Thursday, July 30, 2009

Strategic Planning Analogy #268: We're All in the Fashion Business

A few years back I was working on a project with a number of people in the recorded music industry. I noticed that most of the people who worked in that industry tended to wear black clothing—from top to bottom—nearly every day.

I finally couldn’t take it any longer, so I asked one of them why he (and the others) wore black every day.

He paused for quite awhile, with a puzzled look on his face. Finally, he said, “I don’t know. I guess it makes it easer to get dressed in the morning.”

It’s easier to get dressed when the element of fashion is taken out of the equation. If everything in your closet is black, you can grab just about anything and look okay.

For most people, however, clothing is not so simple. Fashion is a concern. Clothes need to be in fashion and coordinate together. If your clothes are out of fashion or not well coordinated, it will reflect poorly on your image. When clothes go out of fashion, they need to be replaced with the newest and latest. Wearing the right labels is also a concern.

As a result, when the element of fashion is added, getting dressed in the morning suddenly becomes a more complex affair. It takes some effort to stay on top of the fashion cycles, so that you are not looked down upon. There are even TV shows to help us understand fashionable dressing.

Most of us are aware that clothing is driven by fashion. However, as we will see in this blog, virtually all businesses have a significant element of fashion to them. Just as being out of fashion in clothing can hurt your image, being out of fashion in your business can hurt your company’s profitability. Businesses need to get in tune with the fashion complexities of their industry.

The principle here is that everyone is in the fashion business. You ignore the fashion element at your own peril.

Everyone? We’re all in the fashion business? Sure…things go in and out of fashion in business all the time. Take finance. Sometimes private equity is in fashion, sometimes stock is in fashion. We tend to be somewhat faddish over the latest new wrinkle in debt structuring. Sometimes entrepreneurs are in fashion, sometimes big business.

In the automotive industry, sometimes big ol’ trucks are in fashion, sometimes tiny little cars are in fashion. Even the fashion allure of some brands come and go out of fashion. When it comes to Japanese imports, first it was Datsun that was the fashionable one to have. Later, it was Honda. Then Toyota. And now the Toyota brand may be starting to lose its fashion appeal as the hot import brand.

Governments go in and out of fashion. Sometimes it’s more fashionable to be liberal; sometimes it is more fashionable to be conservative. Fringe political groups go in and out of fashion, too.

Food is fashionable. Sometimes Thai food is in. Other times, it’s Indian or Italian. Organic is now fashionable. Carbs were totally out. Now they are back.

In computing, netbooks are in, desktops are out. And mobile phones are extremely fashionable—an older phone really looks out of date and makes you look unfashionable.

The point is that nothing lasts forever and no purchase is 100% rational. Emotional/Fashion elements suddenly make things far more desirable than what makes rational sense. Just as suddenly, they become passé and out of favor. Look at those crazy foam-like Croc shoes. At first they were in such high demand that Crocs could not manufacture them fast enough. Now, sales have plummeted and Crocs is on the verge of bankruptcy. The shoes didn’t change. Demand changed due to a change in fashion.

This phenomenon affects more than just apparel. Consumer markets, business markets, industrial markets, governmental markets, and so on, go through fashion cycles. And as we all know, business management practices are among the trendiest of them all.

So if everything has an element of fashion to it, what can we learn from the fashion apparel industry? I think there are three important principles.

1. The First Markdown is the Best Markdown
When things start going out of fashion, it is usually not a long, slow drawn-out affair. The transition is rather quick. Just ask Hummer how fast they went from cool to embarrassing. When the mortgage market went sour, it killed the fashion for fancy new housing construction almost instantly. In the fashion apparel world, they understand how fast the latest hot thing can go cold. As a result, as soon as there is a small hint that things may be turning bad they go into action. Production is halted; huge sale signs go up; inventory is pushed out the door as fast as possible, regardless of cost. This is not a time to be tentative. Soon the value of that inventory will be nearly worthless, so get whatever you can right now.

Think of bananas. Once you start seeing a few black spots, you know that soon the whole banana will be rotten. You can’t sell a totally rotten banana at any price (you can’t even give it away), but you can sell one with a few black spots if the price is low enough. So mark it down quickly, when there is still a chance of making a sale.

This applies to all businesses. Don’t assume your offering will always be in high demand. Eventually, it will become obsolete, either through new innovation, changes in demand, or competitive moves. And when that time comes, the desirability of that offering will fall far faster than you think. Therefore, when things start to turn bad, be ready to liquidate quickly, even if it means severe markdowns. Don’t procrastinate. Ford got out of Range Rover quickly, selling at a reasonable discount. GM procrastinated with Hummer and will sell it for next to nothing. The first markdown is the best markdown. Take advantage of it by pushing to sell while there is still a bit of fashion in your favor.

2. Don’t Put All Your Eggs in One Basket
If all you sell are Crocs, and Crocs go out of favor, you are doomed. The US auto makers were moving closer and closer to being just manufacturers of big trucks and SUVs. Now that those are out of fashion, they are scrambling to become serious in cars again.

The smart fashion houses don’t put all their eggs in one basket. First, they diversify by holding a portfolio of brands/styles. Second, they keep the product development pipeline full. They are always trying and testing new things. They always have one eye looking towards the next fashion season.

You should do the same. Have a portfolio of products or offerings, so that you can easily shift your mix to the changing whims of fashion. Make product development a priority—keep the development pipeline full. Keep an eye out for the next big thing and pounce on it when the time is right.

3. Seasons Come and Go
People in apparel fashion know that their world operates in seasons. What is hot in the Spring Season will be gone by the Fall Season. Something new will be hot in the fall, which will be obsolete by the following spring. Even what is hot for fall changes from year to year.

Therefore, smart apparel people never rest on their laurels. They know that just because they succeeded in the spring, they have no guarantee that they will succeed in the fall. Each season is a new battle to be won all over again. Reputation only goes so far. You have to win each season by adapting to the new seasonal whims better than anyone else.

The same is true for your business. Although the seasonality may not be as predictable as it is in apparel, there are cycles and rhythms to your business. These cycles and rhythms will significantly alter the landscape, making the successes of the past fairly meaningless. When photography fashion moved from film to digital, the reputation of Kodak only went so far…not enough to keep them successful. It was a new digital season and they were still pushing the last season’s (film-based) products.

One needs to fight hard to win each season by reinventing your offering to meet the mood of the new season. Again, it is not a gradual thing. The seasonal shift is fairly swift. You need to proactively try to predict the next season—just like apparel fashion houses do—so that you are ready when the new season comes.

Every industry has an element of fashion to it, so apply some of the principles of the apparel fashion industry to your own industry. First, be prepared to make the most of the first markdown. Second, don’t put all your eggs in one basket. Third, realize that every season is a new battle.

Fashion people also realize that just because you blew it for the current season, all is not lost. There is always next season to regain the top. So cheer up. There is always the opportunity to win when the next fashion shift comes—if you are prepared.

Monday, July 27, 2009

Strategic Planning Analogy #267: It Must Be Better

Many years ago, there was a comedian who specialized in doing impersonations. Now, it used to be that a lot of comedians did impersonations. This comedian, however, put a unique spin on the genre. He specialized in doing impersonations of people who died long before the invention of recorded sound.

For example, he would do impersonations of people like Abraham Lincoln or Aristotle. It was interesting to watch, but was it accurate? I have no idea what Aristotle sounded like or what his mannerisms were. For all I know, this comedian could have it all wrong and not even be close.

But in the end, I guess it doesn’t matter. Since nobody else knows what Aristotle sounded like or acted like, nobody could challenge the accuracy of the impersonations. As long as the comedian was funny, the audience would accept his impersonations. It was those other comedians, who did impressions of people we knew, who were more sharply critiqued (“Hey that’s not what John Wayne sounds like”).

When nobody knows what truth is (and nobody is able to discern the truth), then nobody can effectively challenge your position. This was the situation the comedian was in. Nobody knew what those ancient people sounded like or acted like, so the audience could not challenge the comedian’s impression of these old people. They just sat back and enjoyed the show.

However, if someone is doing an impression or imitation of something you are very familiar with, then the criticisms come flying. You know what “truth” is because you have experienced the real thing. Any variation from the real thing will be noticed as a flaw or defect. Rather than just sitting back to enjoy the show, you compare the imitation/impression to the reality (as you remember it) and get upset if the imitation does not live up to your expectations of what truth is. You’ll shout something like, “I know what John Wayne sounds like and acts like, and that was not it!”

This situation is similar to what happens in business. In product development, you have one of two strategic choices: either create something totally new, unlike anything else in the market OR create a “me, too” product that is a variation of something which already exists.

The first choice would be like our comedian, who did impressions that were totally new to you (you had never heard the voice of these people before—you have no reference point). Similarly, totally new products have no reference point—what you invent defines the category. It is accepted as authentic and people enjoy it for what it is.

The second choice (offering a “me too” product) is like comedians who do impressions of people we are very familiar with (you have a reference point). You are more critical, because you have a benchmark to compare it to. Any variance from the original reference point makes your product less “authentic.”

The principle here is that the less the familiarity, the greater the acceptance. Therefore, if you blaze new trails in product development towards areas unfamiliar to your customers, your development efforts have greater potential for acceptance.

We could see this principle at work in the comedian story. We are more forgiving of the comedian going where we’d never been than ones covering familiar impressions with a slight imperfection. I also experienced this principle recently in a restaurant. This was no ordinary restaurant. It was an exotic restaurant specializing in exotic foods which I had never eaten before. Heck, I couldn’t even pronounce the words on the menu, let alone understand it.

When the food came out, I had no preconceived notion as to how it was supposed to taste. I had never eaten anything like this before. Some of it tasted fine. Some of it tasted very odd to me. But since this was a nice restaurant with a good image, I assumed they were all supposed to taste like that. It never occurred to me that the dishes might be prepared wrong. They supposedly had excellent chefs, so I just took it for granted that these concoctions were supposed to taste that way—even if I didn’t like it.

But what if I was wrong and the food really was prepared poorly? What if this really was bad tasting food? I wouldn’t know. So I was satisfied, whether it was right or wrong, because I didn’t have a pre-conceived notion of what “good” would taste like. I just sat back and enjoyed the dinner.

Now if this fancy restaurant had served me a hamburger, I would have had a reference point. I could have complained if their gourmet burger drifted too far away from my concept of what a hamburger is supposed to look like and taste like. But they did not offer a “me too” burger. They offered me a taste of the unknown. A taste of the unknown is always yummier than an off-beat version of the familiar.

You can also do this at the low end of the restaurant spectrum. Quiznos has had great success with their $4 Torpedo. The beauty of the Torpedo is that it is so unlike anything else out there that there is no reference point to tell if it is a good torpedo or a bad one—so you accept that it is a good one, and worth the $4.

Quiznos knew that having a $4 item on their menu would be a key to success in this recession. They could have lowered the price of their familiar regular sub sandwich to $4, but that would have caused problems. First, once you lower the sub to $4, there is an expectation that $4 is now the right price for that sub. It would be difficult to raise the price back up later without ruining the new perceived value. Second, the regular sub is not designed to work in the business model at $4. Either you have to cheapen the sub (which would be noticed, since people were familiar with it) or you have to lose money on the deal.

By contrast, the Torpedo was designed to work in the business model at $4. It wasn’t a “cheapened” anything, since it was brand new. Sure, it had less meat than a regular sub, but the Torpedo never was a regular sub and was not expected to be one. It was a Torpedo, and this is how Torpedos are supposed to be. They had never been anything else. A strategic piece of genius!

So what does this mean for your strategy?

1. It is almost always better to create something brand new, where you can define the parameters of success, than to copy someone else, who has already defined success (as being them). When you control how a product is defined, then you can define the perfect product as the one you are offering. Apple has been very good at this.

When Toyota invented the Prius, they made a brand new car which defined what a hybrid is supposed to be. After that, anyone else who tried to make a hybrid brand had to be compared to the definition of the perfect hybrid—the Prius. And of course the Prius is the superior Prius, so it wins. Worse yet were automakers who tried to make a hybrid version of a non-hybrid car people were already familiar with. That didn’t work, because their familiarity with the gas hog version biased them against the hybrid version (familiarity made them more critical).

2. When positioning your product, don’t spend too much time comparing it to the status quo product. If you make too big a deal out of the status quo, you are acknowledging its leadership, which makes you an also-ran. People will say, “If you are so good, then why does the status quo have higher sales?” Instead, position yourself as an entirely new way to solve an old problem. There’s just something about saying that “my revolutionary new way is better” which sounds more believable than saying “I’m making basically the same thing as what is already out there and successful, but I’m better.”

3. Sometimes you can get around cost pressures by replacing the familiar with a cheaper unknown which is positioned as a wholly new product. Cheese was getting very expensive, which is a problem for companies like Taco Bell, who use a lot of cheese and want to keep their prices low. But Taco Bell has never been afraid of inventing new menu items nobody has ever heard of. So the new items substituted cheaper cheese sauce for cheese. However, since these were brand new items that never had real cheese in them, it didn’t look like a cheap substitution. It was just how the new item was supposed to be. This is far more successful than if they had taken familiar items and did the substitution. Then, Taco Bell took this cheap sauce and put hot spices in it and invented “Hot Lava Sauce.” So now the cheaper substitute was a unique, premium item in brand new menu items.

Winning strategies tend to blaze new trails rather than rework the familiar. The revolutionaries get to define the category in their favor and tend to receive less criticism. Because they define the category, they must be right.

Even if your product is not all that revolutionary, that doesn’t mean that you cannot package it in a revolutionary manner. Chrysler was making fairly ordinary trucks, but they were packaged as revolutionary because they had the magic Hemi engine.

Wednesday, July 15, 2009

Professional Vs. Passin' Through

Some companies like their strategic planning areas to be full of strategic planning professionals, who see this discipline as a long-term career choice. Other companies like to fill their strategic planning areas with young, fast-track, up-and-coming operators who are being groomed for bigger things and are only in planning on a temporary basis. Which is better?

In my opinion, either extreme can cause problems. I prefer a balanced mix of both professionals and those who are passing through.

The benefit of filling your strategic planning department with professional planners is that they have the proper long-term strategic mindset. They know all the proper tools to use. They are trained to think strategically. And since their professional focus is on long-range planning, they are less likely to become distracted by the day to day fires that need to be put out, and therefore can stay on the long-term task better.

Unfortunately, if all you have are strategic planning professionals, there is a risk that they can become too theoretical/academic and lose site of the realities of the business. This can lower their stature in the organization and make it harder to get the respect of the people who have to implement it. Second, good strategies exploit the nuances of the business, and people who have not spent some time in operations may not fully understand or appreciate those nuances.

The benefit of using key operating executives on a temporary basis is that they tend to have a more intimate understanding of how the business works. They also tend to be better connected to the people who have to put the strategy into action, which can give them an edge in strategic implementation.

However, if the entire planning function is put into the hands of people who are “passing through” there are negative consequences. First, if you know the assignment is short-term, there is not much incentive to focus on long-term results (which won’t have an impact until after you have passed through). Instead of comprehensive, integrated long-range plans, you are more likely to get a series of short-term “special projects.”

Second, even if intentions are good, if you are not trained in strategy, how good can you ultimately be at it? Without some professionals around, there is nobody to train these operators in strategic skills. The qualifications to be a good operations manager are often quite different than what makes for a good strategist. It doesn’t always work to switch roles—it may be a poor fit and not come naturally.

Therefore, in my opinion, there should be a blend of both professional planners and temporary operations people within a company’s strategic planning area. The benefits:

1) The operators help to keep the professionals grounded in reality.
They can let the group know when they are getting too academic or if the ideas are too impractical or too unrealistic to put into practice in the “real world.”

2) The professionals help to teach the operators about strategic thinking. This could be one of the greatest advantages of the blend. As operators flow through the department, you get each of them to think and act more strategically. They will take this knowledge with them when they go back into operations. As you do this over time, you will create a company where strategic thinking has been spread throughout the organization, like a good virus.

3) Implementation improves via better trust and better networking. People in the field will trust the professionals more (and view them less as out-of-touch academics) if they know that some of their own were involved in the process. This greater acceptance will help when handing off the strategy to the implementers. Even more importantly, by having some of the operators pass through, the professionals get exposed to more people. This improves their network, making it easier for the professionals to reach out to the field when they need to.

I think the blend works best if there are more professionals than those who are passing through. This reduces the amount of time lost in getting people acclimated to their new temporary role as a strategic planner. There is better continuity and a stronger learning curve if there are more professionals around to do the work on a long-term basis. Also, since the work load is strategic planning, I think results are better if most of the people in the area are experts in strategic planning.

For example, you may put a few operators into an R&D function to help ground the research in practical applications, but you would still want most of the researchers to be scientists and/or engineers. These professionals know how to do R&D. I think the same principle applies to strategic planning.

When putting together a strategic planning department, there should be a blend of strategic planning professionals as well as operations executives rotating through on a temporary basis. Within the blend, I think most should be strategic planning professionals.

Some firms like to rotate through professional planners. They do this by hiring professional strategic planning consulting firms to come in from time to time. Although this can work, it also has some risks. First, since they are outsiders, they may not understand the nuances of your business (which are often the source of a lot of strategic advantage). Second, these consultants are more likely to pull out a generic strategy from their bag of tricks than to create a strategy specifically designed for you. Third, they are usually gone before implementation is over, leaving you to clean up any of their messes. Finally, because they tend to work the entire industry, they will use what they learned at your firm with their other clients. Where’s the competitive advantage if all the firms are working off the same generic strategy?

Sunday, July 12, 2009

Strategic Planning Analogy #266: Consequences of Fame

Once there was a young boy who lived in poverty. All he had was the ability to run very fast. He was discovered by some sports promoters, who made him into a popular and successful athlete.

As a result of this popularity and new-found fortune, the boy was able to alter his lifestyle. Instead of running everywhere, his was driven around. He spent his evenings partying and eating lavish meals.

Eventually, he became so fat and out of shape that he could no longer run quickly. Once he lost his athletic ability, he lost his fame and fortune. He was back to where he started—living in poverty.

I’m sure you’ve heard many variations of this story over the years. Often times, athletes, actors or musicians get caught up in the lifestyle of the rich and famous. This wild living of sex and drugs and partying destroys their ability to continue with their gift. As a result, they lose their ability to continue the fame and fortune.

The story is sad, but sadder yet, it is rather common. There’s something about fame and fortune that can often lead to self destruction.

This same concept can also happen to national economies or to individual businesses. Initial success can trigger changes which work to destroy the foundation of that success. We need to understand these factors so that we can accurately assess the future of national economies, as well as minimize the tendency towards self destruction in our businesses.

The principle here is that economic success tends to naturally create aftereffects which act to weaken the cause of the original success. Unless we understand these aftereffects and work to counter them, our strategic assessments will be wrong and we will end up with a failed strategy.

The Principle at the National Level
Take, for example, national economies. Nations typically start on the road to economic success by taking advantage of their low labor costs. This is like the athlete in our story who took advantage of his ability to run fast. It is a competitive edge which provides a platform for gaining success.

Once a nation can prove that it is good at providing lowest cost production, money will flood the country to build low-cost factories. All of these factories, filled with low cost labor, begin the nation down the path to economic success.

Unfortunately, all of this success has aftereffects which work against success. First, the laborers eventually get tired of working under unsafe conditions for little pay. They demand better conditions and a bigger piece of the profits.

Second, the economic success is usually not spread evenly throughout the country. Poor, rural people begin to flood the cities where the initial success began. This creates all sorts of problems, such as inadequate housing and water, congested streets, massive pollution and social unrest. The country must now divert some of its attention from building an export economy to fixing internal infrastructure and strife. This requires increases in taxes, creating even more pressure by the workers to get wage increases.

All of these aftereffects create a situation where the country is no longer the lowest in cost of production. Like the boy in the story, the country becomes fat and is no longer competitive. As a result, all the fame and fortune starts moving to the next nation with a claim to lowest cost of production.

You can see all of this starting to happen in China. There has been tremendous pressure to build safer products in safer factories by employees who get paid a decent wage. Labor unrest builds until it explodes in places like Urumqi this past week. Already, there are some Chinese manufacturing companies that are shifting their production to Vietnam because their own country has gotten too expensive. Exports are way down. Internal strife is on the rise.

Yes, China is still a large and growing economy. But I remember when prognosticators were predicting huge, rapid growth in China seemingly forever until they dominated the entire world. I chuckled to myself, because I knew that eventually the forces behind the initial economic success would lead to natural factors (we are now seeing) which would slow down that economic juggernaut. If you bought into the distortions from these initial prognosticators, you may have made some poor economic decisions.

The Principle at the Business Level
This same situation can happen to individual businesses as well. If your success is based on having created an entirely new business opportunity, natural forces will lead to competitors flooding into the new business as well. Competitive pressure will drive down those initially high profit margins. You may not even survive the consolidation of the industry if the ones who follow you have a superior infrastructure (for more on this, see the blog “Gimme Shelter”).

If, on the other hand, your initial success comes from taking large market share away from someone else, then natural forces will cause the person who is losing share to wake up and retaliate. This retaliation will cause some of the share to go back to the original party and will probably make the entire business less profitable due to lowering of prices (for more on this, see the blog “Bombs Start Wars”).

And then, of course, there are the natural internal factors which tend to follow success. Workers will demand better wages. Leaders will want more lavish compensation. Internal bureaucracy will become bloated, costly and slow. Just look at the US automobile industry to see how initial success can start natural forces inside which tend to destroy the initial success.

The Prescription
So what should strategists do? Two things:

1) Temper Your Optimism
When making predictions about economic situations (be it internal or external), don’t become overly optimistic about early successes. Realize that there are forces in play that will work against those successes. Factor those forces into your long-term projections. Assume aggressive competitive reactions and rising costs of production, for example.

Your modeling should almost never treat “best case scenario” as “most likely scenario.” In fact, if you see a big retaliation coming, the wisest strategy may be to sell out early at top dollar, before the retaliation comes.

2) Put in Measures to Counteract the Natural Aftereffects
Although there is a natural tendency for success to breed high wages and a bloated bureaucracy, it doesn’t mean that you cannot fight the trend. If you know about the forces in advance, you can instill in your strategy measures to resist these forces. By being proactive, you can slow down or eliminate many of these threats.

Proactive, aggressive measures to fight bureaucratic bloat can help keep your core strategic success successful for a longer period of time.

Initial success does not guarantee long-term success. There are natural forces which accompany success and work to destroy the principles behind that initial success. As a result, your strategies should temper their optimism around early successes and put into place measures to fight the negative natural forces.

Since competitive advantages like low labor or getting to the market first tend to be temporary, good strategies should look for advantages which are more difficult to lose, such as patents, unique skills, or synergies that are difficult to copy.

Thursday, July 9, 2009

Strategic Planning Analogy #265: Two Stores, Two Stories

Ritz Camera, the largest specialty camera and imaging retail chain in the US, filed for bankruptcy in February 2009. Now, it has recently said that if it does not find a buyer soon for the chain, it will liquidate its assets in an open auction.

At the beginning of 2009, Ritz Camera had more than 800 stores in operation. It is now less than half that size.

By contrast, Best Buy is doing rather well. Its balance sheet is very healthy and it is gaining market share. Although the recession has had its impact on Best Buy, the company will survive and looks poised to thrive for quite awhile.

Why such different fates for these chains? A friend of mine used to work in the photography specialty retail business many years ago. He said that when taking good photos was very difficult, many flocked to photography as a “hobby.” These photo hobbyists carried around bags of gear to make better photos—lots of lenses, filters, light meters and shades. They would have a darkroom in their basement with lots of chemicals and enlargers, so that they could develop their own film and photos and crop them to be “just right.”

All of this took skill, knowledge, dedication and lots of practice—as well as lots of money. It was not for the average “amateur.” These hobbyists could take great pride in their unique skills and abilities. Others marveled in jealousy at the “magic” of their great photographs.

Then something happened. Technology got sophisticated enough that cameras could take pretty good pictures all on their own—just point and shoot. Now everyone could take pretty good pictures without any advanced training, skills or lots of gear. Being a photo hobbyist no longer carried the same cache. It wasn’t all that special anymore once the average Joe could do just about as well.

As a result, those who looked to their hobby as their point of pride and status saw that being a photo hobbyist no longer satisfied that ego stroking. Therefore, many quit photography and found new hobbies in areas which still held status, like electronics or computers.

Now, with the digital revolution, everyone has access to cheap and easy tools to take, edit, modify and photoshop their pictures into great works of art—and place them on the internet for all to see. And you don’t even need a camera. I was recently at the zoo—a place full of young families. I looked around me and noticed that I was the only one with a camera. Everyone else around me was taking photos with their cell phone.

It is getting harder to even think of photography as a hobby. It’s just something people do, like breathing. And nobody thinks of breathing as a hobby. Without a large hobby segment, there is no reason to for a large photo hobby specialty store like Ritz. Hence the problems at Ritz: it’s camera focus fell out of touch with where pictures evolved.

By contrast, Best buy has frequently changed its product focus. I remember back in the 1980s, when their big emphasis was on microwave ovens. It was the cool new technology, and people flocked to Best Buy because they held seminars and cooking classes on how to use this cool new gizmo. Soon thereafter microwave ovens became mature and were treated like a toaster that you replace at Walmart when they break.

Of course, by then Best Buy had moved on to the next cool new gizmo—VCRs. Then when that started to get mature, they went on to follow with computers, then DVDs, then Digital TV and now Mobile Devices. The idea was to abandon categories before they matured and replace them with the next new thing. That way Best Buy was always hot and always successful.

As a business, companies have two strategic choices. They can either define themselves primarily by specializing in the type of products they sell (like Ritz Camera) or they can define themselves primarily by the specializing in the place in the product lifecycle where they want to be.

This is a critical strategic decision which can dramatically impact how your company evolves. How you answer this question can even be one of the major reasons why you succeed (like Best Buy) or fail (like Ritz Camera).

The principle here is that the decision to focus on product versus lifestage is critical. It needs to be a conscious choice, because it will drive so many of your other strategic decisions. If done well, there are opportunities to succeed with either approach. But to do so takes hard work, tough choices and significant strategic modifications. You have to be fully committed to one side or the other. A half-hearted middle approach will tend to fail.

Let’s look at either option in detail to illustrate the particular types of risks and tough choices which apply to either decision.

Focus On Product
The biggest problem on a product focus is that products evolve and go through a lifecycle. At first, they are the cool new thing, desired by leading edge hobbyists who desire the status of taking the time to become an expert when others aren’t. Second, the experts help the rest of us “get it” so that the product achieves mass demand. It is the hot thing everyone wants. Then, it becomes just another thing that everyone already has. Your sales shift from first-timers to replacement purchases and the priority shifts from expertise/service to low price. Finally, your product becomes a lowly commodity at best, and an obsolete has-been at worst, which is replaced by the next new cool thing.

Therefore, if you focus on the product, then your greatest strategic challenge is to align your business with the changing demands from managing to the life cycle. For example, if the basic product you sell doesn’t change, then you have to change, to have the most appropriate business model for the particular period in the lifecycle where that product lies. At the beginning, you need to be creative, inventive and cool, and you have fat profit margins to pull it off. At the end, you have to think like a commodities manufacturer, with razor-thin margins and a merciless emphasis on cost reduction. That’s a big cultural change. Distribution channels can change over time, too, from dealing with boutiques to dealing with Walmart.

The second strategic challenge is to slow-down the natural progress of the life cycle, to keep it as alive and cool as possible for as long as possible. Rapid obsolescence via frequent product upgrades can help to keep it cool longer. Strong image advertising can help keep some status with the product longer. Look at the mature automobile industry. Cars can last a decade, but clever strategies like leasing and restyling induce people to want to change cars every 3 to 4 years. Relentless beer image advertising has helped beer brands keep at least some preference and status rub-off in that mature business.

The third strategic challenge is to try to outlast all the competition, so that in the end-game you have a near monopoly. That is what Budweiser has done in the US beer market. Everything has pretty much consolidated into their lap, so that they still have enough volume and clout to make a killing.

The biggest risk is that your company dies when the product eventually dies. If you’re in the newspaper business and nobody wants newspapers, you’re in big trouble.

I think the problem at Ritz Camera was:

1) They picked the wrong product (cameras instead of photos)
2) They did not try aggressively enough to own all the new places where photo status was going (scrapbooking, on-line editing software, You-Tube, etc.)
3) They did not try to develop and get an exclusive on the ultimate cool photo-phone.
4) They did not change their business model enough to win when things get commoditized and margins go away (i.e., their stores could not beat Walmart when the product matured).

In other words, they did not manage the lifecycle well because they did not realize how much of a priority that was, so they lost.

Focus On Lifestage
The other option is to be more like Best Buy and focus on staying in a particular lifestage. For example, if you focus on the early stage, when products lose their cool, you switch to the next cool thing. This is also pretty much how GE has worked over the years. As industries they were in starting to get mature, they would sell off the division and add a new division still in the early cool stage. That way, the portfolio stayed hot (and profitable). The benefits here are that a) you can focus on perfecting a management style for that life stage; and b) your lifespan is not tied to the lifespan of a particular product.

With this strategy, the biggest issues are timing and transitioning. By timing, I mean knowing when to let go of old products and when to dive into new products. If you sell off too quickly, you may walk away from a lot of profit. If you stay too long, you may not find a profitable way to exit the business.

If you enter a new business too early, it may take too long to get a return (and you are more likely to guess wrong on whether it will get hot). If you enter too late, you may have to pay too much to enter and be too far behind in the race for leadership.

By transitioning, the problem is getting people to accept that your brand has a right to be in that new space. If you are too far afield, then the customers will not give you credit in that new space. Also the farther away the transition is from your core, the less likely you will have the proper skills needed to win. For example, if Best had gotten into high end designer handbags when they were hot, it would have failed because it does not line up well with the brand customer or the brand image, and they know nothing about designer fashion. That transition would not have worked.

Best Buy has succeeded because their timing was great and they always transitioned into products that were consistent with the brand and its core customer’s desires. They were also willing to be very aggressive in the transition—killing off old categories entirely and going full-out to win in the new category. This is not a game for the half-hearted.

Great strategies tend to be explicit on whether the company is going to focus on a type of product or a particular lifecycle stage. Then one needs to aggressively adapt the company over time to stay true to the chosen path. Half-hearted efforts on either path can lead to failure.

You don’t have to only focus on the early stage of the life-cycle. Pinnacle Foods has done well by purchasing the cast-off mature food brands from the food companies trying to get out of mature businesses. They own brands like Duncan Hines, Hungry Man, Aunt Jemima and Swanson. Because they are experts in running brands in their late maturity, they can make them successful when their former parents found them to be a drag on profits.

Tuesday, July 7, 2009

Strategic Planning Analogy #264: An Efficient Waste of Time

Stephanie had an overweight dog. She went to the Veterinarian to get some advice on what to do about her dog’s weight problem.

The doctor said that what the dog needed was more exercise. He knew that there was a large park near where Stephanie lived, so he said, “You should take the dog for a few laps around the park every evening.”

Stephanie heeded the veterinarian’s advice and started walking her overweight dog a few laps around the park every evening. After awhile, Stephanie found this task to be very time-consuming and very boring. Stephanie said to herself, “I’m an expert in making things more efficient in the business world. I should be able to find a way to make this task more efficient as well.”

And so she did. To make the trek around the park faster and more efficient, Stephanie decided to put the dog in a car and drive her pet around the park a few times every evening. Not only was this faster, but the dog enjoyed it more. The dog loved sticking its head out the car window much more than walking.

Everything was perfect, except for the fact that the dog did not lose any weight.

Stephanie found a way to make the process of going around the park more efficient. Driving was both faster and more enjoyable than walking. Unfortunately, her efficiency “improvement” totally missed the point. The purpose of the trip around the park was to get her dog to lose weight. By prioritizing “efficiency of task” over “purpose of task” Stephanie failed to achieve the intended goal.

What Stephanie really created was an efficient waste of time. She got around the park faster, but without meaning or purpose…and the dog was still overweight.

As silly as Stephanie’s efficiency solution was, it is not that different from what I have seen in occur in strategic planning. Strategic planning is a process, but it also needs to serve a purpose. If all you see is the process, then you become like Stephanie, who only saw going around the park as a process. As you try to make the process of strategy more efficient, you can lose sight of the intended purpose. The result is a highly efficient strategic planning process—one that is quick and painless—but utterly worthless in moving the company forward.

The principle here is that the best strategy rarely comes from an efficient process. Forming strategies is messy work, and the process usually needs to be a bit messy as well. A little sweat and aggravation is needed to get the job done. Just as the dog could not lose weight in an efficient car, but only by slogging it out the slow way in a walk, great strategic solutions cannot be rushed, either. A slick, fast approach to planning can quickly become an efficient waste of time.

There was a discussion on Linked-in recently about all the neat little strategic planning tools one can use in a strategic planning process. Tools are great, but tools can make a royal mess if used improperly. For example, if you see a SWOT analysis (strengths, weaknesses, opportunities, threats) as just a list of blanks to fill in, then you can quickly devise a way to efficiently fill in the blanks. But you may end up with just a bunch of useless platitudes.

In general, top executives don’t like to spend a lot of time on strategy. They would rather dive into the “crisis of the day” and solve an immediate issue. They will encourage strategists to find “efficient” ways to do strategy, so that it takes up less time. You must fight this pressure and temptation.

Here are four reasons why Strategic Planning needs to be a slow and messy process.

1. Planning Needs to Break Down Preconceived Notions
Most great strategies reinvent the rules. They ignore the traditional way things have always been done and try something completely different. Conventional wisdom is thrown away and a new wisdom is invented. Strategist Gary Hamel puts a high priority on the need to break down preconceived notions about how business is supposed to work. You cannot invent the next new thing if your thinking holds too dear to the old rules.

It takes time to break down the old thinking patterns. You might hold so dear to a current business rule that you think it is the only way to get things done. By closing your mind in this way, you prevent yourself from even considering an alternative. For example, you may believe that:

a) All hospitals have to have an emergency room; or
b) Only governments can own and manage highway systems; or
c) Everything on the internet has to be free; or
d) Product development needs to be fully complete before introducing it to the public; or
e) Only a small niche of people are interested in organic.

There are people today who have defied conventional wisdom like this and are making money.

It can be a messy thing to get people to release their grip on tightly held notions. Letting go of the old and embracing the new takes time. If you short-change this process, you can have a company full of doubters who will not fully embrace your strategy. This will internally sabotage your ability to achieve your strategic goal.

2. Strategies Need to Challenge Current Power Bases
Many of the people in your organization have created a strong power base under the old rules of how things were done. Reinventing the rules can weaken or destroy that power base. Naturally, the ones with the power today will tend to resist a new approach which reduces their stature and influence.

Worse yet, if the only opportunity these people have to respond to this change is in a public planning forum, then they may take a strong public position of resistance which will make it difficult to back down later.

In these cases, there often need to be private moments, when challenges can be presented “off-the record” one-on-one to the ones who might be threatened. Negotiations can take place to help them find new bases of power. Extra time can be given to help them see the bigger picture…all away from the public eye, so that they can save face.

I worked with a company that was developing a new vision which threatened the power and influence of the old base business, where over 90% of the employees worked. Because the new vision was thrust at them quickly and publically, they felt trapped. As a result, they used their superiority of numbers of people to essentially do a coup. They took over the company and threw out all of the executives who were threatening the status quo.

If you skip the messy business of delicately transitioning power bases (because it is inefficient), you can end up with a mutiny rather than a strategy.

3. Eureka Moments Need Incubation Time and Diversions
In prior blogs (see Magic Eye and Genius Sleep), we have looked at some of scientific research behind the development of great ideas. In Magic Eye, we saw that eureka moments of great discovery almost never occur inside focused, efficient efforts at idea development. Instead, they tend to occur after laying aside these efficient processes for awhile and spending time at some seemingly worthless (or at least inefficient) diversion.

It could be spending time at some recreational activity (like sports), or entertainment activity (like watching a movie), or something as mundane as taking a shower. Regardless, the brain needs time to back off from heavy, efficient processing and drift a bit into a more daydream-like mode. Science found that the great insights come during this mental relaxation/diversion time after the “efficient” thinking process is done. Skip the relaxation/diversion time and you lose the great eureka moments.

In the Genius Sleep blog we found that the one most common characteristic between geniuses is that they tend to sleep a lot—often taking naps in the middle of the day. How’s that for a seemingly inefficient process?

This combination of alternating between efficient thinking time and random relaxation (or even sleep) time tends to generate the greatest strategic insights. It is a messy and time consuming process which by its very nature cannot be made efficient.

4. Strategies Need to Evolve and Adapt
New revolutionary ideas are rarely perfect right out of the box. They tend to get adapted and modified over time. That’s why so many firms now introduce beta versions to the public to gain more insight before the product is finalized. If the strategic planning process is only at the beginning of this journey, then you are missing the richness of applying a strategic approach to this adaptation. Instead, you may end up with random adaptation which ends up weakening and destroying the revolution rather than strengthening it through strategic coherence.

Since one loses some control over the process once it is released into the public, one needs a messy strategy process to interact with this more uncontrollable adaptation. Changes will be on the schedule of how the public wants to interact, not on some internal strategy calendar. Again, this cannot be rushed for the sake of efficiency.

The ultimate goal of strategic planning is to find and execute a path to a more prosperous future. Strategic planning can use some tools and processes to help achieve this goal, but one must never lose sight of the ultimate objective. Perfecting the “process” of planning to be as quick and efficient as possible almost always leads to strategic failure—an efficient waste of time. It is the time consuming and messy approach which brings better results.

Disney is known for its creativity. Chris Heatherly, VP of Toys, Disney Consume Products, described their success in creativity this way: “Some people want to cut to the chase. We tried it, and it just doesn't work…You have to have some decompression time to be creative.” How much decompression time is in your planning process?

Sunday, July 5, 2009

Strategic Planning Analogy #263: Living in Fear

I knew a woman who was very curious. She liked to read all the time. One of her favorite topics to read about was the dangers and threats which could beset the world. She became an expert in understanding all the potential dangers—everything from the dangers which could beset a women walking alone in a parking garage to the dangers to the entire planet from the thinning of the ozone layer.

The more she read about potential dangers, the more fearful she became. She eventually became afraid that all of the potential dangers had a high likelihood of happening—to her. She became increasing afraid to leave the house. Her fear for the entire health of the planet (and her inability to stop every threat) became so intense that she was prescribed medicine in order to cope.

Over time, the fear so gripped her that she could no longer function in the outside world. She was a true sufferer of agoraphobia—and it was so sad to see.

Although it is not a bad idea to become informed about potential risks, too much fear about those risks can be very detrimental. As we saw in the story, excessive fear over potential threats can be paralyzing. Too much fear leads to an inability to act and move ahead. The fear can trap us in our homes.

Business is all about taking risks. As they say, “No Risk, no Reward.” Of course that doesn’t mean we should ignore all warning signs of risk and dive into a situation blindly. That almost always leads to disaster. The recent economic collapse, for example, was due to not properly understanding the risks of the complex financial products which were introduced. Financial institutions dove too deep into these risky ventures—blind to the extent of the risk—and it almost collapsed the entire economy.

One of the key roles of strategic planning is to provide knowledge and insight so that the risks are minimized. Better, less risky moves can be made based on the discipline of strategic analysis—a solid understanding of the environment. Strategic planning makes you smarter so that you can act smarter.

However, even with the use of strategic planning, the risks do not go entirely away. If you wait until all the facts are in, it will be too late to take the lead. The market dynamics will already be set in concrete and not have room for your late entry. Therefore, there will always be an element of the unknown in every good strategy.

The key is to not become paralyzed with fear. Instead, the goal is to make risk your friend.

The principle here is that risk is not to be avoided, but rather to be exploited. Don’t be like my friend who was so fear stricken that she was afraid to leave the house. To win, you have to take your business out into the marketplace and aggressively fight for success. Even in tough economic times, one cannot just hunker down in the bunker in fear and wait it out.

Market share changes hands all the time—especially when times get tough. Customers are more willing to reconsider their habitual buying patterns when their economic condition worsens. Therefore, tough times are not times to hide in your house, because your share is more vulnerable than ever. Of course, the share of your competitor is also vulnerable, so you have an opportunity to gain if you go out and act smartly.

Taking calculated risks into uncharted territory can be one of your best friends, because:

a. It allows you to get a head start in an area which is relatively uncontested (like the Blue Ocean Strategy).
b. It allows you to write the rules in your favor.
c. It increases your chance of being the leader and reaping most of the rewards.

Of course, not all ventures into new space are successful. So how can we improve our chances of success within this uncertainty? Here are four suggestions.

1. Plan the Entire Chain
Successful ventures are based on successful business models. In today’s increasingly sophisticated marketplace, it is not enough just to create a cool product. To make money, one needs to plan and control the entire value chain around it. Your business model strategy must include a way to get the rest of the value chain to work in your favor. Otherwise it can work against you.

Compare, for example, Sony versus Apply. Sony has concentrated on making cool devices. Apple has concentrated on making cool business systems—devices, apps, stores and so on.

Apple realized that a cool device can quickly become a commodity—a piece of hardware that gets the profit margin kicked out of it if you do not control the selling process downstream. Therefore, Apple has tightly controlled its retail distribution.

Second, Apple knew that if the cool applications shift to another device, nobody will want the Apple device, because what customers really want is the ability to get to the cool apps. As a result, Apple did its best to become THE place for the cool apps programmers to programming for.

Finally, devices get purchased infrequently, whereas the apps get purchased all the time. Apple knew if it was not getting a cut of the apps business, it was losing out on where most of the ongoing value in the business model was being made. Therefore, Apple made sure it was THE place for purchasing the apps, so that it could get a cut of the sales.

By planning the entire value chain, Apple was able to ensure that the value chain continued to flow through Apple and did not get diverted somewhere else. This this thoroughness and control significantly increased Apple’s ability at being a success in risky new ventures like the ipod and the iphone.

By contrast, Sony’s recent ventures aimed at cool devices only have not been as successful. They have recently suffered a large loss. Sony’s cool devices are not cool enough on their own to create a secure business model. By not controlling distribution downstream or applications upstream, Sony is more vulnerable to being bypassed in the value chain. By not having the compelling stickiness of a tight value chain, Sony has to cut prices in order to create preference, which hurts margins.

Sir Howard Stringer, head of Sony, has seen the error of this narrow focus and is in the process of transforming Sony to think more holistically about the entire value chain. So, success in new ventures goes up if you plan out the entire value chain—to build a system which is biased in your direction and makes all the players better off if they play by your rules.

2. Look for Superior Solutions
A lot of businesses get excited by a new venture when it uses the latest and greatest technology. The mindset tends to be that “if it uses the latest technology, it has to be better, so the business model should succeed.” The problem is that most people don’t care about how up-to-date the technology is. What they really want is a superior solution to a problem. Sometimes, the latest technology does not improve the ability to solve a problem. Sometimes it even makes it worse.

Take internet grocery shopping, for example. Nearly every venture into this space has been a miserable failure. Is it because they did not use the latest technology? No, it’s because internet grocery shopping is an inferior way to shop.

They claimed that internet grocery shopping would be more convenient. However, how convenient is it really when you consider that:

a) You have to sit at home for a 4 hour delivery window (which is a longer time than it takes to shop).
b) If they are out of stock on an item you want, either they may make a substitution you don’t like or they will not supply the item, leaving you with only half the ingredients needed for a meal. Is that convenient?
c) The ordering process on line is less enjoyable than shopping, and unless you like eating the same food every week, it is still time consuming.

On top of that, a lot of the things a customer does for free when shopping the store (picking out the items, checking them out, taking them home) now are done by labor that must be paid if you buy off the internet. This makes the internet process a lot less efficient and the groceries a lot more expensive. As it turns out, the minor bit of convenience is not seen as enough to justify the higher prices the new internet grocery model needs to earn a profit. So the business model fails. The moral? Just because a model uses newer technology does not automatically make it better. Only go after ventures which truly have a significant advantage over the status quo in solving the customer’s real problem.

3. Narrow the funnel quickly
Although there are risks to putting all your eggs in one basket, there are also risks to trying to venture into too many different directions at the same time. The solution? Don’t be afraid of looking at a lot of potential new ventures early in the process. This increases your chance of finding a real winner. However, quickly determine which ones have the best shot of success and stop the funding on the rest. One of the biggest drains occurs when one delays halting support for the losers. The longer you wait, the worse it gets.

4. Experiment and Adapt
Ultimate successes rarely end up looking like the original vision. They tend to morph along the way as you learn. Therefore, rather than working in the lab alone until the original vision is perfected, do some early experimentation. Let beta models out into the marketplace. Get input along the way from your customers. Be willing to flex and adapt. This increases the likelihood that the final product is what the market really wants.

Even though new ventures pose risks, that is not a reason to hide and resist venturing into new areas. The idea is to use a strategic planning process which minimizes the likelihood that the risks will hurt you. This includes ideas such as planning the entire value chain, planning for superior solutions, narrowing the funnel quickly, and experimentation/adapting.

If you do the types of activities mentioned in this blog, risk moves from being an enemy to being a friend, because it gives you an edge over the competitors who do not follow this advice.