Thursday, November 29, 2007

Analogy #134: Strategy is Like High School

In retrospect, academy award winning actress Meryl Streep does not look back on her high school years at Bernards High School in Bernardsville, New Jersey, as her fondest memories. She remembers it as a very superficial place, where external appearances were far more important than who you were as a person. It was a place full of cliques, where the ultimate quest was to become popular.

As Meryl saw it, popularity for girls had little to do with accomplishments, but with how pretty you were. This was especially true if you were trying to impress the high school boys. Who you knew meant more than what you knew. Minority positions or points of view made popularity even more difficult.

However, when Meryl Streep got to college at Vassar, her eyes were opened up to a new and glorious world. In college, it seemed like everyone was accepted, regardless of looks or points of view. People were encouraged to express themselves without fear of rejection. Hard work was rewarded. Minds and talents were nurtured. Anything seemed possible.

Meryl loved college life so much that after graduating from Vassar, she continued her education with three years of graduate work at Yale. By this time, she was feeling strong and self-confident, a welcomed departure from those insecure and superficial days of high school.

However, when she left college and entered the work world, Meryl was shocked and disappointed to find that the real world was much more like high school than college. The battle returns to trying to fit in. Looks and popularity mattered big time. Holding contrarian views would get you in trouble. Experience or excellence was not normally rewarded. Whereas college life gave Meryl confidence that she could successfully tackle almost anything, she found the real world to be “vast and impossible,” where “resigning oneself, or hiding and hunkering down becomes the best way of getting along.”

In many ways, Meryl Streep is correct in her conclusion that the real world is a lot like high school. This applies to the business world as well. Success in business comes by using many of the same tricks learned to become successful high school. If your business is popular and fits in with the right crowd, your firm can be successful. However, if your company is seen as “uncool” and rejected by the popular people, then you will typically have problems.

Therefore, many of the strategies you used to cope with high school will also work in the business world (with only a little bit of tweaking).

The principle here is about finding ways for your firm to “fit in.” Applying the rules of high school, there are three steps to fitting in:

1) Pick a Clique
2) Look and Act the Part
3) Manage the Gossip

These three rules are briefly discussed below.

1) Pick A Clique
High Schools are full of cliques. There are the Jocks, the Nerds, the Goths, the Druggies or other assortments of peer groups. When in high school, one of the first things one learns is the need to find a way to fit into one of these groups.

The marketplace of business is very similar. Customers are not a homogeneous group. Some customers are just interested in the lowest price. Others are looking for status. Still others may be service-oriented, wanting to be waited on. You can think of these different customer segments as being like the cliques in high school.

In high school, one learns that it is nearly impossible to be popular across a wide variety of cliques. In fact, if you are accepted into certain cliques, it almost by definition means that you will be rejected by other cliques. It is just the nature of cliques to reject those who act contrary to the norms of their little group. But that was okay, because as long as you fit in and were accepted by one of the groups, you could put up with the rejection of the other groups.

This is also true in business. The goal of a business is not to try to make everyone happy. Not only is this impossible, but counterproductive. Rather than trying to become acceptable to all, a better strategy is to become loved by one of the consumer cliques. Even if the love of one group means you are hated by others, that’s okay if the group that loves you is large enough to make you profitable. This topic was covered in great detail in the blog “The Opposite of Love.”

So step one in the strategy is to pick a clique where you can fit in and become loved & accepted. For example, Apple decided it wanted to be accepted by the “cool kids.” They don’t mind that they are rejected by people who are most interested in low prices or business functionality. Similarly, Nike decided it wanted to be accepted by the “jocks.” They don’t mind if they are rejected by couch potatoes.

2) Look and Act the Part
Once you pick your clique, you need to live by the rules of the clique. You have to embody the essence of what the clique stands for. You have to win the popularity battle for being the first company to come to mind when one thinks of the clique.
In high school, this meant living and acting and dressing and looking and thinking like everyone else in your clique. In business, this requires a go-to-market strategy which:

a) First understands what is most important to the essence of what the clique stands for; and then
b) Makes strategic choices which place you closest to delivering that essence.

Wal-Mart wants to appeal to the clique of people who are most interested in saving money. Therefore, every decision at Wal-Mart is made in that context—does my choice of action serve to increase my ability to deliver low prices.

Similarly, Apple wants to be popular with the cool crowd. Therefore, you will never see Apple produce a product that is primarily concerned with achieving the lowest price. To achieve the lowest price, Apple would have to make compromises with product design, limit the functionality, and make it dull and cumbersome to use. This is contrary to what their clique wants and could cause their clique to reject Apple, because it “no longer fits in” to what they deem important (coolness). Apple’s television commercials (Mac vs. PC) are specifically designed to enhance the coolness of Mac.

3) Manage the Gossip
An old friend of mine once said that no matter what you do, people are going to talk about you behind your back (and a lot of what they say will not be flattering). Since you cannot stop them from saying bad things about you behind your back, the best you can do is try to control the nature of the way they speak poorly of you.

In the case of my friend, he did not want others saying things that would question his competency or his loyalty, so he tried to find something less dangerous for them to criticize. He chose eating habits. He would make a show of eating too much at a single meal in their presence. Then he tried to position that as the acceptable way to criticize him.

In high school, we referred to this as gossip. Gossip was everywhere in high school. You couldn’t stop it. However, if you worked at it, you could manage it to be less damaging.

Advertising can be an important part of a business strategy, but attention to public relations and word of mouth may be a better way to manage your company’s gossip. Do you check out the web sites to see what the gossip is about your company? Do you try to manage the “buzz” around your strategy? How good are you at viral marketing?

A great strategy is worthless if nobody understands it, or if the “word on the street” is against you. Winning in high school was all about image. The more you can manage the gossip, the more you can improve your image.

If you understand your weaknesses, you can inject into the negative gossip some neutralizing factors. Listerine knew that people hated its taste. They neutralized this by telling people that the strong taste meant it was a strong and effective product. Their slogan was “the taste you hate twice a day.” This turned the negative into more of a positive.

Or take the deep discount limited assortment grocer Save-A-Lot. The stores have a poor selection and no ambiance. But they do have very low prices. In its advertising, Save-A-Lot would admit to not having all of the niceties of the fancier supermarkets (for example, proudly proclaiming that they do not have live lobster tanks). But then they would say that all of those niceties serve to raise costs. By eliminating them, they are able to pass on the savings in lower prices. In essence, they used their negative as “proof” as to why they can offer lower prices.

The business marketplace is a lot like high school. Therefore, the tricks of getting through high school can also work in developing your business strategy. The steps are to pick a clique, look/act the part, and manage the gossip.

Although Meryl Streep may not have enjoyed the superficiality of high school, she was smart enough to know how to play the game. She focused on her appearance, became a cheerleader, and ended up being popular enough to be named homecoming queen. She was then able to apply those skills to be successful in the superficial world of Hollywood. So even if you don’t love it, you can still do it.

Wednesday, November 28, 2007

Strategic Planning Analogy #133: Don't Abandon the Maps

There’s a reason why Las Vegas is one of markets hardest hit by the recent housing crunch. For the longest time, it used to be one of the hottest housing markets. I guess what goes up, must come down.

I have a friend whose job was to find real estate for a retail company. He was looking for retail sites in Las Vegas at the height of its house construction boom. New sub-divisions were spouting up all over Las Vegas at a rapid rate.

When my friend would get to Las Vegas, he would buy the most up-to-date road map he could find. However, even the most recent maps could not keep up with the growth of the area. A large number of streets would be completely missing from the map.

Since he wanted to build stores in the areas of growth, he would always be driving around these new areas of Las Vegas that were not on his map. As a result, he would often get hopelessly lost. The maps were of no use to him.

Strategic plans are often like maps. They help companies find their way to the desired future. As we saw in the story above, when the environment is rapidly changing, maps can quickly become out-of-date. At that point, they have lost much of their usefulness.

In much of the business world, the environment appears to be changing at a rapid rate. Using the analogy of maps, many would say that the strategic planning maps can no longer keep up with the fast pace of change. They become out-of-date too quickly. New strategic alternatives, like the new sub-divisions of Las Vegas, aren’t even on the map. Therefore, these people suggest that the idea of strategic planning is no longer very useful and should be abandoned.

I heartily disagree with this conclusion. I believe that in rapidly changing, turbulent times, strategic planning becomes more valuable, not less. In this blog I will try to explain why.

There are several reasons why strategic planning is even more valuable in times of rapid change:

1) It reduces distractions
2) It helps speed decision-making
3) It helps strengthen one’s position
4) It provides a competitive advantage

These are briefly discussed below.

1) Strategic Planning Reduces Distractions
When things are changing rapidly, it is easy to get distracted by all of the activity going on. One can get so immersed in the details of the change that you can lose sight of the big picture.

Each little change can lure you in. You can fall victim to the latest fads, which provide no lasting value or competitive advantage. You can end up like a pinball, bouncing all over the place from fad to fad without making any forward progress.

In times of rapid change, one cannot afford to waste time bouncing around from distraction to distraction. To continue the analogy, sure there may be some new streets in Las Vegas, but don’t let them distract you. Your goal is to get from Salt Lake City to Los Angeles. All you need to do is get through Las Vegas on the way to Los Angeles. You need a “big picture” map of the entire trip. With the big picture strategic map, you can continue the quest to Los Angeles without getting bogged down in all of the change in Las Vegas.

2) Strategic Planning Speeds Decision-Making
Strategic planning helps you focus in on the ultimate destination for where you want to take your business. When you have a firm focus on the end point, it is easier to understand how to react when confronted with rapid change.

Using our example, if you know that your strategic destination is Los Angeles, it is easier to deal with the changes in Las Vegas. There may be many new roads, construction on old roads, and numerous detours confronting you when you get to Las Vegas. If you have no idea where you are going, all of that change can become very confusing and slow you down.

However, if you know that the end goal is to get to Los Angeles, the process is easier and faster. All you have to do is ask a local which it the best way to get through Las Vegas in the direction that leads to Los Vegas.

This is also true with strategy. If you know your goal of what strategic position you want to own or strengthen, then you can quickly deal with rapid change. As each change confronts you, all you need to do is ask yourself how that change impacts your goal and choose the answer which exploits the change in a way which gets you the closest to your goal.

There is no need to reinvent your strategy for every little change. Just stay the course. However, if you have abandoned strategic planning and thrown away your map, then you have no guide to help you navigate the change. Every little change can slow you down, because you have no reference point.

With no ultimate destination in mind, every little change can open up all kinds of possibilities and you can become paralyzed by not having any idea which possibility to pursue. When you don’t know where you are going, every road can become a temptation. Change creates more strategic roads to bog you down in decision-making, unless you can quickly assess them in reference to a larger strategic goal.

3) Strategic Planning Helps Strengthen Ones Position
When large organizations are confronted with change and there is no unified ultimate strategic goal, you can have factions of the company each choosing a different path. This would be like having everyone in your company choosing a different road in Las Vegas.

Your efforts are now diluted into many directions. Portions of your organization will be moving in opposite directions, canceling out the benefits of each other’s effort. Worse yet, your consumers will become confused. They will not understand what you stand for in the marketplace. Without a strong position and a unified effort to excel in that position, your firm will lose the battle.

Even if all of your people move in the same direction, if change causes the direction to appear random, it does not help strengthen your position either. Strong positions come from getting everyone to move in a direction which reinforces that position. If strategic planning is abandoned, there is no focus on where to win, so your efforts will be less fruitful. Instead of getting closer to the goal of Los Angeles, you will end up wandering aimlessly through the Nevada desert.

4) Strategic Planning Provides a Competitive Advantage
If your competition has abandoned strategic planning, then they will fall victim to the problems mentioned in points 1 through 3. They will become distracted, have their decision-making slowed down, and weaken their position. By contrast, if you continue to employ strategic planning, then you will avoid these pitfalls. Relatively speaking, you will become stronger in the marketplace while they become weaker.

Sure, it may be a little more difficult to do strategic planning in a world of constant change than in a static environment. However, if you take the extra effort to do so when your competition does not, then you are that much further ahead.

Many people have justified abandoning the process of strategic planning because they do not see its relevancy in times of rapid change. In my opinion, strategic planning is even more important in times of change, because it improves your focus, so that change does not distract you and throw you off course.

Certainly, over longer periods of time, if there is enough change in the marketplace one may need to reassess one’s strategic goals. Eventually all strategies become obsolete, and rapid change accelerates this phenomenon. But this is no reason to abandon strategic planning. Instead, one needs the process in order to periodically reassess one’s goals, to determine when it is the right time to make modifications.

Sunday, November 25, 2007

Strategic Planning Analogy #132: Always On

I enjoy reading stories about how musicians compose music. It is amazing to me how similar many of their stories are. Most are not sure where all of the musical ideas come from. There is a sense that it is coming from an outside source they cannot control. This is often referred to as a muse.

Some of the best songs tend to come into their mind quickly and are basically written in only a few minutes. The longer it takes for a song to gel, generally the less successful it is.

Although the best songs come quickly, for many of these composers there is always some sort of new music flowing through their mind at all times. Ted Nugent once said that he writes around 300 songs per day. That being the case, one might wonder why Ted Nugent recorded such songs as Cat Scratch Fever or Wango Tango if he had so many other songs to choose from. I think the point is that Ted could always sense songs going through his mind, but only a handful of it was worthy of recording.

My favorite comment came from the artist known as Seal. He once did a promotion for snowboarding. Seal claimed that the reason he loved snowboarding so much was that it was the only thing he had found that was so exhilarating that, for a brief moment, it blocked out all of that music which was constantly flowing through his head.

It is as if these musicians’ brains are tuned into a cosmic radio station and they are unable to find the “off” switch.

Successful musicians often times seem to have their minds constantly tuned into the world of sound. No matter what they are doing, a small part of their brain is always functioning at a musical level, pumping musical ideas into their head. Although the music may not always be in the foreground of their thinking, the switch always seems to be in the “on” position.

This is a good analogy for how strategic thinking should work in an organization. No matter what someone in the organization is doing, there should always be a part of their brain which is tuned into the corporate strategy. Turning off strategic planning should not be considered an option.

The principle here concerns the idea of burrowing strategy deep into everything a company does. Strategic planning should not be seen as a separate activity done only once or twice a year at some strategic planning retreat. What is more important than strategic planning is strategic thinking—getting our everyday thoughts tuned into our strategic radio in an “always on” position.

Strategy is the end result of the culmination of all of a company’s activities. Every little action adds up to create what the company is. And what a company is determines how well it competes in the marketplace.

If all of the small actions tend to be moving a company in a particular direction, then that—in reality—becomes the direction of one’s strategy. Even if the formal “official” strategy says something different, it is the result of our actions which create one’s true strategy. Therefore, it is important to get all of the small day-to-day activities in alignment with where we want our strategy to be.

Nobody can write a detailed enough strategic plan to prescribe what to do for every small day-to-day activity. First of all, one could never conceive of every possible day to day scenario. And even if one could, the document would then become so large and cumbersome that no one could comprehend the document.

Therefore, instead of trying to get every possible option in writing, one’s time is better spent trying to get the basic principles of the strategy burrowed so deep into the minds of employees that they can instinctively think at all times of what is the right thing to do. It is better to have everyone in the company thinking of how their actions impact the strategy then to have only a few people at the top thinking strategically.

Take, for example, Nordstrom’s. Their strategy is centered on giving superior customer service. Rather than writing up a huge document with every particular about how this should impact day to day operations, they instead focused on the large picture, to ensure that everyone knew what the end goal was. Then Nordstrom’s empowered the employee to use their own initiative to act in the direction of the end goal. For many years, the Nordstrom employee handbook consisted of only a single 5x8 inch gray card consisting of 75 words, as follows:


We're glad to have you with our Company. Our number one goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them.

Nordstrom Rules: Rule #1: Use your good judgment in all situations. There will be no additional rules.

Please feel free to ask your department manager, store manager, or division general manager any question at any time.”

The next step at Nordstom’s was to use storytelling to illustrate what great customer service looks like. My favorite story is about a Nordstrom’s store in Alaska which was in a location formerly held by a different retailer. A customer had purchased tires from the retailer who formerly occupied that space and wanted to return them. Even though Nordstrom’s had never sold tires, they accepted the return and gave the customer a refund. The strategy of outstanding customer service had been achieved.

Once a number of these stories filter through the organization, people are able to comprehend that:

1) Strategy should impact everyday activities; and
2) Certain types of activities represent that strategy more than others.

FedEx is another organization which follows this pattern. Their strategy revolves around dependable and reliable service. To help illustrate how important this is on an everday basis on everyday decisions, FedEx loves to disseminate stories of this practice in action in the company.

In one example, a FedEx driver forgot the keys to open one of the package deposit boxes. By the time the driver realized he had forgotten the key, it was too late to go back to the office to get it. If he had taken the time to go back to get the keys, he would not have been able to get the packages to the office and the airport in time. People who had put packages in the deposit box were depending on the famous dependability of having them shipped overnight. Therefore, the driver found some tools to unbolt the deposit box from the concrete and brought the entire box back to the office. By doing so, the FedEx driver was able to keep the strategic promise of dependable service.

In fact, FedEx has taken to the airwaves to air commercials showing a number of these examples of customers going out of their way to ensure that dependable service. Not only do the stories help employees comprehend the strategy, but they help reenforce the strategy with potential customers. These stories beat a fat strategy book any day of the week.

Just as musicians always tend to have music running through their heads, employees should always have the company strategy running through their heads. Usually, the best way to do this is by:

1) Not segregating strategy to a separate off-site exercise done once a year, but in making it a part of everyday discussions and everyday activities.
2) Keeping the communication about the strategy simple.
3) Using stories to show how strategy can impact day to day decisions in a remarkable way.

The problem with strategic thinking is that if a company is not used to doing this on a daily basis, it will not be missed. This is unlike thinking about eating. If one forgets to think about eating, one’s body will soon remind him or her. Our bodies need nourishment, and if we forget about it, our bodies will bring it back to our attention through hunger. This is good, because there are negative consequences if we stop eating.

Similarly, if a company ignores thinking about strategy, there will be negative long-term consequences. However, we need to proactively work to make strategic thinking a daily priority, because there tends not to be a natural “hunger” for strategy that kicks in.

Wednesday, November 21, 2007

Strategic Planning Analogy #131: Gimme Shelter (In a large Infrasructure)

In 1993, Walt Disney Pictures released the movie Cool Runnings, which was the story of the beginnings of the Jamaican Bobsled team. Although the movie took great liberties with the facts and showed little resemblance to what really happened, it did get a few things right:

The Good News:
1) The Jamaican Bobsled team had some very talented athletes.
2) The Jamaican Bobsled team had some talented coaching
3) The team worked hard to condition itself for competition

The Bad News:
1) The Jamaican Bobsled team had difficulty getting sponsorship and funding.
2) Relative to other Bobsled teams in the 1988 Calgary Olympics, The Jamaican team had virtually no support infrastructure and very little practice time on a bobsled course.

As a result, the Jamaican Bobsled team did poorly in the 1988 Calgary Olympics. The fans loved them, but love alone was not enough to win.

Many businesses start out like the Jamaican Bobsled Team. They have several key components necessary for success. Just as the Jamaican team had talent, coaching and conditioning, these businesses may have talent, great ideas, and great managers.

However, visions of greatness can be shattered without the proper infrastructure. If the Jamaican team had been part of a stronger Winter Olympics infrastructure, had better financing, and better training facilities, it most likely would have seen far greater success. Similarly, if a business tries to seek success with insufficient infrastructure, it can also fare very poorly.

Consider tiny East Germany, which won far more Olympic Medals in the 20th century than a country of its size should normally expect. Was East Germany blessed with exceedingly better athletic breeding? No, East Germany had unusually good success because it built one of the finest Olympics infrastructures in the world.

Therefore, when considering a strategic plan for success, do not forget to consider the Strategic impact of your infrastructure.

A couple of blogs back (see “Time for a Change”), we talked about how it can be a mistake to throw away a company just because its current business model is obsolete. Rather than abandon the firm and shift investment to a new start-up in a growing industry, it is often better to reinvigorate the established firm with a revitalized strategy. This blog will expand on that topic by looking at the power of an established infrastructure.

In the December issue of Portfolio magazine, there is an article talking about this very issue (and was referenced in the November 20, 2007 issue of the Wall Street Journal).

According to the article, Andy Grove (co-founder of Intel) has been working with Stanford University on research into business innovation. The conclusion? Firms with large infrastructures are often best suited for tackling the problems of innovation.

To quote the reference in the Wall Street Journal: “When people think of radical innovations, they usually think of start-ups that shake an industry from the ground up. Some sectors are hobbled with ‘intractable, industry-wide problems’ that only a large company can solve.”

The research found that large companies from outside the industry have two factors which make them most successful in innovation. First, they are not hampered by outdated internal industry conventions because they are outsiders. Second, their large size and infrastructure give them the clout and credibility necessary to effectively get the industry to rewrite the rules.

For example, many small startups tried to rewrite the rules of the music industry to innovate it out of the CD era and into the digital downloading era. All of these small startups failed. It wasn’t until a large established company from outside the industry (namely Apple) entered the game that the innovation was possible. Apple’s large position and infrastructure was necessary to budge the artists and labels into accepting a new paradigm.

On the other side of the issue, the problems of the small start-up can be seen in the story of Robert Black and Clean Shower. Back in 1993, Robert’s wife asked him to clean the shower. He hated the task and vowed never to do it again. Being a chemist and inventor, Robert Black decided to invent a product that would prevent the need for cleaning showers. His research lead to the invention of Clean Shower.

By the late 1990s, Robert’s innovation was selling well and starting to look like a huge success. And he got that far with virtually no infrastructure. The big consumer product companies could see the potential and were starting to make big offers to buy his company.

Robert decided at the time not to sell out to any of the big infrastructure companies. Instead, he decided to go it alone. However, once the big companies discovered they could not buy Clean Shower, they decided to compete against it. They used their huge infrastructure and large budgets to out advertise and to influence the retailers. Over time, the big companies with the big influence, big money and big infrastructures started to win the battle for market share. Robert Black and his little company began to suffer.

Eventually, Robert could see that his little company was not in a position to win against the big firms, so he sold out to the Arm & Hammer folks (presumably at far less than he could have gotten earlier). Eventually, even Arm & Hammer couldn’t compete against the lead of firms like Dow and they discontinued the product.

So here is the point. Great, innovative ideas are important, but so are other factors. Many people had the great idea of rewriting the rules of music, but only someone with clout the size of Apple could pull it off. Robert Black had a wonderful innovative idea, but it was the firm with the big infrastructure (Dow) who benefited from it.

So, if you want to innovate and rewrite the rules, here is what you need to consider:

1) Do I have enough clout to break through the conventions of how things are done today and get the rules of the game rewritten?

2) Do I have enough staying power to withstand competition from the big players once they start going after my success? (And they will attack. For more on this, see my blog “Bombs Start Wars”)

If you answer no to at least one of these questions, then you may want to seek shelter by joining up with someone who can say yes, either by selling out early to a big company or by forming joint ventures/strategic alliances. And if you are a big company, perhaps your strategy should involve looking for places in other industries where you can change the rules.

In many cases, the best way to innovate is not by starting up a small little company. Instead, the best way to innovate is to be a large company with a strong infrastructure and be from outside the industry. As an outsider, you have nothing to lose in changing the industry. As a big player, you have the resources and clout to get the job done.

After doing the research with Stanford University, Andy Grove decided that one of the best ways to get breakthrough innovation in the automotive industry and lessen our dependence on oil would be if GE decided to build an electric car. According to his logic, GE has little to lose by rewriting the rules of the automotive industry. In addition, they have the technical know-how and credibility to pull it off.

Monday, November 19, 2007

Strategic Planning Analogy #130: Strategy Gifts

There is a story told about boxer Mike Tyson. Mike grew up under less than ideal conditions. He was born into poverty in a bad section of Brooklyn. His father left when Mike was only two years old, leaving his mother to try to find the means to raise the family.

Mike was expelled from junior high school for fighting and spent a number of years in juvenile detention centers. To raise money, Mike got involved in petty crime. By the age of 13, he had been arrested 38 times. Eventually, Mike Tyson ended up being placed in the Tryon School for boys in Catskill, New York.

It was here that his boxing skills were discovered and he was put on a path that would eventually lead him to becoming the world heavyweight boxing champion in 1986. With the fame came money. For the first time, Mike Tyson was not in financial need.

Companies wanted their products associated with a successful boxer like Mike Tyson, so they started showering him with cash or free products to try to get his endorsement. All of this amazed Mike.

He is claimed to have remarked on this strange phenomenon by saying something like the following: “When I was poor, I begged people to help me and nobody would pay attention to me. Now that I am rich and can afford to buy things on my own, people give me stuff for free...even a new free car. Where were all you people when I needed the help?”

There’s an old saying that “The rich get richer and the poor get poorer.” This seemed to be the case for Mike Tyson. When Mike Tyson was poor, there didn’t seem to be any way out of the poverty cycle. Things just seemed to continue to get worse. However, when he got his lucky break of being discovered at the Tryon School, it put him on a path to boxing wealth. That wealth lead to a great number of opportunities to get even wealthier.

Mike Tyson really didn’t have any strategy to get all of those extra sources of income. He just knew how to do one thing well (boxing), and that success created its own opportunities for other successes, all initiated by others.

Similarly, there are businesses that do only one thing well, which place them in a powerful position. Others, who want to take advantage of that success start throwing great business opportunities at them. This creates greater success for the firm. It didn’t come by any pre-planned strategy. The ideas just came unsolicited by people who wanted to use the company for mutual gain.

Sometimes, the only strategy one needs is to create a point of power in the marketplace. Once the power is created, others will supply you with preferential access to all of the future opportunities one needs. Your only strategic responsibility at that point is to determine which of the many opportunities are best for your company.

The principle here is “the power of the gatekeeper.” Gatekeepers provide access to something you cannot reach on your own. That could be access to distribution channels, access to customers, access to money or whatever. Mike Tyson was a gatekeeper providing access to a certain type of demographic (his fans) who tend to be difficult to reach with traditional media. As a result, firms were willing to offer a large number of great deals to Mike in the attempt to access that demographic.

If you can create a strategy where you become a powerful gatekeeper, then others will shower you with opportunities as they did for Mike. Look at Oprah Winfrey. She is such a powerful gatekeeper that everyone wants to jump on her bandwagon. If you are an author, Oprah can be a great gatekeeper to readers. Huge numbers of firms want to pay large sums to advertise on her show or in her magazines. The opportunities are unlimited, creating great wealth and making Oprah a billionaire.

The Chicken McNugget was not invented by McDonalds. It was invented by Tyson Foods (not related to Mike Tyson). Tyson Foods believed they had a potential hit on their hands, but they needed a gatekeeper to give them access to the fast food channel. Since McDonald’s was the strongest gatekeeper in the channel, they started there. At first McDonald’s was reluctant to take on the product. It took a lot of time and a lot of coaxing by Tyson Foods to get McDonald’s to try the idea. It eventually became one of their greatest product launches.

There was no strategy here. McDonalds had no desire to get into the chicken business. They had no creativity to invent something like a McNugget. At first they even rejected the idea. It was only through the creativity and persistence of an outsider that they got into the business.

I had a conversation with a former strategy executive at McDonalds. He told me that when he first came to McDonald’s, he expected to find great masterminds at marketing. Instead, he found very little marketing expertise. Either they bought it from an ad agency, or the ideas came to them from outsiders who wanted to tap into their power. He said the only thing they were really great at was running a highly efficient restaurant process. That high level of efficiency, combined with rapid expansion, created the market presence that lead to gatekeeper power with fast food and for families with small children. The rest of the success just sort of fell into their laps.

Whenever a new technology opportunity comes up, there are competing forces trying to determine how it will evolve. The question is which of the competing technology standard will win. For example, which high definition TV technology will win? Which high definition video disk technology will win? And so on. Anyone who wants to set the standards for new technology in their favor knows that their potential for success is much greater if they can get powerful gatekeepers on their side. Best Buy has tremendous gatekeeper power in accessing people interested in leading edge technology. Therefore, firms with new technology do whatever they can to become the preferred technology standard at Best Buy.

Best Buy understands the power it has and has created a strategy around exploiting this gatekeeper power. They often essentially pit one standard against the other and see which one will offer Best Buy the biggest prize. Then they back the one that offers the best results for Best Buy.

The point here is that in some cases, one does not need to fully flesh out all of the strategic detail. All you need is a strategy to create gatekeeper power and a strategy to exploit it. If done properly, this will put your firm in position so powerful that you do not need to be geniuses in creating opportunities. Other firms will do all that for you and shove more opportunities into your face than you can absorb. You just need to be wise in picking amongst all the ripe opportunities put in front of you (and wise in properly negotiating the deals with these people).

Now becoming a strong gatekeeper is not easy. If it were easy, there would be more of them and they would command less power. This alone can be serious, time consuming strategic work. The trick is to pick something that other businesses desire, yet find difficult to access. Then you specialize in finding ways to gain that access and then let others start throwing money at you.

This is a common ploy in the dot com world, where if you can create great access to a desirable group of people, then advertisers will be all over you. For example, Google used technology to allow firms access to people interested in a particular search word. This type of gatekeeper power has proven to be very successful for google.

Go out there and find your gatekeeper opportunity.

One approach to strategic success is to own the best access to a desirable resource, such as a particular type of customer, technology, distribution channel, raw materials, a particular type of labor force (highly skilled or highly inexpensive), or some other item. Once you have locked up the access to that resource, the firms who want to access that resource will provide you with all kinds of business opportunities. These opportunity “gifts” will supply more than enough ways to increase your wealth.

Of course, if you manage that gatekeeping poorly, it can lead to ruin. Mike Tyson did not continue to perfect his one point of expertise which lead to his gatekeeping power (boxing). This quickly lead to others becoming the heavyweight champion. In addition, he did not do a good job of proactively exploiting the gatekeeper power at the time when he had it. As a result, in 2003 Mike Tyson had to declare bankruptcy.

Sunday, November 18, 2007

Strategic Planning Analogy #129: Time for a Change

One of the things I did while on vacation a week and a half ago was visit a local historical museum up near Haliburton, Ontario. Haliburton is located in some rugged rural country near the Algonquin Provincial Park.

There was an older man with a scraggly beard running the museum. He didn’t own a TV or seem too interested in modern times, but he knew the local history. He said that there were essentially three economic periods to the local history.

The first period was the agricultural era. During the 19th century, there were so many immigrants coming to Canada that the areas already developed for habitation were getting full. Most of these immigrants were farmers by trade, so the government looked for suitable farmland to open up. The Haliburton area had rich soil, because it had been untouched for thousands of years. The problem was that the soil was very shallow, with hard impenetrable rock just below the surface. There was a debate as to whether the land could support agriculture, but given the pressure, the government caved in and opened up the area for agricultural development.

For the first couple of years, the crops were good. However, the soil’s richness was soon depleted and became unprofitable to farm commercially. There were, however, lots of large trees in the area. So eventually, the farmers turned to the lumber industry. This became the second economic era.

Lumbering got the area through the remainder of the 19th century and about half of the 20th century. However, eventually the area became depleted of its large trees. Without the trees, lumbering no longer was economically viable.

About this time, wealthy people from southern Ontario started putting up vacation and retirement cottages along the many lakes in the area on the areas cleared of trees. Thus began the third economic era, the era of cottages. Now the key source of income for the area is taxation on all of those cottages and the tourism industry. In the summer it’s fishing and hiking. In the winter it’s skiing and snowmobiling.

Sometimes business models cease to work. In the case of the Haliburton area, soil gave out and trees gave out, making those economic models no longer viable. It was no fault of the hard workers in the area. Circumstances just changed, making the model unprofitable.

The same situation can occur for a business firm. A successful business model may be in place, but over time it no longer becomes viable. The problem may have almost nothing to do with the quality of the management. I am reminded of the Three Mile Island nuclear power plant disaster of March 28th 1979. At the time General Electric has a large division dedicated to building new nuclear power plants. After that disaster, Jack Welch told the division that they needed a new business model that was not dependent on building a single new nuclear power plant. Jack was correct in assessing that the era of growth in new nuclear power plants in the US was over for a long, long time.

So what do you do when the economic viability of your business or industry or geographic region (like Haliburton) is no longer viable? The people of Haliburton fought back and looked for radically different ways to stay viable—from agriculture to lumber to tourism. Sometimes the changes need to be this radical for business firms as well.

The principle here is “adapt or die.” Success requires more than just strong management and a dedicated work force. Even the best companies can see their viability vaporize due to changes in the environment. Consumers change; products become obsolete; technology reinvents consumer solutions. To survive over the long haul, a company must adapt to the change, like Haliburton did.

Better yet, a company should anticipate the change and get in front of it. This is one of the largest benefits to be gained from strategic planning. It allows a company to develop scenarios around what will cause the demise of its current business model. It also allows a company to see into the future about where new business opportunities may arise. By getting this advance knowledge early, a company can prepare for the times when radical change is called for. The first to successfully transition to the new business model tends to be the most successful. Strategic planning can help improve your chances in that transition.

There is a school of thought which says that businesses should stay close to their core and not stray very far from what they know. In general, this can be good advice. However, if the foundation of your core business model is changing too quickly, there may not be enough left to your core to remain viable. You could stick to the core of agriculture in Haliburton and never find a viable business model. Sometimes a radical change is required.

Take a look at Textron. Textron got its name from textiles, which was the core of its business in the first half of the 20th century. In 1923, it began in the basic yarn business. By the 1940s it had diversified into a number of synthetic fibers and then became the owner of a large number of textile mills. However, by the 1950s, Textron could see that there were risks to being so heavily invested in the US textile business. The textile business was moving overseas to where the labor was cheaper. The margins in the business were shrinking. Textiles no longer looked like the place to be in the US.

Therefore, Textron redefined their core. Instead of the core being seen as textiles, the core was defined as engineering and manufacturing. Textron looked for places where engineering and manufacturing skills could create a greater return. As a result, the portfolio began to change. Textile businesses were sold off and replaced with industries that provided a better future. By 1963, Textron was completely out of the textile business.

Today, some of the biggest divisions of Textron include Bell Helicopters, E-Z-Go golf carts, Cessna Aircraft, and military vehicles. This is a far cry from textiles, but Textron is still around and very successful, with revenues of around $11 billion and employs about 40,000 people. If Textron had stayed in textiles, I believe its fortunes would have been much worse.

Nokia is another company which has radically changed over the years. Started in 1865, Nokia began in the wood pulp industry. In the first half of the 20th century, it got into basic manufacturing of commodities like rubber products (boots) and telephone cable.

In the latter half of the 20th century, they could see that commodity manufacturing had its limits for a company located in Finland. Therefore, Nokia redefined their core from basic manufacturing to being more of a high tech participant in the telecommunications industry (trying to build up from their established base in telephone cable). Eventually, this lead them to the cell phone industry. Nokia is now the world’s largest producer of cell phones, with a global share of about 39%. That’s a long way from wood pulp.

GE is also legendary for redefining itself over the years—shedding business that have less of a future and adding businesses with more of a future. This has kept GE the company on top in spite of the viability of the individual parts.

Now some would argue that when a company gets in trouble, it should shut down, sell off, or harvest its business down and give the proceeds back to the shareholders. The logic is that if there are new opportunities, the shareholders can take their money out of the “losers” and invest in those new industries themselves.

However, success requires more than just money. New opportunities in the hands of incompetent businesses may be no opportunity at all, regardless of how much money you give them. It can be very difficult to start up a new independent business from scratch to attack a new business opportunity. Now you have two risks—the risk in the new industry and the risk in the new company. Established successful firms can diversify/morph into the new opportunity with potentially less risk.

In addition, there are other stakeholders than just the shareholders. What about the communities and the employees? Giving them the opportunity to participate in the new business opportunity can eliminate costly disruptions to society.

Changes in the marketplace will inevitably make all business models obsolete. If you want your business to survive over the long haul, there will be times when significant change is required. Sometimes that change can appear to be a radical departure from the past. Yet, even in times of radical change, risk can be minimized if you can find a redefinition of your core which transcends your current business model.

For Textron, they redefined from an industry focus (textiles) to a competency focus (engineering and manufacturing). For Nokia, it was a broadening of the definition from telephone cables to telecommunications. For GE, it is a focus on sound business principles rather than individual businesses.

As long as you can find that thread to get from the past to the future, there is potential for continued success long after your former business model becomes obsolete. Strategic planning is useful in all of these phases: realizing when it is time to change, looking for the common thread, and transitioning to the proper new model.

Haliburton may soon need to look for a fourth economic model. They used to get more tourism from the nearby parts of the US, like Michigan, New York and Ohio, because it was within easy driving distance. However, now Americans in increasing numbers are flying to more exotic places with more things to do, so tourism in the area is down. Haliburton is looking for a way to revitalize the tourism or perhaps find their fourth economic era. One of the things they are looking at is making the area a haven for the artist community, taking advantage of the scenic inspiration and, in particular, the plentiful stock of rock which can be used for sculpture.

Monday, November 12, 2007

Strategic Planning Analogy #128: Talk Your Ear Off

Well, I’m back from my vacation. I spent a week in rural northern Ontario. The locals told me that my wife and I were up there during the off-season—after the warm weather activities and before the snow-related activities.

There were many ways to tell it was the off season. First, the resort was nearly empty. Second, about half of the tourist attractions were closed. Third, about five times when we went to a restaurant to eat, we were the only patrons in the restaurant. At first that seemed kind of creepy, but we got used to it.

Initially, we thought this would make it hard to fill up the days. However, we soon found out that it didn’t take much to fill the day. Everywhere we went we would run into locals who would want to talk to us as long as we were willing to listen. Sometimes, they could talk on for hours at a time. If we hadn’t walked away a couple of times, we’d probably still be talking to some of these people.

The funny thing was that these locals would tell us they liked living up in the rural areas because they didn’t like being around a lot of people. They said they liked the solitude. Yet, whenever someone showed up (local or otherwise), they would end up talking up a storm to each other. One guy told us he took walks on trails that weren’t near his home, because if he went on a trail close by he would end up seeing someone he knew on the trail and spend his time talking rather than exercising.

Then I thought about all the people I know who love the hustle and bustle of the big cities with all the people. These urban folks don’t mind all the people, yet they rarely strike up a conversation with people they meet on the street. So the people who craved solitude seemed more willing to break that solitude with conversation than the ones who like to be surrounded by people.

It seems a bit ironic that even though these people preferred the solitude, the fewer the people in the area, the more likely they wanted to break the solitude by talking to anyone—even strangers. Yet those more comfortable being around lots of people seemed less likely to talk to them.

Apparently, we tend to place more value on the things that are the most rare. If people are rare, we value their company more. If people are plentiful, we tend to value each individual less.

Business seems to work in the same way. Value is not necessarily based on the intrinsic worth of the item. Instead, it is based on the relationship of the worth to its supply. Even if it is not worth all that much under normal circumstances, if the item becomes extremely rare, then its value suddenly increases. Therefore, when developing strategies, one must not evaluate items in isolation, but rather in relation to their supply in the marketplace.

The principle here is “supply and demand.” The more supply relative to demand, the less the value. The less the supply relative to demand, the higher the value. At first, this would seem to be a simple principle. Nothing new here…we’ve heard this before. However, how many times have we failed to include supply and demand in our strategic toolkit of actions?

On October 31, 2007 the Wall Street Journal wrote an article about GM. They explained a new strategy taking place at GM. In the past, whenever GM had a hot-selling car, they would ramp up production. Their logic was that they should manufacture more of the items that were selling well.

Unfortunately, it is difficult to fine-tune production rates to demand in a timely manner. Inevitably what would happen was that GM’s rate of production would eventually outstrip demand, causing a glut in supply for the car in demand. To sell down the glut, they would have to discount the price heavily. This would take all the profit out of the hot-selling vehicle. This is what happened to the GM HHR vehicle.

By contrast, the latest hot vehicle at GM is the Buick Enclave. However this time GM did not ramp up the production much on the Enclave. Instead they intentionally kept the supply of the vehicle small.

This had two positive impacts. First, by not flooding the market with Enclaves, people did not tire of the vehicle through over exposure. The difficulty in getting the Enclave helped to make the car even hotter to own. There is more status in owning that which is difficult to attain. Second, by not building so many, GM was able to sell the Enclave at full sticker price, which increased the profitability on each unit sold.

The strategy used by GM regarding supply had a direct impact on profitability—to hurt the profits of the HHR and help the profits of the Enclave. Even though they didn’t change the vehicles themselves, GM changed supply—and that changed the profits.

Just as the limited supply made people more important in rural Ontario to locals (even though the locals claimed to not liking to be around lots of people), the Enclave’s value was heightened based on limited supply.

This principle is also very important in the fashion industry. When production is limited so that only the elite few can get it, the fashion stays hot. Once supply is opened up and “everyone” can have one, the fashion allure is lost and the entire fashion brand suffers. It is a fine line that many of the high end fashion brands are now walking in trying to increase the breadth of demand for their brands. If they go too far, the brand will lose its cache and will be abandoned by its core customer.

Remember, the goal of most strategies is not to maximize sales, but to maximize profits over the long haul. Many times, the relentless pursuit of additional incremental sales can actually reduce total profitability, because of some combination of the following:

1) Too much margin needs to be given up to create the additional sales. This margin loss may not only impact the incremental items sold, but reduce profits on other units which could have sold at a higher price if fewer were made.

2) The brand image/status is destroyed through over exposure and future brand efforts fail as a result.

3) To get the additional sales, additional investments needed for production capacity or marketing create a negative return in investment on these sales.

4) Due to the efforts of getting new customers, the more loyal and more profitable customer base could receive less attention, causing them to leave and take their business where they feel more important.

Fewer sales can actually be more profitable, because it keeps supply and demand in a more profitable balance.

Studies have shown that, regardless of industry, most of a company’s profits come from about 15-25% of the customers and that about a half of one’s customers are currently unprofitable to serve. Perhaps if one quits trying to get all of those extra customers and spends more time trying to satisfy the 15-25% best customers they already own, one may be better off.

Therefore, when designing your strategy, don’t let the lure of sales cause you to make strategic decisions which destroy profitability. Sales are nice, but profits are better.

Value is often influenced greatly by the laws of supply and demand. Supply and demand is something your company can have some influence over, if incorporated into the strategy. Therefore, controlling supply and demand should be a part of the strategic goals.

Just because the people in rural Ontario wanted to talk more did not mean that they were more gifted in the art of conversation. The conversations weren’t special or the words more exciting. The length had more to do with the desire to talk (based on the rarity of people to talk to) rather than the value of the words spoken. The same was true with the Buick Enclave. GM didn’t raise the value by improving the vehicle. It was not made more special. It was the same vehicle it was before. They just increase the desire through controlling supply.

Saturday, November 3, 2007

Taking a Vacation

Just a note to let you know...

I'm taking a vacation this next week and I doubt that I'll be posting any blogs during that time. I'll be resting up so that I can go at it again when I come back.