Thursday, September 25, 2008

Analogy #211: Killing With Good Intentions

When I was a very little boy, I got sick. The doctor prescribed medicine to help me get better.

After taking the medicine, I continued to be sick, so my father told the doctor the medicine wasn’t working. The doctor responded by increasing the dosage. After taking the increased dosage, not only did I not get better, I got worse.

So we went through a few more rounds of upping the dosage until I was very, very ill, coughing up lots of blood and all. There was some concern about whether or not I would survive. Then my dad decided that perhaps it was the medicine which made me ill, so he stopped giving it to me. Not too long thereafter, I became healthy again.

Nowadays, when a doctor or nurse asks me if I have any allergies they should know of, I am quick to tell them not to give me any of that medicine I had as a child.

One of the core foundations to success in medicine is an accurate diagnosis of the problem. If you diagnose the problem incorrectly, you will take the wrong course of action. In my case, the doctor had incorrectly diagnosed my symptoms as being related to the disease rather than a reaction to the medicine. His prescribed solution—increasing the dosage of the medicine—almost killed me.

The symptoms of sickness in a business are usually easy to see—financial losses, large decreases in sales, loss of market share, inability to pay the interest on the debt, and so on. However, just because one can see the symptoms of sickness in the business does not automatically mean that you know how to cure it. You may guess wrong, like my doctor did, and actually do more damage than good.

Any fool could have seen that I was very sick…you didn’t need a medical degree for that. But the one with the medical degree did not know how to cure me, which put my long-term survival at risk.

Victory comes not from identifying the symptoms, but rather from knowing how to remedy the underlying cause of the symptoms. Identify the right cause and then you can prescribe the proper strategy.

The principle here is to focus on curing the underlying cause, rather than the symptoms. For example, a symptom of a problem may be poor sales. If you only focus on eliminating the symptom (poor sales), you may conclude this is a marketing problem and pump up the advertising. Unfortunately, this may be exactly the wrong thing to do.

In a prior blog, we looked at what happened when Wendy’s had the “Where’s the Beef” advertising campaign. It was one of the most successful advertising campaigns ever, if measured by recognition. And in the near-term, it brought a lot of traffic back to Wendy’s. But for Wendy’s, that prescription of using those ads almost killed the patient.

You see, the real disease was that in-store operational discipline had deteriorated to the point that the in-store dining experience was awful. All the advertising succeeded in doing was get more people in to have a bad experience sooner, so that the image got worse more quickly. Those ads were as helpful in fixing the problem as that medicine was for me as a child. It was making things worse.

Eventually Wendy’s figured out what the real disease was and improved the in-store dining experience. It was only after fixing the underlying problem that the company was able to improve. Therefore, when designing strategies, build them around underlying issues instead of just surface symptoms.

In general, there are only three main underlying issues to focus on. If the surface symptoms look sickly, they can usually be cured by repairing one of these three issues.

Issue #1: A Reason For Being
Winning strategies start with a winning position—a reason why someone should prefer you over all other alternatives. You need to own a uniquely desirable solution in the marketplace. If you cannot quickly and easily describe why you are the obvious choice in particular area, then don’t be surprised if customers fail to choose you.

I’ve seen many companies try to avoid this positioning issue. Usually, their argument goes something like this: “Sure, I won’t have the leading market share, but if I can just get about a 5 to 10% share, I should be able to do okay. And to get a 5% share, all I need to do is be a credible alternative.”

The problem is that usually there are a dozen or so firms looking to get that 5 to 10% share, and once the market leaders are done getting their 50 to 60% share, there aren’t enough 5 to 10% wedges in the market share pie to satisfy all of those dozens of firms. Just being credible is not enough. You need to have a winning position of leadership with a niche group in order to get even a small share.

K Mart has a lot of bad symptoms and one can use a lot of tactics to try to eliminate those symptoms. However, K Mart’s real problem is that they no longer have a great position—a reason for being. Until that root problem is fixed, the rest is wasted effort. That’s why just putting some Sears brands into K Mart or putting a talking light bulb on TV won’t get the job done. The bad symptoms will remain at K Mart until a strategy is put in place to repair the POSITION.

On the right of this blog, there is a listing of blog topics I have covered. If you click on “Positioning,” you can learn about ways to cure this problem.

Issue #2: Not Delivering on the Promise
A great position is only great if consumers are satisfied that you are superior in delivering on the promises inherent in that position. Home Depot’s early success was based on an encirclement position: Best Assortment, Best Prices, and a High Level of Personal Service.

Over time, Lowe’s tended to neutralize the assortment and price superiority Home Depot once held. In addition, Home Depot lowered its standard for service in order to save money. As a result, Home Depot was no longer winning on the promises behind its position. Therefore, all sorts of bad symptoms started to appear.

It took awhile (and a change in CEO’s), but eventually Home Depot figured out that to fix the symptoms, they had to return to delivering on the promises behind the position. Superior service is once again a priority. The symptoms are starting to get better.

Make sure your position is more than just hollow words. Have your strategy look for ways to increase your ability to “own” your position by pushing the envelope. Increase the distance between your level of delivery and the rest of the market. In addition, before tweaking with your business model, think about the long-term implications it may have on your ability to hold your position. Skimping a little bit on service may have helped a tiny bit in the near term, but created a long-term sickness for Home Depot.

Issue #3: Inefficiency/Complacency
I’ve seen companies who got the first two issues right, but still had some bad symptoms creep in. What was wrong? They got lazy, sloppy, greedy and fat. The headquarters became lavish and bloated. Bureaucratic gridlock made it impossible to get anything done. Inefficiencies and wastefulness sucked up all of the cash.

The world is too competitive to allow for gross inefficiency. A leaner firm can come in and use its superior efficiency to fund a successful attack on your position.

We live in a world of constant change. Lean and nimble companies who have a war chest of money at their disposal are best able to adapt to the change and stay ahead of the game. There is never a good time to rest and stop fighting, because the battle never stops.

If your company is showing signs of problems, don’t focus on the symptoms. Instead, build your strategy around the root causes of the problem. Typically, those root causes revolve around three issues: poor positioning, poor delivery on the position, or inefficiency/complacency. Get those root issues right, and the bad performance symptoms will tend to go away.

When I make an appointment on the phone to see a doctor, the receptionist will usually ask “what seems to be the problem?” Apparently, they want me to make a self-diagnosis before seeing the doctor. I’m not sure I’m always the most qualified one to do that. That’s why I’m trying to get an appointment with the doctor.

Similarly, if one of your business divisions is having problems, don’t just rely on their own abilities at self-diagnosis. Take the time to get an objective and accurate diagnosis. Remember, if they are so smart, then how come their division is so sick?

Monday, September 22, 2008

Analogy #210: Inside the Superhighway

There’s a beltway which surrounds the Washington, DC area. Inside the beltway, pretty much everything centers on the bizarre world of national politics. Outside the beltway is the rest of the country. The mindset outside the beltway is very different from inside the beltway.

There is an old saying about politics in the US. If a politician spends too much time inside the beltway, he or she will totally lose touch with the reality of what is happening outside the beltway. They are blinded by the artificial atmosphere of Washington and mistakenly believe it to be “normal.”

Ironically, this means that the longer a politician serves his/her constituents, the less qualified they are to do so, because they become increasingly unable to relate to them.

Washington DC is not the only place where a person can lose touch with the real world. The CEO’s office can be very similar. I remember talking to a CEO in his office one time, trying to explain to him the reality of what it was really happening in the company. He turned to me and said, “You know, I’m so isolated here. It’s hard for me to know what is the truth and what are lies.”

Other places in business can also feel like “inside the beltway.” Unfortunately, that can include the people who are working on your corporate strategy. Strategists often spend a lot of time trying to look into the future. As a result, they tend to hang out with people on the fringe—supposedly the leading edge of what is to come.

Although fringe people may give a glimpse into a possible version of the future, it is important to remember that they do not represent anything anywhere near normal. If you spend too much time with them, you will start to think this is the new normal. This will make you as irrelevant to today’s marketplace as lifelong politicians who never get outside the beltway.

The principle here is that the internet superhighway can create as much of a delusion barrier as the Washington, DC beltway. For people who spend too much time on the internet superhighway—sampling the leading edge of technology—there can grow a false notion that “everyone else” is also out on the edge of technology. This is simply not true.

I’ve recently read about a number of surveys and commentaries regarding technology. Here are a sampling of the findings:

1) A huge percentage of the population wishes their cell phones had a lot fewer features. They just want to make phone calls.

2) In spite of all the hype, very few people actually do much multi-tasking—using multiple media at the same time.

3) Most people never use all of the whiz-bang added features of their technology/software. All it does is add unnecessary complexity/confusion, slow down processing time, and increase costs.

4) There are still millions of people who do not own an iPod.

The point is that if you believe all the technology hype, you will have a distorted view of reality. The world is not as far down that technology superhighway as the leading edge experts would have us believe. Business models and strategies built upon this distortion will certainly disappoint.

Yes, strategists need to have one eye on the future to see what is “possible.” However, they also need one eye on today to see what is “practical.”

Don’t assume that just because something is technologically possible that it is a viable business model. There are lots of people playing with technology that may never become monetized. Just because something is cool does not mean that people will pay anything for it.

Here are a couple of simple rules to live by to help from falling into this trap.

1) Rather than focusing on the technology and all the cool features, focus on the benefits. People want their lives to be easier and more fulfilling. If something does that, there will be demand, no matter how much or how little technology is in it.

The microwave oven is hugely popular because it is incredibly easy to use and provides the great benefit of shortening meal preparation—something a great many time-starved people want. It has nothing to do with the technology itself.

2) Spend some time with the masses. Experience “normal” lifestyles. Don’t assume your lifestyle is normal. Just spending a little time with your own family won’t cut it. I would assume that most of the people reading this blog are wealthier, more highly educated, better read, and more sophisticated than the average person. To experience “normal” you may need to get outside your comfort zone and hang out with people you would not normally interact with.

It is easy for business people to become isolated from the “real” world. This isolation can cause one to make decisions which are out of touch with reality. One of those areas has to do with technology.

Don’t let the “coolness” of the latest technology blind you into thinking that everyone is immediately ready to spend tons of money on it. As the technology busts of the past have shown, not all cool technology leads to a promising business model.

One time I was visiting the offices of a leading dotcom commerce site. There was one part of the offices where the employees seemed to have all of the latest technological toys. They had the most expensive computers, with gigantic plasma screens. Their internet connections were the fastest available.

I asked what the jobs were of the people who had all that cool stuff. I was told that these were the people who tested the web site. Their job was to see that the web site worked as desired.

I started thinking about that. Now, the average customer using the site is going to have a cheaper, slower computer. They are going to have a much smaller screen. And most will have a slower internet connection. In other words, the average consumer experience will be completely different from what the site testers were using. The abnormal experience in the headquarters will provide virtually no insight into how the site is working for the typical customer.

By contrast, I know someone who used to create radio ads. He would play back the ads on a tiny, tinny-sounding speaker. Why? Because at the time, most of the radio speakers used by the typical customer were tiny and tinny. He wanted to hear the ads on the same type of speakers as the audience was using.

Stay relevant to the customer.

Wednesday, September 17, 2008

Analogy #209: Draw A Bigger Circle

Once upon a time, there was a politician who wanted to clean up water pollution in the local rivers. He decided that he would have greater success if he started small. Therefore he took a map of a large river in his district and drew a circle over a portion of that river.

“There,” he said. “I will start by making all the river water within this circle pollution-free. Once that is done, I’ll move to another circle until the whole river is clean.”

The politician passed all sorts of laws making it impossible for anyone to do any sort of polluting within the boundaries of that circle. Proud of himself, he later went to check on the quality of the water within that circle. To his dismay, the politician discovered that the water was more polluted than before.

“How can this be?” the politician cried out. “I banned all polluting activity within that circle.”

Upon further investigation, he discovered that:

1) There were factories on the shore of the river just outside his circle that were pouring tons of pollutants in the river.

2) There were tributaries to this river that were bringing polluted water into the river. These tributaries were also outside the area in the drawn circle.

3) There were polluting activities upstream from the circle that flowed into the area inside the circle.

At this point, the politician realized that he could not solve the problems of the water inside his circle without also tackling issues occurring outside the circle.

“I guess I drew my circle too small,” sighed the politician.

The strategic planning process is a tool to help improve the performance of our business. This is similar to the politician’s goal of trying to improve the quality performance of that river.

The politician’s mistake was that he tried to fix the problem by only looking at the area inside the circle. He failed to realize that his little portion of the river is connected to a lot of other areas. These other areas had a significant impact on the quality of that river’s water. By ignoring the outside influences, he was unable to control the internal results.

The same is true in business planning. Our goal may be to improve our firm (or brand or division or product’s) performance. However, not all of the factors which influence that success fall within the direct control of the firm (or brand or product). Outside influences are important.

Therefore, as we develop our strategic planning, it is important that we do not draw our circle of planning too small. The process needs to be inclusive enough to cover not only our own internal team, but the major influencers as well.

The principle here is that interconnected solutions work best if all the interconnected pieces are a part of the planning process. So the question we must ask ourselves is this: How big is the circle of people involved in our planning process? Is our circle large enough?

In this blog, we will look at four groups you may want to consider adding to the list.

1) Employees
There are two reasons why it is important to get employee feedback into the planning process. First, employees are your eyes and ears out in the areas where your products/services are produced and sold. They see things that may never make it to the secluded offices at corporate headquarters. They know things you do not know. This knowledge and insight can be very valuable in creating a strategy most appropriate for the “real” world (which may look different from the “perceived” world in the minds of the leaders at the top). Take advantage of that resource.

Second, the employees are the ones who have to do a lot of the work to make the plan a reality. If they are not solidly behind the strategy, they may not be as effective at implementing it. By contrast, if they had a stake in creating a strategy, they are more emotionally attached and motivated to making it come to life.

2) Partners
Today’s business activities are far more interconnected. Larger pieces of the business are outsourced to various outside partners. In addition, financial partners have a desire to become more active and involved in how the business is run. More and more of your success is dependent upon these partners over which you do not have full control.

If you do not invite your partners to the planning table, they may not be able to fulfill their role in making your strategy a reality. For years, Microsoft and Intel worked closely to ensure optimal performance for their own individual business. Microsoft knew that if Intel did not supply sophisticated enough chips, there would not be the ability for computers to run the next generation Microsoft software. Similarly, Intel knew that if Microsoft did not invent more complex software, there would not be demand for their more sophisticated chips.

Since each company’s success was dependent upon the actions of the other firm, there were benefits to working this out together.

The new Boeing Dreamliner airplane is being built with cooperation of an extraordinarily large number of outside partners. Significant delays are occurring due to the difficulties of coordinating the activities of all of these outside partners. The better you can jointly plan these activities, the smoother the cooperation.

3) Suppliers
The same principle applies to suppliers. In this just-in-time world, it is difficult for a supplier to meet the demands of your plans if they are not aware of what the plan is. Even more important, if you let the suppliers in on the planning process up-front, they may have suggestions on how to do it better, based on their unique perspective and superior knowledge in their own field. This point may be even truer with partners.

The Japanese auto industry shows some of the advantages of working more closely with suppliers.

4) Customers
In today’s environment, customers are demanding a greater say in the operations of the businesses they patronize. Digital technology is making it easier to create interaction between customers and companies. For example, Dell has used web 2.0 consumer conversations to help them understand what the customer really wants. Dell’s latest product introductions are a direct result, offering some of the most wanted features.

There are many ways to include the customers in your planning process. The good news is that the more the consumers are involved in the brand, the greater the emotional attachment to the brand. This should improve customer loyalty. In addition, it’s no small benefit if the interactions create a strategy more in tune with the marketplace where the money is made.

This is not to imply that all of these people (employees, partners, suppliers and customers) need to be a part of the entire planning process. Yet, it amazes me how often these players are not a part of any of the planning process.

Who do you invite into your planning circle? What is the list of people invited to sit at the planning table? Is it big enough?

Individual company/brand/product success depends not only on the internal actions of your business, but also upon the actions of numerous parties on the outside. Your chances of success in having a successful strategy improve if these outsiders are invited to the planning table. First, they bring knowledge and insight from their unique perspective. This knowledge can improve the quality of the plan design. Second, by being a part of the plan, they should be better able to execute their portion of the plan.

Some problems are so large that it may be necessary to even work together with your competitors. For example, it may be beneficial to get the government to change its stance on issues related to your industry. Therefore, industry associations and lobbying groups may also be people to include in your planning circle.

Monday, September 15, 2008

Analogy #208: Phone Tag

Who invented the telephone? Well, that depends on your point of view. Conventional wisdom is that Alexander Graham Bell invented the telephone in 1876. He has the patent to prove it.

However, in the recent book The Telephone Gambit, author Seth Shulman makes a compelling case that Elisha Gray invented the telephone. The book claims that Alexander Bell had gone to the patent office and seen some of Gray’s superior work on the phone. He then supposedly copied the work and got the patent hours before Gray tried to do the same.

Then again, in June of 2002, the US government officially declared that Antonio Meucci was the inventor of the telephone. Meucci had a working telephone as early as 1848 and a perfected version by 1871, years ahead of both Bell and Gray. Because Meucci was destitute, he could not afford the $250 fee for a US patent, so in 1871 he filed a one-year renewable notice of a pending patent. Three years later, in 1874, Meucci could not afford the $10 fee to renew the notice, so it lapsed. Had Meucci paid the $10 for the renewals, Bell would have never been granted his patent.

And then there are others with varying degrees of legitimacy to their claims to have invented the telephone. These names include Johann Reis, Innocenzo Manzetti, Charles Bourseul, Amos Dolbear, Sylvanus Cushman, Daniel Drawbaugh, Edward Farrar and James McDonough. For some background on the controversy, you can look here, here, here, and here.

In the end, I guess it doesn’t matter so much who invented the telephone as much as who was able to harness that knowledge and become the driving force behind making the telephone the important invention that it was.

Coming up with a great invention is a lot like coming up with a great business strategy. One can become excited about dreaming up a great strategic positioning, but that claim isn’t worth much if you aren’t able to exploit it.

Gray and Meucci may have had greater claims to the invention of the telephone, but Bell was the one who got to exploit it. Meucci died in poverty...Bell became enormously wealthy.

Great strategic positions, like great inventions, are not always in abundance. It becomes a race to see who can get the opportunity to exploit the good ones first. Bell beat Gray in the race by a few hours. Those few hours made all the difference.

The principle here is that it is not enough to just come up with a great strategy. You also have to win the race to execute the strategy and get credit for it in the minds of the public. I call this part of the strategic process “pursuit.”

In the last blog (see “Eight Questions”) we looked at the eight questions to ask when trying to invent a great position. In this blog, we will look at the three steps one must take to pursue and win with this position.

To win and hold a position, one must defend it from those who would like to take that claim away from you. One way to stop them is to prevent them from any opportunities to establish a beachhead. In other words, if you can prevent them from having any openings to grab for staking a claim, then the only one who can claim the position is you.

To close these openings, one needs to quickly fill the market to capacity. This means getting your business into all places, all platforms and all potential as soon as feasible.

All Places: For example, if you start up your business in one country, as soon as you are ready try to go international. Otherwise, someone might come up with a similar strategy in another country and use that as a base to eventually fight you in your own country. Wal-Mart became what it is, because Kmart and the other discounters ignored the rural markets. By not filling rural markets to capacity, they left an opening for Wal-Mart back in the 1970s, which it used to build a power base to conquer the rest of the US. And now they are rapidly going international.

All Platforms: If you start your business in the physical world, eventually move it to the digital world (and vice versa). Any platform you do not conquer becomes available territory for someone else to conquer and use against you. Even in the digital world, there are various platforms like laptops, mobile, etc. AOL was the master of the slow speed dial-up world, but missed out on the high-speed platform. It lost its position and has not been able to catch up.

All Potential: Just being in a place or on a platform is not enough. You need to soak up as much of the market potential there as possible. Look at Starbucks. It didn’t just build a few coffee shops here and there. It saturated the markets, soaking up as much of the potential as possible, by building in every conceivable location. This allowed Starbucks to really grab ownership to the concept and not leave room for anyone else to profitably build another large chain. The capacity already belongs to Starbucks.

To summarize, if you want to own the capacity for a position be first, be fast and be full.

Strategic positions are built on tradeoffs. You excel at certain attributes by playing down others. For example, if you want to win at convenience, you may do things which keep you from being the low cost leader. That’s fine, as long as you can find enough customers who are willing to pay a little more for your convenience. The trick is that whatever you choose to emphasize in your position, you need to do it so well that it is worth people trading to you.

Whatever the capabilities are that create excellence in this area, you need to race to stay ahead of the crowd in getting these capabilities. New advances keep pushing the envelope, so what was excellent yesterday may be sub-standard today.

Therefore, you need to do two things:

a) Shore up any weaknesses you have in your capabilities to deliver on your promised position. This could include expertise, infrastructure, technology, human resources, or whatever.

b) Push the envelope by being innovative in the area most critical to your position. Stay one step ahead of the others in defining the new frontiers for your position.

Apple understands this concept. They want to excel at the attribute of having “cool technology” so they do whatever it takes to have greater capabilities to do so than anyone else. They are the best at cool product design. They built their own distribution channel in order to control the “cool” buying experience. They keep pushing the envelope on design and rapidly introduce upgrades and variations, so that no one else can leapfrog and become cooler. They even found a way to inject superior “coolness” into the advertising. Apple continually ensures that it has the capability to deliver on all fronts on this attribute.

3) CAPTURE (of Customers and their Cash)
It does little good to win on capacity and capability if you cannot translate it into cash. You need to connect it to consumption that people are willing to pay for.

Part of this has to do with bonding well to the customers most likely to enjoy your position. The more you can bond with these customers, the more likely they are to spend lots of money with you. If you look at a lot of the admired companies of today, like Apple, Starbucks and Google, you will see that they have amazingly loyal advocates for their brand. This strong brand loyalty makes them very receptive to your new offers and less likely to patronize others.

Today, one of the ways to increase this bonding is to include the customers more fully in the way you run your business, such as being included product design and marketing. Loyalty clubs are another tactic.

Another point to remember is that positions can be doorways to new product offerings. The more you have to offer, the more you can sell. Take, for example Kaplan. It started out as a tool to help people pass college entrance exams. However, because it gained such a strong position in the education space, Kaplan was able to grow into a multi-billion dollar education business, including even the selling college degrees.

By levering your customers and your strengths, you can take your position into profitable places you may not otherwise have been able to reach.

Once you have a chosen position, there are only three things you must do to optimize your potential with that position: soak up as much capacity as you can, build up the capabilities to deliver as well as you can, and capture as many customers and selling opportunities as you can. The strategic planning process then is the act of choosing how to prioritize your actions in these areas, so that at any given time you have a manageable and achievable work load.

The race was not over when Alexander Graham Bell got the patent for the telephone. He had to continue to pursue to create the business which allowed him to reap the benefits of the invention. The race is never over. The day you think the race is done is the day your prospects for future success are done.

Friday, September 12, 2008

Analogy #207: Eight Questions

When I was watching the Olympics, I saw a lot of relatively obscure sports. And of course, they only televise the more popular events. There were many more not shown on TV that were even more obscure. It made me ask the question, how great is it to win a gold medal in a sport that very few people care about and very few people compete in? I’m sure the person’s mother is impressed, but who else? Virtually no fame, no glory and no money.

It is one thing to be rated the best in an athletic endeavor which many hundreds of thousands of people participate. It is quite another thing to be rated the best when only a few dozen others are trying to do the same thing.

Since the Olympics, I’ve heard about a sport called Mountain Unicycling, or MUni, for short. This “sport” consists of the riding of a unicycle up and down steep, rocky hills and mountains. It reminded me of someone I knew in college who liked to ride his unicycle up and down the steps in a stairwell at the dorms. I’m sure it takes lots of practice and great athleticism to become great at MUni, but being the best at something very few care about doesn’t get you much, career-wise. Nice hobby, but keep your day job.

One of the most important elements in strategic planning is choosing your strategic position. Where do you want to stake your claim? Where do you want to win?

It is a lot like an athlete deciding which sport they want to excel in. Some athletes pick obscure sports to excel in. It may create inner joy at excelling in the sport, but it doesn’t provide much of a financially fulfilling career path.

The same is true in business. You can position your firm or brand to win at something which is so obscure that it never provides an adequate return on investment (the market is too small). Or you can win at something in business where the business model does not lead to profits. For example, Facebook may be a great social networking site, and I think there are a lot of people who have worked very hard at Facebook, but I doubt it will ever be a good return on investment. Facebook may have more in common with MUni—fun for the participants, but no pot of money for the investors.

Some entire industries are bad choices. NYU professor Aswath Damodaran has a web site with lots of statistics, including annual rankings of industries by their return on capital. These statistics show that there are many industries which consistently have terrible returns on capital, often less than the cost of capital, year after year (Property & Casualty Insurance, Home Construction, and Airlines come to mind). Winning in these industries is like winning an obscure sport. It may feel good to be the best, but there isn’t usually much of a financial reward.

To have a successful athletic career, you not only have to be very good at your sport, but you have to pick a sport that can support successful careers. The same is true for businesses. Winning in business has to be more than just being the best at what you do. It has to be doing well at something worth doing (from a financial point of view).

The principle here is that success is most predicated on choosing the right position. All other strategic issues pale in importance. Choose the right position and it is hard to mess up execution enough to not have a measure of financial success. Choose the wrong position and even exceptionally superior effort may not yield much of a benefit.

There is no universally right position for everyone or every business. Just as certain physical builds lead one to be better at certain sports (such as tallness and basketball), individual business characteristics will help dictate which position is right for your particular situation. To help find out whether a position is right for you, I suggest asking yourself the following eight questions.

1) Is the position Desirable?
At the end of the day, a successful position needs customers who desire someone holding that position. In short, do people want what you are trying to sell? Sure, people desire cars, but if you pick a position like Yugo (cars so cheap that they are unreliable and unsafe) you have chosen an undesirable position within the automobile industry. Make sure there is a market for what you want to stand for (sounds obvious, but this rule is broken quite frequently).

2) Is the position Sizeable?
To make a profit, you need enough sales to cover all your costs plus a little bit more. You may have found a position that several people find very desirable, but if there are not enough of them, you will fail. Going back to the sports analogy, the profits come from ticket sales and TV revenues. If not enough people desire your sport, you will not get enough ticket sales or TV revenues to make a profit. Therefore, make sure you have chosen a position that is desired by enough people (big enough size) to make the business model work.

3) Is the position Ownable?
Often times, positions which are highly desirable by large numbers of people are already taken. For example, being known for “selling everyday essentials for the lowest prices” is a great position. Unfortunately, Wal-Mart already owns the position. I doubt you would be able to take that position away from them. You will lose and they will win.

Position ownership takes place in the mind of the consumers. Once they conclude that a position is strongly owned by someone else, it is nearly impossible to get them to change their minds. It is a losing battle.

The better approach is to create a position (desirable, sizable) which is not already taken. Then, you have the potential to own that position. Don’t follow the leader and copy their position. Then you will just be inferior at what the leader does. Instead, find a desirable point of differentiation. A place you can call your own.

4) Is the position Preferable?
The most frequent question I ask when critiquing positions is this: Why should a customer prefer your position versus what the competition is offering? People may like your position, but if they like the competitor’s position more, you’ve lost. For at least some sizable segment of the population, your position needs to be their favorite position.

Decisions are not made in a vacuum. Your position is being compared by consumers to other options. People make trade-offs and chose the position that most closely matches their preferred trade-off. Choose your position in light of the alternatives.

5) Is the position Achievable?
Just because a position looks great on paper (desirable, sizable, ownable, preferrable) does not mean that you will be able to pull it off in reality. For example, I may want to have the position of selling an automobile which is not only the best quality sports car in the world, but the lowest priced automobile in the world. Since it is probably impossible to achieve such a position, it is not very useful.

It’s okay to aim high with your positioning goals, but don’t aim for the impossible.

6) Is the position Believable?
Even if you could make the best quality sports car and sell it as the lowest priced automobile, customers might have trouble believing your claims. Any car priced that low could not possibly have that much quality, they would say, so they would not buy it. This is similar to the problem Wal-Mart faces whenever they try to get a piece of the higher-end quality/fashion apparel business. People do not believe that Wal-Mart’s apparel will have a high fashion image, no matter what they do.

7) Is the position Understandable?
The key here is simplicity. If you cannot explain your position in just a few words, then the customer will give up on trying to understand it. I knew someone who worked on one of the final positioning attempts for the now-defunct Montgomery Ward department store. It took several paragraphs of gobbledy-gook to try to explain how it fit into the marketplace. No consumer would ever be able to figure out that position. It didn’t stand a chance. All successful positioning share the idea of simplicity.

8) Is the position Profitable?
In the end, this is capitalism. We want to get a financial return on investment. Pick a position where winning will bring in lots of cash. How much are people willing to pay to get what you are trying to offer? During the dotcom boom, a lot of positions seemed to neglect this question.

Achieving a winning position takes more than just working hard. One has to work hard on the right choice of position. That right position must be one which is desirable, sizable, ownable, preferable, achievable, believable, understandable, and profitable.

I knew someone in college who was finishing up getting her Ph.D. in Music History. She wrote a doctoral paper on a very obscure composer that almost no one has heard about, let alone cares about. This woman worked long and hard on getting that Ph.D. and enjoyed the subject matter. However, a few months before finishing her Ph. D., she started thinking about what came next.

At this point, she suddenly realized that her Ph.D. prepared her for absolutely nothing. She had no intention of teaching music history and could think of no other value in having the degree. She started to panic about what she was going to do with herself—how she would earn a living. All that time and effort to get that Ph.D. was starting to look to her like a total waste of time.

If she had years earlier asked herself questions like the ones posed in this blog, she would have realized that she had chosen the wrong career position. Then she could have taken all of that great effort and gotten to a far better career position.

Wednesday, September 10, 2008

Analogy #206: The Magic Tool

When I moved from Minnesota to Ohio, I seemed to have lost my toolbox and tools. Apparently, my old tools got all intermingled with my son’s tools in Minnesota and now I don’t have them any more. So I went to Sears and got a cool new toolbox (“softsided”) and have been slowly filling it up with tools as I buy them when needed.

This got me thinking…how valuable are tools when they are located five states away from where you live? Can a tool be of much use when the human element is so distant? Wouldn’t it be great if we had “magic tools” that could do all of the work by themselves without a need for a human? Then I could stay at home and just send my toolbox to get the work done.

Let’s say I needed to build a house in Florida. If I had magic tools, I could just send the toolbox to Florida. The tools would jump out of the toolbox and do all the work. The saw would cut the boards all by itself (no humans involved). The hammer would hammer nails without the need for a human to hold it. When they were all done, the tools would jump back into the toolbox and be sent back to me here in Ohio, where I spent the whole time reading a book on house architecture.

That would be great! Sign me up for some of those magic tools.

House builders are not the only ones who would like magic tools. Business leaders also seem to be always looking for “magic tools”—tools to help make running a business easier and/or more profitable. Every year, bookstores are filled with books describing the hot new business tool. These books sell very well.

All that money being spent on finding the latest magic business tool creates quite a feeding frenzy. Software developers also claim to have the latest magic tool for business. Just plug their new software into your IT system and your problems are solved! Management consultants never seem to be at a loss for having new magic tools, either. Just call them up. I’m sure that they would love to sell you the tool (at an outrageous price).

It all looks so tempting. Let the magic tools do their thing, while management just sits back and counts all the extra money they are making.

Unfortunately, a tool is just a tool. My hammer cannot hammer without me. I am the one doing the hammering—the hammer is just I tool I use in the process. Put an axe in the hands of a lumberjack and you will get a pile of firewood. Put an axe in the hands of an axe murderer and you will have gruesome deaths. Don’t blame the axe. It is just a tool.

The same axe can produce either firewood or death. The outcome depends on the one using the tool.

The same is true of business tools. Their effectiveness depends upon the one using it. If you expect the magic tool to do all the work on its own, don’t be surprised if the outcome is a disappointment.

Most of the modern business tools today rely heavily on fact-gathering. If you can just gather enough of the right kinds of facts, the “tool” will produce “metrics” that can be displayed on “scorecards” or “dashboards” to tell you exactly what to do. Taken to an extreme, you get someone like a boss I used to have. He claimed that everything he did was “fact-based” and he would not act until all the facts were in and they had been run through one of these fancy tools.

Unfortunately, the principle of this blog is that “fact-based management” is not really management at all. Facts are like tools. If all you do is let “facts” dictate your actions, then you are acting as if the tool is doing all the work by itself. There is virtually no human element involved—just do what the facts say.

Just as a hammer works best when in the hands of a skilled craftsman, facts are most useful when interpreted by a skilled strategist/businessperson. They need to be actively managed as part of a larger strategic effort.

Average tools in the hands of a skilled craftsman will create better houses than top-of-the-line tools in the hands of an idiot, because the quality of the craftsman is more important than the quality of the tool. Similarly, the quality of the human business leader is more important than the quality of the latest magic tool for business.

I was reminded of this principle when reading today’s Wall Street Journal (September 10, 2008). There were two seemingly unrelated articles in this issue that caught my eye.

The first article praised a new magic business tool being used by retailers. The tool collects data on the productivity of store salespeople. Then it uses that data to schedule the employees. The most productive employees get scheduled the most hours and the busiest hours. The less productive employees get fewer hours and hours when the store is less busy. In the example in the story, the tool discovered that the optimum level of time it should take a salesperson at the store to make a sale was 5 minutes. Therefore, when scheduling employees, the computer staffed the hours on the sales floor based on exactly 5 minutes per sale, with estimated sales broken down into 15 minute intervals.

At first, this sounds great. It should optimize productivity by having only enough people to serve the demand (no excess payroll), and by getting a higher percentage of the time on the floor be with your most productive sales people. Human error was taken out of the system because the computer did all the work.

What was the actual result? Well, due to the nature of the program, weaker employees were given weaker time slots. This made it even harder for them to hit the quotas, so they got even weaker scores (no fault of their own).

Second, if an employee had something else going on in their life which required some flexibility in scheduling, it was ignored, because there was no human element to work out a schedule with. This created ill will. In addition, when you schedule people in 15 minute increments, you create unrealistic schedules for people to live lives around, further demoralizing the employees.

From a customer’s point of view, this productivity measuring caused employees to fight over customers in order to get credit for the sale. In addition, the old strategy of spending time with customers to build up a strong rapport for long-term lifetime sales had to be discarded to try to make a sale right now in just five minutes. So now the customer experience was diminished.

The result? Terrible morale for the employees and a less satisfactory experience for the customer.

Does this mean the tool was bad? No. It just needed to have the human touch applied in order to use the tool more wisely. Rather than abdicating management solely to the computer, it needed to be seen as a helpful aid in the hands of a human manager.

The second article in the paper talked about how UAL got punished in the stock market because of a computer error. Apparently, an old 2002 article about UAL’s old bankruptcy court filing appeared in Google as a new news item. Computers which blindly scan for new news articles picked it up and gave the UAL bankruptcy prominence. Suddenly, everyone was selling off UAL stock thinking there was a new bankruptcy there. The lack of any human intervention here caused a real mess for UAL.

Put these two articles together and you can start to see the problems of relying solely on fact-based management. Namely:

1) Not all facts are really as factual as you think. Flaws get into the system…false stories about UAL…false readings on employee productivity due to how busy the store is when they are scheduled.

2) If you accept facts blindly without question, you will end up making bad decisions…like selling off the wrong stock or ruining the relationships with both your employees and your customers.

3) Near-term “facts” may cause decisions which create long-term disasters, because the long-term impacts are not yet at a point where your tool can manage them. For example, that store tool cannot measure lost productivity long term when you destroy morale, or lost future sales because customers are no longer being wooed for lifetime sales.

4) Truly monumental improvements to strategy (as well as true innovation) cannot be found in historical “facts.” Great leaps of innovation have to look well beyond a historical reservoir of data. Creativity has to look at future possibilities, not measured history.

5) By the time all the facts are in, the game is usually over. The innovators who invented the new opportunities have already grabbed the business. Business implies taking risks—acting before all the facts are in. By the time all the data is in to eliminate the risk, the rewards for taking the risk are gone.

6) By the way, given the dynamics of the marketplace, all the facts are never in. By the time you think you have all the facts, the market will have moved a bit, making them less relevant. If you wait for all the facts before acting, you will wait forever.

Management tools are nothing more than tools. The real value is in the quality of the person using the tool. Blindly following fact-based tools without human intervention is a dangerous path to take. “Facts” are not the end-all and be-all of management. They are just one element which needs to be synthesized with human intuition, compassion and insight. Let’s put the management back into fact-based management.

In the Disney movie Fantasia, Mickey Mouse had a magical wand which allowed him to get tools—like brooms—to do the work without the need for humans. At first, everything looked great, but in the long run, Mickey ended up with a disaster on his hands, because when brooms work without human intervention they create a real mess. Don’t fall into Mickey’s trap. Put direct human management into the mix.

Tuesday, September 9, 2008

Analogy #205: Dating Among Friends

If you want to mess up a perfectly good relationship among friends, start having some of them date each other. I’ve seen it happen many times. There will be a group of mutual friends that like to hang out together. Then, two in the group start having a serious dating relationship with each other. Suddenly, the dynamics in the group change.

Now, all of these same people can be a little less comfortable hanging around together. The two that started dating may prefer more private time away from the group…or maybe the others feel awkward being with the daters (the proverbial “third wheel”). And if someone else in the group is jealous because they wished they were having that dating relationship the other person, then it gets even messier.

Now if some in the group get married, it can change the dynamics between the married ones in the group and the unmarried ones. The gang may end up splitting into two groups—the married and the unmarried.

A similar situation could occur among guys who hang out together if one of the guys starts dating the younger sister of one of the others in the group. All of that free-flowing conversation about girls may no longer be as free flowing. Suddenly, that isn’t just a girl—it’s my baby sister—and “nobody is going to talk that way about my sister.” The friendships can become strained.

People are not the only ones who have relationships. Businesses (and their leaders) do as well. Businesses have relationships with their suppliers. They have relationships with their customers. They even have relationships with their peers in the same industry.

As long as everyone feels pretty much like equals, these relationships can be somewhat friendly and work smoothly. However, if some of these businesses start pairing up to form more serious relationships, it can ruin the old gang of friends.

For example, you may not be as friendly with a supplier if they start a serious relationship with one of your peers and end up merging with them. Now, buying from your supplier feels like you are lining the pockets of your competitor and that feels less comfortable.

And if a competitor gets a little too cozy with one of your customers, you may become as angry as if one of your friends was taking advantage of your little sister.

Therefore, if your strategy calls for creating some more serious relationships with others in the supply chain (like acquisitions, mergers, strategic alliances, etc.), be careful. Sure, it may seem all romantic and wonderful to hook up. However, it could upset a lot of your other relationships in a negative manner. The negative unintended consequences with the rest of the gang may outweigh and benefits of the pairing up.

The principle here is that a handful of stronger relationships in the supply chain may end up putting your firm in a weaker overall position with the rest of the marketplace. In the end, you may be worse off than before. In other words, by dating a couple of your friends, you may alienate the rest of your friends.

This may appear to run contrary to conventional wisdom. When it comes to strategy, it is commonplace to hear references to staying close to your core business (stick to what you know). And what could be closer to your core business (and knowledge base) than the neighboring pieces of the supply chain? Therefore, there is a temptation to want to form stronger associations (or acquisitions or startups) above you (suppliers) or below you (customers) in the supply chain.

For example, many retailers are moving upstream to get stronger control over their suppliers, creating exclusive brands or even buying out the supplier. Approximately half the sales at Kohl’s and JC Penney come from such relationships. Nervous suppliers (who are not part of the deal) are responding by opening up their own retail stores (becoming their own customer).

At first, one can dream up reasons why this could be a wise move. First, it is assumed that more ownership of the supply chain leads to more control and that more control leads to the ability to extract more profits. Second, it is assumed that there are some synergies and economies of scale in there somewhere which will lower your expenses.

Unfortunately, my experience and observations have shown me that reality usually works in the opposite direction. More often, the move to control more of the supply chain can serve to lower sales and increase costs. Allow me to explain why.

Buying a Supplier
First, let’s look at what happens if you acquire one of your main suppliers. Typically, prior to the acquisition this supplier had other customers besides you. Many of those other customers may be your direct competitors. When the supplier was independently held, all of these competitors would be okay with all buying from this same supplier. It was a happy group of friends.

However, once you purchase this supplier, the relationships change. These direct competitors suddenly have less desire to purchase from that supplier, because that money would now be going into the same company as one of their direct competitors (namely you). The fear would be that the profits from the supplier could be funneled into your core business and used to make life more difficult for them. So they start purchasing more from another supplier.

Your purchase of that supplier has made the supplier less desirable for no other reason than the fact you own it. You have tainted its independence with your connection to it. Sales for the supplier will most likely drop with these other customers and it is usually unlikely that you will throw enough extra business at them to make up the difference.

And even if you could throw more business to the supplier you purchased to make up for the supplier’s lost sales volume, consider this. There was a reason before why that supplier was not getting all of your business. They probably didn’t deserve it. Just because you now own them may not have made them any more deserving of that business.

And, of course, your negotiating stance has changed with that supplier now that you own them. Before, if you could negotiate tough terms with them, you got a disproportionately higher share of the value chain profits as they got disproportionately less. In other words, you could put the squeeze on the supplier and win at their expense.

However, if both sides of the negotiating table are owned by the same company, then you are only putting a squeeze on yourself. In fact, because you become more of a captive audience to your supplier, you will probably have less aggressive negotiations and end up paying more than you did before.

As a result, when you buy a supplier, there are forces at work to destroy value. There is pressure for the supplier’s sales to go down (do to defections from your competitors) and for your core business’ costs to go up (due to a weaker negotiating stance with the owned supplier).

Buying a Customer
A similar problem occurs if you make an acquisition downstream in the supply chain. The customers you did not acquire will resent the fact that you purchased one of their competitors, and weaken the sales of your core business as they abandon you.

If you own your customer, you may negatively change the focus of that company. Instead of letting them focus on their customer, you may try to get them to act in the best interest of your core business. For example, you may force them into purchasing too much inventory from you, or inventory they would not otherwise want. If you make them try to please your needs, rather than their own needs or their customer’s needs, you will make them less profitable.

And if you avoid this influence and let them run as before, then you have not created any synergies. The benefits of the purchase (for which you probably paid a premium) start to vaporize.

So again, when you buy a customer, there are forces at work to destroy value. You pay a premium price for the opportunity to destroy the company’s worth, for no other reason than the fact that you own it.

When you purchase firms directly above you (supplier) or below you (customer) in the supply chain, you have upset the old order of business for the entire supply chain. Unfortunately, these changes tend to work against you rather than for you. Synergies and economies of scale fail to occur to any large measure. Instead, the results tend to be alienation of customers and higher costs—a bad combination.

There’s an old saying that one shouldn’t date people at the company where they work. Not only may it make things awkward at work during the period of dating, but it can get really ugly at work afterwards when the couple breaks up. Once you determine that the types of acquisitions mentioned in this blog are often mistakes, you may want to sever the relationship and sell the business (i.e., break up). However, by then a lot of the relationship damage in the supply chain is already done, so it will still be ugly.

Wednesday, September 3, 2008

Analogy #204: Wrong-Way Sally

Sally needed to drive from Chicago to Los Angeles. Because this was an important trip, Sally wanted to drive to Los Angeles as efficiently and cost-effectively as possible. Therefore, she prepared well.

First, she did research to determine the most appropriate automobile for her journey, taking into account practicality and fuel efficiency. Then, Sally did research to determine where the best place to purchase this automobile was.

Once she had purchased the automobile, Sally had the car looked over by a mechanic and got a tune up. She knew this would make the car more efficient and less likely to break down on the journey.

Then Sally got in the car in Chicago and started heading east. Unfortunately, her destination—Los Angeles—is west of Chicago, not east. As a result, this efficient, well-purchased, well-tuned, practical automobile never reached its destination. It just wandered aimlessly along the east coast of the US.

Sally spent a lot of time trying to optimize the execution of her trip. She wanted to have the most practical, efficient and cost effective journey possible. The only problem was that she pointed her car in the wrong direction. By going in the wrong direction, Sally negated all of the preparation work that went into that process.

An efficiently run car that is hopelessly going in the wrong direction ceases to be efficient. The trip becomes a waste of time and money. It would have been far more efficient for Sally to have overpaid for a gas-guzzling, run down old car, provided it was able to get her to Los Angeles.

This same principle applies to businesses. A business can focus on all sorts of executional efficiencies, but then apply them to a strategy which takes them nowhere. Getting nowhere more efficiently is not much to brag about.

An efficiently-run bad strategy is worthless. Unless you first have a viable and desirable strategy, a focus on execution is a waste of time.

The principle here is that strategy is more important than execution. This principle was once again brought to light in the September 2008 issue of the Harvard Business Review. In the article “Seven Ways to Fail Big,” authors Paul Carroll and Chunka Mui discussed their research into business failures. They examined 750 business blunders to determine what caused them. What they concluded was that most of these failures were due to wrong strategy, not poor execution.

In other words, most business failures are like the failure of Sally—not pointing the company in the right direction. Even flawless execution would not have saved the majority of these 750 failures, because they were executing the wrong thing.

Strategy is about making choices. If you make the wrong choice, then the execution becomes meaningless. By contrast, if you make the right choices, you may be able to win even if your execution has a number of flaws in it.

You’ve probably heard that old quote from General Patton, “A good plan, violently executed now, is better than a perfect plan next week.” This may make one believe that execution is more important than strategy. However, even Patton understood that first and foremost, the strategy must be good.

Unfortunately, Carroll and Mui found that, quite often, companies have strategies which are bad. Now the executives involved in these 750 failures were not stupid. They did not intentionally choose a bad course. They were deceived into believing that a bad strategy was good.

So what causes such deception? In my experience, it is a combination of assumptions and egos. Our egos tend to make us place an unrealistic positive spin on the assumptions. And when your assumptions are wrong, your conclusions are wrong. Wrong conclusions lead to wrong strategies.

Key areas where our assumptions can become distorted relate to:

1. Potential Benefits
Strategies to acquire or diversify or whatever tend to have assumptions about the benefits they will bring to the totality of the business. These benefits may go under various names, like “synergies” or “economies of scale” or “elimination of redundancies” or “cross-selling opportunities” or “a leveraging of competencies” or “a platform for future growth” and so on. If you assume the wrong levels of benefits, you will make the wrong strategic choice. And trust me, the actual benefits rarely come close to the assumed benefits.

2. Potential Costs
Costs include time, money and people. Not only may integration take more time, money and people than assumed, but integration may not even be possible given issues such as corporate cultures, government regulations, and incompatible business models.

3. Evolution of Marketplace
Strategies take place over a span of time. Markets evolve over time. How a market looks at the time when strategies are being developed is not how a market will look when the strategy is up and running. If you make the wrong assumptions about how a market will evolve, then you will likely have designed a strategy inappropriate for what environment really exists.

Some of the key assumptions which evolve over time include assumptions about future pricing/cost structure, how many companies will copy your strategy, which technologies/platforms will win, how fast the current paradigm will last before becoming obsolete, unintended long-term consequences to near-term actions, and so on.

Finally, it should be noted that the best strategy for the decision-maker may not be the same as the best strategy for the company. For example, a resume that says “I kept a company from making a bunch of stupid mistakes by doing nothing” doesn’t sound as impressive as “I was put in charge of implementing a major initiative (even if it failed).” This creates a bias to act, even if the action is wrong for the company.

And if the action fails, it is in the best interest of the decision-maker to blame someone else. Therefore, there is a bias to blame the implementers (bad execution) rather than blame the decision-maker (I chose the wrong strategy). As a result, we don’t learn from our mistakes and continue to make poor decisions.

The solution?

1. Spend more time vetting your assumptions. If Sally had spent less time worrying about the car (execution) and more time worrying about where she was driving (strategic assumptions), she would have been better off. In order to separate ego from assumptions, get people without a vested interest in the project to evaluate the assumptions.

2. Do scenario planning to discover what happens to the viability of your strategy if your assumptions are off a bit.

3. Determine which assumptions are most critical to success and then monitor them well during implementation. That way you can get an early warning of potential problems and perhaps change course before it is too late.

Although execution is important, strategy is more important. Choosing the right strategy requires laying aside your ego and scrutinizing your assumptions. There’s usually quite a gap between “best case” scenario and “most likely” scenario. If the strategy only “works” if the best case scenario occurs, then you probably have a bad strategy.

Final Thoughts
On a job interview, I was asked what I thought would be the best approach to creating strategy. In keeping with the thrust of this blog, I said that the ideal strategy is one where the value proposition is so unique and so compelling that no amount of incompetency would be strong enough to keep you from succeeding. The interviewer then told me that he put a very high priority on getting the execution right. Not surprisingly, I did not get the job.