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.

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