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.

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