Monday, November 16, 2009

Strategic Planning Analogy #291: The Defining Moment

I friend of mine who worked in the brewery business used to like to tell this story. There was a bar across the street from a factory that made beer. A lot of the guys who worked at the brewery factory would go to that bar after work. Sometimes, the managers at the brewery would visit the bar as well.

One day, one of the managers from the factory was in the bar. He saw one of the factory workers in that bar drinking a beer made by a competitor. The manager was infuriated that one of the factory workers would dare to drink a competing brand of beer. To him, that was an act of treason.

The more he watched, the more incensed he became at what he perceived as the unloyal behavior of this factory worker. Eventually, the manager couldn’t take it any longer. He went up to that factory worker and shouted “Who do you work for?”

The factory worker answered, “The local of the International Union of Brewery Workers.” So much for the disloyalty argument.

As the story points out, how one defines themselves has a lot to do with how someone behaves. The manager defined himself as working for a particular brand of beer. Therefore, he was loyal to that brand and could not conceive of why any employee would drink any other brand of beer.

By contrast, the factory worker saw himself as working for the local brewery union. As long as he was drinking any beer produced in a union factory, he was supporting the union. His loyalty was to his fellow workers rather than to the brand of beer they made.

One of the most important strategic questions a company must answer is this: What business am I in? How you define your business will determine how you act. If you choose the wrong definition, you will wind up doing the wrong actions. This will then lead to the wrong outcomes.

The principle here is that a good strategic process needs to, at some point, define what business the company is in. I call this “the Defining Moment.” Here are three things to avoid when creating that definition.

1. Avoid Too Narrow of a Definition
If you define the business too narrowly, you will miss opportunities. Back in 1960, Theodore Levitt published what is considered to be one of the 10 most influential articles in the history of the Harvard Business Review. The article was entitled “Marketing Myopia.”

In this article, Levitt claimed that a lot of business stopped growing or failed because they defined their business too narrowly. For example, he claimed that the railroad industry stagnated because the members narrowly defined themselves as in the business of “railroading” instead of in the broader business of “transportation.” Transportation grew rapidly while railroading stagnated. Had the leaders defined themselves more broadly, they could have participated in that transportation growth. Instead, they went down with their narrowly defined product.

All products and service offerings have a life cycle. If you define yourself by today’s product or service, your company’s fate is tied to that lifecycle. You will die when that product dies. Kodak’s fate declined because it spent too long defining itself as in the narrow “analog photo business”, rather than in the broader “imaging” business. Imaging hasn’t gone away. It has grown. But Kodak missed all that growth because of defining itself too narrowly.

2. Avoid Too Broad a Definition
Of course there are also problems if you take the opposite extreme of defining yourself too broadly. If you define your mission as “making a large return on investment” you have provided no guidance to the company. The definition is too broad to have any meaning or direction.

Without direction, you have anarchy. Anarchy leads to chaos and destruction, not success. Success requires a focus. A company without focus one cannot excel at creating a point of competitive distinction that will allow them to win in the marketplace. Rather than being a team focusing its limited resources at a point where it can make a real difference, you are just a bunch of individuals working at cross-purpose to each other. A company definition needs enough detail to point at where you will focus your effort in order achieve that advantage.

3. Avoid Definitions Out-of-Sync with Your True Skill-set
In addition to finding the right balance between defining yourself too narrow or too broad, one needs to address the fit between you definition and your capabilities. For example, I could define myself as being in the low-cost transportation business. However, if I have an unusually high cost structure, I will almost assuredly fail at that mission. That definition did not match up with my capabilities.

Although it is possible to change a company’s skill-set or culture, it is extremely difficult. Most attempts fail. Therefore, successful business definitions tend to look for ways to exploit the good in the current skill-set or culture, rather than trying to start all over again from scratch.

I was reminded of this need to align with skill-sets this morning as I was reading the Wall Street Journal. There was an article on page 1 talking about firms which appeared to be on the verge of bankruptcy but were saved from that fate (or at least postponed it) due to an increased availability of refinancing options.

One of the “near death” companies getting a reprieve that was mentioned in the article was Blockbuster, the leading movie rental retailer. I believe that one of the reasons Blockbuster got into so much trouble was because of how they defined their business.

Blockbuster has traditionally defined themselves as being in the entertainment business. In 2007, the revised business mission continued this entertainment focus: “To provide convenient access to media entertainment.” Sure, Blockbuster rents a lot of movies and games, but is entertainment really at the core of their culture and skill-set?

Blockbuster has shown no real skill in creating entertainment. They have no unique skill in developing forms of entertainment media. My understanding is that within the entertainment community, most of the other players hold animosity towards Blockbuster to the point where it puts them at a disadvantage versus other partners in doing media deals.

If entertainment is not Blockbuster’s core, then what is? First, it is the ability to run small neighborhood stores. At their peak a few years ago, Blockbuster operated or franchised over 9,000 stores. Most of these were in neighborhood locations.

Second, Blockbuster is a pretty good deal-maker with outside partners. One of the reasons why the entertainment industry is hesitant to do any more deals with Blockbuster is because they did not like how well Blockbuster negotiated against them when the video rental business first started.

Now, if you define yourself as in the entertainment business, you might be prone to do many of the things Blockbuster has done in the past few years (try to align with Radio Shack, try to imitate Netflix, look into non-conventional media delivery ideas, etc.). Unfortunately, these moves have not produced very good results.

However, what if Blockbuster had defined itself as being in the neighborhood retail business? Perhaps then they would have considered other ways to leverage that retail infrastructure:

1) As a convenient pick-up point for packages purchased on the internet (so that they are not vulnerable to theft off your porch while you are at work).

2) As a convenient pick-up point for groceries ordered on-line (a place that can keep the cold items cold until you can get around to picking them up).

3) A convenient drop-off or pick-up point for items like dry cleaning, shoe repair, selling things on EBAY, etc.

Blockbuster could have focused on making deals with all sorts of non-media people and converted those stores into THE place to coordinate and protect all my neighborhood needs until I am ready to pick them up. Instead, they have been taking one of their most valuable assets—their dense network of neighborhood stores—and destroying it by closing down stores by the hundreds.

I’m not positive that this new approach would have saved Blockbuster, but I do know that their choice in how they defined themselves put this type of thinking out-of-bounds. Definitions impact decisions. Be careful in how you handle your defining moment.

The way you define your business impacts the way you think about your business. This thinking them impacts how you act. The best strategic actions tend to take place when that definition avoids the extremes of being either too broad or too narrow as well as matching the definition with the key culture and skill-sets.

The defining moment can often be iterative. It may start out broader until the right strategic path is discovered. Then the definition may be narrowed a bit more around that strategic path.

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