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.

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