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.

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