Saturday, March 14, 2009

Strategic Planning Analogy #247: Pendulocity

I went to a science museum once that had a huge pendulum dangling from the ceiling. These are called Foucault Pendulums. The weight on the pendulum had a small point at the bottom, which slightly dragged through a sand pit. When the pendulum swung back and forth, it left a tiny etched trail in the sand ground showing the path it had taken.

With a pendulum that big, it could go back and forth for hours—seemingly forever. One would think that the pendulum would move in a straight line on its many travels back and forth. Hence, there would be only a single straight etched line in the sand.

However, this is not the case. Slowly, over time, the pendulum starts making curved etches in the sand. How can this be? It looks like the pendulum is going in a straight line. And, in fact, it is going in a straight line. So why is the sand line curved?

The problem is that the earth is rotating underneath the pendulum. The pendulum is indeed going back and forth in a straight line. It is the ground the sand is on that is moving with the rotation of the earth. This is called the Coriolis Effect.

Just as a pendulum goes back and forth, from one extreme to the next, so does public opinion and behaviors. Sometimes people as a whole are optimistic, sometimes pessimistic. Sometimes they want to spend lavishly, sometimes they prefer to be frugal.

Remember what it was like shortly after the events of 9/11 in 2001? People said they were changing their outlook and perspectives on life. They said they would be less materialistic and care more about their families and the people around them. They said they would think about the larger issues and go to church more. They talked as if this was a permanent change to their lifestyle that would last until they died.

Well, it wasn’t more than a few years later that we had one of the largest growth rates ever in the sales of premium luxury branded items. People were spending so much that we had negative savings rates. Attendance and interest in traditional churches dropped to among their lowest levels. Superficial celebrity gossip magazines and web sites were hotter than ever.

And now, after the economic meltdown, things are going back. Conspicuous consumption is out again—frugality is back. People are talking about the importance of family again.

This is just the pendulum of life going back and forth, back and forth. And this is the environment in which you must develop your strategy.

The principle here is something I call “pendulocity.” This is the combination of the words pendulum and velocity. The idea is to remember that world trends, like a pendulum, are always moving back and forth—from one extreme to another.

Sometimes, the velocity is relatively fast, as we saw in the shift from optimistic spending before 9/11 to conservative frugality after 9/11 back to optimistic spending and now again to conservative frugality. That’s quite a few swings of the pendulum in a decade.

Other times the swing is a lot slower. Back in the 1960s, the military was held in low esteem by many in the US. Soldiers coming back from Vietnam were ignored or booed. People went to great measures to avoid service, and the career path of the military was looked down upon by many.

Now, soldiers are viewed as great heroes, getting cheering crowds when they come back. Many are proud again to volunteer for military service. This swing from one extreme to the other took decades.

So not only do you have to consider the direction of trends, but also the speed.

There are three factors in particular about pendulocity that are important to strategy formulation.

1) The Pendulum is always in Motion
When a pendulum swings out to an extreme, it never stays there. It soon starts coming back. The same is true in the marketplace. Lately, I read reports of “experts” saying that the current recession is causing a “permanent” new reality. All those people trading down to shop at Wal-Mart are expected by experts to continue that behavior once things get better. Experts say the new frugality is a permanent behavior change for society.

Yeah, yeah, yeah. I heard things like that after 9/11 and at other swings of the pendulum in that direction. Guess is temporary. The pendulum will swing back. These are not permanent changes to behavior.

Don’t build a strategy that only works at the extreme of the pendulum or needs the condition to be permanent, because that condition is temporary. I remember that at the peak of the low-carb diet craze, someone was building a strategy around supermarkets that only sold low-carb food. It failed miserably, because by the time the first store opened, the low carb craze was already waning. The pendulum was moving back to a different diet craze.

There may always be a niche at the extremes, but the masses move back and forth. The changes are less permanent than you think. Remember that when developing strategies.

2) Anticipate Rather than Chase
One of the problems with the low-carb supermarket strategy was that the concept was chasing a trend that had already peaked. When chasing a pendulum, it is hard to catch up, because it is always in motion. By the time you see the peak and react to it, it may be too late. The pendulum is moving to another location.

The better strategy is to look at the direction the pendulum is going before it reaches the extreme. By anticipating the flow of the pendulum, you can get out in front of the trend and be ready before the peak. Hockey player Wayne Gretzky claimed that much of his success was due to the fact that he did not skate to where the hockey puck was, but rather to where the puck was going. He anticipated the future state of the puck and went there. So should you.

This is why trend monitoring is so important. It allows you to prepare in advance by getting early warning signs.

Early in the life of Best Buy stores, Best Buy put nearly all its effort behind one or two new technologies at a time, like microwave ovens and VCRs. When a technology is new, consumers tend to behave in a particular direction. They desire a store with extra service and expertise, to help them understand the new technology. Hence, they go to specialty stores and are willing to pay a little extra for the expertise.

However, once people get comfortable with a technology, they are less interested in expertise, and more interested in low prices. They shift their purchases to a discount store.

This was a predictable pendulum swing, from a specialist like Best Buy to a discounter like Wal-Mart. After experiencing it a few times, Best Buy founder Dick Schulze said he would never again run a retail concept dependent on a single type of product, because he always go burned when the trend swung away from him.

Instead, the idea was to abandon technologies early—not try to chase every possible sale, because that would be a losing battle against the discounters. Instead, Schulze would anticipate what was the next ascending new technology innovation and become the early leader in that. Then, he was in the right location when the new technology peaked.

3) The Pendulum Curves
The pendulum appears to curve, because the conditions of the ground below it are changing. The earth is always in motion, causing the pendulum to end up in slightly different places on earth each time it goes back and forth.

The same is true of the marketplace. It is in constant flux and movement, like the rotation of the earth. Therefore, when the pendulum swings back, it will not be in exactly the same location as the last time is swung back.

Each time the consumer trends swing back, the conditions will take a slightly different form. It won’t be exactly like it was the last time. There will be some variations. Therefore, one cannot just drag out the old strategy when the conditions come back. It will need to be adjusted for the changing nuances caused by the rotation churn along the way.

Nothing stays the same forever. Conditions change back and forth, like a pendulum. To be in the right place at the right time, one needs to know where the pendulum is going and make the proper adjustments.

The world is not a still photo. It is a moving video. If you develop a strategy around a single still photo (i.e., assume everything is frozen in one location or use only one data point), you will develop the wrong strategy.

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