind out beyond the fringe of practicality, you will never know how far out the practical fringe lies. The edge can only be found when you venture beyond the edge.

Let’s look at another trend which is moving from the fringes towards mainstream—people wanting to take more direct control over their health care. If you were to start from today and try to step forward a few paces, you might see your future potential as starting up a web page that helps people control how they inform themselves about medical issues. Nice, but probably not the potential home run.

What if we go to the ludicrous extreme? That would be to devise a way so that people could eliminate the doctors out of the equation completely and perform open heart surgery on themselves. Well, that’s not too practical, since after the anesthesia, it would be hard to perform your own surgery. So maybe open heart surgery is out, but what other ways can you get to curing yourself without the need for involving doctors?

Well, Royal Philips Electronics NV, the consumer electronics firm is betting its future on redesigning medical devices, like defibrillators, so that the average person can have one and operate it themselves, without the need for doctors or trips to medical facilities. In other words, eliminate the need for doctors and put control in the hands of consumers through advanced technology which simplifies it for the common person.

Retailers, like the major drug store chains, supermarkets, and even Wal-Mart are putting medical clinics inside their stores. There are no doctors, but there are trained nurse practitioners, and sometimes Physician Assistants. They are open convenient hours in your local neighborhood and will see you without an appointment. It costs less than visiting a doctor. You can get simple ailments taken care of and get health forms for your children to participate in sports taken care of. The doctors are frozen out of the loop. For more information, check out their trade association site,

Doctors are getting so concerned about being frozen out of the loop that they have persuaded the AMA to ask federal and state agencies to investigate this trend to try to get the government to shut it down.

So, as you can see, if you look out to the ludicrous extreme, you may end up with more radical solutions than if you just venture forward a few steps.

Businesses need great new ideas to leap ahead of the pack and win the rewards. The best way to find them is to spend some time out on the fringe. The best way to find the fringe is to cast your mind out to the ludicrous extreme and then reel your mind back in until you find the fringe.

After catching a fish, it does you know good if you do not know how to prepare it for eating. Similarly, catching a great idea does no good if you have no idea of how to bring the idea to reality.

Tuesday, July 17, 2007

Spalding Water

Back about the time when sports beverages were just starting to take off, I had the opportunity to attend a huge food and beverage convention. In the gigantic exhibition hall, there was a company with a booth dedicated to pushing a new product called “Spalding Water.”

It sounded interesting, so I went up to talk to the salesman at the booth. He started praising the virtues of his “light, refreshing” sports drink, making sure I got the name association with Spalding, a company noted for its dedication to sports.

I asked him a simple question: “So this stuff has all of the electrolytes and the other chemicals to replenish your system like Gatorade?”

His answer was, “No, there are none of those replenishment chemicals in this beverage. We wanted to make sure this beverage was safe for children, so we did not put all of those chemicals in the water. Instead, we just wanted to keep it light and refreshing.”

Looking at the brightly colored water in the bottles, I responded, “So, then, is this stuff just an expensive version of Kool-Aid?”

“No, not really,” said the salesman. “Kool-Aid has a much stronger flavor. This Spalding water is lighter and more refreshing. In addition, it has much less sugar.”

I took a small sample of the beverage. After pondering his words for a brief moment, I think I started to get the picture, so I posed another question. “So what you’re telling me is that this is something which tastes liked watered down Kool-Aid where they forgot to put in all the sugar…and because it says Spalding on the bottle, I’m supposed to pay a premium price for the privilege. Is that about right?”

At that point, the salesman gave up on me. I could see in his eyes that he was unable to respond because, in essence, I had described what they had done. I know it sounded better when he described it as “light and refreshing,” but as part of a nation which grew up on Kool-Aid, I think most others would have describe it somewhat like I did, after tasting it.

And you know what? I never saw Spalding Water sold in any store. I don’t think it got much beyond the stage of being introduced at this convention.

At some point, businesses succeed by selling something to someone at a profit. It can be either a good or a service or some combination of the two, but eventually money needs to change hands.

If you have a new product which you are introducing to the marketplace, potential customers are going to want to know what it is you are selling before they make a purchase. Like the example in the story above, I was confronted with a new product, called Spalding Water. I was trying to understand what exactly Spalding Water was. Because I eventually associated the product with something which made it appear bad—inferior Kool-Aid—I became uninterested in the product.

If you want to succeed, you need to be proactive in making sure that you help the customer define the product in a favorable light. This is accomplished through making sure it compares favorably to an alternative (“more refreshing than plain water”) rather than unfavorably to an alternative (“less flavorful than Kool-Aid”).

The principle here is relativity, or the idea of reference points. Great positioning strategies tend to target a new space which is not already claimed by someone else. For example, Starbucks chose a great position for coffee which was pretty much untapped in the United States. Unfortunately, because it was a new position, customers did not have any experience with the position. In order to make sense out of the new position (which they did not fully understand or appreciate), people would try to compare it to something which they did understand.

The item they compare it to becomes the reference point. The customer compares the new product to their reference point to see if they think it will be better or worse. If they decide it is relatively better than the reference point, you stand a better chance of making a sale.

In Starbuck’s case, a common reference point could have been how the person was currently purchasing coffee—in five pound cans of Maxwell House at the supermarket. With that as their reference point, the relative conclusion could have been as follows: Why should I make a special trip to stand in line to get a single cup of coffee at Starbucks which costs almost as much as an entire can of Maxwell House, when I can conveniently just pick up a can at the supermarket and brew it any time I want?

With that as a reference point, Starbucks appears to be relatively worse. However, Starbucks was clever in changing the reference point. Instead of being seen as a more expensive and less convenient way to get a cup of coffee, Starbucks chose a different way to portray their offering. They positioned it as a very inexpensive way to get a high quality diversion and indulgence into your humdrum life (and oh, by the way, there is some coffee in there somewhere as an added bonus). With alternative forms of partial day diversions as the reference point, Starbucks suddenly appears more desirable.

New positions are naturally at a disadvantage in the beginning, because they are asking consumers to not only change their behavior, but to change the way they think about their world. New products succeed by making current reference points appear inferior or irrelevant. We all tend to be creatures of habit who find comfort in our current reference points. Therefore, strategic success requires not only time spent in creating wonderful new positions, but time spend in helping make sure the new position compares favorably to the current, dominant reference point. And if it doesn’t compare favorably, then we need to help customers find a different reference point.

In the case of Spalding Water, it was branded with a name associated with sports and athleticism. They also referred to it as a sports drink. Therefore, my reference point at first was the dominant sports drink of Gatorade. Since Gatorade dominated the category of “sports drinks”, my reference point for what a sports drink should be was to be what Gatorade is. Gatorade is designed to help athletes replenish the necessary chemicals lost when sweating through athletic activity. Therefore, my first reaction was that for this to be a successful sports drink, it would need to do a better job of replenishing those chemicals than Gatorade.

Spalding Water, however, made no attempt to even try to replenish these chemicals. Therefore, using my reference point for what a sports drink should be, I claimed Spalding Water to be a failure.

So then the salesman said that it was not targeted at athletes as much as it was at children. My reference point for a children’s beverage was Kool-Aid. As a comparison to my reference point of Kool-Aid, Spalding Water came off as being less flavorful and less sweet (and we all know that the sweetness is why kids love it so much). So again, the product failed against my reference point.

The problem was that Spalding Water had not convinced me that it had come up with a new position, and when I compared it to current positions it failed relative to my reference points. What the salesman should have told me was that this was a beverage targeted to concerned mothers. These are mothers concerned that their precious children are not hydrating themselves enough during the day. These mothers know that if they try to push a lot of water at their children, they will eventually balk at it, so they will remain dehydrated.

At the same time, these concerned mothers do not want to shove a lot of soda or Kool-Aid at their children because of the negative health impact of taking these products in excess. Therefore, Spalding Water is the perfect beverage for concerned mothers because it has just enough flavor and coolness to get their children to drink enough to get hydrated, but not so many additives to cause negative side effects like sodas or Kool-Aid or even adult-strength sports beverages.

Now this would have been a position for which I would have needed a different reference point. I would then have had to ask myself if I thought children would be more likely to hydrate themselves properly if a concerned mother was forcing them to drink a lot of water or drink a lot of Spalding Water. In that case, the reference point would have been tap water, and the Spalding Water would be cooler and more likely to be consumed in enough quantity to give this paranoid mother the assurance that their child was properly hydrated.

New positions require proactive management of reference points, so that when the customers are confronted with the new position, they compare it to something in their mind for which the new position appears relatively superior. If reference point management is not a part of your strategic plan, consumers may choose reference points which make your product appear inferior. Don’t leave it up to chance. Be explicit in how you want your new product to compare to the current familiar reference points.

When attempting to get someone to switch from a current habit and instead purchase what you are selling, in a way you are forcing a consumer to admit that their past behavior was a mistake. Nobody likes to admit a lifetime of mistaken behavior. That is why ultimately positioning yourself as “new” can be superior to positioning yourself as just a better version of a solution already owned by someone else. This way, instead of forcing the consumer to admit they had habitually purchased the wrong solution, they only have to admit that they are solving a different problem. This will make them more receptive to switching without guilt.

Monday, July 16, 2007

Genius Sleep

Henry Ford was a real stickler for efficiency. It was his passion. After all, he paid some of the highest wages in the nation and he wanted to get his money’s worth.

One day, Henry Ford hired an efficiency expert to examine his business, to see if the expert could find people who were unproductive, or find ways to make Mr. Ford’s automobile processes more efficient. This expert spent days looking around and watching people.

Legend has it that Henry Ford was curious about what the expert was discovering, so he asked him if he had found anything yet. The expert replied,

“Yes, I have found someone who is extremely unproductive. All he seems to do is lean back in his chair with his feet up on the desk. I have never seen him do anything else. I think you should fire him right away.”

Henry Ford responded by saying, “Oh no, you cannot fire him. He is one of my most productive employees. He once came up with an idea which has saved me a fortune. And as I recall, he came up with that great idea seated just as you have described.”

Businesses thrive on great ideas. If you can come up with the best ideas and then find a way to capitalize on them, you stand a high likelihood of achieving greatness. This is particularly true in strategy, where big ideas can make all the difference.

Often times, the best ideas come out of situations which at first can seem unproductive. Like that employee of Henry Ford, sometimes you need to kick back and relax in order to open your mind up to great possibilities. It may look like laziness, when in fact it is just a method to prepare the mind.

Any strategic planning process, or for that matter any important process, which does not allow time for kicking back and relaxing, is a process which will probably not achieve the optimal idea output. One needs to factor in “down time” as part of the process.

We live in a world where busyness is not only expected, but expected at multiples levels at the same time. Laziness is now defined as not multi-tasking at least three things at the same time. With modern technology, it is almost impossible to escape work. It follows you wherever you go.

I read recently of a new trend, called work-dating. Couples will get together for a great meal, usually eating in at one of the couple’s homes. After the meal, each one pulls out their laptop and begins to do work for their jobs (the couple each works at a different place, so this is not really a shared activity). Occasionally they will look up at each other while they work, and there might even be a few brief utterances to the other person. However, most of the next couple of hours is spent “ignoring” their date for the evening.

When you ask people why they do this, they say that if it wasn’t for work-dating, they would have no social life at all. Work has consumed them, and they have to fit the social life into the time-cracks around work.

Even our so-called personal relaxation time is not really relaxation at all, but merely personal hectic multi-tasking. One time I had the pleasure of working with entertainment and media expert Michael Wolf. He has done consulting in the field of media and entertainment with both Booz-Allen and McKinsey. More recently, he was President and COO of MTV Networks. Michael Wolf told me that there is so much desire in people to participate in all of the wonderful media and entertainment options available today, that they are making sacrifices to fit it all in.

In fact, Mr. Wolf claims that it has gotten to the point that people are making a conscious effort to cut back on eating and sleeping in order to fit more entertainment into their lives. If you know anyone who is deep into on-line gaming or spending time in virtual worlds, or wanting to upload every online video, you know exactly what I am talking about.

It seems that no task is so complicated that it cannot be compounded by subjecting the brain to either an I-Pod or a cell phone at the same time (or maybe both). It looks to me like automobiles only need half a steering wheel, since one of our hands always seems to be busy doing something else while we’re driving.

This is all a far cry from the man who helped out Henry Ford with all of those great ideas. He didn’t clog his mind with tunes or with phone chatter. He wasn’t multi-tasking. He was hardly tasking at all. Yet, from that silence came great wisdom.

Many years ago, I read of a study where someone wanted to find out if there was a common character trait among geniuses. The person came up with a list of people who are generally considered by most as being geniuses. Then this researcher examined all of their lives, to see if there was a common thread—something they all had in common.

There weren’t a great deal of common threads…geniuses are an odd and diverse lot. There was, however, one common thread: they all got more than the average amount of sleep. In fact, not only did they sleep a lot a night, but great number also regularly took naps in the middle of the day.

The conclusion? If you want great output from your brain, you need to give it time to rest. You’ve probably heard of the concept of Beauty Sleep—if you want to look beautiful, get more sleep. Well, today I am proposing the principle of Genius Sleep—if you want great ideas, you need to let your mind sleep, or get some true rest.

Silence is nothing to be feared. Doing nothing is actually a wonderful thing to do. You’d be amazed how much more productive your brain can be if you give it more time to recharge. Rather than always subjecting your brain to someone else’s ideas through passive entertainment (always throwing a movie or a game or a song at it), let you brain have time to push back in the other direction.

These days, it seems that the height of “creativity” is in what is known as “mashups.” This is where you take digital snippets from other people’s creative works (video, music, whatever) and mash them together. In some ways, this sounds like a person who would go into a library and rip a bunch of pages out of a variety of books and put the ripped pages in a pile and claim that they had just written a book.

How original of an idea will you get if you limit yourself to that which has already been created?

“Genius Sleep” needs to be proactively programmed into the lives of people given the responsibility of creating the future for your business. It doesn’t need to always be sleep per se, but it needs to be down time for the brain. The pressure to always be “on” requires some adjustment. It needs to be okay kick back and put the feet up on the desk and appear to be doing nothing. Afternoon naps are fine, or a short midday walk in the woods. Work environments need to encourage such activity.

When people used to ask me what my hobby was, I’d tell them it was pondering. It didn’t really matter what I pondered. It was all sorts of things. The important thing was that I was giving my mind a chance to wander—to romp around and dance in a field of ideas with no deadlines, timetables or pressures.

Did you every attempt to concentrate on trying not to think about something? Or maybe try to concentrate hard on trying to sleep? Usually these types of tasks are fruitless. Sometimes the brain works best when the pressure is taken off. That is what Genius Sleep is all about. If you let the brain rest, the great ideas will flow much faster than if you cram a brief “brainstorming session” into the middle of a busy day and demand that all the creative ideas comply with the space given it in your crammed-full Daytimer schedule.

Businesses need great ideas to leap ahead of the pack and win the rewards. Great ideas are not like paper clips, which you can order up any time you want from the office supply superstore. Great ideas come from great thinking. Great thinking requires the preparation of Genius Sleep. Without extended periods of brain relaxation, the brain will not be as capable of creating those great thoughts. You are cheating the future of your business if you stifle Genius Sleep. Run your business in a way that encourages down time. Don’t create expectations of constant busyness at multitasking. Allow some time-outs.

History has a way of repeating itself. About a half century after Henry Ford made those comments to the efficiency expert, I had a friend whose father was an engineer at the Ford Motor Company. Sometimes, my friend’s father would try to explain to me what he did for a living. Being a high schooler who never had a full-time job (other than summer jobs) it all sounded so odd to me. It seemed like on many days he did very little, if anything, which sounded like engineering to me.

I remember in particular him talking about a day that was spent mostly just cleaning hunting rifles and chit chatting. But here’s the point. This engineer had invented a large number of patents for Ford. One patent in particular saved Ford millions of dollars every year. To quote old Henry Ford, this man was very productive for the Ford company. I suspect that if there hadn’t been days just cleaning hunting rifles, he would have been far less productive.

Sunday, July 15, 2007

CMOh, No!

Top secret agent James Bomb was about to go out on a very important mission to try to stop the evil schemes of dastardly Dr. Whoa. Before embarking on his mission, James Bomb went to the agency’s top secret lab to find out what kind of customized sports car he was getting.

“This automobile is state-of-the-art in fighting evil,” gushed with pride the scientist who customized the sports car. “It has everything you need…a machine gun, a rocket launcher, a grenade launcher, and even a torpedo launcher, in case you end up near the water.”

“I looks ingenious,” said James Bomb. “Now show me how they work.”

“Well, therein lies the problem,” sighed the scientist. “Because the sports car is so sleek, there was no room for the bullets, the grenades, the rockets or the torpedoes. I was able to squeeze in all the launchers, but none of the things they launch.”

“What, then, am I supposed to do?” asked Mr. Bomb.

The scientist replied, “In the glove compartment, there is a small pistol which shoots little BB pellets. I’m sorry, it was all I could find at the last moment.”

“Hrrummph,” murmured the disappointed Mr. Bomb. “Well at least I can hope to find some pretty women on the mission.”

Just as in the spy world, there are important missions in the business world. It may not be the dastardly schemes of Dr. Whoa you are fighting, but there are forces out there that can seriously damage the future of your business unless you stop them.

They can give you a fancy mission and they can give you a fancy title (like top secret agent). They can even give you what looks like a powerful platform from which to do battle (like that sports car). However, if you have no bullets or rockets or grenades, you will lose that battle. All you have to look forward to is nabbing a little beauty on the way down.

I think a similar situation is occurring for many of those placed in the Chief Marketing Officer position, known as the CMO. They have been given a fancy mission: to protect the brand long-term and to help it grow over time. They have even been given the fancy title of CMO (they get to be part of the “C”-suite). And as part of the C-suite, they have what appears to be a powerful platform from which to operate.

Unfortunately CMO’s, as a whole, appear to be failing in their task. I think a lot of it is because they do not possess all the tools to get the job done (their version of grenades and bullets). They can make some beautiful ads on the way down, but that’s about it.

In last week’s issue of Advertising Age magazine (dated July 9, 2007), one of the cover stories was about a study of the effectiveness of CMOs. The study, by marketing professors Pravin Nath at the LeBow College of Business and Vijay Mahajan of the University of Texas at Austin, looked at 167 companies over a five year period.

What they concluded was the following: CMOs on top management teams don’t have any effect on a company’s financial performance. Let me repeat that: CMOs on top management teams don’t have any effect on a company’s financial performance.

This study will be published in the January 2008 edition of the Journal of Marketing. To quote Advertising Age, “Pay attention CMOs: If you’ve been fighting for more influence with top management, hide this publication—now.”

I guess then it should be no surprise that in a different article which appeared last year in Advertising Age, it said that the average tenure for someone in the CMO position continues to drop and is now less than two years. It appears that boards and CEOs are not waiting for this study. They are already frustrated and have taken to canning the CMO.

What’s going on here? What is the problem? I think the problem has a lot to do with the principle of Expectations and Capabilities. In other words, if people’s expectations exceed your capabilities to meet them, you are bound to fail. It’s like super secret agent James Bomb. He is expected to defeat the evil Dr. Whoa, but his capabilities are limited to a little BB gun.

The typical expectations for a CMO are to:

1) Increase Sales Near-Term
2) Increase the Business Even More Dramatically Long-Term
3) Protect and Strengthen the Brand over Time

In many businesses, the CMO is pretty much the only one in the C-suite with a mandate to focus primarily on the long-term interest of the company. That is quite a tall order. And to top it off, if near-term sales take a dip, all the work on the long-term becomes somewhat for naught, as the pressure builds to forget long term and get the near term fixed. And if the average tenure is less than two years, how is anyone in the CMO position going to have enough time to see the fruit of their labors?

And for all of this responsibility and all of this stress, what are the tools this person has to work with? Typically, it is little more than advertising. In the fight for the future, advertising is like a BB pistol. It has some impact, but it is not enough. The fight for the future needs more.

In a prior blog, I talked about how if someone comes from a narrow professional background, they will see all problems as requiring their narrow background for the solution (see “Henry the Hammer”). In other words, if your background is advertising, you will see nearly every problem as requiring advertising to fix it. Most CMOs tend to come out of a narrow advertising background. Hence, they tend to rely on advertising as their primary tool to get their job done.

However, much of what it takes to protect and grow a firm long-term has little to do with advertising. It is far more complex, involving finance, strategy, asset alignment, personnel choices, and so on. All of the intricacies of positioning, pursuit and productivity which I briefly outlined in a prior blog (see “Same Title, Different Jobs”) come into play. Advertising is only a small part of the puzzle.

My conclusion is that the position of CMO is failing because the design of the position is such that it is almost impossible not to fail. The capabilities do not match up to the expectations.

My solution? Bring back the chief strategist. Strategic planning as a full time job in companies is becoming obsolete. Yet there is nobody more qualified to handle the expectations of preserving and building the future than the strategist. Strategic planners tend to have broader backgrounds than CMOs and are more capable of getting their arms around the big picture. Because they are pulled less in two directions (look out for the future AND get out next week’s ad), they can do a better job of focusing on and articulating the full scope of what must be done to grow the company.

Yes, outside strategic consultants have their value. However, would you ever consider outsourcing any of your other C-suite functions to an outside consultant who only shows up on an infrequent basis? By having someone on premise all of the time worrying just about your future, you get far more than just the advice of someone out for billable hours.

Advertising and marketing are very important, but they are not the whole job. Giving a VP of Marketing the title of CMO doesn’t really change anything but their title (and, I suppose, their compensation). Adding a Chief Strategy Officer to the team, however, can give a much needed fresh broad perspective to winning the future.

Protecting and growing the future of your firm is an important task. It is important enough to require having someone on senior staff, full-time, just worrying about the future. The CMO is usually not capable of doing this, regardless of expectations, because they are distracted by the “tyranny of the now” on their advertising responsibility as well as not usually having a broad enough background to cover all the aspects related to the task. Instead, the best solution to the problem is to have a senior executive schooled in the art of strategic planning.

It is interesting to note that, while the study mentioned in Advertising Age saw no positive impact from CMOs on financial performance, it also concluded that “CMOs do not have a negative impact on financial performance.” Well, there you have it. Something to call home about and to put on your tombstone: “I did not have a negative impact on financial performance.”

If you have CMO in your title, I would suggest that you always be out there networking, because the nature of your position tends to cause short career stints.

Wednesday, July 11, 2007

Management by Growing

Once upon a time, the there was a small little boy who hated being so small. “Nobody pays any attention to me or gives me any respect because I am so small,” he lamented to himself.

One day, a fairy godmother came to visit the little boy and offered to grant him any one wish. Well, that was an easy choice for this boy. “I want to grow and grow and become BIG!” he replied.

The next day, the boy woke up and was big and tall, like an adult. The boy was ecstatic! People, finally paid attention to him and gave him respect. It felt great.

Unfortunately, his growth did not stop there. Every day he grew a little bigger. At first, it wasn’t such a big deal. But eventually he was so big that he was taller than large buildings. Everywhere he stepped, he ended up crushing something with his gigantic feet. The respect he used to get from others turned to fear, as people were afraid to be near him for fear of being crushed. It made him feel like the monster Godzilla.

“I guess it’s possible to grow a little too much,” the boy finally admitted.

One of the most popular phases in a business life cycle is the growth phase. It can be a lot of fun. Your position is relatively well set and desired by a lot of consumers. Your only problem is growing the company fast enough to take advantage of all the great potential you have. It feels like you can do no wrong.

Shareholders seem to love growth companies as well. They give the stocks high multiples. Suddenly, the company is worth a whole lot of money, and everyone is smiling.

It’s like the boy in the story. When he was small, he was ignored and not given any respect. However, once he started growing, everything started to change for the better. He started receiving the love and respect of others.

It feels so good that you want it to continue forever. However, as we saw in the story, sometimes too much emphasis on growth for too long can backfire on you. Continuing the push for growth long after you’ve reached your optimal size can cause all of your friends to turn on you.

In the business world, maturity will eventually come, causing additional rapid growth to no longer be appropriate. Too much growth for too long can result in investments which are no longer needed in the marketplace, causing returns below your cost of capital. You may be merely spreading your relatively constant sales over a larger, more costly infrastructure, which reduces overall profitability.

Growth is good, but other factors also need to be considered in your strategic planning, so that your company does not turn into a hideous monster like Godzilla.

In the last three blogs, we talked about how different companies require a different approach to strategic planning depending on where they are in their lifecycle and how many barriers there are to entry/exit in their industry. In the blog “Same Title, Different Jobs”, we said that there are three major steps in strategic planning:

1) Positioning: Determining what you will stand for (own) in the marketplace—the solution you are providing, the place where you can win.

2. Pursuit: Determining the path to achieve (or improve) your desired position. This usually involves acts which allow you to gobble up market share so that you can build a strong claim to your position.

3. Productivity: Discovering ways to leverage your position so that you can optimize the return on your investment.

During the rapid growth phase of an industry, most of the attention is on growing the business (I guess that’s why it’s called the growth phase). The key area of strategic focus in this period is on pursuit. The idea is to grab as much of the market potential as fast as you can, so that nobody else can gain a stronger foothold at that position.

The success of your position is what is making the growth possible, so there is not much need to reassess the position. Regarding productivity, you greatest contribution at this point is the productivity which is a natural outcome of rapid growth—economies of scale. Hence, if you focus on the growth, productivity will be a natural byproduct at this stage of the lifecycle.

That being said, one still needs some balance. Positioning and productivity cannot be ignored. Success usually causes imitators to crop up. These imitators may create a need to tweak your positioning strategy in order to stay one step ahead of them.

In addition, the growth phase usually leads eventually to a consolidation of the industry, as a greater percentage of a company’s growth comes from acquiring competitors. If you are not an efficient, productive operator, it is likely that you will be the one being acquired rather than being the one doing the acquiring. Efficiency helps give you the edge when the intra-industry warfare begins, to see who will survive and make it to the mature stage. When the sporting goods retail industry recently went though its consolidation phase, it was the blander, but more efficient Dick’s Sporting Goods which acquired the flashier, but less productive Galyan’s.

Thus, although pursuit is the most important concern at this stage, the other factors should not be ignored.

The pleasure which comes in the growth phase causes pressure to want to continue the growth phase, long after that phase in the industry is over. It seems like everyone wants to be a growth stock forever.

If you want to be a growth stock forever, one probably needs to abandon industries as they mature and move on to new evolving industries. This is pretty much what GE has done over the decades. The growth comes from shifting one’s position, rather than continuing growth in an industry that no longer requires it. At that point, it is an emphasis on positioning, rather than pursuit which continues the growth (We’ll talk more about that in a blog at a later date).

Last month, Wal-Mart finally started coming around to seeing this conclusion. They announced that they were cutting back on new store growth, because it was no longer as productive as in the past. The sales for the new stores were coming largely from other Wal-Marts, so the net increases were shrinking.

Here is what the Wall Street Journal had to say about it on June 2nd:

“Wal-Mart Stores Inc. plans to sharply curtail future U.S. store openings, amid disappointing results for the world's largest retailer and growing investor pressure to curb its aggressive domestic expansion. Friday, it promised to cut more than a third of this year's planned store additions, delay some openings and restrict future U.S. store expansion.

“The move will cut the retailer's capital expenditures by $1.5 billion in 2007 to $15.5 billion for the year and help fund a large share buyback that investors also have been urging the company to pursue. Wal-Mart has been under pressure on Wall Street to slow its U.S. expansion and use the savings to prop up its stock price.

“Wal-Mart, based in Bentonville, Ark., isn't the only retailer to retreat on its store-building boom. AutoZone Inc., Home Depot Inc. and McDonald's Corp. have pulled back on expansion in recent years to improve store operations and boost shareholder returns. 'This is what everyone's been clamoring for,' said Goldman Sachs retailing analyst Adrianne Shapira.

“News of the capital-spending cutback and share repurchase cheered investors, who sent Wal-Mart shares up 3.9%, or $1.87, to $49.47 in 4 p.m. composite trading on the New York Stock Exchange Friday.”

So as you can see, sometimes it is wise get out of a single-minded approach to planning focused only on growth and move to a balance which includes productivity (such as stock buybacks or reinvestments in making current assets more productive, as McDonald’s has done).

Growth is good, but too much of the same kind of growth for too long is often not one’s wisest move. One needs to have a balanced approach which also looks at potential repositionings or focuses on productivity in order to keep the profit wheels moving.

For some people, the thought of no longer being a growth stock is like a fate worse than death. Trust me, there is life after rapid growth. By no longer pumping all that money into pursuit, those years can be some of your most profitable. Yes, the stock might initially fall when growth-minded shareholders leave, but keep this in mind. Those same people will also leave if they see your rapid growth as no longer productive. And in that case you have nothing.

At least if you stop the unnecessary investments and start doing things like buying back stock or raising dividends or improving efficiencies, you can attract other shareholders who will still reward you. All of the retailers mentioned in that Wall Street Journal article saw their stock rebound when then quit the unnecessary growth. And finally, keep in mind that Warren Buffett did pretty well refraining from the lure of rapid growth, and instead focusing his investments in a lot of more stable businesses.

Tuesday, July 10, 2007

Management By Dreaming

At the peak of the dotcom bubble, I was working at Best Buy. All sorts of people were knocking on Best Buy’s door trying to convince us to put money into their dotcom dream. I heard a number of them. I remember one in particular.

This young man came to the office. I think he was still a freshman in college. He claimed to have a great dotcom idea. His idea was to run a site where consumers could gather and jointly buy major appliances (items like stoves, refrigerators, washing machines and the like). The more people who gathered together and wanted to buy identical appliances, the lower the price they would pay on each unit.

That was pretty much his entire pitch. It only took about five or ten minutes.

It was obvious to me that he had not done his homework on the major appliance industry. First, the margins in the major appliance industry are razor thin. In fact, the retail prices for standard major appliances during the dotcom boom of the 1990s were almost identical to the prices charged back in the 1950s (and you know that costs have gone up quite a bit since the 1950s).

One of our merchants used to say that there is so little profit in major appliances, that a retailer can make more gross margin dollars selling a single George Foreman grill than in selling one oven. If we dropped prices the way this young man suggested, we’d be bankrupt in a hurry.

Second, I started asking him questions about implementation. I asked him how the consumers would get their gas stove, particularly if they lived outside of a Best Buy trade area. Would we ship it to them by UPS? If we did, that charge would wipe out any cost savings from the bidding. And who would install that gas stove? He replied that he hadn’t thought through all of those details.

In fact, I don’t think he had thought through any details. He had no detailed deck showing his research. He had no preliminary financials. He didn’t even have a Powerpoint presentation. He didn’t bring any software skills or any prototypes of the site. All he had was a dream…and not a very good one at that.

In the last two blogs we talked about how different companies require a different approach to strategic planning depending on where they are in their lifecycle and how many barriers there are to entry/exit in their industry.

If you are at the very early stages in a business cycle, the industry is not well defined and lots of business ventures come and go. Success at this stage has a lot to do with dreaming up clever ideas on how to win in the new space in ways that have never been done before.

This was the case in the early days of the dotcom boom. As the story above illustrates, a number of people were dreaming up ways to use the internet to reinvent an industry. In this case, the young man was trying to reinvent how appliances were sold.

Yes, it is appropriate in these early stages of an industry to focus significant attention on dreaming. This is a key part of the strategic planning process at that point in the lifecycle. However, as we saw in the story, if your dream is not grounded in at least some rudimentary research, it can be more like a nightmare.

Two blogs back (see “Same Title, Different Jobs”), we said that there are three major steps in strategic planning:

1) Positioning: Determining what you will stand for (own) in the marketplace—the solution you are providing, the place where you can win.

2. Pursuit: Determining the path that will ensure you are able to obtain (or re-enforce your hold on) your desired position. This involves making it easier to get what you need and harder for your competitors to do the same

3. Productivity: Discovering ways to leverage your position so that you can optimize the return on your investment.

In young, evolving industries, the positions are relatively wide open. Nobody really has a lock on the market in any given position. In fact, you are probably inventing a new position that never before existed—a brand new way to solve an age-old problem. At this early stage, one of the greatest ways to add value to the business is to spend time in your strategic process focusing on what your original position should be.

This is really not the time to be stressing out over getting the last ounce of productivity out of the business model. After all, it is likely that the business model at this early stage will morph into numerous variations until you get the new formula right. Trying to optimize productivity before the business model is set can be counter productive to your immediate battle to find the right position and win it in the minds of your customers before someone else does.

So the first priority at this early stage is dreaming and experimenting to first get the positioning “relatively right”, then to look at ways to pursue the position so that you can win in that space. Productivity is well down the list of priorities at this point. As you can see, this is the opposite prioritization of tasks to what was said in the last blog when talking about mature firms (see “Management by Yelling”).

So, yes, dreaming is an important prioritization in this early phase. But it is not the only task. Dreams need to be rooted at least a somewhat, through some combination of:

1. Consumer research
2. Secondary research
3. Concept testing with potential customers
4. Small trial runs of some aspects of the business model actually run for real out in the real world marketplace
5. Beta testing
6. Financial modeling
7. Pressure testing your assumptions against what you know about the marketplace. In particular, it is important to gage how big the space may eventually evolve into and how well suited your idea is to capture that demand.

The more your insights come from actual behavior rather than opinions, the better. Behavior is a better predictor than opinion, especially in new areas where the consumer has little experience in which to base an opinion.

Sure, because you are venturing into new space there will be many unknowns. If you wait until all the facts are in, it will probably be too late to enter the space. Yet that is no excuse to enter blindly like that young man in the story.

Speed is important at this stage, so you don’t want to get bogged down in the paralysis of analysis. However, running as fast as you can when you have no idea of the general direction where you should be heading is not a formula for success, either (for more on this topic, see the blog “Cutting Your Way to Prosperity—Part 2”).

The idea here is balance and timing. Use some diligence to get close on the position, then quickly shift to pursuit, where you begin to roll out the business model out into the real world to see how well it really flies and to make modifications. The closer you get to getting the model “right”, the faster you can ramp up your pursuit. Then, once the rules are relatively established and you position is relatively strong, you can shift more of your focus to increasing productivity.

Of course, this does not mean that productivity is completely ignored in the early stages. If you are inefficient and completely unproductive in the early stages, you will not have the financial stamina to fight the battles to get to the next stage. That’s one reason why so many dotcom startups during the boom fizzled out early. They ran out of cash before they could generate their own due to wastefulness. Again, there needs to be balance, even in the early phases.

Even though young and evolving industries should spend the majority of their strategic effort on getting a grip on how to invent their position, they also need to spend some time on understanding how to get insights from pursuit and how to create enough cash to get to the next stage via productivity.

Rarely do the original dreams look exactly like what the business evolves into. But don’t let that stop you from taking the risk. You cannot evolve to the right position if you never start at all.

Monday, July 9, 2007

Management by Yelling

One time, early in my business career, I had the privilege of flying on the corporate jet. Boy, for a young person like me that was a treat! I highly recommend corporate jets if you travel a lot.

Also on the flight was a senior executive. Normally, this executive would not have given me the time of day, because I was so far beneath him in the corporate hierarchy. However, it was a long flight, and there were no other senior executives on the plane.

Therefore, since I was the next highest ranking person on the plane, after a long period of silence, he finally, reluctantly decided that he would have to talk to me. Not knowing quite what to say, he started off by saying, “You know, I’ve discovered over the years that fear is a great motivator.”

With an opening comment like that, you can imagine that the conversation for the rest of the flight was a little bit awkward.

In the last blog we talked about how different companies require a different approach to strategic planning depending on where they are in their lifecycle and how many barriers there are to entry/exit in their industry.

These approaches can lead to different styles of management. In the story above, this senior executive had a very cold management style. Fear and yelling seemed to be his way of getting things done. Although I am never sure that this type of management style in its extreme is appropriate, I can see how such a style can develop depending on the types of industries one has worked in.

In industries that have the characteristics of being mature, stable, consolidated, and with high barriers to entry/exit, a cold management style characterized by yelling can appear to be appropriate…at least for awhile. However, as we will see below, even in those instances, it has its limits.

In the last blog (see “Same Title, Different Jobs”), we said that there are three major steps in strategic planning:

1) Positioning: Determining what you will stand for (own) in the marketplace—the place where you can win.

2. Pursuit: Determining the path that will ensure you are able to obtain (or re-enforce your hold on) your desired position. This involves making it easier to get what you need and harder for your competitors to do the same

3. Productivity: Discovering ways to leverage your position so that you can optimize the return on your investment.

In mature, stable industries, the positions are already pretty much staked out. Consumer impressions of what you stand for are already firmly planted in their minds. High barriers to entry keep my customers from having many choices. High barriers to exit give me more ability to play hardball without fear of negative repercussions. Little can change in the near term. Therefore, less time is needed to devote to positioning.

A similar situation exists for mature companies when it comes to pursuit. You have already pursued growth and market share to the point where you were able to survive the industry consolidation and still be in business as one of the industry leaders. You also have had sufficient time to pursue the basic tricks of the trade in your business and become relatively good at them. Therefore, less time is needed to devote to pursuit.

Hence, these mature stable businesses tend to focus their strategy on productivity. In other words, the key question becomes:

How can I use the power of my current situation (a result of prior success in positioning and pursuit) to squeeze more incremental profits out of the same basic business? How can I beat up my sources for lower prices? How can I get more productivity out of the employees? How can I get my customers to pay a little bit more?

With a focus like that, it is easy to see how the management style in these industries can become cold and be based on fear and yelling.

The executive mentioned in the story above learned his management skills while working for a leading supermarket chain in the New York City area. At the time he worked there, supermarketing in New York City was mature and stable. It had consolidated to only a handful of major players and he worked for one of the leaders. It was nearly impossible any more to find many new sites to build supermarkets in the New York metro area, so if you already had stores in the key locations, you were pretty much set. People have to eat, and supermarkets at the time were the primary places to get food to eat, so as long as you were a decent operator, you were pretty much assured of success.

Therefore, the big focus was on trying to squeeze a little bit more out of the business through productivity. This may help explain how this executive came to this management style.

Unfortunately, when taken to an extreme, this type of strategic mindset can get you into big trouble. First, through cockiness, one can start holding back on reinvestment, believing that the barriers to exit are so high that you can get away with letting the business run down a little (so that you can pocket more profits). Second, one can start believing that the current stability will last forever, so there is no need to reassess one’s situation to see if there is a need for repositioning or a new wave of pursuit.

Stable situations never last forever. In the case of supermarkets, the format started to become obsolete as people preferred shopping at larger stores with greater variety, such as supercenters, warehouse clubs and combination food/drug stores. The dense urban markets, which used to seem impenetrable for new competition, were getting increased food selling by drug stores as well as selling by internet companies which did not need to build a lot of stores. Food tastes were changing, with more people looking for gourmet, fresh prepared and organic foods. Gradually, the “conventional supermarket” position in New York was not so strong any more.

Shifts in populations were making some old sites less desirable and opening up new real estate opportunities for more aggressive pursuers. If the supermarkets were not pursuing by reinvesting in the core business, they could start looking weak compared to the new competitors on the block.

Recently, that strong supermarket company this executive used to work for became rundown and quite weak and was eventually sold.

That is why even mature and stable businesses cannot ignore positioning or pursuit and just relying on yelling for more productivity. Times change, requiring repositioning and renewed pursuit.

Take, for example, the photography industry. The camera film business used to be mature and stable. Fuji and Kodak were the survivors who had pursued relentlessly to make their film available for sale almost everywhere. Life, for a time was relatively simple. But then came digital and the need for film started to become obsolete. Kodak was slow in realizing a need for repositioning and a renewed pursuit of the new technology. Now Kodak is only a shadow of its former self.

A similar situation occurred in the camera business. As digital cameras came into being, new companies broke through the old barriers to entry, like Sony and HP. The old rules no longer applied. Recently, I was visiting the Columbus Zoo and noticed that more people where taking snapshots with their cell phones than with digital cameras. So even the idea of a camera may someday become obsolete.

Just getting more productive at making film or making film-based cameras no longer gets the job done. That is why there is a need for balance. Even in mature and stable industries one needs to spend a little time on studying positioning and pursuit to ensure that one is ready when the stability is upended by change. Trust me…all stable businesses eventually get reinvented and the process starts all over again with a new upheaval. You cannot just suck all of the money out of a business without reinvestment and assume it will survive into the next upheaval. Investments in experimentations to ensure that you are on top of industry trends can help keep you from getting upended when the new trends take over.

Wal-Mart was smart enough to understand that traditional discount stores were becoming obsolete and it repositioned itself as a supercenter operator and pursued this new vision relentlessly so that nobody else could beat them to the end goal of leadership once the supercenter industry matures. They did this even though it meant abandoning their huge investment in conventional discount stores and starting the investment process all over again. Sometimes a radical replacement of what you used to be with something else is what is necessary in order to survive the industry upheaval. And a focus only on productivity through yelling won’t get you there.

Even though mature and stable industries should spend the majority of their effort on productivity, they also need to spend some time on positioning and pursuit, so that they are prepared when the industry inevitably gets upended by a reinvention that makes the industry unstable again.

It is not easy to envision of how an industry is evolving and what must be changed to survive a new instability by yelling at people.