Tuesday, December 18, 2007

Strategic Planning Analogy #140: Two Simple Steps

Awhile back, rap singer 50 Cent (aka Curtis Jackson) was on the David Letterman show. Curtis Jackson said he had come up with the secret for happiness. Naturally, David Letterman wanted to know what that was.

Curtis said there were two steps to reaching happiness. First, you have to figure out how much money it would take to make yourself happy. Second, after figuring out how much money you need, go find a job that pays that much money. It’s as simple as that.

As odd as that advice seemed, 50 Cent was dead serious. He said he knew he needed a lot of money to be happy, so he became a rap star.

This reminds me of an old Steve Martin comedy routine. Steve Martin claimed to have discovered a simple two step process for becoming a multi-millionaire. Step #1: Get a million dollars. Step #2: Invest it wisely. It’s a simple as that.

The problem with these simple two-step processes is that they ignore all of the complexities involved in achieving each step. It’s one thing to just say “get a million dollars” or “get a high paying job.” It is quite another thing to accomplish the task.

For example, let’s say that you want to follow 50 Cent’s advice and get a high paying job. Well, there are a lot of actors making oodles of money, so maybe I should become an actor. The problem is that while there are dozens of actors making a ton of money, there are thousands upon thousands of actors who cannot earn a full-time living at acting. They are all supplementing their income by being waiters or taxi drivers or doing some other low end service job.

The advice doesn’t help me overcome the odds and become one of the few really successful actors. As a result, the odds are that I am more likely to fail as an actor than succeed. These two step plans may be aspirational, but they provide no sense of direction, nor do they give any details on what path to take to overcome the odds. So the simple two step plan as stated is fairly worthless.

I have seen a similar level of worthlessness in company strategic plans. A number of companies claim to have a strategy, but instead just have empty aspirations. Although it may be masked inside a lot of fancy jargon, a lot of business strategies boil down to little more than one of these aspirations:

1) Make a lot of earnings

2) Create high returns on investment

3) Increase the stock price

This isn’t far removed from 50 Cent’s “find a job that makes a lot of money” or Steve Martin’s “go get a million dollars.” There’s no direction or path to increase the odds of success…in other words, fairly worthless as a strategy.

Lately, another phrase like this is becoming popular in business strategy jargon: “Succeed through Innovation.” These companies claim that innovation in and of itself is a strategy. This is no more insightful than saying “succeed by getting a high paying job?” Just as most actors fail to make a lot of money, the vast majority of innovations fail as well. If the strategy is little more than just “go out there and innovate,” the odds are that you will fail miserably.

The principle here is that innovation by itself is not a strategy. It can be an important tool within a strategy, but it is only one of many steps within the strategic process.

In the recently published Winter 2007 edition of “Strategy+business,” the folks from Booz Allen Hamilton published the results of their annual study of the top 1000 spenders of R&D. As in the past, they found that most companies do not get much of a return on their R&D efforts. As a result, it appears that just saying “go out there and innovate via R&D” is not a natural path to success.

Some companies, however, do create great success via innovation. Booz Allen Hamilton found that those who were successful in innovation tended to have similar characteristics. First, these companies worked closely with their customers to ensure that the innovations were something their customers wanted (which they referred to as “customer focus”). Second, these companies focused their innovation efforts specifically into areas which supported a broader strategic plan (which they referred to as “strategic alignment”).

In other words, for successful companies, innovation was not the strategy. Instead, it was just a tool to help bring the overall strategy into closer alignment with the consumer. To put another way, success requires:

1) Winning the hearts of your customers buy providing goods and services which they will love; and

2) Winning the minds of your customers by providing goods and services which they will believe you are the best at offering in the marketplace. Even if you can create the innovation, if the customer does not make you the top of mind best brand for that innovation, you will not get sufficient credit for your efforts. You are most likely to get the credit if the customer can see the innovation as a natural extension of an ongoing strategic position which is already burrowed deeply into their mind.

Hence, if innovation helps in winning the hearts and minds of your customer, than it is probably successful innovation. If innovation is not doing this, than it will probably fail. If you can further win the hearts and minds without innovation, then perhaps innovation does not need to be a part of your strategy at this point.

Let’s apply this principle to an example—energy drinks. Energy drinks are one of the fastest growing and most profitable segments of the beverage industry. It is the single greatest innovation in the beverage industry since bottled water. However, even though the product is a great innovation, not every firm that has entered this space has been successful.

The successful firms were the ones that either found a way to use energy drinks to get closer to their customers or found a way to use their current strategic position to get leverage in the marketplace.

In 2006, about 91.5% of the energy drink market was held by five firms: Red Bull (43%), Hansen (15% via Monster brand), Rockstar (11%), Pepsi (13% via AMP, No Fear and other brands), and Coke (9% with Full Throttle and Tab brands). These five companies fall into one of two categories:

1) Energy Drink Specialists who can focus on owning the hearts and minds of the customer because this is all they do (Red Bull and Rockstar);

2) Beverage Distribution Specialists who can easily integrate energy drinks into their current strategy in order to make their current strategy more powerful (Coke, Pepsi, and Hansen).

Now, let’s look at a firm who appears destined to fail in this category—Hooters Energy Drink. It does not appear on the surface that there is a close enough connection between the Hooters core customer and the energy drink core customer. Also, if you were a bar or nightclub and had a choice of any brand of energy drink to sell, why would you sell a brand that advertises an alternative bar location? So Hooters was not getting close to the bar or nightclub operator customer, either.

Second, this really does not take advantage of any core Hooter strategic strengths. They are not beverage manufacturers or beverage distributors. Energy drinks will end up as a fringe distraction to the Hooters core strategy rather than an enhancement. When the average person thinks about Hooters, the strategic vision would not automatically lead one to naturally think that Hooters should be a leader in this category. Hence, it should not surprise anyone that the readers of Brandweek magazine voted Hooters Energy Drink as the most questionable food line extension of 2007.

By contrast, one of the line extensions thought highly of by Brandweek readers was PetSmart’s diversification into PetsHotel, a place to leave your pet when you have to travel out of town. This is a winner because first it is customer focused. PetSmart knows its customers and it knows how important their pets are to them. In fact, on December 17, 2007, the Wall Street Journal talked about the growing importance in the pet’s place in the owner’s life by pointing out the growing trend among pet lovers to worry about their pets when doing estate planning. Another part of this growing concern for pets occurs when owners are away from home and need someone to care for the pets overnight. PetsHotel fills this growing need.

Second, this trend fits in well with the ongoing strategy of PetSmart. PetSmart is known for caring about pets. PetSmart already has an affinity with pet lovers. Hence, it is a natural fit in customer’s mind to give credit to PetSmart in the pet hotel space. They trust PetSmart for the food their pets eat, so why not trust them to look after the pet overnight? So PetSmart is well positioned to win with this innovation because they know it is something the customer will love (win the heart) and they know it is something the customer will give them credit for (win the mind).

Innovation is not a strategy. Innovation is just a step in a larger strategy process which requires consumer focus and strategic alignment. Without intimate knowledge of your customer and a sophisticated strategic position to leverage, innovation will most likely fail.

So maybe there is a simple two step process after all—consumer focus and strategic alignment.

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