Monday, October 19, 2009

Strategic Planning Analogy #284: Wheels on the Plow

Once upon a time, there was a successful, experienced farmer named Joe. Joe would hook his trusty horse up to his old plow and create a precision garden.

Then, one day his neighbor Bill bought one of those new-fangled motorized tractors. Bill was a less experienced farmer who had poorer soil to work with. However, that motorized tractor made Bill’s farm far more productive than Joe’s farm.

Joe didn’t like his neighbor doing so much better than himself. After all, Joe was the more experienced farmer. So Joe examined the situation. He noticed that Bill’s tractor had wheels. Therefore, Joe decided to put wheels on his horse-drawn plow.

The wheels made Joe’s horse-drawn plow a little more efficient, but still far less efficient than Bill’s motorized tractor. “What’s the problem?” Joe thought. “I’ve got wheels just like the tractor. I’ve got more experience. Why is Bill doing better than me?”

A motorized tractor is far more efficient than a horse-drawn plow. No matter what you do to modify that horse-drawn plow, it will never catch up to the power of the tractor. Imitating part of the tractor, by putting wheels on the plow was not good enough. Even Joe’s added experience wasn’t enough to overcome the power of the motorized tractor.

To be as efficient as Bill, Joe would need to completely abandon the horse-drawn plow and get a motorized tractor.

The tractor was a disruptive technology. It made the old technology obsolete.

Disruptive technologies and processes occur in business rather frequently. When it happens, we can either react like Joe or react like Bill. Bill embraced the disruptive technology. Joe tried to modify the obsolete technology with a small part of the new (the wheels). Bill’s approach was more successful.

In general, embracing new technology is more successful than a half-hearted approach.

The principle here is that sometimes you have to abandon what you know and embrace the new in order to thrive. A half-hearted approach (putting wheels on the plow) won’t do.

We can see that in the history of the retail/restaurant sector.

I was recently eating at a Big Boy’s restaurant. While sitting there, I started thinking back to my childhood, when Big Boy was one of the largest and most successful restaurants in the US. It had a strong appeal with children and made good burgers.

Then along came McDonalds. McDonalds brought a disruptive technology to the restaurant industry. It eliminated waitresses and busboys. It eliminated washing dishes. It made the food preparation far more efficient. As a result, McDonalds could offer items similar to what was on the Big Boy menu far more efficiently than the Big Boy way (and charge a lot less for them).

At first, one might think that Big Boy had the advantage. It was more experienced in the restaurant business than McDonald’s founder Ray Kroc. It had a nationwide market penetration. It invented the Big Boy hamburger (the Big Mac was just an imitation). It already had the devotion of children.

Yet today, Big Boy is barely limping along as a tiny company in a few locations, whereas McDonalds is everywhere, doing quite well.

Sure, Big Boy made some improvements along the way. They did their equivalent of “putting a wheel on the plow.” But it never embraced the transformational invention of the fast food industry. Had it quickly embraced the disruptive new industry, Big Boy could have been what McDonalds became. But it did not, and saw a declining future.

Similarly, Sears could have been what Home Depot became. Sears had all the early advantages, including the power of the Craftsman name. Yet Sears did not embrace the disruptive technology of the large Home Improvement Center. It just put a few wheels on the old way that Sears had always done things.

Even when Sears tried to build free-standing specialty stores to compete with Home Depot, it modeled them more after the old hardware store format (which Home Depot was putting out of business) than it did the new disruptive business model. The free-standing Sears Hardware Store near my home currently has a going out of business sign on its door.

By contrast, let’s look at the history of Wal-Mart. In the 1940s, Sam Walton started out as Walton’s Variety Stores. At the time, this was the most efficient way to sell basic goods in the rural south. However, in the late 1950s, Sam Walton noticed that the new discount store format was superior to the old variety store business model in terms of providing value to the customer. So Sam Walton abandoned the variety stores and fully embraced the new discount store format, opening his first Wal-Mart store in 1962.

Eventually, Sam noticed that warehouse clubs might be a disruption to the discount store model, so he fully embraced the technology and in 1983 began to build the Sam’s Club chain. Later, he noticed that the hypermarket/supercenter model could be the disruptive technology to make discount stores obsolete, so he fully embraced the supercenter concept, opening the first unit in 1988.

Today, Wal-Mart sees the internet as a disruptive technology that could significant overtake the old business model, so they are starting to fully embrace on-line retailing. According to a Reuters article dated October 17th, CEO Raul Vazquez told Reuters its aim is to be the biggest and most valued online retail site. According to Vazquez:

"In a few months, whenever someone thinks about buying diapers—in the same way they think about going to a Wal-Mart in the physical world—they will think about going to Eventually, we'll be the biggest in sales and the biggest in mind-share and all of those other things that we've established in the offline world."
Given their track record, I would guess that Wal-Mart will be a winner here as well.

Wal-Mart wins because it was not afraid to abandon its successes of the past and embrace the new disruptive technologies. Big Boy and Sears are losing because they hung onto the past and made only minor, half-hearted improvements.

So what does this mean for the rest of us?

1) Be on the lookout for Disruptive Technologies
Wal-Mart kept spotting the disruptive technologies early because they were always on the outlook for any potential threat to their value proposition, no matter where it came from. If you are not actively looking broadly, you may miss it, because the disruption often comes from outside your industry and not from your traditional competitors.

2) Be careful in how you define yourself
Big Boy and Sears defined themselves by what they were and what they did. Big Boy saw itself as a traditional restaurant. Sears saw itself as America’s Department Store. By contrast, Wal-Mart defined itself by the benefits it provided to customers—namely lowest prices.

When Wal-Mart saw anything that could potentially offer better prices to its customers, it quickly pounced on it. They knew that if they lost their pricing edge with the customer, the game was over, so they saw any pricing advantage anywhere else as an immediate threat.

However, Big Boy and Sears did not feel as immediately threatened by McDonalds and Home Depot, because these newcomers came from different industry definitions. Since they did things differently, McDonald’s and Home Depot were not seen as direct competitors. The newcomers were seen as playing in a different industry—not their own—so not an immediate threat. Hence, their technologies were not fully embraced.

3. Be willing to abandon what used to make you successful
Wal-Mart was willing to abandon its prior means of success in order to fully embrace its next means of success. They would shut down a Wal-Mart discount store and build a Wal-Mart Supercenter across the street. Such abandonment of the past is difficult to do, but often necessary. If you are not willing to completely abandon the past, you cannot completely embrace the future.

4. Don’t Just Put Wheels on the Old Plow
Improvements to obsolete technology don’t change the fact that the technology is obsolete. A halfhearted inclusion of bits and pieces of the future glued onto the past won’t succeed against others who fully embrace the future. Rather than putting wheels on the plow, buy the motorized tractor.

When disruptive change occurs, you can either embrace it or resist it. Embracing it is usually the best approach, even if it means abandoning what made you successful in the past.

Prior experience is not much of an advantage if the experience is in obsolete processes. Don’t let your obsolete experience blind you to the need to gain new experiences.

No comments:

Post a Comment