Kmart Smart?

 

Mark Snyder's Challenge

Back on April 1, Chief Marketer ran an interview with Mark Snyder, the chief marketer at K Mart.  Mark Snyder took the job with Kmart about the time the stock market collapsed in 2008. 

 

What Mark inherited was a Kmart brand that was fairly worthless.  On just about every attribute, Kmart's image was worse than Target and Wal-Mart.  As Snyder put it, Kmart had "pretty heavy negative perceptions."  I'll say…I think its image could best be summed up in one word—"loser." 

 

I once did focus group research with teens about discount stores.  I'll never forget this one girl describing her feelings when her Mom insisted they go to Kmart.  She said, "I would stay in the car in the parking lot, lock the doors, roll up into a ball underneath the dashboard and pray that nobody I knew would see me."  K Mart was not exactly the brand people wanted to be associated with.

 

So Snyder's goal was to find a new brand identity for K Mart—hopefully one that was favorable.  He knew that Wal-Mart already owned "low price" and Target owned the trendy "cheap chic."  He needed to find something else to own.

 

His choice?  Smart.   To quote Snyder, "We decided Kmart could own the identity as the smartest [discounter]."

 

Smart???  If Kmart is so smart, why is it such a loser?  If I'm smart, why am I associating with such a loser?  Winners are smart, losers are dumb.  And right now, Kmart is not a winner.

 

If I had been in Snyder's shoes, I would have picked something different.  I would have picked the attribute of time.  I would have positioned Kmart as the "fastest" discounter.

 

Time Fits Who Kmart Is

Why win on time?  First, it takes advantage of the few things Kmart already has going for it.  Kmart's stores tend to be smaller than Wal-Mart's and Target's.  Small stores are faster to shop. 

 

Kmart's stores tend to be older and located closer to interior communities (whereas Target and Wal-Mart tend to be more likely on the outskirts of town).  This can make Kmart faster to get to—right in the neighborhood.   

 

Also, customers tend to equate successful stores with busy stores.  Hence, the perception would be that Target and Wal-Mart are so busy that it is hard to just get in and out quickly.  Conversely, Kmart must be faster to shop, since it is probably less crowded.

  

And best of all, if people have a negative conception of shopping Kmart, let them know that the time spent doing it is very short.  We've shortened the pain as much as possible.  Shift the attention to the experience with the product after purchase, not the shopping.

 

Time Fits Our Society Trends

People sense more pressures on their time than ever before.  There are more media choices to spend time on.  There is having to care for both your children and your aging parents at the same time.  Mobile devices mean we can never escape work, and so on. 

 

With more pressure on time, people have to make trade-offs.  Long term trends show that one of those trade-offs is spending less time shopping.  Other activities are getting a higher priority for that time than shopping.  So if that's how people value their time, than why shouldn't Kmart do the same?  Support what people desire by shortening shopping time, so that customers can spend it doing things they would rather do.

 

Time has become the new scarce commodity.  Kmart becomes the savings store that saves you time.

 

Time is Hard For Competitors to Refute

Time is the Achilles heal of Wal-Mart.  It takes forever to journey from their massive parking lots to the massive supercenters.  Navigating the inside of a Wal-Mart Supercenter is a very time-consuming chore.  And those checkout lines?  It seems like weeks go by as you stand there in frustration watching your frozen food melt before you.

 

It is extremely difficult to make significant cuts to the time a customer has to invest when shopping Wal-Mart.  They cannot suddenly make all of their mammoth stores small and convenient.  Their insistent pressure to do whatever it takes to be lowest price runs against spending the money to have fast checkouts.  In other words, Wal-Mart could no longer be who it is if it wanted to outdo Kmart on fast.  And Wal-Mart will not give up its ownership of lowest price to try.

 

Even if you want to save money, there are limits to how much time you want to waste in doing so.  Many would pay a few pennies more to claim back that time and frustration.  When you put time into the value equation, Wal-Mart's value suddenly doesn't look as strong.

 

Dollar stores, like Dollar General and Family Dollar, have seen great growth recently.  Part of that has to do with the economy and the fact that prices in these stores are cheap.  But part of it also has to do with time.  Customers realize that they can park right next to the door of a Dollar General and finish the shopping trip in just a few minutes.  Kmart could tap into that as well.

 

Implications for Kmart

So, if Kmart wants to own time and be known as the "Fastest Discounter" or "Time Savings Store" what must it do? 

 

First, make sure the checkout lines are the fastest in the business.  This is where people are most aware of time.  Make it where they are most aware of how much better you are at minimizing it.

 

Second, save people time through highly edited assortments.  Rather than forcing the customer to waste time trying to choose between dozens of types of ketchup to find the best deal, just sell the best deals.  Tell people that the Kmart merchants spend all the time seeking out the best deals so that you don't have to spend the time doing it.

 

By highly editing the assortments to the best deals, one can put all the one-stop shopping of the mammoth Wal-Mart of Target supercenter into the convenient little Kmart.  The new Kmart would be like three stores in one:  the speedy value food shopping of an Aldi/Save-A-Lot, the speedy value commodity shopping of a Dollar General/Family Dollar, and the speedy value fashion shopping that can be found nowhere else.

 

Third, save people time by linking the stores and internet shopping tightly together.  For items not in the edited assortment, you can supplement via the internet.  Allow people to pick up items ordered on line in the store, so they don't have to wait a few days for a UPS truck (saving waiting time).

 

Kmart becomes the king of convenience:  convenient locations, conveniently sized, one-stop-shopping convenience for food, fashion and commodities, and the most convenient checkout process.  Suddenly Kmart is not a loser.

 

Longer Term Opportunities

Once Kmart sheds the loser image for the time saver image, it opens future opportunities to leverage time.  Fast fashion is a hot trend in apparel retailing.  Firms like H&M and Forever 21 use it to rapidly change the fashion assortment in the store.  This has many benefits.  First, customers are less likely to procrastinate on a purchase, because they know the goods won't be around very long.  Second, customers return more frequently because they want to see the changing assortment of fashion.  Third, by purchasing in small lots, there is less chance of a store being stuck with excess inventory to mark down.

 

Thus, Kmart could morph fast shopping to include fast fashion when appropriate.

 

Then, maybe Kmart could add fast to services which are normally slow, or add fast home delivery to save time, or a host of other things.

 

Wal-Mart can say they save you money so that you live better.  Kmart could say they save you time so enjoy life more.  Now, in my mind that is a smarter Kmart.

 

Final Thoughts

"Kmart Smart" sounds to me more like an advertising slogan than a positioning statement (and not even a very good one).  But that's what happens when you let Chief Marketing Officers do strategy rather than strategists.

Strategic Planning Analogy #255: Growth

THE STORY
Once upon a time, there was a boy named Bobby who dreamed of being a great basketball star. Bobby’s dream had a problem—Bobby was short. Bobby knew that if was ever going to be a great basketball star, he would need to find a way to grow a lot.

One day, Bobby went to the carnival. In a dark corner of the carnival, far away from the midway lights and the noisy crowds, Bobby found a small tent with an old woman inside. The old woman claimed to have all kinds of magic potions for sale.

Bobby was excited! This was his chance to grow, so that he could finally become a great basketball star. Bobby asked the old woman for the strongest growth potion she had. As the old woman handed Bobby the growth potion, she tried to warn him about how it worked, but Bobby was too excited to stick around and listen. He ran straight home to take the potion.

Sure enough, the growth potion was very strong. Unfortunately, the only thing that grew were Bobby’s earlobes. His earlobes became so long that they dragged on the ground. Whenever Bobby tried to play basketball, he tripped over his earlobes and fell down. His dream had become a nightmare.

THE ANALOGY
Bobby dreamed of growth. He was willing to do almost anything to grow. Bobby got so focused on growth that he did something foolish. It lead to growth, but not the kind that helped him. Instead the growth made his situation worse.

Businesses tend to have a strong desire to grow as well. Just like with Bobby, not all business growth is good growth. Some growth can make your situation worse. Growth at any cost can often be too high of a cost.

THE PRINCIPLE
The principle here is that growth is only desirable if it makes you stronger. Growth in earlobes or cancer is not very useful. Growth in muscle and stature is. Therefore, be very careful about the type of growth you focus on. Here are my three rules on growth.

1. Focus on Growth of Market Position Rather Than Growth in Sales
Strong companies have strong market positions. Just think of the companies that tend to do well consistently over time. Nearly all of them have a strong position in the marketplace. Wal-Mart owns the price position in the marketplace. Apple owns “cool” design and usability. Toyota owns quality and reliability. Four Seasons owns Customer Service.

Conversely, struggling companies tend to have weak positions. What does Buick own? What does K Mart own? What does RCA own?

Therefore, a key growth measure is how fast you are growing the strength of your position:

A) In terms of how much your targeted customer prefers your brand (How loyal are your customers? Do they recommend you to friends? Would they pay a premium to get what you offer? How much repeat business do you get? Am I loved?);

B) In terms of performance relative to competition on the key positioning attributes (Are we the best at what matters?).

The particular metric in this area depends on your particular situation and what position you are trying to own. The key is to find a metric (or two or three) that shows how strong you are at a) rational performance on the key positional attribute, and b) emotional bonding with the customer. Think of rational performance as “muscle” and emotional bonding as “stature.”

A side benefit of a strong emotional bond is that it opens the door for the consumer to trust you as you migrate to new growth categories. For example, Apple’s emotional strength with the iPod position created the opportunity to successfully migrate to the iPhone.

This is superior to focusing on just growing sales, because not all sales are good sales. Sometimes sales growth can be like fat, or cancer, or big earlobes, rather than muscle. For example, to get extreme growth in sales, you can destroy your image. Just ask every exclusive fashion brand over the years what happened when they branched out to the masses. They got a near-term burst in sales, but in the long run destroyed the brand with its core customers and lost its ability to turn a profit.

Sometimes, the way to boost sales is to lower the price to virtually free. This can destroy profits and weaken the brand image (you get what you pay for).

Too many sales can overcome your ability to meet demand. Your standards may fall or disappointments may rise.

Or you can increase sales by venturing into diversifications in areas away from your core strengths where someone else already owns the market. Or you can pay way too much to get sales via an acquisition. Both of these can destroy profitability.

If you win on growing your market position, growth in desirable sales tends to follow. But if you look for sales growth at any cost, you can end up destroying your market position and end up with neither sales nor profits in the long term.

For more on this idea, check out my earlier blog on balloons.

2. Focus on Growth in Cash Flow Rather Than Growth in Profits
It is good to be loved and to be the best, but that isn’t worth much if you lose money on every sale. We also need to make money.

The best measure of how well you are making money is cash flow. Cash flow is about making sure more money is coming in than going out. The #1 factor determining stock price is anticipated future cash flows. The more cash flow potential you have, the more valuable is your company. Cash flow, provided it is not part of a ponzi scheme, is true muscle.

By contrast, net profits are a weaker measure. Yes, they can be muscle, but profits can also be fat, cancer or big earlobes. For example, you can buy profits through overpaying for acquisitions, which may make the bottom line go up, but create a negative return on investment and actually destroy value.

A profit focus tends to look only at outcomes. This can lead to growing near-term profits by starving investment in the future. One of the big problems at Enron was that it had such a strong focus on quarterly profits that it tended to ignore the idea of building sustainable business models.

By contrast, a cash flow focus looks at both inputs and outputs. It realizes that it is the net of the two that is most important. As long as the investments are sound, a lot of spending can be a good thing, because it builds muscle. I’d rather have a steady stream of good cash over time than a burst of profits in one year that comes at the expense of any future profit potential.

3. Strike a Balance Between Market Position and Cash Flow Growth
Both Market Position and Cash Flow should be a part of your growth plan. A focus on market position alone can lead to giving all the value from the strong position to the customer. Conversely, a focus on cash flow alone may result in not giving enough value to the customer.

However, by looking at the two together, one creates a balance. Company needs and customer desires both get fed, creating a long-term sustainable (and profitable) model, capable of growth over time.

SUMMARY
Growth is good, provided you are growing muscle rather than fat. To make sure the growth is muscle, focus on two things: growing Market Position and Cash Flow. A balanced approach in these two areas will almost always lead to muscle. By contrast, a focus on sales and profits may or may not lead to muscle. Instead it might result in fat or cancer.

FINAL THOUGHTS
They say that muscular people are more efficient at burning calories and can keep off new fat better than people who are already fat. Similarly, companies with historically strong market positions and cash flow orientation tend to continue to stay strong and avoid getting fat. So protect your future by getting into shape today.

Strategic Planning Analogy #254: Irratationality

THE STORY
When I was growing up, my grandfather lived with us (from my mother’s side). Well, from a political standpoint, my grandfather was about as conservative as humanly possible—a real extremist. On the other hand, my father was about as liberal as humanly possible—a real extremist. This made dinner table conversations very explosive.

Nearly every night, the two would argue about something. They could never convince the other one to change their mind. And they both thought the other one was irrational and “didn’t get it.”

I found it fascinating. I knew that neither one was crazy. I could easily follow the logic of both of them. This was not a matter of one being a genius and the other being an irrational idiot. They were both smart people.

The problem was that they had completely different sets of core beliefs about things like people and society. Their posititions sensibly and rationally flowed out of those core beliefs. But since their core beliefs were so different, their logic led to different conclusions. And since they always argued about their conclusions rather than their core beliefs, they could never persuade the other to change their mind.

THE ANALOGY
Strategic planning deals a lot with interpretation. First, one needs to take observations and statistics about what is going on in the marketplace and interpret them in a manner that allows the strategist to detect business opportunities. Second, once a strategy has been chosen, one needs to be able to communicate them to the “troops” in a manner that allows them to properly interpret what they need to do to succeed.

As we saw in the story, my father and grandfather had difficulty interpreting what the other was saying, because their core beliefs came from radically different perspectives. It was as if they were talking gibberish to each other. Their arguments were an exercise in futility (although I got a little entertainment value out of them).

For our strategies to avoid that same fate of futility, we need accurate interpretations. And that requires us to dig deeper into core beliefs.

THE PRINCIPLE
The principle here is about rationality. I’ve heard people complain that there is too much irrational behavior in this world, be that as it relates to the price of oil, the stock market, terrorism, or a host of other things. This can be used as an excuse to avoid rigorous strategic planning, since it is nearly impossible to plan in an irrational world.

However, I firmly believe that VIRTUALLY NO BEHAVIOR IS IRRATIONAL. Unless one is on drugs or mentally unstable, ALL ACTIONS ARE RATIONAL. The problem is not actions, but core beliefs.

Take, for example, a little girl who believes that there are monsters living under her bed who will eat her if she falls asleep. With those core beliefs, it is entirely rational to stay awake all night in fear. Even though a parent may see fear of sleep as an irrational behavior, it is entirely rational behavior for the girl. For a frustrated parent to just tell her to go to sleep anyway is not a convincing argument. If you want to get her to sleep, you first need to convince her that her core beliefs are incorrect—that there are no monsters under the bed. It is only with new core beliefs that you can get different behavior patterns.

So what are the implications for businesses?

1. Irrationality cannot be used as an excuse to not plan
The actions out there in the world are rational. If you cannot see the rationality, then you must be misinterpreting the core beliefs behind those actions. Get to understand those core beliefs and then the world will make sense. And once the world makes sense, you can create a viable strategic plan for that world.

Don’t use your inability to see the rationality as an excuse not to plan. Instead, look for the rationality via core beliefs so that you can make plans.

2. Understanding Core Beliefs Must Be a Core Part of Understanding the Marketplace.
Reams of facts on what is happening in the world can only take you so far. Knowing “what” is going on is only half the story. The other half is knowing “why” it is happening. It is only in knowing the “why” behind the “what” that you can fully understand and then exploit the situation.

The “whys” are hidden in the core beliefs. Therefore, core belief discovery should be fully integrated into your strategic planning process.

Don’t assume that everyone has the same core beliefs as you do or thinks like you think. What appears illogical to your core beliefs may be perfectly rational behavior under a different set of beliefs. Assume first that people are acting rationally, and then discover what core beliefs would make it so. If my father and grandfather had done that, they would have had more productive conversations.

3. Successful Strategies Find Ways to Satisfy Core Beliefs Better Than the Alternatives.
When looking for strategic alternatives, a core belief focus can be superior to a product-centered focus. Take, for example the fashion clothing business. Sales have been relatively stagnant for quite awhile. What’s the problem? Well, let’s look at the core beliefs. A large segment of those who traditionally have been motivated to buy a lot of fashion apparel have a core belief that their status/coolness and sense of self worth is enhanced when others think more highly of them. And they believe that others will think more highly of them if people see they are associated with the cool/status fashion labels.

What has happened over time is that coolness and status has been shifting from apparel to electronic gadgets like the iPod or the iPhone. Therefore, based on their core beliefs, it is entirely rational for these people to divert money previously spent on apparel and to spend it on electronic gadgets. In other words, Apple has created a superior way to satisfy a core belief that used to belong to apparel brands. For apparel brands to get that spending back, they need to either become cooler than Apple or start associating their labels with cool gadgets.

Focusing on superior apparel is not going to get the spending back. Instead, it is a focus on superior status transfer, since that is what the customer truly wants. Therefore, planning requires first discovering the core beliefs and then focusing on looking for ways to satisfy them better than the alternatives (and the alternatives can be entirely different types of products).

4. When Behavior is Against You, Attack the Core Beliefs
Back in the 1960s, Volkswagen was trying to penetrate the United States. People were reluctant to buy those Volkswagen Beetles because they were small. The core belief in the US at the time was that “Bigger is Better.” Therefore, if Volkswagen was going to make any headway in the US, it would first have to attack that core belief. Volkswagen did, by starting an ad campaign with phrases like “Think Small” and “Small is Beautiful.” It worked. Even to this day, that campaign is considered one of the best ad campaigns of all time. Moral of the story: switch behavior to your favor by first changing core beliefs to accept that behavior.

5. If Your Company is Having A Hard Time Implementing Its Plan, Then Look to the Core Beliefs of Your Employees.
Many strategies fail because the companies fail to adequately execute the plan. If employees are not motivated to make it a reality, it probably is not because the employees are lazy or stupid. Instead, it is probably because you have not adequately connected strategic success with your employee’s core beliefs. Employees like to feel that what they are doing is important and meaningful. This is particularly true among Gen-X employees.

That is why I like business missions which tap into a higher purpose. Rather than just being in the business to sell stuff, have a noble purpose where selling that stuff makes the world a better place. This taps into the core beliefs of the employees and will make them more motivated to make the plan a reality. I’ve talked about this in greater detail in another blog.

SUMMARY
Although the actions of the world may appear irrational, they really are rational once you understand the core beliefs behind the actions. Understanding and taking advantage of these core beliefs will make your strategic planning more successful.

FINAL THOUGHTS
If you look at a lot of political blogs these days, there is plenty of nasty, hateful name-calling of people who are on the other side of the political spectrum. That’s no way to create meaningful dialog. Remember, each side’s point of view is entirely logical if you just peel things back to the underlying core beliefs. That’s where the dialog should be. And if you want to be persuasive with your business arguments, that’s where the dialog should be as well.

Strategic Planning Analogy #253: Sailing Into Headwinds

THE STORY
One time I was on an executive retreat and had the opportunity to go sailing in San Diego Bay. That sounded like a pleasant and relaxing way to spend an afternoon, so I signed up. When I got to the boat yard, I found out that I was going to one of the leading schools in the nation for teaching how to race sailboats competitively. Well, so much for relaxing.

We got a brief lecture on how to race sailboats (way too short for me) and then we were out in the water. I was relatively clueless about what was going on, but a least we had a good teacher on this large sailboat (or so I thought).

Well, we lost the race, but at least once it was over I thought I could get that relaxing boat ride I had wanted. The teacher said it should be very pleasant, since it never rains that time of year in San Diego. Shortly thereafter, it started to rain.

As the teacher was moving the sail to catch some wind, he unknowingly tried to place the crossbeam in the same location as where my head was. I was knocked flat on my back and almost fell into the bay. Fortunately, the only thing that went into the water was my hat. We got to watch it sink into the bay.

With a sore head, I was ready to go back to shore. Unfortunately, at this point the wind totally disappeared. We were stranded and couldn’t go anywhere. We waited what seemed to me to be forever. The wind never returned. Finally, the teacher decided to call to shore to get a motorized boat to tow us in.

What a crazy day. I haven’t gone sailing since.

THE ANALOGY
Strategic Planning is a lot like sailing a boat. In both cases, you have a team of people trying to move from one location to another. In a racing sailboat, the goal is to get to the finish line before anyone else. In strategic planning, the goal is to reach and own a winning position before anyone else.

If your sailing team doesn’t know how to get a sailboat moving, you will not achieve your race goal. Similarly, if your business does not know how to get a company moving, it will not successfully achieve its strategic goal. Therefore, this blog will look at what we can learn from sailing success and apply it to strategic success.

THE PRINCIPLE
The principle here has to do with motion. Without the right kind of movement, you will not achieve your goal. In sailing, motion depends upon harnessing the power of the wind. The wind is an external force, over which the sailor has very limited control. A similar force is at work in business—it is the movement of the marketplace.

The marketplace is made up of a variety of trends. They could be things like demographic trends, lifestyle trends, governmental trends, attitudinal trends, and economic trends. Sometimes the trends are moving up, sometimes they are moving down. For example, in demographics you may see an increase in the elderly or an increase in young Hispanics or a decrease in traditional families.

Whatever direction the trends are moving in, it is movement. It is this movement that changes the direction in which money is spent. Like the wind, the directional movement of how money is being spent in the marketplace tosses around the fortunes of businesses like a boat. Also, like the wind, these market forces are external to your business and you have only limited control over them.

Good sailors know how to harness that wind to their advantage. Good strategists need to do the same. So what can we learn from these sailors?

1. It is Easier to Adjust to the Wind Than to Get The Wind To Adjust to You
Racing sailboats have all kinds of ropes, pulleys and gears. These are used to reposition all of the sails in order to catch the wind. The idea is that although the wind is essential for moving the boat, if you want the boat to move in the proper direction, you need to adjust the location of the sails.

In the current economic difficulties, many managers are blaming the economy for their poor performance. They refer to the recession is a “strong headwind” which is holding them back from achieving their goals. A good sailor wouldn’t use these excuses. They would instead adjust their sails to use that headwind to their advantage.

This doesn’t mean that you necessarily have to abandon your overall strategy in order to catch some wind. In the case of Target stores, their “Expect More, Pay Less” strategy has had to adjust its sails to be focused a bit less on the “expect more” side and a bit more on the “pay less” in order to catch the winds of the economic downturn. The overall strategy still remains in tact.

On the west coast, many high end restaurants have found that the current economic winds are moving spending away from expensive meals, but still going out for drinks. Therefore, many of these restaurants are adjusting by expanding the size of their bar and cutting way back on seating for meals, but they still want to be seen as high end.

As sailors know, it is easier to adjust the sails to the wind than to command the winds to change to suit your sails. Businesses that are fighting the prevailing long-term trends of the marketplace tend to fail. Just as sailors cannot change the wind, you cannot suddenly change the economy or make baby boomers young again. Being out of touch with the times is hardly a winning strategy and wishing for the times to change doesn’t help. Instead, adjust!

2. Have a Course, But Be Flexible
But what if my strategy wants to take me in the direct opposite direction of the near-term prevailing trends? Well, good sailors know that one can even make forward progress using winds going in nearly the opposite direction. The tactic is called tacking. In tacking, you make forward progress by using a zig-zag motion. The zig-zags provide angles that can catch the wind from alternating sides in a way that combine to still get you going roughly forward.

The idea for business here is that even during rough patches, a strategy can still move forward. However, the exact course may need to adjust a little—perhaps become more zig-zag and less direct. Remember, the goal is not to follow a precise line in your journey. The goal is to reach the finish line. If modifying the path gets you to the finish line faster, than so be it.

What does tacking mean from a business point of view? Well, if the trend’s against you, then zig-zag the agenda of your conversation with the customer. For example, let’s say you want to sell expensive luxury goods in an economic time when customers are cutting back and desiring cheaper items. The customer wants the agenda to be about price. You need to zig-zag around that and use the tough economic times to create an agenda which helps you. Examples:

• Luxury items have a lower total cost of usage because they last longer and need fewer repairs.
• It’s really not price, but value which counts.

Remember that this is a race, so stealing share from the competition may be the best move when the pie stops growing. Zig-zag faster than the competition by adding more service to the package (increasing relative value), or introducing some lower-price entry products, etc.

You can be flexible in the path while keeping the same goal in sight. So don’t just go wherever the wind wants to go. That is randomness that never gets to the goal. Use the wind to go where you want to go, even if it means taking a slightly different path to get there.

3. It takes coordination
When I was sailing that boat in a race, I was not alone. We had a racing team positioned at different spots on the boat to make different adjustments. We had different roles, but we had to work together in order to make the proper adjustments. Our teacher told us what to do so that all of our individual actions added up to the right adjustment.

The same is true in business. Strategic plans need leaders who know what adjustments to make and teams of people who can coordinate their work in order to make that adjustment. Strategies need to be more than platitudes on a piece of paper. They need to embrace action plans.

4. Be Ever Alert
Winds can change in an instant. All it took was two planes ramming into the World Trade towers on 9-11 to instantly cause a major redirection of marketplace trends. Sailors pay attention to the weather to try to anticipate wind changes. We need to do the same by studying trends and doing scenario analyses, so that we can try to spot changes early and have a backup plan in place for when they do.

5. Don’t Just Sit there
When I was in that boat race, we never had a moment to rest. We were continually tightening and loosening ropes. Sometimes we had to change where we sat and lean so that the weight was in the right place. It was tiring work.

The same is true with strategy. It is not something you do once a year for a few days and then ignore for a year. It is an ongoing process that requires action all year long. Adjustments are being made daily. If the strategists are not in on the adjustment discussions, then the adjustments can make the overall strategy obsolete. You need to provide context so that all the adjustments eventually get you to your goal.

And when the winds die, don’t just sit there waiting. Find ways to get towed to where the winds are (spend some capital, reposition). Sometimes the prevailing winds have moved so far from where you are that it is time to refashion an entirely new strategy.

SUMMARY
Businesses move on the winds of marketplace trends. These trends direct the way the money flows. If you want that money to flow into your sails, you need to be adjusting your sails on a continual basis. This does not mean randomly drifting with the wind and chasing every fad, but in cleverly using those winds to accomplish your long term goals.

FINAL THOUGHTS
One time I went canoeing a large lake on a very windy day. The wind blew me westwardly across the large lake and quite a ways north. When I tried to turn around and go back, I was not strong enough to fight the wind. It kept pushing me and the canoe back to shore. Eventually I had to get out of the boat and knock on doors until someone could help me call the boathouse to get them bring out a pontoon boat to haul me and the canoe back…another example of the problems which occur if you ignore the wind when planning a journey.

Strategic Planning Analogy #252: The Price is Wrong

THE STORY
Back in the 1990s, the warehouse industry was starting to explode. Firms like Costco and Sam’s Club were growing like crazy, taking market share away from traditional supermarkets.

I worked for a traditional food retailer who believed that the clubs were getting an unfair advantage. The belief was that traditional supermarkets were paying full-price to the manufacturers for product.

By contrast, it was believed that the clubs were getting preferential pricing. The manufacturers were spending extra money to bundle their products into larger “club packs.” Yet even though the manufacturers took on extra costs to make these club packs, the clubs were paying less money for their product.

The rationale? The club business was seen by the manufacturers as a small incremental business. As a result, they were only charged for the incremental additional cost to serve them. The core expenses for development and infrastructure were only passed on to the core supermarket customers. At least that’s what they thought at the company where I worked. And they didn’t like the idea of subsidizing the manufacturer so that the clubs could get a cost break.

To test the theory, we opened up some warehouse clubs of our own. That way, we would be able to see the actual types of prices being charged to the clubs. If we could prove the theory, we were going to make a big stink about it.

Well, the manufacturers figured out what we were up to, so most manufacturers either refused to deal with us or they offered the identical deal that they were giving to our supermarkets. Soon thereafter, we had to shut down the experiment.

Of course, it didn’t take long for consumers to see the lower prices in the clubs.

What’s happened since then? Well the combined sales of Costco and Sam’s Club are now over $115 billion. Traditional supermarkets have lost a ton of market share. Clubs really aren’t incremental business any more.

THE ANALOGY
A key part of strategy has to do with pricing. What is the best pricing strategy? Price too low and you forego potential income. Price too high and sales may vaporize.

A key part of pricing struggle comes when you are pricing your product into two different distribution channels, like clubs versus supermarkets. Manufacturers in the early years appeared to give the clubs a price advantage by treating them as incremental business that only needed to cover incremental costs.

Of course, when you give one channel the advantage, you are creating a market dynamic which favors one channel over the other. Market share shifts will follow. In the long run, that can be a problem, because if the core business shrinks too much, there is nobody left to cover all of the core costs. Incremental pricing won’t pay all the bills.

THE PRINCIPLE
The principle here has to do with understanding the long-term consequences of incremental pricing. This is particularly important in this digital age. The incremental cost of adding a digital component to a core business is virtually free. Adding a digital news component to a newspaper company adds virtually no incremental costs. Adding a digital sales channel for selling songs adds virtually no additional costs to the recording label. Adding a digital sales channel to a travel agency adds virtually no additional costs. And so it goes in the digital world.

The problem comes when these new digital channels are priced out at the incremental cost added by that channel. Since the added costs are virtually free, one can charge virtually nothing and still appear to be putting extra profit on the bottom line.

Of course, this only works if the core business can still absorb the core costs. Although a digital newspaper may be virtually free to produce if you have a healthy newspaper to cover the core costs, what happens if the paper version of the newspaper goes away? That news-gathering organization is very expensive. Somebody has to pay for it. If you give away the digital version, it cannot absorb these costs.

This is a real problem today. Large newspapers like Denver’s Rocky Mountain News and the Seattle PI are gone. The Detroit newspapers only home deliver a couple of days a week. Tons of smaller papers have or will soon be calling it quits. There are rumors that even big papers like the Boston Globe and San Francisco Chronicle may soon cease to print newspapers.

It used to be that newspapers had one of the largest profit margins around. Traditionally, the most profitable part of the newspaper was the classified section. Digital sites like Monster.com took away the job classifieds and other sites took away the car classifieds. Others, like Craig’s List and EBAY took away a lot of the rest.

Then the younger generations stopped buying the papers and got their news off the internet for free. So the newspapers lost their most profitable advertising and a big chunk of their customers. And when newspapers lost a generation of customers, they became less desirable for other advertisers. Suddenly, papers like the Seattle PI were losing $14 million per year.

The same thing is happening in the entertainment industry. With the sales of CDs vaporizing, there is not enough money coming in to pay the bills in the music industry. The small, incremental prices for music (often free) on the internet are not making up the difference. People are scrambling to find a new business model. Although there is no consensus on what that new model will be, there is an agreement that the profitability of the entire music ecosystem has permanently shrunk and there is a lot less money to share with all the players.

Digital travel sites were priced so low that the traditional travel agent industry is virtually gone.

So, what can we learn from this?

RULE #1: Price Favoritism Eventually Leads to Market Share Favoritism If one channel is given a pricing advantage, it will eventually get a market share advantage. The channel that only pays the incremental cost gets an advantage. It can price cheaper in the marketplace, because it isn’t burdened with its fare share of the non-incremental costs.

Consumers tend to prefer paying less rather than paying more, so market share shifts to the one with the pricing advantage, be that wholesale clubs, digital news, digital music, digital travel, and so on. It might not happen overnight, but it will happen.

As the subsidized product gains share from the non-subsidized channel, eventually the whole idea of incrementalism becomes invalid. The subsidized product is now too large to be just incremental business. It is becoming the new core. Conversely, the old core business is no longer large enough to cover the core costs.

RULE #2: Once a Low Price Has Been Established as the Norm, It Gets Sticky
Now, one has a problem. Expectations have been set. People expect digital products to be essentially free. This expectation becomes sticky in the mind of the customer. They are resistant to start paying a lot more for something that they used to get for a lot less.

Therefore, it is extremely difficult to raise prices to cover the core costs once the lower incremental price has been set. As a result, supermarkets are going away, newspapers are going away, travel agents are going away, and so on. The business model is broken and it is very difficult to fix.

The solution?

1. Consider the potential long-term market share shifts when pricing to a new channel. Ask what happens when this little side business becomes the main business. Does the model still work?

2. Try to work early in the conversion to set the pricing expectations for the new channel, since it is difficult to change expectations after they are set.

3. Look for ways to reinvent the core, so that it can still be supported. This may require a whole new business model, where costs may need to be shared with competition, or revenues may need to come from new sources (like advertisers).

4. If the business model looks like it could be in serious trouble due the channel shift, sell out early. The folks who sold out of the newspaper business a few years ago were the smart ones.

SUMMARY
When new distribution channels show up, keep in mind that your near-term decisions on how to price to that channel can have serious long-term consequences. Think out the whole scenario before making a hasty pricing decision just on incremental costs.

FINAL THOUGHTS
Many young cartoonists have recently given up their profession. Newspapers cannot afford to take on new, unproven cartoons. The new cartoons are all over the internet for free. Without an income, these cartoons are disappearing. And that’s not funny.

Strategic Planning Analogy #251: Exploit Your Luck

THE STORY
Back in the late 1960s, when Nicholas Charney was getting his Ph.D., he loved to read articles about psychology. Unfortunately, other than the occasional article in Scientific American, he couldn’t find much of interest to read on the subject. Therefore, even though Nicholas Charney was not formally trained in psychology nor had any experience in publishing, he started a magazine in 1967. He called it Psychology Today.

In a short period of time, Psychology Today became a huge cult hit. It captured the turbulence of the times and put a new countercultural spin on it. Readership was high and so were the profits. Businesses waved a bunch of money in front of Charney, so he eventually sold the magazine for a huge profit.

Well, that all seemed easy enough, so Charney decided to do it again. This time he started a magazine called Careers Today. It failed miserably in a short period of time.

Later, Charney bought the Saturday Review. He had the notion of converting the weekly magazine into four different monthly magazines. In the process, he destroyed the Saturday Review, which had to be resurrected by the old publisher.

During the thirty years or so after he sold Psychology Today, Nicholas Charney tried a number of different business ideas but never really hit upon another success.

And what happened to the magazine Psychology Today? Well, once it got into the hands of professional publishers, they destroyed the original counter-culture freedom that drove the business. Instead of the old days, when the magazine was created out of a beach house in California by a bunch of free spirits, it was moved into offices in Manhattan to be run by the professional “suits.”

Every few years, the magazine would be sold to yet another publisher. Each time, Psychology Today became an even bigger losing money pit. At one point, it was owned by a psychological association, who tried to make this counterculture classic into a dull academic journal where its members could get published. Eventually the magazine went totally bust. Now, it has been resurrected, but it is a shadow of its former self.

THE ANALOGY
There’s an old saying that it is better to be lucky than to be good. Nicholas Charney was not a good publisher. He had more failures in publishing than successes. But Charney was very lucky in that his personal interests and personal style were exactly the right blend of magic for creating a successful counter-culture psychology magazine in the culture of the late 1960s.

This lucky magic of success for Psychology Today depended upon a lot of particular events all converging at the same time—Charney’s interests, Charney’s unconventional approach to publishing (more like how dotcoms were run in the 1990s), the emotionally charged environment of the 1960s, and so on. Without the serendipity of these chance events coming together, Psychology Today would never have been a successful launch.

The problem was that people did not realize how much lucky happenstance was behind that success. Charney thought he was good enough at publishing to create a whole string of successful publications. He was wrong. He was never able to pull together enough lucky serendipity to create another success.

The publishers got it wrong as well. They thought that since they were smarter publishers than Charney, they could make Psychology Today an even more successful magazine. What they failed to understand was that the success was based on a lot of intangibles that had nothing to do with publishing—the corporate culture of the magazine, the culture of the 1960s, the unusual interests and desires of Charney, etc. When they destroyed this magic formula, there was no more magic in the magazine. The luck was sucked out of the venture.

So Charney was lucky, but not good, and the publishers were good, but not lucky. And as we said earlier, it is better to be lucky than good.

This is not the only time that this type of event has happened in the business world. Remember all those successful dotcom “geniuses” in the 1990s who sold their little start-ups for huge sums of money? They all thought they could do it again, over and over. The media called it “serial entrepreneurship.” The idea was to sell your little start-up for a fortune and then do another start-up to sell for a fortune, and then do another one, and so on.

Unfortunately, the pattern of Psychology Today was often repeated. Most of these so-called geniuses never had another blockbuster startup after their first. They had been lucky. And many times the companies who bought these startups ended up having to write them off as big failures.

Therefore, if we want to avoid these outcomes, we need to understand the role of luck in a successful strategy.

THE PRINCIPLE
The principle here is to exploit the luck that comes your way. Many years ago, I knew a business consultant who said, “Great business ventures come along very rarely. If you are lucky enough to find one, exploit it for all it is worth, because you may never get another such opportunity.” His point was that when the luck of good fortune comes your way, don’t squander it. Don’t treat it lightly. Instead, maximize its potential, because you may never get another chance.

This is the third blog in a row on luck. It all started with a statistical study by Deloitte stating that the majority of successful companies are where they are because of luck rather than skill. In the first blog, I stated that perhaps we should focus more on positioning than on skill. In the second blog, I stated that there are ways to increase your luckiness. In this blog, we will look at how to exploit the luck you have.

1) Understand the Lucky Factors and Hold Them Together
If it is true that success less to do with skill, and more to do with a lucky confluence of little serendipitous events, then it behooves one to understand what factors caused that luck. Otherwise, you will not know how to keep the luck alive.

In the Psychology Today example, the big publishers did not understand what caused the luck. Therefore, they reinvented the magazine in a manner which took many of the lucky factors away (Charney, counter-culture work environment, etc.). They thought they were smart enough and skillful enough to succeed. Their smarts and skills were less powerful than then lucky confluence of factors they got rid of.

So dissect the lucky success to see what odd mix of factors created the magic for that success. Then do whatever you can to keep that magic alive as long as you can. Rely on that magic formula more than you rely on your skills.

2) Build up the Business as Big and as Fast as you Can
This may be the only really lucky break you will have in your lifetime. Therefore, don’t squander it. Try to squeeze as much out of it as you can. Grow it large and grow it fast (provided that doesn’t break the magic formula).

Microsoft got lucky when IBM licensed its MS-DOS program. Bill Gates had a pretty good idea of what made him lucky and he build a huge business called Microsoft to exploit that lucky break as much and as long as possible. At the same time, he built as many barriers as possible to protect that lucky break for as long as possible.

3) Look for the Next Lucky Confluence Instead of the Next Repetition
Times change. The next magic formula for luck may look entirely different from an earlier version. In the late 1960s, a countercultural magazine on psychology was the magic formula. Now, it might be some app for the I-phone.

Don’t blindly try to keep repeating the same formula over again (like Careers Today magazine). Lightening rarely strikes twice in the same location. Instead, look for the next odd confluence of factors, and try to figure out the new magic formula that luckily takes advantage of this new situation.

4) Quit While on Top
Some of the lucky factors may be outside your control. For example, some of the early success of Psychology Today had to do with anti-establishment, rebellious mentality of the 1960s. As society moved to a different cultural mindset in subsequent decades, the luck started to go away. If you can see that the lucky factors are starting to go away, sell out at the top to someone who naively thinks their skill can overcome your luck.

Even though the publishers lost a lot on the purchases, Charney did okay when he sold out. And when you sell out, don’t believe that the success was all because of your “genius” and that you can easily repeat your success. Then, you are throwing away your money on ventures that will probably fail (like Careers Today or Saturday Review). Just pocket the money as a lucky break.

SUMMARY
Many times luck triumphs over skill. Therefore, when you get lucky, figure out what the magic formula is and exploit the luck for all it is worth.

FINAL THOUGHTS
Las Vegas counts on the fact that people continue to play once the luck has gone away. Don’t fall into the trap of believing you can outsmart the house. When the luck starts to go, cash in your chips.

Strategic Planning Analogy #250: Be Prepared

THE STORY
A great number of significant inventions over the years have come about due to lucky happenstance. For example:

1) The artificial sweeteners saccharine, cyclamate and aspartame we not discovered as part of a dedicated effort to find an artificial sweetener. Instead, chemists were working on something entirely different and just happened to notice a sweet taste when licking their fingers or smoking a cigarette after handling the compounds.

2) Phenolphthalein was discovered to be a potent laxative quite by mistake. It had been tested as possible marker inside cheap Hungarian wines, in order to help identify them. How would you have liked to have been the one testing those wines?

3) Velcro was discovered by a man who was frustrated with having to pull thistles off his clothing whenever he went into the woods. Once he discovered what made the thistles “sticky,” had the concept behind Velcro.

4) The principle behind microwave ovens also came by accident. A scientist working in a lab liked to carry a candy bar in his pocket for an afternoon snack. He noticed that after working around the microwave generator in the lab his candy bar always melted in his pocket. I suppose he should have also wondered what those waves were doing to the rest of his body, if it could melt a candy bar.

Louis Pasteur was well aware of this process of accidental discovery. He had determined that careful observation of randomness lead to more discoveries than deep dives into theory. As a result, in 1854, Pasteur said the famous quote “In the field of observation, chance only favors the prepared mind.”

THE ANALOGY
Great business strategies are a lot like great scientific discoveries—they often come about because of luck. The folks at Deloitte recently did some extensive research into this phenomenon. You can learn more about this study by going to these sites: here, here and here.

What Deloitte found was that a company’s success appears to have more to do with luck than with any particular management skills or techniques. The research implies that you can pretty much throw away all those books about doing what the “successful” companies do. Just get lucky.

THE PRINCIPLE
“Get Lucky” is not vey useful advice. People like McKinsey and Company would go bankrupt with that type of advice (I’m not sure Deloitte is going to make much money on this advice, either). We need to go back to the advice of Louis Pasteur. He advised that you can increase your luck if prepare your mind for it.

Over the course of time, I suppose that millions of people have been bothered by getting thistles stuck to them. Heck, my cat seems to get covered with thistles all summer long (and guess who has to get them out of the fur?). But only one person was observant enough to see the potential for Velcro in those thistles. What about the rest of us millions? Why didn’t we see the potential?

It is not enough just to be in a place where a lucky happenstance is possible. One needs, as Pasteur put it, a “prepared mind” to discover the possibilities. And that, my friends, is not luck. We have some control. In this blog, we will look at what we can do to increase our “luck” through preparation.

1) Prepare Your Visual Agenda
If you want to be in the right place at the right time, then you need to be in a lot of places, all the time. This is not to imply that your business should be unfocused and all over the place. Focus is clearly an important part of strategic execution. But if you want to create “luck,” your eyes need variety.

The point here is that if you want to see something new and exciting, then you need to be looking at new and exciting things. If you spend all your time looking at boring spreadsheets and attending boring meetings, you will not have your eyes in places where they can discover exciting things.

Put another way, if you spend all your time locked up indoors, you will never experience the thistles of life that lead to great discoveries. Get out into the real world and look around. Experience life. Go to where things are happening. Watch life in its fullness. Talk to your customers. Talk to strangers. Experience life personally…get your hands dirty.

When Ross Perot was on the board of GM, he used to complain that the top executives would never come up with any great automotive insights, because they had stopped having normal automotive experiences. They never bought cars, they rarely ever drove cars (they had chauffeurs), and one had even let his driver’s license lapse without renewal.

Make a point of blocking off time on your calendar to see what’s going on in the real world.

2) Prepare Your Mental Approach
So you get out into the world and get covered with interesting “thistles.” That’s only half the battle. Now, you need the insight to convert that into a marketable idea.

To do this, your mind needs to be prepared for the task of discovery. Discovery is more than just seeing the obvious. Discovery is being able to apply what you see to a new business model, a context not yet in existence. Seeing a thistle and envisioning a new way to temporarily fasten items are two different approaches. It is the second which leads to “luck.”

So how do we prepare our mind for this type of discovery? Here are some ideas.

a) Be prepared for unintended consequences.
In the examples in the story, great scientific discoveries were found in the process of looking for something entirely different. The chemists weren’t looking for an artificial sweetener, the wine people weren’t looking for a laxative, and the scientist was not looking for a new type of fast oven. If they had only been focused on the original task at hand, they would have ignored these little nuisances or oddities and the discovery would never have occurred.

Therefore, if we assume that many great discoveries are going to be accidental (not a part of our original objective), then we need to be open for these chance encounters. In fact, we need to actively seek them out. These unintended consequences (sweet taste, melted chocolate bar) are often the most important consequence.

Don’t become so focused on the original task that you miss the other items going on. These interesting tidbits of information can be so much more valuable than the original goal. Make note of them. Ponder them. See if they have a business application. Just because they are not immediately applicable to the original objective is not sufficient enough justification to ignore them.

b) Look for Solutions/Problems
People, in general, are not really buying products or services. What they are really buying are solutions to problems. How you solve the problem is not as important as how well you solve the problem. To fix the problem of too much weight, one can look to many distinctively different areas for a solution—exercise, diet, surgery, enemas, drugs, and so on. Often times, great success does not come from improving a current approach to a problem but in finding an entirely different approach for that solution (like laser surgery instead of eyeglasses to solve the problem of poor eyesight).

Therefore, when you see an unexpected consequence, look at it in the context of solutions. What problems will that action solve? Will this approach solve a problem better than current alternatives? When looking at the thistle, do you see a potentially superior solution for adhesion? When you see a melted candy bar, do you see a potentially superior way to heat food?

Conversely, you can look at a situation and see what problem is not currently solved well. By seeing the situation as an unresolved problem, it can focus your thinking on ways to solve it. For example, if you observe your customers in action, you may see struggles you were not fully aware of before. Now you have a focused area for inspiration (solve problem “X”), but unbounded by any particular type of solution.

C) Look For Ways To Exploit What You See
Finally, once you discover the solution (the Eureka moment), the last step is to exploit it. A lot of what appears as luck is really just perseverance and sweat. Experiment with the idea. Build prototypes. Get it out into field testing. Not everything you try will be successful, but we know that you will never be successful if you try nothing.

SUMMARY
Success often is a result of luck. However, there are ways to improve your chances of being lucky. Prepare your eyes to look for the lucky happenstance. Prepare your mind to see the potential of the lucky happenstance. Transform the lucky idea into a workable business solution.

FINAL THOUGHTS
The old Girl Scout motto was “Be Prepared.” This is not a bad motto for strategists as well.

Random Search for Excellence

In March, the folks at Deloitte produced the findings of some interesting research.  It implied that all of those business books that try to teach us the tricks behind successful businesses are of little use.

 

According to the research, most of the companies which appear to be successful in these books are really just lucky.  Therefore, studying the tactics and management styles of these so-called "successful" companies is fairly worthless, since it was luck which got them there, not their skills or management styles.

 

You can find the study at:  http://www.deloitte.com/dtt/cda/doc/content/us_consulting_persistencerandomsearchfor_April2009.pdf

 

You can find the Deloitte blog on the topic at:  http://blogs.deloitte.com/persistenceproject/.

 

I tried to put a comment about their report on their blog, but as of yet, they have not printed it.  Therefore, I am printing my response below.  In a few days, I hope to have a more formal blog on the topic.

 

My Response:

 

After reading through the data in your paper (A Random Search for Excellence), I came to a completely different conclusion than the one voiced in the document.  The underlying current written between the lines in the article seemed to be that "style does not determine substance."  In other words, the relationship between the way a company is managed (management "style") and the way it performs (its "substance" as defined by ROA or TSR) seems to be predominantly random.  Therefore, don't put a lot of hope into recommendations of how to improve your substance by changing your style. 

 

This line of reasoning leaves the reader in a rather hopeless state--Just try to be lucky and see if you can find a fable with questionable relevancy.

 

While all of this may have some truth in it, there is also a second truth in the data which I find very uplifting and practical.  This other truth is that while style may not determine substance, positioning does. Getting positioning right (something you have control over) can help you be successful.

 

Consider the two data conclusions from the paper: 

 

1) The most likely outcome for a firm in any decile is to repeat that decile in the following year.

2) This stickiness in performance is especially pronounced at the high and low ends of the spectrum.

 

What these two conclusions say to me is this:  Once you have established your position in the market, it tends to stick.  If you pick a winning position in the marketplace, you tend to remain a winner.  If you pick a losing position, you tend to remain a loser.  Therefore, rather than worrying about "style" we should focus on one's market position.  If you get positioning right, it can overcome a lot of other randomness and get you "sticky" in the right outcome place regardless of style.

 

Winning positions are the sweet spot between three forces:  consumer desires, internal capabilities and marketplace vulnerabilities.  In other words, if you are able to profitably meet a desire better than anyone else and the market allows you to own that position in the mind of the consumer, then you have a winning position.  (I go into the process of finding a winning position in a lot more detail in one of my blogs: http://planninga-from-nanninga.blogspot.com/2008/09/analogy-207-eight-questions.html)

 

Wal-Mart has won over all these years primarily because they have won the low price position in general merchandise, much more than any management trick.  K Mart has lost because it did not secure that position.  It has caused both of these companies to be stuck on opposing ends of the performance continuum.  They are not randomly walking.  Their fate is sealed by the nature of their position.

 

To learn more, read what Al Reis and Jack Trout have written on positioning, or better yet, read all of my blogs that are tagged with positioning (http://planninga-from-nanninga.blogspot.com).