Wednesday, November 19, 2008

Analogy #223: Do You Miss Me?

Here are two examples of stories which happen all too often:

Back in 2003, some people in Nashville started to realize that they hadn’t seen their neighbor Deanie Kelly in a few weeks. Her mailbox was starting to overflow with mail. So on the next Saturday, Greg, one of the neighbors, approached the house and found that the door was unlocked. He went in and found Deanie lying in bed dead from a self-inflicted gunshot wound. Police later said she had been dead for about three weeks.

In November of 2008, Police became aware of a situation at 90-year-old Margaret Bernstorff’s home in Evanston, a suburb of Chicago. Margaret shared the house with three of her siblings: Anita, Frank, and Elaine. However, by November of 2008, none of the siblings were still alive. Anita had died a few months earlier in May. Frank had died in 2003, and Elaine had died in the late 1970s. Yet they were all still inside the house, in different rooms, some wrapped in blankets.

People said that Margaret was a bit of a pack rat, but I think this goes a bit too far. After police discovered the bodies, Margaret was put into a senior care facility.

Death can be a sad occasion. Death is even more tragic when nobody notices that you are gone. Deanie Kelly had been dead for three weeks before being discovered. If it hadn’t been for her mail piling up, she might have gone undiscovered for an even longer time. Anita, Frank and Elaine had been dead for many months (and in Frank’s and Elaine’s case many years) without anyone noticing.

What does it say about someone’s life if nobody misses you when you are gone? It makes me sad to think of how little these people were connected to the world around them.

Like people, businesses come and go all the time. Many are missed when they disappear. Many more just go away quietly and almost nobody really notices that they are gone.

A good strategy should make your business so vitally important and necessary to your marketplace that people would instantly notice when you are gone and then morn the loss.

The principle here deals with indispensability. The idea is that the more critical your existence is to the marketplace, the more successful you will tend to be. Do your customers find you indispensible? Can you provide solutions in a unique way that would be instantly missed if you were gone?

One of the most important set of questions you can ask yourself in the strategy formulation process has to do with your level of indispensability. I typically start the conversation like this: “Why should someone prefer your product/service over all of the possible alternatives?” Or, if I want to make the question even more severe, say “Why should someone go out of their way to seek out what you have to offer?”

If you’ve done your strategy homework properly, these should be easy questions to answer. However, I am shocked by how often these questions are unanswerable by top executives. Sure, you might get some mumbling about how the company’s product performs a little better than the competition (and it might even be true). But how much better? Enough to get people to clamor for you over the competition?

If your offering did not exist, would your customer just switch brands and hardly notice the difference? It’s very difficult to create strong demand for your brand and get healthy profit margins if your offering is viewed as pretty much indistinguishable from the list of alternatives. One of the reasons why so few brands create strong loyalty is because there is nothing unique enough about them to cause one to become loyal.

A primary role of strategy is to create a position where you are uniquely best suited to serve the marketplace. Rather than being one of many similar options, you become the only sensible alternative for some segment of the population. In this way, if you were gone, there would be a gap in the marketplace no longer properly served.

Taking the indispensability approach can change the entire nature of your strategic conversation. Rather than talking about ways to become better, you will look for ways to become different. And as I and Michael Porter like to point out, it is your differences which make you valuable to the marketplace. And the more valuable you are, the more profitability you can extract.

Now you may be thinking to yourself that you sell something rather generic and that it is impossible to create any uniqueness. Well, just because the product is generic does not mean that the way you sell it has to be generic. As we saw in an earlier blog, even a company selling something as undifferentiated as sand or gravel can be seen as indispensible if it wraps the product into a unique value proposition. Your way of selling, means of delivery, speed of delivery, level of service or bundling of services can make the generic become quite unique.

Is the Apple Ipod the only available digital music player? No, there are lots of options. Is the Ipod indispensible to its customer? Very much so. Why? Because it is a unique total offering. Itunes was the first music downloading service that broke through the clutter and created demand. The link between Itunes and Ipod made Ipod more valuable. In addition, the design and workability of the features on the Ipod were unique. Finally, the Ipod is uniquely more “cool” than the alternatives. And, through rapid obsolescence, the Ipod is continually updated, so that it can continue to be unique. All of this uniqueness created great loyalty.

Once you determine your area of uniqueness, then the strategic conversation shifts to moving the organization to enhance itself more in the direction of that uniqueness. In other words, if you know what causes your indispensability, then you know what areas to concentrate on—those initiatives that accentuate your indispensability, make it stronger.

Successful strategies tend to create a position for their brand which is seen as indispensable to their customers. Then the work of strategy is to discover the point at which you are to be indispensable and then find ways to expand and extend the types of uniqueness which make the offering even more indispensable.

The irony in business is that the more you would be missed if your offering died, the less likely you will die. Indispensability is linked to immortality.

Tuesday, November 18, 2008

Analogy #222: Square Pegs

There’s the old story of the square peg and the round hole. The problem is that the four points on the square peg stick out beyond the size of the round hole. As a result, no matter how hard and how long you hammer at that square peg, it will never go into that round hole.

Now the typically prescribed solution is to get rid of the square peg and find a round peg. The round peg easily fits into the round hole and can be hammered into place with just a few hits from the hammer.

Of course, this assumes that you only have three items at your disposal: a hammer, some pegs and a hole. But what if you had a fourth item—a saw.

With a saw, two more options are available. First, you can saw off the pointy sides of the square peg, so that it more closely resembles the shape of the hole. The second option would be to saw the round hole so that it more closely resembles the shape of the square peg.

A good strategy creates a strong fit between what you are offering and what the environment needs. In classic strategic analysis, one starts by examining the environment. Based on what the environment looks like, you then create a strategy which fits that environment. For example, if the world is turning environmentally green, then it might make good sense to create a green strategy.

Relating this back to the story, if the environment looks like a round hole, then you should be creating a strategy which looks like a round peg. But what if your company is shaped more like a square peg?

A classic answer would be to replace your square peg with a round one. This sounds easy, but it is fraught with problems. First, “squareness” is what you are good at. It is your competitive advantage. Throwing it away and picking up a competency that is foreign to you (“roundness”) can be difficult. If you have to build the new competency from scratch, it can take a lot of precious time and there is no guarantee that you will succeed. Your “square” way of thinking may hurt you in your journey.

Second, if you try to get the round peg through acquisition, there can still be problems. As we’ve mentioned many times before, most acquisitions fail to provide a positive return on investment. One typically overpays for something which under-delivers relative to expectations. So you can still fail.

Third, there are others who already have wonderful round pegs. They will fill the round hole quickly before you are ready.

That’s where the saw comes in. Rather than accepting the environment as a given, we have the opportunity to alter the way the future evolves. Just as a master gardener can cause a bush to grow into a particular shape of his/her choosing, we can help shape the future. If you have a square peg, use your saw to create a square hole.

The principle here has to do with preparation. Before planting a seed, the ground is prepared for it. The hard ground is broken down, the stones are removed, and the soil is fertilized. If you don’t prepare the soil, the seed won’t grow. Similarly, for your strategy to take root, the environment must be prepared for it in advance. Therefore, consider advance preparation as an integral part of your strategic plan. Improve your strategy’s potential for success by changing the environment.

This idea was made clear to me as I was reading a recent Business Week article about Cisco. Back in 2005, Cisco created the Emerging Markets Group, headed by Paul Mountford. The idea is for Mountford to spend time working with the leaders of emerging nations to help them envision the future. Part of that future includes the digital infrastructure.

Mountford tries to increase the importance of the digital infrastructure in the way these country leaders think about growing their nations and their economies. He tells them how building large digital hubs will help create jobs and make their cities more prosperous. Later, when the time comes for these leaders to put their visions into action, Cisco tries to win the business on those digital hubs.

Now Cisco doesn’t always win all the contracts. This preparation does, however, create more and better contracts to bid on. Better to get a smaller slice of a big, juicy pie than most of a meager crumb.

In other words, rather than waiting for the digital market to evolve on its own, Cisco pro-actively tries to redefine the market and chance the nature and the pace of the growth. It has taken its saw and cut a Cisco-sized hole into the future.

Another example years ago took place in the US soup business. Campbell’s had a near monopoly in soup and could have stayed content with that. However, Campbell’s realized that although it had most of the US soup business, it had only a small share of the US food business. If it could change the nation’s perception of soup, it could change the overall share for soup in the US diet.

As a result, Campbell’s embarked upon the “soup is good food” campaign. They changed the perception of soup to make it appear more wholesome and nutritious. This changed the demand profile for soup. And since Campbell’s sells most of the soup,
It gained most of the share of that increased demand. In other words Campbell’s took a saw to food demand and cut it into a shape that looked more like soup.

The beauty of this approach is that it not only makes the market more inviting for your strategy, it often makes it less inviting for competitors. The more you can shape the future to look like your peg’s particular shape, the harder it is for others to get their peg in the hole. In an extreme example, the battle between Blu-ray and HD DVD was a war to influence a preference for a standard technology. Once Blu-ray won, HD DVD had to disappear.

In addition, the more actively you control how a business ecosystem evolves, the less risk there is to your strategy. There’s a reason why some companies spend so much money lobbying governments. They want to help shape how the industry evolves and how it will be regulated. At times, it can be far more profitable to spend time and money on getting the world prepared for what you want to offer, than to try to offer what the world currently wants.

It takes time to proper influence a marketplace. Mountford often spends years working with government officials to dream and envision before any project comes out of it. It can take years to change one’s perception about soup. But the rewards can be great. That is why a long-term perspective can be so valuable. It gives you time to saw the hole that will reap the greatest rewards.

If all you do is react to what is in front of you, then you will never play to your strengths. Your fate will be determined by the world, which does not have your best interests at heard. However, if you take time to mold the future into what is best for you, good times are ahead.

Strategy is about trying to create a fit between what the market wants and what you have to offer. In classic marketing, the emphasis is usually on creating internal adjustments in what you offer so that you are more in tune with the environment. However, it can often be more desirable to spend that effort on changing the environment to be more in tune with what you do best. How much time do you spend trying to influence the marketplace versus having the marketplace influence you?

If you don’t have a saw, make friends with someone who does. I worked with a furniture retailer that wanted to define high-end furniture shopping to be what they offered. It did not have enough influence on its own to do this. As a result, the retailer spent a lot of time wooing the local garden club. The garden club was very influential in helping define what cultured high-end people did in that market. By directly capturing the approval of the garden club, the retailer indirectly cut a hole in the high-end furniture space that was just their size.

Wednesday, November 12, 2008

Analogy #221: Timely Vs. Timeless

There hasn’t been a lot of good news about the US newspaper industry lately, but they had a pretty good day on November 5, 2008. The New York Times, which normally sells about 220,000 newsstand copies, printed 475,000 copies that day and sold out quickly. The Washington Post has a daily circulation of about 623,000, but quickly sold out about 975,000 copies that day.

There were over 1800 active auctions on Ebay selling copies of newspapers from November 5th, at prices in the hundreds of dollars. Some were selling bundles of papers from November 5 on Ebay in the thousands of dollars.

What was going on here? Well, this was the newspaper announcing the historic victory of Barack Obama as the next President of the United States. The newspaper became a collector’s item, a memento to hang onto for years in order to remember and celebrate the occasion.

The irony here is that newspapers were originally designed to provide the timely news of the day. They were designed to become obsolete within 24 hours (when replaced by the next day’s paper). However, their most successful paper in decades was bought to be a timeless reminder to be held onto for generations.

A good strategy creates a good position in the marketplace. As long as you own that position, you can usually do quite well, provided there is sufficient demand for it.

In the news business, timeliness is a good position to have. Being known as the first to offer the “news” is successful, because so many people want to know the latest right away. For generations, newspapers owned this position of timeliness. Competing papers would fight to be the first to get a story and “scoop” the competition. It sold papers.

Well, newspapers are no longer the most timely way to get news. Between the internet and cable news networks, one can get the latest news instantly—as it is still happening. You no longer have to wait until tomorrow’s edition of the newspaper. Since newspapers no longer own the position of timeliness, their circulation has plummeted and most newspaper firms are in serious financial trouble.

The irony in the story is that their most recent success comes from the exact opposite positioning—the idea of timelessness. Cable news and the internet are not positioned well for timelessness—they are just fleeting digits. They don’t have that image of permanency which comes from tangible newsprint.

Unfortunately, there aren’t enough November 5ths to bail out the newspaper industry. So they tend to be stuck in the middle between timeliness and timelessness. The middle is not a great place to be.

This is a common principle for most strategic decisions—the middle ground is typically not a great place to be. “All things to all people” typically loses out to “The perfect thing for a few people.”

Although we could take the broad approach and talk about the principle of not being in the middle, I want to be more specific. In looking for a position, one place to look is on the timeliness/timelessness continuum. In many product categories, there is the option to be known as the timely brand or the timeless brand. This may be a fresh way to look at your category for options.

It isn’t that only one extreme works. There are successful and unsuccessful brands on either end of that timely/timeless continuum. You can typically make either work for you. Just don’t get stuck in the middle.

Look at beverages. Coke is positioned as the timeless brand. It is full of heritage, has stood the test of time, and will continue for generations. Pepsi has taken the timeliness approach to beverages. It latches onto every trend and fad in beverages. It has aggressively gone after sports drinks, energy drinks, fruity drinks and whatever else is the hot beverage of the moment.

Apple is the master of timeliness. It’s product obsolescence is extremely rapid. It pushes the envelope for what’s the latest in “cool.” It finds getting the design right (latest look) is as important as getting the technology right (latest performance). Microsoft was always known for being late in its releases and not being as cool as Apple’s operating systems, but it was the timeless standard. You knew that Microsoft would always work and be backwards compatible. You knew that businesses would stick with Microsoft, so it was the safe, timeless way to stay in tune in the business world.

Then came Vista. Although Vista was an attempt to become more timely, it still wasn’t as timely as Apple. At the same time, the timeless reliability of Microsoft was compromised. It was stuck in the middle, a bad place to be.

In automobiles, the Ford Mustang is a very successful “timeless” automobile, whose design has remained fairly consistent over the years. It evokes a timeless image reaching back to the days of the muscle car. The rest of the Ford automobile fleet tends not to be timely or timeless, and is not as successful as the Mustang.

Toyota tried to compete against the Mustang with the Celica. Rather than reaching backwards, the Celica kept redesigning itself to be the most trendy and forward looking in design. It took the “timely” approach. Of course, now Toyota has abandoned the Celica and devoted itself to getting out in front of even timelier car issues—the Prius hybrid and the Yaris high fuel economy car. Ford isn’t even close in these trendy (and timely) areas.

In fashion retailing, you have many brands which focus on the timeless quality of their product (great design that stays in style). This would include brands like Talbots, Ann Taylor, Burberry and J. Crew. On the other end of the spectrum are stores that pride themselves on short production runs, rapid obsolescence and timely trendiness. This would include brands like Forever 21, H&M, Zara, Arden B., and Wet Seal. The problem location is the traditional department store, which is trying to be both timely and timeless. This middle ground is a tough place to be.

In an age of digital photography, when digital picture are zapped all over the place online and on personal web pages (which are kept ever so timely as old photos are replaced with new), there is still room for timelessness. You can see this in the growth of scrapbooking—an old tech way of preserving photo in a timeless manner.

When it comes to blogs, nearly all are positioned to be as timely as possible. However, to stand out, I have tried to position my blog as being timeless. Nearly every one of my blogs is just as relevant today as the day it was published and will still be relevant years from now, because of taking a timeless approach.

Can newspapers find a position as being timeless? Well, I know of a suburban newspaper firm that gives away its newspaper for free. However, their key secret is that whenever they cover a local event, they take an extra ton of quality photographs. If you go to their web site, they will sell you quality reprints of these photos at a hefty profit. It is your chance to commemorate a special moment in the life of your child, the local high school sports team or a special moment for your community. They are selling timelessness.

As an editor of a different community newspaper told me, “We try to get photos of as many people as we can in the paper, because we know that if you see your picture in the paper, you will want to buy several copies as keepsakes for yourself and your friends.”

But here is the important point. It takes a particular type of culture, mindset and operating philosophy, if you want to excel at timeliness. It’s all about rapid obsolescence, a focus on being on the edge in design and performance, about chasing the latest in “cool”, about jumping from one short-lived success to another.

This is very different from the culture, mindset and operating philosophy needed to excel at owning timelessness. This is about building transcendence, about permanence, about becoming a part of the fiber of humanity, about creating classic legends, about extending the life of a brand.

Since they tend to be so different, it is difficult to manage both at the same time. For example, it is hard to go full-speed at obsolescence with one brand while also trying not to hurt a timeless brand at the same time. Fear of cannibalization has kept many timely innovations from seeing the light of day. For example, Ford owned the timeless station wagon design. This kept it from bringing out the timely minivan, which their engineers invented. Chrysler’s former Ford executives introduced the minivan because they didn’t own the “timeless” station wagon. They had less risk in being timely.

Therefore, either only focus on one extreme (timely or timeless) OR separate the timely brands from the timeless brands and run them under different structures.

Successful strategies tend to avoid the muddle in the middle and try to stand for something more specific. Although there are lots of positions to choose from, one that could be very relevant to you is the timely vs. timeless continuum. Either end of that continuum could bring you success. Just pick one and then build the appropriate culture and organizational style which fits the position.

I was a paperboy for the Detroit News back on the day when we landed a man on the moon. The Detroit News knew that people would want to save that timeless cover, so they printed it on higher quality (magazine quality) paper. That special paper would not fade or get brittle, making it a perfect keepsake. If you want to own the timeless position, it may require making those kinds of changes to what you do.

Saturday, November 8, 2008

Analogy #220: Red + Green = Gray

For one year in college, I was an art major. They taught me a bit about color. There is a special progression in the order of colors, as you can see if you look at a rainbow or look at the colors cast by a prism. Red bleeds into orange into yellow into green into blue into purple and back to red. It forms a circle, known as the “Color Wheel.”

With paint, if you combine colors that are close together on the Color Wheel, you create another pretty color. For example if you mix yellow and blue, you get green. If you mix blue and red, you get purple. It you mix yellow and red, you get orange.

However, if you mix colors on the opposite sides of the Color Wheel, you make the color disappear. All you get is a dull, ugly dark gray. Red + Green = Gray. Yellow + Purple = Gray. Orange + Blue = Gray.

Therefore, you have to be careful when mixing colors. Otherwise, you may not end up with any color at all.

As we mentioned in our last blog, one of the keys to a successful strategy is the creation of superiority at a point of competitive differentiation. In other words, strategy is about finding a place where you can be both:

a) Unique/Distinctive; and
b) Preferred by a Sizable Sector of Consumers

These unique points of differentiation can be thought of as being like colors. You need to find your own “color” position in the marketplace. If your competitor has a “yellow” strategy, don’t try to become another yellow company. Instead, stake out your own unique superiority as a “purple” company.

The good news is that, just as there are lots of colors on the color wheel, there are lots of strategic options to choose for your competitive differentiation. In automobiles, Toyota is known for “reliability.” That is their color. BMW is known as the “ultimate driving machine.” That is their color. Kia is known for offering a good value at a low price. That is their color. By owning a different color, each of these brands has a place where they can win.

I’m not sure I understand what color a Chevrolet is supposed to be, which may explain some of their marketplace woes. By trying to have a car for everyone, Chevrolet doesn’t really stand out as special to anyone. Too many colors…too much bland gray.

So rule number one is to pick a position/color which you can own in the marketplace—one that is easy to understand. Then, rule number two is focus your communication around that color, so that people associate that color with your brand. If you do these two things, then when a customer is looking for your “color,” they will gravitate towards your brand.

These unique points of differentiation tend to be built on attributes, like price, or quality, or status, or service, and so on. So, when choosing the color of your point of differentiation, what you are really doing in choosing the attribute bundle you are going to try to own.

The problem comes when a company wants to stand for too many attributes at the same time. This would be like trying to mix together a lot of colors of paint. Little tweaks may create an exciting new color. But if you combine radically different attributes together, it can be like mixing colors at opposite sides of the color wheel—all you get is a dull, dark gray. You will fade into the background and become forgotten.

The principle here is that, when it comes to finding the proper position for your strategy, more is not always better. By trying to own a large, complex mixture of attributes, you may end up owning absolutely nothing. You become just a dull gray company that fades into the background. By contrast, a simple focus on one attribute usually helps you stand out like a bright color and create a profitable niche for your brand.

Professor Alexander Chernev, at the Kellogg School of Management at Northwestern University, recently proved this with an experiment. I will summarize the results here, but you can read a more detailed report in the November 2008 edition of Kellogg Insight.

Chernev asked consumers a number of questions about everyday items, like laundry detergent, toothpaste, and cold medicines. Some of the products stressed excellence in a single attribute. Others claimed to excel at multiple attributes. For example, there could be one toothpaste brand emphasizing just whitening, while another brand claims expertise at whitening, cavity prevention, and fresh breath.

What Chernev discovered was that products specializing in a single attribute were perceived by consumers to be superior in that attribute relative to a multi-attribute product making the same claim. In other words, even if I tell you that the teeth cleaning powers in my multi-attribute brand are as strong as the brand that only claims whitening, consumers won’t believe you. They’ll think the specialist is better at whitening.

Chernev refers to this principle as a “zero-sum heuristic.” In other words, people approach products as if they can have only so much beneficial quality to them. It’s sort of like a point system, where each product has 100 points of benefit. The more attributes you claim, the more you have to divide those hundred points among the attributes. So if you claim four attributes, each attribute only has the power of around 25. However, if you only claim one attribute, that one attribute can claim all 100 points. And 100 beats 25 if you are looking to whiten your teeth, so the single attribute product wins.

Things got even worse when the pricing component was added. Chernev discovered that if you price the multi-attribute product the same as the single attribute product, the perceived inferiority of the multi-attribute product is reinforced. Instead of being seen as a superior value (more attributes for the same price), the multi-attribute product is seen as having to weaken each attribute in order to sell them at the same price as the one attribute brand.

It’s as if a $4 toothpaste specializing in whitening is seen as having four dollar’s worth of whitening ingredients, where as a four-attribute toothpaste for $4 can only have one dollar’s worth of whitening ingredients. The other $3 have to go to support the other attributes.

What this tells me is that one must be very careful when building a positioning strategy. If you try to claim excellence in too many areas, customers will be reluctant to give you credit for your claims. This is especially true if you choose to own seemingly opposite claims, such as having both the highest quality AND the lowest price. Just as opposite colors cancel each other out, so do opposite attributes.

A better approach is to narrow your focus of excellence to one main attribute. When you do so, customers are more likely to believe you. They will give you a stronger ownership of your claim.

So, to return to our analogy, don’t mix together too many colors of paint into your position. Instead of brightening the power of the colors, they offset and weaken each other, turning into an ugly gray.

To win in the marketplace, one must create an image of superiority at a unique point of differentiation. This is done by focusing on a unique blend of attributes. When designing this focus, there are a few points to keep in mind. First, don’t pick a focus that is already owned by someone else. Choose something else. Second, clearly communicate that focus to the customer, so that they will associate your brand with that attribute.

Third, don’t get greedy and try to make too many claims of superiority. The more attributes you claim to own, the less likely customers will believe that you own any of them. A simple, narrow focus almost always wins out over claims that “I can do it all.”

As strategy professor Michael Porter likes to say, strategy is about making choices and tradeoffs. You cannot be everything, so examine the tradeoffs and choose the right narrow positioning for your firm. In other words, pick a color.

Thursday, November 6, 2008

Analogy #219: Repair Vs. Prepare

Yesterday, I went to the hospital to visit a friend who had broken his leg. Now, when you break a leg, you have a true emergency on your hands and you have to get the leg repaired quickly. But I started thinking, how often do people end up in hospitals and emergency rooms for other types of problems which could have been easily avoided if preventative measures had been taken?

I used to live in a smaller community that had a shortage of doctors. I could not find any doctors who were accepting new patients, so if I needed health care, I had to use the emergency room at the hospital. It was a very inefficient way to get health care. As a result, I started to spend more time on preventative care, like:

1) Joining an Exercise Club
2) Treating Early Symptoms Quickly with Over-the-Counter medications, before the problem got worse.

Studies show that a few preventative lifestyle changes, such as a proper diet, exercise, sufficient sleep, and avoidance of things like tobacco, alcohol and the like can help avoid all sorts of medical issues in the future. It won’t stop broken legs, but at least it will stop a lot of other things.

The goal of strategic planning is to help move a company from its current situation to a better condition. At the very least, strategic planning should help a firm avoid falling into predicaments where the situation can get worse.

This is somewhat similar to the field of medicine. There, the goal is to move a person from an unhealthy situation to a healthier condition. And if you are already healthy, the goal is to help you remain healthy.

The two approaches to medical treatment are “preventative” and “curative”. The curative approach it to detect disease and then fine a way to cure the patient who has the disease. The preventative approach is to find ways to promote healthiness so that the disease never occurs in the first place.

Following this analogy, we could take two approaches to how we focus our strategic effort. We can take the curative approach—use strategic thinking to fix the problems our company already finds itself in. I call this “repair” strategy—trying to fix the mess we are in.

We can also use the preventative approach—use strategic thinking to avoid getting into the mess in the first place. I call this “prepare” strategy, since it prepares us in advance for what the future holds, so we can better withstand any threats.

Sometimes, life throws situations at us that no amount of preventative medicine can prevent, such as a broken leg. At those times, we have to resort to repair tactics. However, as we will see in this blog, one is usually better served if the bulk of the effort is placed on prevention.

The principle here is that a “prepare” approach to strategy tends to be better than a “repair” approach. This is even more true in strategy than in medicine.

Here are some of the reasons why this is so.

1) Some Damages Leave a Scar
One of the biggest problems with a repair approach is that even if you can fully correct the problem and make things right, the memory of the problem lingers. It’s like a scar…you know you are healed, but the scar reminds you that you were once ill.

Take the “Made in China” brand image. Given the problems with tainted milk, tainted dog food, tainted eggs, poisonous toys, poisonous toothpaste and other such issues, China has severely damaged its brand. I am confident that China will work to minimize these problems. That may repair the process, but it won’t immediately repair the reputation and image. They have lost the trust of the consumer. They have lost the trust of Wal-Mart, one of their top purchasers. They still see the scar.

Fixing something that has gone wrong does not erase the memory of the wrong that went on before. So if you use the repair approach, not only do you have to fix the problem, but you also have to fix the reputation and image.

If you are good all the time, you will earn a good reputation. However, if you slip up, you have to become extra good just to regain a good reputation. You will not get full credit for your efforts. Thus the repair approach can be very inefficient over the long run.

2) Prepare is Simpler than Repair
If you over eat, you can increase the odds for getting all sorts of illnesses, like as high cholesterol, high blood pressure, diabetes, heart problems, and so on. Therefore, obese people have to be on the lookout for all sorts of problems which can come from many different directions. To “cure” these problems, the obese may have to take all sorts of different medications for the rest of their lives and deal with many nagging issues.

By contrast, a preventative approach is simpler. All you have to do is concentrate on one thing—weight control—and you can significantly reduce the odds of having to deal with dozens of potential problems. Weight control is one focus, which is pretty much under your control. This is much better than the alternative, which is many nagging problems that come at you in an uncontrolled manner.

The same is true with the prepare approach to strategic planning. With this approach, the first step is to know what the key attributes are at the core of your strategy. Then you simply focus on preparing to excel and stay on the leading edge with these attributes. This is one thing pretty much under your control. And if you can control it, then your strategy will be productive for a long time.

While K Mart is frantically running all over the place trying to fix all of its problems (repair approach), Wal-Mart is focusing on just doing what it takes to excel at low prices (prepare approach). As a result, Wal-Mart has a strong strategy that is working quite well. By contrast, K Mart is not really building up a strength at much of anything. Being “less bad” is not a strategy. K Mart is too busy fixing little things to have time to focus on the one big thing.

3) Prepare is More Future Oriented
As I said at the beginning, the goal of strategy is to build a way to get to a better situation in the future. Strategy is future-oriented. The prepare approach looks forward into the future and tries to prepare the company so that is optimally positioned for that future environment.

The repair approach, by contrast, is backwards looking. It looks at what you did in the past to get into your current mess. Then it tries to build a short-term strategy (or isolated tactic) to get rid of the mess. As long as your focus is on the now and the past, you will not have sufficient time to look forward. It is only by looking forward that you can get ahead of the situation and build strategies to prevent potential future messes.

So Why Don’t We Do It More?
All that being said, it would seem obvious that the prepare approach is superior to the repair approach. Yet, when I look at the business world, it seems like the primary focus is on fixing the crisis of the day, rather than preparing for the potential glory of the future. In an earlier blog, we talked about the Tyranny of the Immediate. This is the idea that we become a prisoner to the problems of the immediate, so that we do not feel free to break away and look ahead.

Yes, someone needs to deal with the problems, but it doesn’t always have to consume the time of the leaders. Delegate most of it and turn your focus forward. That way, you can prepare, so that there will be fewer problems ahead. Break the cycle!

Yes, every company will have to face problems from time to time that are unavoidable. But that doesn’t mean that your strategic focus should be to just solve problems. Winners create strategies focused on building strengths around a point of strategic differentiation. They look forward to anticipate threats to that differentiation and prepare a path to eliminate the threats.

Fixing bloated expenses or some other internal problem is not a strategy. Customers typically don’t care about your internal mess. They just want to get their needs met at a good value. Problem fixing is inefficient. Problem avoidance is priceless.

So, when allocating your time, put the emphasis on prepare rather than repair.

Time spent getting repaired in a hospital is time which cannot be devoted to moving forward. Avoid the hospital by investing time in preemptive, preventative strategic efforts.

Saturday, November 1, 2008

Analogy #218: Fit or Fat?

When my Dad was a young man, he was very trim and muscular. In those early years, he did a lot of manual labor work, like digging ditches and fighting forest fires. Over time, he gradually did less physical work.

As a result, when he got older, my Dad became fairly fat and flabby. Yet, in spite of that, my Dad insisted he had to eat more food in his older age than he did when he was younger and more active. His logic?

Well, my Dad used to say, “I keep losing weight. No matter what I do, I can’t sustain the weight I had when I was young man. I’m wasting away. I have to eat more than I want to just to slow the loss of weight.”

What my Dad failed to take into consideration was that, beginning around age 45, men lose about 1% of their muscle mass each year just from aging. Add to that the fact that my Dad became far less physical in his activities and that he had added muscle mass loss due to surviving polio. In other words, he didn’t have a weight loss problem, he had a muscle mass loss problem.

Fat has less density than muscle, so when my Dad was replacing his muscle mass with fat mass, he was putting on a lot of flabby fat. He wasn’t wasting away. He was just trading useful muscle for useless fat.

Most business strategies revolve around leveraging some competitive strength. In other words, a company finds some competency or benefit which they can deliver better, faster, or cheaper than other companies. They then use this strength to create a strategic market advantage. For example, Wal-Mart uses its strength in supply chain management to create a market advantage around low prices.

You can think of competitive strength as being like the strength your muscles give your body. When you do a lot of exercise, you build up a lot of muscle mass. This gives you even more strength than you had before. However, if you stop exercising, the muscle mass goes away and you become weaker.

In a similar sense, businesses can only maintain their competitive strength if they focus on the hard work of exercising in their area of superiority. If you stop trying to grow in your area of competitive strength, your strategic point of positive differentiation will start to atrophy, just like the idle muscles in my Dad.

And don’t lull yourself into satisfaction just because you’ve been able to keep the company large. You may have just repeated the folly of my father and traded in useful muscle for useless fat.

Look, for example, at the recent financial mess we’re in. A lot of really, really big financial institutions fell apart and no longer exist. Unfortunately, we found out too late that these companies became large on fat, rather than muscle. Rather than doing the hard work of exercising their muscles on improving excellence in traditional areas of finance, they got fat and lazy on the junk food of sub-prime mortgages, derivatives and credit default swaps.

Like my Dad—who was focused on the number of pounds he weighed rather than the quality of those pounds—these financial institutions focused on the potential size of the profits, rather than the quality of the profits. As it turns out, the quality of the profits sucked, and caused the companies to collapse. They did not have enough muscle to overcome all that fat.

The strategic principle here is vigilance. There is never a good time to slack off. If you want to keep your strategic advantage, you need to watch how well you are doing every day.

Without vigilance to monitoring your strengths, you can fall into one of three traps:

1. Muscle Atrophy
Don’t assume that just because you had a competitive strength in the past, it will always be there. If you take it for granted, it can go away, just like my Dad’s muscles. It probably took a lot of hard work to create that competitive strength in the first place. Similarly, it will probably take a lot of hard work to keep that strength.

When Tater Tots came out, they were a great success. They had a unique flavor and texture, due to their ability to hold little chunks of potato together in crispy bite-size morsels. Management assumed that great taste and texture would always be there, so the owner, Heinz, started to focus on cutting costs.

As a result of stopping the vigilance on maintaining strength in taste and texture, the cost cutters changed the way the Tater Tots were made. The little potato chunks started turning into mush. The “tots” couldn’t hold the mush together. The Tater Tot bags were full of potato crumbs. Sales dropped. Eventually Heinz figured out the problem and renewed their strength in flavor and texture. Sales came back.

2. Out Muscled
Even if you keep your strength from weakening, you can still have problems. There needs to be an effort to build and improve upon that strength. If you stand still, competitors can either catch up or pass you by. Toyota used to have a large competitive advantage in quality. People put up with their bland cars to get that superior quality. Now, Ford has caught up to them in quality and has snazzier vehicles. Toyota is still in the lead, but we’re starting to see cracks in their strategy. Without renewed vigilance to regaining its strategic strength, Toyota could be in for tougher times.

So, not only does one need internally focused vigilance to make sure a strength does not slip into fat, one needs external vigilance to make sure that others don’t get stronger and pass you by.

3. Working the Wrong Muscles
The third one is the trickiest. You may be successful in keeping a competitive edge in an area only to find out that your edge has become irrelevant. Times change. Technology changes. People’s desires change. Your strength may no longer matter. You may find yourself working the wrong muscles.

Polaroid was vigilant in keeping its competitive strength in instant film technology. It fought a long, tough battle to keep Kodak from making inroads. Unfortunately, newer digital imaging was a superior way to get instant pictures over the Polaroid process. Polaroid’s technological strength, which it protected so well, was now irrelevant. Polaroid, as we know it, ceased to exist.

The US auto makers focused on their strength of trucks. However, times changed and now people wanted fuel efficient cars. Oooops! By focusing on truck profit margins instead of changing consumer tastes, those fat truck margins were suddenly just fat.

Therefore, vigilance also requires taking a broader look at all the possible events that could make your strength irrelevant. It’s not a bad idea to use trend spotters and to have a few experiments going on in areas which might replace your relevancy. For example, Wal-Mart’s strength is predicated on having low prices. If a new retail format has the potential of getting an edge in pricing, Wal-Mart’sformat can become irrelevant.

For example, when their spotters noticed the rise of the warehouse club format, Wal-Mart became concerned. Wal-Mart was afraid that warehouse clubs could be cheaper than their discount stores. As a result, they started up the Sam’s Club format as a hedge.

Later, they saw hypermarkets as a potential threat, so they experimented with Hypermart USA. That threat in the US turned out to be false, so they closed it down. However, they next started to see supercenters as a potential threat to their pricing strength, so Wal-Mart built Wal-Mart Supercenters. Who knows where Wal-Mart would be today if they were not that diligent in watching the environment for any potential threat to their strength.

Without a competitive advantage, you don’t have much of a strategy. In fact, strategy gurus like Michael Porter would argue that without a competitive advantage you do not have a strategy at all. Competitive advantages are built upon strengths. If one is not vigilant in making sure that the strength is still an advantage, then that strength can go away. And maybe you will go away as well.

Virtuoso pianist Vladimir Horowitz would practice on the piano every day. He claimed that if he missed one day of practice, he could notice a difference in the quality of his performances. If he missed two days, he said his wife could notice the difference. And if he missed three days of practice, Horowitz said his audience could notice the difference. That is why he never let up on honing his strength. Do the same with your strength.