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.

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