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.

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