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.

No comments:

Post a Comment