Sunday, January 25, 2009

Analogy #235: It’s Not Fair!

Usually, the first words said by a baby have something to do with their father or mother…words like “Mama” or “Dada.”

Although I can’t prove it, it seems to me that one of the first sentences a child says is “It’s not fair!” Even if it is not the first sentence, it is probably one of the most frequent sentences you will hear from a small child…and usually accompanied with some tears (and perhaps a temper tantrum).

Even very small children seem to have a sense of justice. They feel they have rights, and when they do not get what they think they deserve, they cry out “That’s not fair!” Although you may disagree with these young children over what they truly deserve, there is no denying that these youngsters get very unhappy when they feel that they have not gotten a fair deal.

To show their displeasure, they may cry, throw a temper tantrum, or try to create their own sense of justice by stealing back what they believe was unjustly taken away from them. A good parent will eventually show the child that the world is not always fair and that we are not to create our own vigilante justice, but work within the system. In the meantime, parents will teach the child that temper tantrums are not the proper way to resolve problems.

Unfortunately, I have seen companies do the equivalent of crying “That’s not Fair!” and throw temper tantrums when a competitor has what appears to be an unfair advantage. Well, you know what? Life isn’t always fair in business and normally, throwing a temper tantrum will not solve the problem. Crying about an unfair disadvantage won’t suddenly make your “disadvantaged” strategy a rousing success. It is still a failed strategy, regardless of whatever injustice you feel.

And although you may want to use this “injustice” as an excuse for poor performance, guess what…your shareholders don’t care. They just want performance. Rather than throwing a temper tantrum, just pick yourself up and find a different strategy where you have the advantage in your favor.

The principle here is that the world is not always “fair” and that a good strategist does not use unfairness as an excuse. Instead, a good strategist looks for an alternative strategy which creates “unfairness” in its favor. In other words, instead of sitting around pouting over bad performance and blaming “It’s not fair!,” redesign your strategy so that the tables are turned and the competition is now the one claiming “It’s not fair!”

I was recently talking to an executive about a business division that was performing below expectation. I suggested that the problems were primarily due to a particular competitor that was gobbling up market share at their expense. The response I got sounded a bit like a temper tantrum excuse: “But that competitor is a dotcom startup that is not required to turn a profit. Because we require our division to make money, it cannot offer as strong a consumer value.” I half expected the excuse to end with a cry “It’s not fair!”

My answer was that it didn’t matter that the competitor did not feel compelled to make as big a profit as we did. From the customer’s perspective, they don’t care about all that profit stuff. All they know is that the competitor offered a better deal.

Hiding behind that excuse won’t solve the problem. Customers will continually flock to the place where they get the best deal. Eventually, the board and shareholders will stop listening to these cries of “It’s not fair!” and demand results. To solve the problem, this division needs a new strategy which creates a different type of value that the competitor cannot match.

I was reminded of a similar situation earlier in my life. The company I was working with had a division that was doing poorly against a particular large food retailer. This food retailer was privately held. Being privately held, this competitor made financial decisions as if its cost of equity was virtually free. Our company, which was publically held, had to calculate a large cost of equity into its return on investment. As a result, the competitor could “afford” to do things which our firm thought were poor investments.

The customer didn’t care about “cost of equity” and “return on investment.” All they knew was that these so-called “poor” investments created a preferred shopping environment for our competitor. People within our company were saying the equivalent of “It’s not fair!” They hid behind this excuse rather than change the rules with a new strategy. Guess what? The competitor grew and our division shrank. And no amount of temper tantrums would fix that.

So what do we learn from this?

1) Don’t Hide Behind Excuses of “It’s not fair!”
If the situation truly is not fair and you are at a disadvantage, then you have a broken strategy. Sticking with such a broken strategy is suicide. Crying about it won’t change it. Pick yourself up and change your strategy.

2) Develop a Strategy Where you Have Your Own “Unfair” Advantage
If your strategy is broken, you need to reposition yourself relative to the competition in a manner where you can create your own advantage. For example, if the competitor has a unique cost advantage which you cannot touch, then do not use a price strategy against them. That is suicide. Instead, find a place where they are weak (like service) and build your “unfair” advantage there. Remember, the goal is not to beat the competition at their game. The goal is to find your own game where you can win.

There is almost always multiple ways to approach the marketplace, particularly with a niche strategy. Find the approach where you have the edge over the others.

In the end, you may find that your best approach is a strategy where both companies win. For example, if you let them win on price and you win on service, then both companies can succeed on their own and not resort to killing each other firm in a downward competitive spiral.

Unfair does not mean illegal. It is not illegal that taller people win more basketball games. Their height gives them an advantage in basketball, and they can legally use that advantage there. But being tall is not always an advantage. If you are short and small, perhaps you should be competing as a jockey. Riding a racehorse is a place where a huge, tall basketball center is at a disadvantage.

A good strategy is one where the competition complains “It’s not fair!” about you rather than you complaining “It’s not fair!” about them. This requires looking for positions where your uniqueness gives you an edge that others find difficult to imitate. This proactive search for your own “unfair” edge is much better than just whining and complaining about the unfair edge that someone else has.

Lately the US government has been listening to a lot of whining and complaining about unfairness. The auto industry, for example, is asking for a handout because of the unfair advantage they claim to have versus the foreign auto companies. Just giving them more money won’t change the “unfairness.” Ultimately, the auto industry needs to change and find a strategy which is not broken.

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