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for a Change”), we talked about how it can be a mistake to throw away a company just because its current business model is obsolete.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.

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