Tuesday, December 30, 2008

Analogy #230: And the Contents are Free


During one of the long garbage worker strikes in New York City, one man had an ingenious idea. 


Every day during the garbage strike, he would put his trash into a box.  Then he would wrap the box up in wrapping paper—just like a birthday present, complete with a bow.  He would put the box in plain sight on the front seat of his car, and leave it there after driving to work.  In addition, he left his car door unlocked.


When the work day was over, he would go back to his car, and sure enough, every day that box was gone—it had been stolen.  As a result, the man was able to get rid of his undesirable garbage every day—for free. 



During this current economic crisis, people have cut back on their spending.  What we sell has become less desired.  Sometimes it feels as if we are trying to get them to buy undesirable garbage.


In the story, the man got rid of his undesirable garbage by hiding it inside something which appeared more desirable—a gift.  In other words, instead of trying to get people to take something they didn't want (trash), he offered something people desired (a gift) and threw in the trash for free.


This same principle can work in business.  Rather than trying to sell what people do not want, sell them what they do want (even if it is just an illusion) and throw your product in for free.



The principle here is that there is a difference between "stuff" and "status."  Stuff is what you make—goods and services.  Status is what people desire—an enhanced sense of self-worth.  People want to buy status and you want to sell stuff.  Therefore, success comes when you can hide your undesirable stuff inside a pretty box of status.


To a large extent, it really doesn't matter what stuff is inside the box.  So long as it is packaged inside a status box, people will want it.  If the box is pretty enough, they will even take your garbage.


Take transportation, for example.  It used to be that status came from owning the newest, biggest, most powerful, most gadget-laden SUV on the block.  People abandoned cars and bought SUVs in droves, even though none of them ever planned to take these cars off-road.  They really didn't want the SUVs, per se.  They wanted the status which came with the SUV.


Now, the SUVs are positioned as wasteful, earth-hating, gas guzzling, obnoxious vehicles.   Their status is gone.  The new status symbol is the earth-friendly, responsible, fuel-efficient Hybrid car.  So people are buying the Prius in droves.  Again, a lot of people buying the Prius really don't want a Hybrid.  They want the status which comes with owning the Prius.


So the idea here is stop focusing on how to sell your stuff and instead create a strategy which places your stuff inside a desirable box of status.  Think of it this way:  What if you had to put the price tag on the box and treated the contents as if they were free?


I worked on a project like this for an upscale consumer electronics retailer.  This retailer saw itself as in the business of selling stuff—items like televisions, speakers, and amplifiers.  We told them they would be better off seeing themselves as selling a status laden in-home entertainment experience.  The idea was to reposition them as experts in designing the home entertainment room that would make customers the envy of the neighborhood. 


Sure, they would still be putting televisions, speakers and amplifiers into your home.  But for all intents and purposes, that "stuff" was being given to the customer for free.  What the customer was really paying for was the status of having home entertainment experts designing the perfect home entertainment option for them.


In today's economic environment, the accumulation of more stuff appears to be out of favor.  Frugality is the new chic lifestyle.  Trying to get people to open up those wallets and pocketbooks just to get more stuff will be a tough sell.  The better idea is to sell the box of the new "Frugal Chic" and give them the stuff inside for free.


According to Marian Salzman, partner at public relations firm Porter Novelli, "We all have enough stuff; it's not where our heads are anymore.  We're going to value a lot of other things."


Therefore, position your brand as something that imbues those other things being valued—the current attributes of status, such as "earth-friendly" or a wise use of resources.  Then sell those attributes rather than trying to sell the stuff.  Treat the stuff as being thrown in for free.


For example, look at Apple.  Their successful commercials in the US for the Mac never really mention anything about the computer itself.  The stuff of the Mac is ignored.  Instead the commercials focus on the enhanced status of being associated with Apple.  They're selling the status box and throwing in the computer for free.


Almost anything can be put into the box, provided the box is desirable (even garbage).  Link your stuff to the best box, and the customers will pick your box.  Remember, your competition is not other firms selling the same kind of stuff.  Your competition is anyone putting stuff into the same kind of box.


Your competition could be a computer, a car, a vacation, food, clothing, or whatever.  All can be positioned as being the most "frugal chic."  The money will flow to the one who wins the "battle of the box"—the one most linked to the current status, regardless of the contents.



The problem today is trying to sell stuff in a post-stuff environment, a time when conspicuous consumption is out and frugality is in.  The solution is to quit selling the stuff and focus on the current definition of status.  Sell the status and throw in the stuff for free.



At Christmas time, it is not unusual for parents to buy their child an expensive toy, only to find the child more interested in playing with the box than the toy that was inside the box.  We adults can be the same.  We can be more interested in the status box than the stuff inside the box.  Pay attention to your packaging.

Monday, December 29, 2008

Analogy #229: Gutter Talk


A few days ago, we suffered torrential rain at my house.  The rain was coming down about as fast as it could, along with strong winds, thunder and lightening. 


As I looked out the window, I noticed that the gutters were plugged.  The rain overflowed the plugged gutters and just poured over the top of them onto the ground.


I thought about going out there to unplug them, but given the wind and the rain and the lightening, I didn't think being up on an aluminum ladder would be a good thing.  All I could do is stare out the window at the disaster.


I started thing about how one never thinks about cleaning the gutters except when it is raining and it is already too late to do so.  I should just schedule a date on my calendar to automatically check the gutters every autumn. 



When you can see the disaster, it is easy to recognize the need for change.  However, by then, it can be too late to do anything.  I could see the need to clean my gutters when the rain was pouring out of the top, but it was too late to fix the problem.


The same is true in business.  By the time a business' failure is obvious, it is usually too late to fix the strategy.


Strategic planning shouldn't be a reaction to disaster.  It should be put on the calendar to be done on a regular basis, as I should have done with gutter cleaning.  That way, instead of reacting to disaster, one is proactively preventing disaster.



The principle here is that prevention is better than correction.   Sure, one can fix a problem through correction, but usually there is some residual damage from those problems which slow you down—overcoming customer disappointments, internal political upheaval, lost cash flow, lost credibility, inability to meet debt obligations, etc.  Your strategic options in such an environment may be narrower. 


Just look at the US auto industry.  They are trying to correct a problem that has been growing worse for years.   The longer they waited, the more their "profit gutters" became plugged with bad business practices.  Then the storm came and their only hope was to call in for a government bailout.  If they had gotten in front of the problem and cleaned out the gutters early (before the storms), they could have prevented this mess. 


This was the successful path Caterpillar took.  They took on the bloated organizational structure and union issues early, when times were still good.  This allowed them to become a world leader. 


If you look at business press releases, about the only time you see the word "strategy" anymore is when a company announces that it has hired a firm to help it look for "strategic alternatives."  In plain talk, what they are saying is that they have so screwed up the business that they cannot fix it, so they are either looking for someone to buy them out or, if that doesn't work, they are going to liquidate the business.


In my mind, those are two lousy strategic alternatives (sell or close).  Where's option #3?  There is no third option, because the companies have waited too long.  The economic storms have already come, with high winds and lightening.  The pipeline to profits is plugged and it is too late to go out and unplug it.  Selling or liquidating is all that is left.  Given the economic storm we are currently in, I suspect we will be seeing a lot more of these "strategic alternative" announcements.


When the days are sunny and everything appears to be well, it is easy to forget about checking those gutters.  However, if you want to prevent the buildup of gunk in the gutters, you need to do regular maintenance during the good times.  


There's an old saying that "if it ain't broke, don't fix it."  In other words, as long as things appear to be working, leave them alone.  This concept, however, is disastrous when it comes to strategy.  The environment is always in a state of flux—ever changing.  Periodic strategic assessments and adjustments are needed to make sure the strategy is still properly aligned with that changing environment.  If you wait until the business model is completely broken, it may be unfixable.


Instead, the best time to make these strategic adjustments is when times are still good.  In the good times, consumers still like and trust you, and are more forgiving of change.  Your cash flow is still strong enough to fund the transition.  And most importantly, you still have time to make the changes before the storms come.


Therefore, I recommend two things.


1) Make periodic strategic assessments, even when times are good.  Get it on your calendar.  Get in front of change rather than playing catch-up after change has already created severe problems.


2) Create a method to monitor key elements critical to your strategy.  That way, you can tell when the gutter is just starting to get clogged, so that you can act quickly, before it becomes a problem.  They say "out of sight, out of mind."  If you want to keep awareness of potential problems on the top of mind, you need a dashboard which lets you see it and measure it all the time.


Yes, we are currently in the middle of an economic storm.  But eventually, this storm will go away and the sun will return.  When that time comes, use the reminder of all the grief you are dealing with today to motivate yourself to prevent future pain though these two suggestions.



Don't wait until times get bad to examine your strategy.  By then, it can be too late.  Examine your strategy during the good times.  That way, you can prevent problems rather than fix problems.  Prevention is always easier than correction.



When the rainstorm ended, I belatedly went outside to clean out my gutters.  Unfortunately, I had two problems.  First, by the time the rain had ended, it was night and I was groping around in the dark trying to clean the gutters by "feel."  Second, I had no idea how much of the leaves had gotten into the downspouts and were clogging areas I could not get to.


I would have been much better off doing this on a sunny day before the buildup had occurred.

Thursday, December 18, 2008

Analogy #228: Fashionality

When I was a young teen, I really did not pay much attention to fashion. Clothing and style weren’t important to me. As one might expect, by not paying attention to fashion, I often ended up not being in fashion. As a result, other kids at school used to make fun of me and laugh at me behind my back.

Fortunately, I had some friends who would occasionally clue me in to my larger fashion faux pas. Without their help, I would have been a total social outcast.

Most teenagers are really into fashion. Status and acceptability with teens is closely linked to your fashion statement. Make the wrong fashion moves and you are ostracized.

Fashion-consciousness is not just important to teens. It is also important to business. Virtually all products have a fashion component to them, what I call their level of “fashionability.” If you ignore the fashionability of your products, you can become the social outcast of your customer group, leading to declines in market share and profitability.

The principle here is to pay heed to the “fashion triggers” of your industry. Now at this point, you may be thinking that this principle applies to clothing, perhaps, but not my business. Well, I believe that there is an element of fashionability to ALL products.

Fashionability includes those external factors which change the demand for your product (up or down), even though the performance of your product (relative to competition) remains unchanged.

For example, take a sack of potatoes. The quality, taste and nutrition value of potatoes remains relatively constant over time. Yet the demand for potatoes rise and fall over time due to external economic conditions. When the economy is bad and people feel poorer, potatoes are more “in fashion.” They are the fashionable way to “fill the tummy” when times are tight. When the economy is good and people feel wealthier, potatoes are less in fashion, with the fashion moving to better cuts of meat.

Within the potato business, organic is becoming more in fashion, so the growth segment within potatoes is in organic potatoes.

And how about those SUVs and pickup trucks made by US automakers? The quality and performance of the trucks did not suddenly plummet in 2008. In fact, the quality and performance might be even better. Yet sales of these SUVs and Pickups plummeted in 2008. Why? They became less fashionable. Higher fuel prices, the rising importance of the green movement, and a rise in “frugality chic” made these vehicles a less desirable fashion statement.

Most consumers never take their off-road SUVs off the road. The four-wheel drive feature is seldom ever used. They never need to put a ton or two of cargo into the back of a pickup. These rational quality and performance features were not the driving (pardon the pun) force behind these purchases. The SUVs and pickups were purchased as fashion statements. They made the owners feel “cool” and powerful—admired by their peer group.

Since the features did not drive the sales upward, it should not be surprising when the sales plummet even though the features actually got better. When owners of SUVs and Pickups became re-labeled as “wasteful harmers of the planet” (rather than cool and powerful), the fashion element went away (as did the sales).

Although the US automakers have done a lot of things wrong, I think one of the big mistakes has been their inability to become leaders in embracing the fashion whims of their industry. They’ve been late with small cars when small was in fashion, late with hybrid cars when that was in fashion, and so on.

If fashionability affects all products, then smart strategists should see at least a portion of their strategy as an attempt to manipulate that fashionability to their advantage. Below are some tips on how to do that:

1) Identify the fashion triggers for your product.
What factors cause your industry sales to rise and fall regardless of performance? What causes some firms in your industry to gain or lose market share regardless of relative performance? What makes some products or brands “cooler” than others? What factors make your customers look good or bad to their peers? If you can answer these questions, then you can identify the fashion triggers in your industry.

They may be economic triggers or they may be social triggers. They are whatever impacts the image of the person who purchases that product. If it is a social trigger, what puts a person on the top of their social ladder? Is it being the most innovative? the least risky? the most eco-friendly? the most caring?

You cannot manipulate what you do not understand. Get to know what the key triggers are.

2) Get In Front Emerging Fashion Trends
Fashion changes over time. What was “in” becomes “out” and vice versa. If you do not want to be a brand on the “out” you need to embrace the next new definition of what is “in.”

Being reactionary rarely works. By the time you identify the next version of “cool” already in effect in the marketplace, someone else has already captured that space. You will always be seen as a fashion laggard—a step behind and a bit out of date.

One needs to be pro-active—looking for the next big fashion trigger before the trigger is pulled. That will give you time to create the strategy which captures the moment when it arrives.

3) Manipulate Fashions to Your Advantage
Fashion triggers are not an exact science. You can influence them. Look at who you are and what you are good at. Then try to make that the right fashion statement. Heinz took a performance negative (hard to get its ketchup out of the bottle) and made it into a fashion statement (great ketchup is thick—having thick ketchup that is hard to get out of the bottle makes you look like an astute ketchup shopper).

4) Don’t Just Focus on Performance
If factors beyond performance impact sales and profitability, then don’t just look at performance. The time and effort spent to make small, incremental improvements to performance may have been better spent on improving one’s “fashion” statement.

The successful advertising campaign by Apple rarely talks about performance. Instead, it talks about why it is more fashionable to associate yourself with Apple. Yes, the ipod performs well. Microsoft’s Zune also performs well. But which makes the stronger fashion statement?

When times get tough, just improving performance may not suffice. You can make the performance of an obsolete product better, but it may still be obsolete. It may make more sense to reposition yourself on the fashion trigger.

5) Keep a Flexible Portfolio
If you put all your eggs in one basket (i.e., concentrate on only one product) then you may be screwed when that one basket goes out of favor and becomes unfashionable. Having a portfolio of products helps in many ways. First, what is in fashion with one segment may be different with other segments. Having more products allows you to better target the fashion trigger of each segment more precisely.

Second, having a portfolio increases the chance that when fashion changes, you have something else to offer which is in tune with what is “in.” Because the US automakers had pretty much abandoned small cars in their portfolio, they had little to offer when their big trucks and SUVs went out of fashion.

Third, even if you do not offer lots of options, one can benefit from having several ideas in developmental stage. That way, when the fashion changes, you can ramp up whatever developmental project is most appropriate, rather than losing the precious time from having to start from scratch.

6) Don’t Fear Cannibalization
Ford invented the minivan, but did not introduce them, because of fear that it would hurt their highly successful station wagon business. Well guess what? When Chrysler introduced the minivan, station wagons went out of fashion and Ford was hurt anyway. Ford would have been better off killing off its station wagons with its own minivan than to have another company do it to them.

Apple remains cool, in part, because it embraces cannibalization. It continually introduces new products to make the old obsolete. This helps Apple keep a strangle-hold on the cool factor and leaves no room for competitors to take it away.

All products have an element of fashionality in them. If you want a successful strategy, then you need to understand how to use that fashionality to your advantage.

When I was a teen, being a geek was considered a fashion no-no. Now, geekiness is considered cool by many. Had I only been born in a different generation, I could have been naturally in fashion.

Wednesday, December 10, 2008

Analogy #227: Trickle Up Strategy?

Once upon a time, the Meglamight Corporation needed to quickly build a bridge across a remote river. Big Bob, the CEO of Meglamight, gave the approval to send large wooden beams to the area as soon as possible, for use in the construction.

Big Bob waited back at corporate headquarters to hear word of progress on the bridge. Days passed with no news. Finally, he made a few calls and found out that there was still no bridge. He also found out that the big wooden beams had disappeared. Big Bob was furious!

Big Bob demanded to know what happened. The project manager explained it as follows: “I’d been reading about the benefits of empowering all the individuals in a company. I wanted to give everyone an opportunity to become entrepreneurial and innovative in building the bridge. Therefore I took those big wooden beams and had them ground into toothpicks. That way, I could give every individual a few pieces of the beam to innovate with. So now each employee has a pile of toothpicks and is individually innovating for success in bridge-building.

“You fools!,” shouted Big Bob. “The bridge was not the goal. It was just a path to get to the other side of the river. The treasure was located on the opposite bank of the river. While you were playing with the toothpicks, a competitor got to the other side first and already took the treasure.”

These days, there are a lot of business gurus talking up the benefits of empowering the masses. This includes not only empowering all of your employees, but also your customers and suppliers. Yes, there are many benefits to be had from opening up creativity to a larger circle of people. It does, however, have its limits.

Taken to an illogical extreme, this process leads to what I call “trickle-up strategy”. The idea is that if you have a lot of people trying to do creative and innovative things, then a lot of interesting innovative and creative things will occur. And the things which pop out of the process, by default, become the strategy.

Well that’s sort of like saying that if I get in a car, close my eyes and hit the accelerator as fast as I can, wherever I end up becomes my desired destination. Unfortunately, if you did that in a car, you ultimate destination would probably be the emergency room of a hospital after you crashed the car.

In the story, the project manager made many mistakes in employing this trickle-up approach. First, the project manager had the wrong focus. He had assumed that having a bridge was the goal. Therefore, he focused on creativity and innovation in bridge building. The bridge was not the goal. The treasure on the other side was the goal. Big Bob would have been happy if they had just thrown the beam over the river and run over the top of the beam. It didn’t have to be a fancy or creative bridge—just a path to quickly get to the other side. By wasting too much time on perfecting the bridge, they missed the opportunity to get the treasure on the other side.

The second mistake was to diffuse the project and the resources into piles too small to accomplish the purpose. A thousand little toothpick bridge experiments are not going to get a team across the river to get to the treasure (and haul it back)

The third mistake was poor communication between Big Bob and the project manager. Big Bob was not clear about the goals and objectives, so the project manager came to the wrong conclusions.

The idea here is that one needs to be careful when applying “trickle up” approaches to innovation. If done improperly, they can waste your resources and lead to random wastes of time.

Google has traditionally been one of the strongest advocates of this trickle up approach. Employees there are given great freedom to work on all sorts of little projects which they dream up. Up to 20% of an engineer’s time can be spent on pet projects. Google has spent a fortune on hiring people and supplying other resources to tackle all of these trickle-up ideas.

The results of this approach, however, have been disappointing. After 10 years, and countless experimentation, Google still gets about 97% of their revenue from the original business of on-line ads—mostly on the Google search pages. Most everything else has ended up being a dry well without profits.

Given today’s economic situation, a lot of these dry wells at Google are being shut down and fewer resources are being given to new trickle up ideas. You can read more about this in the December 3, 2008 edition of the Wall Street Journal.

The problem is not that innovation and experimentation are bad. The problem is that RANDOM innovation and experimentation are bad. It used to be considered crass at Google to talk about whether a project would eventually make money. Instead, people randomly worked on whatever they thought would enhance the internet user’s experience.

Those days may be gone. Experiments at Google are now being more closely linked to profit motives. Just as a million little toothpicks are not going to get you across the river, a million random dry holes are not going to create a worthwhile strategy.

So here are a few points to remember about trickle-up experimenting.

1. Strategic Intent Should Not Be Trickle Up.
The old saying was that if you put a million monkeys in a room with a million typewriters, the random typing would eventually create the great American novel. Of course, that is not true. Great documents require great forethought. Similarly, if you want a great strategy, you must used dedicated forethought to the approach.

If you don’t know where you are going, any path looks good, but most lead nowhere. A company needs goals—an explicit description of where it is trying to go. Don’t rely on randomness to create your strategy. Instead, use your strategy to provide direction to where you experiment. Strategy comes first, experimentation second.

2. Make Sure The Strategy Is Well Communicated and Well Known Within the Organization.
To prevent randomness, the experimenters need to know the boundaries of what is acceptable experimentation. In other words, if you want your experimentation to get you to your strategic goal, those experimenting first need to know what the goal is.

Don’t hide your strategic intent from your people. Shout it from the mountain tops! You are more likely to reach your destination if everyone knows what that destination is. Big Bob failed in getting the treasure because he kept his strategic goal hidden from the project manager.

To get the right trickle up experiments, one needs to trickle down strategic intent.

3. Create Critical Mass in Your Resource Allocation
Strategic success typically requires winning a leadership position within a particular space. Leadership rarely comes from halfhearted efforts. It takes a large, dedicated effort within that space to win the battle. In other words, to get across the river, one needs big beams, not piles of toothpicks.

Therefore, resources should not be spread so thin over so many areas that there is not enough there to win any particular battle. Make sure your scarce resources are bunched up enough to create the critical mass needed to win. Figure out which spaces need to be won, and load up your experimentation in that area. One of the criticisms of Microsoft’s failed approach to the internet is that they have done a little bit everywhere rather than pick a few concentrated battles where they could win.

It’s okay to start up a lot of small experiments within the space you are trying to win. However, one needs a process to quickly weed out the losers, so that more resources can be given to the potential winners.

4. Profits Are Everyone’s Business
Capitalism is about profits—getting a return on your investments that is greater than the resources you put in. This includes experimentation. Not that every experiment must turn a profit, but the overall trickle up movement must as a whole be a wise investment.

Just because Google is profitable enough to waste a lot of money and get by does not make it any less wasteful. Waste is waste.

So in addition to keeping a strategy focus in front of the experimenters, keep a profitability focus there as well. Some of the experimenter’s rewards should be linked to profits.

In the story, the experimenters were ignoring the treasure and just fiddling around with toothpicks on the wrong shore. Had they been focused on the prize, they more likely would have gotten there.

It’s hard for an army to win a war if only the Generals are concerned with winning. All of the soldiers need to be committed to winning as well. Similarly, it’s hard to make a profit if only the top executives care about making money. Everyone needs to think at least a little about it.

5. Don’t Micromanage the Experiments
If the first four points are in place, then let the experimenters go wild. Don’t micromanage them. Most of the greatest inventions have a bit of wild abandon in the process.

Trickle-up experimenting is a terrible way to create a strategy. It may, however, be an effective way to implement a strategy. This requires that the strategy is well known by the experimenters and that experimentation resources are clustered at the places which will most likely create a profitable success in achieving that strategy.

Once when I was in a college chemistry class, I got bored with the lab work, so I started randomly mixing chemicals. All of the sudden, the chemicals in my beaker started bubbling. They foamed up and spilled all over the floor. Not exactly experimentation at its finest.

Monday, December 8, 2008

Analogy #226: Dealing With Roadblocks

This morning, driving to work, I came to a place where traffic was stopped...a place where traffic is not normally stopped. I could see a police car up ahead flashing its lights. Therefore, I concluded that there must be a big accident up ahead.

I had three options. First, I could sit and wait until the police were done stopping traffic. Second, I could turn left and drive a few blocks along a path parallel to my normal path, except one block further east. Then I could return to my normal path once past the police car. The third and final option would be to turn around and take an entirely different path to work.

Well, it looked like traffic wouldn’t be moving for awhile, so I decided not to do option #1 (stay and wait). Then I figured that an entirely new path to work would take me so far out of my way that I would probably lose more time, so I opted against option #3 (entirely new path). As a result, I went with option #2 (modified original path). It worked out just fine and I lost very little time.

As mentioned in our last blog, strategic planning is about finding paths to our destination. In today’s story, I had a great path for getting to work, but I was temporarily blocked by an unusual occurrence. The same can happen to businesses. They may have developed a great strategic path which normally works, until an unusual event occurs.

For example, the severity of the current economic crisis can cause many formerly good strategies to suddenly stop working, just like that police car stopped my ability to get to work. So then the question arises: what do I do to my strategic path when there is a temporary blockage, like a recession?

Similar to my commute, you have three options. First, you can keep your strategy in tact, change nothing, and wait it out. Second, you can pretty much maintain your core strategic path, but make a small temporary adjustment. Third, you can look for an entirely new strategy which is specifically designed for the new temporary conditions.

As we will see below, typically the best response is option #2—small modifications to the path.

The principle here is that strategic success finds the proper balance between consistency and adaptability. Strategic consistency is very important. If you keep changing your position regarding what you stand for, you will end up standing for nothing in the mind of the consumer. By contrast, consistency reinforces your position over time, making it stronger.

Unfortunately, temporary events, like a recession, may cause your position to become far less relevant for the times. You may be shouting a consistent strategy of “quality” or “prestige” at a time when your customers are mostly focused on “low price.” Therefore, one may need to become adaptable to the changing times.

The question is how to adapt to the short-term while not destroying the long-term strength of your brand consistency. As we will see in a moment, this balance between consistency and adaptability is done via “context.”

But before we get there, let’s look at a real, live example in the marketplace—apparel retailing to teens. In the current economic recession, apparel sales to teens have dropped considerably. The old paths aren’t working like they used to. If I were an apparel retailer, what should I do?

Well, Abercrombie & Fitch opted for option #1 (stay and wait). They have not lowered prices or gone into any sort of panic promotions. They are acting as if nothing has changed. They are remaining consistent to their prestige “cool” image.

There is some logic to this approach. If they start shouting “price” and promote like crazy, they can potentially destroy the strategic foundation of the entire company. To quote CEO Michael Jeffries, “Promotions are a short-term solution with dreadful long-term effects.”

Unfortunately, this consistency places Abercrombie & Fitch in a position of being temporarily out of touch with its customers, causing them to leave and start shopping the competition. In November, sales for stores open at least a year at Abercrombie & Fitch were down about 28% from the prior year. A more promotional competitor, like Aeropostale, was down only 5% and more price-oriented The Buckle had an increase of 15%. At least for now, Abercrombie is losing market share and there is no guarantee that it will come back when the recession is over.

So, is option #3 (total strategic change to a price orientation) a better option? Not especially. To achieve those lower prices, these other firms had to significantly lower their gross margins, which tends to wipe out any of the profitability that the short-term sales boost provides. If you have built your reputation on prestige rather than price, you probably don’t have an infrastructure to support those lower margins. Therefore, you may not be much further ahead near-term in profits. In addition you may have destroyed your ability to return to your prestige pricing once the recession is over, so the long term is also destroyed.

So the trick is to find that balance in the middle, where you show enough adaptability to still be relevant to your customer, without changing so much that the long-term strategy is destroyed. To do that requires context.

For example, rather than looking at it as a dichotomy between two opposites (prestige versus promotional), look at how to make prestige more desirable in tough economic times. In other words, look for ways to increase the value while retaining the prestige context.

Beauty companies have done this for years. Rather than destroy their pricing image through heavy discounts, they go the other direction. They retain the same basic price point for the item, but add large gift boxes full of other beauty products for “free” with the purchase. This type of promotion retains the prestige pricing context, yet makes the value stronger in times of recession. As an added bonus, it can expose a customer to more of the company’s beauty products, which can lead to more future sales for the products that were originally received for free.

There can be lots of ways to increase value without losing context. Perhaps the prices stay high, but financing options are improved. Perhaps a purchase can gain the customer access to other relevant products/services/events that they could not otherwise have access to. In other words, make the prestige or exclusivity even greater for the same price.

Hence, the best option when you hit a temporary roadblock is most likely option #2. You essentially stay on the same basic path (the context), but make a small adjustment to make that context more relevant. This way, you help keep customers from defecting during the rough patch without destroying the long-term strength which comes through consistency.

When times get tough, there is the temptation to abandon one’s strategy and do whatever it takes to get sales in the door. Unfortunately, when you are looking for sales in the worst way, you often end up using the worst way to get sales. Remaining consistent to the context of your long-term strategy is usually the best approach, both for near-term and especially long-term profits. However, within that context, look for ways to make it more relevant to the current times through minor adaptations.

Standing one’s ground, like Abercrombie & Fitch, can sound very noble, like the sentries at Buckingham Palace. However, that makes one like a motionless statue, rather than a living being. And we all know what birds do to statues…and it is not pretty. Better to move a little bit and wave one’s arms to keep the ill effects of the birds away, provided one does not abandon one’s post.

Wednesday, December 3, 2008

Analogy #225: Fewer Colors, More Contrast

As strange as this might sound, my wife prefers to watch television in black & white instead of color. She says that all of those colors can be distracting and take away from focusing on the plot.

In addition, when the picture is in black & white you can increase the contrast. This makes certain items on the TV pop out more. It is easier to see the individual elements on the screen when the contrast is greater.

Strategic planning has a strong visual component. In the process, we are trying to “see” many things:

1) What does the future look like?
2) Which elements of the business should I be focusing my visual attention on?
3) What does “good” look like? How do I know when I’ve achieved it?

In all of the complexity and speed of today’s business world, the picture we see can look a bit blurry and confusing. There is so much to be done and so little time. It’s hard to pick out the critical issues from the flurry of the daily crises and the constant buzz of the Blackberry. How do we keep from drowning in the mundane and locate where our eyes really need to be focused?

The answer is that I think we need to become more like my wife. To find what is really important, we need to set our sights on fewer colors and more contrast.

When I say “fewer colors” what I mean is that we need to focus on fewer issues. Of the millions of things we could be paying attention to, not all of are equal importance. By getting the critical few linchpin issues right, the rest will tend to fall into place. We need to put blinders on to all of those pretty bright colors that can distract us from the core.

When I say “more contrast” what I mean is that we need to become more extreme in our strategic responses...see things more as Black or White and less as various shades of gray. When everything looks about the same (gray) everything gets treated about the same (mediocre or average).

However, if we accentuate the extremes, we get more dramatic variability in what we do. Everything that is black gets pursued at full speed and high resource. Everything that is white gets cut and ignored. True success is based on finding the few things to do very, very well and knowing what to not waste any effort on at all. Being average across the board leads to failure. It is by spreading your resources and priorities unevenly (with high contrast) that you get the best outcome.

So the principle here is to develop your strategic plan in a manner that:

1) Does not get distracted by a bunch of pretty and colorful things that aren’t important; and
2) Helps increase the contrast in the issues which are important, so that it is easier to see how to disproportionately allocate resources.

To see this in action, I will use a teleconference that was put on today by the Corporate Executive Board. About 10,000 listeners were learning about what top companies do to win during an economic crisis. Although they did not use these terms, a lot of what they said seems to reinforce this idea of fewer colors and more contrast.

Over and over, the theme seemed to be that the best companies narrow their focus and then get more extreme in their approaches within that focus. This suggestion was repeated in five areas.

1. Projects
When deciding what projects to work on, fewer colors says that in an economic downturn I should be focusing on fewer total projects. More contrast means that individual projects need to be treated differently. For example, instead of cutting 20% out of the budget of every project, cut 100% out of a large number of projects (kill them off) and perhaps even increase the budgets for the few that remain so they have a better chance of succeeding.

In addition, selectively ensure that the entire development pipeline has at least one project in full black attention. Don’t cut out all of the long term and only do the near-term projects. Selectively spread the resources so that a few projects in near-term, mid-term and long-term remain. And for the few that remain, pursue them with the highest of effort and resource.

2. People
To make sure your business has the best employees during troubling times, the Corporate Executive Board suggested ideas that emphasize fewer colors and more contrast. First, they said to focus your efforts on your very best employees. Second, they recommended that there be greater contrast between how you treat you best and your worst employees. Be more generous in the way you compensate your very best (even at the expense of others). Also, be more willing to get rid of the weaker employees. By doing so, the Corporate Executive Board says that you will do a better job of retaining your best employees and increase the overall quality of your employee mix.

3. Cost Control
When looking for places to cut costs, the Corporate Executive Board says to focus on fewer colors and put the bulk of the attention on making cuts at the point where the products and services are produced. Cuts at this level tend to be larger and last longer. In terms of increasing contrast, they suggest that while cutting at the point of production you may actually want to increase spending on general and administrative (G&A) costs. This seems to be what the best in class do. The rationale is that the people at the G&A level:

a) Have a broader perspective and can better see what to focus on.
b) Can better leverage best practices across more areas.

4. Product Mix
There are lots of attributes one can emphasize when putting together the value bundles offered to the customer. The Corporate Executive Board suggests that you “limit the colors” by only focusing on the attributes most important to people in an economic downturn. Then you increase the contrast by actually investing more in these few attributes which are most relevant (often at the expense of other attributes, which get cut way back or eliminated). That way, your company can afford to stand out as being the very best at doing what is most important to people at this point in time.

5. Risk Management
The Corporate Executive Board does not recommend an approach to try to reduce all risks in the business. After all, risks often lead to rewards. Therefore, more contrast is needed in how risks are handled. Some risks should be reduced by trying to push them onto the rest of the supply chain (primarily by focusing on contracts). However, there may be other risks that your business can uniquely absorb better than the rest of the supply chain. In those cases, you may want to even increase the risk in those areas by using your strengths there as a lever to get increased business (or increased concessions) from others in the supply chain who want to reduce risk in that area by handing the problem over to you.

Great strategic action plans tend to have two characteristics;

1) They narrow the focus of what is worked on to only a small handful of issues, which we referred to as “fewer colors.”

2) They have more variability in how to handle individual elements within the areas of focus—more extremes in the effort required (all or nothing), which we referred to as “more contrast.”

Instead of across the board cuts of a similar percent (which leads to mediocrity), make bigger cuts in some areas so that one can actually increase spending at a few critical points.

By following this “fewer colors, more contrast” approach, one can afford to selectively and aggressively go on the offensive, even in tough times when resources are lean. Since tough economic times tend to cause customers to reassess their buying habits, this is the ideal time to pick up market share. This will not only create rewards during the current times of difficulty, but create a stronger platform for when the times are good again.

To keep the “number of colors” down, sometimes it helps to use a clever catch phase to help people understand what is truly important to focus on. When I was at Best Buy, we called them KRAs (Key Results Areas). You couldn’t get funding or staffing unless it was tied to the small handful of KRAs. At Limited Brands they use the term CFI (Critical Few Initiatives). Pick your own three-letter acronym and focus away.

Tuesday, December 2, 2008

Analogy #224: Doing Vs. Becoming

When I was younger, I loved to work on doing maze puzzles. I even loved designing maze puzzles of my own. The objective of a maze is to find the one route that will get you all the way from the beginning to the end without reaching a “dead end.”

One thing I learned about mazes is that it is a lot easier to finish a maze if you work backwards, rather than forwards. In other words, starting at the end and seeking out the beginning is easier than starting at the beginning and seeking out the end.

The reason for this is simple. At the beginning of a maze, there are usually a multitude of options. Even though they all look potentially desirable, only one option leads all the way to the end. As a result, one can waste a lot of time choosing the wrong option and going down the wrong paths.

By contrast, at the end point, there is usually only one viable path. This makes it a lot easier to find the right path backwards to the beginning.

One of the goals in a strategic process is to find the right path into the future. Finding the right strategic path is similar to trying to find the right path in a maze. At first, many strategic paths into the future may appear desirable. It is only through careful analyses of these options that one can determine if each option leads to a desirable future or a dead end. That’s a lot of hard work.

The easy way out is to pick the endpoint first and then work your way backwards to today. This is where business visions come in. If you choose the right vision for where you want to end up, it is easier to find the path in the maze to get there by working backwards.

Conversely, if you have no idea of where you are trying to end up, all the paths in the maze look good (and it may be hard at first to distinguish between a desired end and a dead end). So visioning should precede path choosing. (I wrote a chapter on this concept in a book awhile back. Follow this link to read that chapter.)

Although it is fine to work backwards from a vision to today, there is a problem if we may substitute tactics for visions. When we do that, the easy way out often becomes a pathway to destruction, because we lose the rigor of the careful analysis.

For example, we may say that a particular acquisition should be our goal. Acquisitions are not strategic goals; they are only potential means to achieve a goal. Tactics are more like a path in the maze than and endpoint—a means to an end. That acquisition may or may not be the right path. By committing to a tactic, we have in essence pre-chosen our path before determining if it is the right path. There may be much better paths.

The principle here is understanding the difference between “doing” and “becoming.” Doing is a process. Becoming is an outcome. For example, let’s assume that your goal is to be the low cost operator in your industry. This is what you want to “become.” This is the end point in your maze.

Now, there are lots of potential ways to become a low cost operator. For example, one might consider:

- Outsourcing
- Creating greater economies of scale through growth by acquisition
- Instituting more rigorous controls
- Backward integration
- Eliminating costly services or features
- Using cheaper raw materials/ingredients

These options are the “doing” part. Each of these options can be a potential path in your maze. Not all paths may be right for you. In fact, sometimes opposite approaches may be better. For example, outsourcing may lower costs for some, while taking more control in-house may lower costs better for others. Backward integration may lower costs for some by eliminating the middle-man, but the opposite approach of opening up sourcing to more bidders could be even cheaper for others.

The right path for you may be quite different than for your competitors. It takes serious analysis to make sure you pick the right path for your business.

The problem occurs when our goal shifts from “becoming” to “doing.” In other words, instead of saying our goal is to “become” the low cost operator, our goal is to “do” an economy of scale acquisition. Choosing the “do” too quickly may cause us to commit to the wrong path before we’ve had a chance to see if there are better alternatives.

This problem can be seen in a recent survey of over 2,000 executives by McKinsey & Company. These executives were asked to think about a recent strategic decision (good or bad) and how the decision was derived. What McKinsey discovered was that good decisions were more likely to have come out of a process which used additional rigor when choosing the path. Bad decisions were put through less rigor.

For example, good decisions were more likely to come out of a process with:

- Better assessment of internal capabilities
- Thorough, objective review of business case, even when most were already strongly in favor.
- Use of a robust fact base
- Dissenting voices were heard

The problem when you choose a path too early is that one can always find a way to justify the decision. As a CFO I knew used to say, “I’ve been in this business a long time and I’ve rarely ever seen a proposal to do something that did not come with a pro forma that had a positive return on investment.” In other words, we can make almost anything we want to do look good on paper.

However, this CFO would go on to say that although all projects had a favorable pro forma prior to implementation, a large percentage would have negative returns once implemented. In other words, the pro formas seemed to have little correlation with reality. Apparently, more rigor is needed in the decision process.

So, when faced with a strategic decision, keep the following in mind:

1) Am I making a decision on what we want to become or what we want to do?

2) If the decision is about what we want to do…

a) Does doing this get us closer to what we want to become?

b) What are the other potential options (paths) of things we could do to get to what we want to become? Why is this option better than the others? In other words, don’t make the decision isolated in a vacuum. Put it into the greater context of goals and alternatives.

3) Don’t accept the assumptions in the proposal at face value. Pressure test them and see if the proposal still makes sense under less rosy assumptions. Listen to the dissenters.

Our strategic decisions cause us to choose a particular path, as in a maze. Just as mazes have many paths with dead ends, we can choose a strategic path with a dead end. To avoid dead ends, remember two things. First, make sure the path you choose (what you want to do) leads to the end of the maze (what you want to become). Second, take nothing at face value. Pressure test the assumptions and compare your proposal to other alternatives.

Getting the job done right is not the same as getting the right job done. Spending more time upfront on making sure this is the right path to take can save a lot of grief and dead ends later on.