Monday, August 20, 2007

Building & Tearing Down Walls

In order to earn money while in college, I spent some time doing heavy labor. One time we had to tear down a sturdy brick wall inside of a building. The only tool we had was an incredibly large and incredibly heavy sledge hammer.

We took turns whacking at the wall with the sledge hammer. You would whack at the wall until you were exhausted, and then hand the hammer to the next guy. He would do the same, and so on. Eventually, the sledge hammer would get back to you and it would be your turn again to whack away at the wall. I have never been so exhausted and sore in my life as I was after that day was over. And after all that effort, we only made a small hole in the wall.

Another time, I was on a team helping to build a wall, although I did not get to have any of the fun part. My job was to haul the cement in buckets to the site where the wall was being built. The cement was outdoors. The wall was being built on the interior of the second story of a building. So I had to spend all day carrying these buckets up flights of stairs. Let me tell you, wet cement is very heavy. By the end of the day, I thought my arms and legs would never stop being in pain.

So the next time someone says that something is as solid as a brick wall, trust me—those walls are very solid.

Strategy is like a journey. It is the art of finding a way to get from where we are today to where we want to be tomorrow. In business strategy, we tend to focus on creating the path we want to take. This is good, since blazing new trails can lead to great reward. However, as any trailblazer knows, after you do the hard work of creating a path where none existed before, others will start walking down that path you worked so hard at.

You may have invented a great new retail concept only to see someone else copy it and build out a successful chain faster than you. You may have worked hard to invent a new kind of drug and then see others make similar copycat formulations.

Studies have shown that being a “fast-follower” can be a very profitable way to go. For years, Coca Cola was successful by watching others experiment in the beverage space and then quickly copying what appeared to be catching on. Because Coke had superior distribution channels, it would win the battle. RC Cola invented cola in cans, diet cola, flavored cola, and so on. Coca Cola let RC do all the hard work of blazing the trails, and then swooped in to take all the profits.

Microsoft used a similar philosophy over the years. It would watch for developments in their space, like Netscape, and then be a strong fast follower with their own products, like MSN. The idea is to let someone else spend all the money and take all the risks on innovation, but out battle them on who ends up getting all the market share for that innovation.

So if you are an innovator, you need to do more than just focus on blazing the trail. You also need to spend some time building some walls. You need to build impediments to others so that they cannot just waltz down the path you built. As mentioned in the story, it is very difficult to tear down walls. It will slow down the competition as they try to chase you.

Yes, building walls can be difficult as well, but the effort can often produce great benefits by slowing down others who would want a piece of the fortune you are designing.

The principle here is to incorporate into your strategy a comprehensive approach which not only makes it easier for yourself to get to the prize, but also makes it harder for others to do the same. We’ve touched on the need to concern one’s self with the competition in other blogs (see “Bombs Start Wars” and “If You Can Open the Door, So Can Others”). This time the focus is on designing ways to keep the competition from getting the upper hand in the race for market leadership.

Here are some ways to build those walls that will help your cause by not allowing others to catch up.

1) Speed to Capacity
It is usually not enough to just be good. In most cases, one also has to be fast. Speed is necessary, because of limited capacity, be it capacity in the supply chain or capacity in the mind of the customer. Take retailing, for example. If you have a great new retail concept, one cannot afford to be slow in rolling out the concept to multiple locations. Potential competitors may visit your store and copy it faster than you can roll it out yourself. There tends to be a relatively fixed capacity of how many stores a market will hold. The more you let a competitor build stores in a market, the less capacity there is for you.

Let’s say that a market can hold three stores. You build a single store in the market, thinking that will be very profitable. But what if the competition builds two stores in the market? Now, you may be locked into an inferior position in the marketplace. What if you own one city, but the competitor surrounds you by owning the rest of the state? Eventually, they will win the war of attrition. A similar situation occurs in packaged goods where the rush is to soak up the limited shelf capacity in the stores. If you own all of the shelf space, it is hard for others to attack you.

The customer’s mind has limited capacity as well. The first one to penetrate the mind as owning a position will get the credit for that position, whether they invented it or not. Everyone else will be seen as an impostor. Therefore, it is important to act quickly in order to be the first to claim the position in the mind of the customer.

Once you own the capacity in the field and the capacity in the mind, you have erected a difficult wall for others to tear down. The sooner you ramp up, the stronger your wall will be. Get out of test mode as quickly as possible and ramp up to outpace the competition in the growth mode.

2) Exclusivity
Competition has a tougher time attacking you and taking away your progress if you have created exclusivity for yourself. Maybe you can create exclusivity for yourself in obtaining some key manufacturing resources, like specialized computer chips. Perhaps you can create exclusive arrangements for yourself with key retailers. If you can create a strong, exclusive network with all of the other major players in the supply chain, then you force the competition to utilize an inferior network. When you “lock up” an exclusive arrangement, you have turned an open door into a locked wall. Exclusivity can be a huge wall.

3) Loyalty
The more you can lock in a customer to be loyal to you, the harder it is for a competitor to take them away. Loyalty programs which reward customers for increasing their business with you make it harder for them to leave, because they have to abandon not only you, but the rewards they were getting. The higher the wall you can build around “switching costs” the less likely a customer will switch to someone else.

4) One-Upmanship
If you can always stay one step ahead of the competition, then you are forcing the competition to always be one step behind. The Japanese automakers have been doing this to the Detroit automakers for years. Just when the Detroit firms think they have caught up the Japanese on some factor, like quality, the Japanese firms up the ante by moving on to the next improvement, like fuel efficiency or luxury.

The worst thing to do is to stay in the same place. If you don’t keep raising the bar for success, someone else will pass you by and create a new level of superiority. Reinvest some of the profits from being ahead into innovations that will make it even harder for others to catch you. This creates a situation so that when competition thinks they’ve finally torn down your wall, they will be disgusted to learn that behind that wall they just eliminated you built yet another wall for them to tear down.

Take time from your busy trail-blazing schedule to ponder ideas that can keep you one step ahead of the competition. For more on this, see the blog “Genius Sleep.”

Sometimes, we can get so caught up in trying to move forward with our own company’s agenda that we forget to consider the ways in which competition can benefit from our strategy as much or more than we can. Unless we incorporate wall-building into our strategic process, we may be blazing trails which others use to get greater success than we do. Incorporate ways to increase your speed, suck up capacity, create exclusivity, increase loyalty, and stay a step ahead.

If you are not very good at building walls, then perhaps you should not have a strategy that is overly dependent upon innovation. Instead, you may want to become the fast follower by focusing on ways to tear down walls.

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