Wednesday, April 14, 2010

Strategic Planning Analogy #318: Measured Approach

I’m not very handy when it comes to home improvements. Once, I was going to replace some windows on my house. I went to the home improvement store expecting to see some standard-sized windows that I could just slip in to replace the old ones. As it turns out, there really is no such thing as a standard-sized window, especially for an old home like mine.

I would have to measure the opening and get custom-made windows. I knew that my skills at properly measuring the hole the window would go into would be poor, so I didn’t even try. Instead, I decided to call in a professional. They sent two people to my home—one to look at the windows in the house and one to talk about options and prices. As it turns out, while the one person was telling my wife and me about options and prices, the other one was going around the house stealing things from us.

Another time, I decided to put new siding on the outside of my home. At the time, I was living in Minnesota, which gets very, very cold in the winter. Since winter is the slow time in Minnesota to get new siding, I got a really good deal on the price. Unfortunately, when the workers took off the old siding and insulation, the pipes in my house froze.

When the job was eventually finished, it looked really nice. However, something happened that following summer, when it got very warm. The siding on the walls expanded with the heat and no longer properly fit the dimensions of the house. It became extremely difficult in the summer to open the door to the house, because the expanded siding was pushing against the door frame, making it too small for the door.

In home improvements, making the proper measurement is very important. If you cut things too large or too small, they will not fit. You will have wasted your time and have a disaster to deal with. Nothing seems to come in standard sizes, so it is up to you to make sure the measured size is right. Even when you outsource the measurement to so-called experts, you can have problems.

The same is true when it comes to defining the scope of your business. There is no standardized scope which is the same for everyone. You have to define the unique size of the scope which is right for your business.

Back in the 1960s, Theodore Levitt wrote one of the most popular articles ever to appear in the Harvard Business Review, called “Marketing Myopia.” In this article, he claimed that many businesses measure their scope too small. Levitt talked about how the railroad industry got into serious difficulties because they narrowly defined their scope as being in the “railroad” business when they should have used the larger scope of defining themselves in the “transportation” business. Other transportation options (planes, trucks, etc.) were growing while the railroad industry was shrinking. Levitt claimed that if the railroad companies had defined a larger scope, they could have continued to grow by diversifying into these related growing transportation businesses.

Then there is management/strategic planning professor Henry Mintzberg. Mintzberg claims that many businesses get into trouble by defining their scope too broadly. A large scope can lead to a lack of focus and dissipation of effort. Mintzberg claims that if the railroads had redefined themselves as in the transportation business, they would have failed due to lack of focus and stretching their resources too thinly across too many areas.

Marketing expert Al Ries would agree that focus is one of the cornerstones of business success. Ries claims that most brand extensions fail because they destroy the power of what the formerly focused brand stood for in the minds of the customer.

So measuring the proper scope for your business is as tricky as measuring the windows or siding for your house. Measure it too small, and you can miss all the growth opportunities. Measure it too large, and you can never get focused enough to accomplish anything.

So how do you know what is the right size for your custom-fit business scope?

The principle here is that the size of holes should be defined based on the size of what you are trying to put in the hole. In other words, holes for windows should be defined based on the size of the window you are putting in the hole. So before you define the scope of your business, make sure you know what kind of “window” you are putting in that hole.

So what is the “window” equivalent when defining scope? Well, here are few to consider:

1) The size of the customer alternatives
Consumers have alternatives. They can choose your firm or choose something else. Some of those alternatives can be very different from what you are offering. For example, if the customer wants to lose weight, they can choose from a wide range of diverse alternatives, from diet supplements to exercise programs to cosmetic surgery. The size of the “window” is the breadth of alternatives which are relevant to your core customer.

Returning to the railroad example, it is probably too large a leap to go from railroads to transportation. I think you need to understand which type of transportation solution you are specializing. For example, one could specialize in low-cost transportation, bulk container transportation, rapid transportation, small batch transportation, etc. Determine your solution specialty and then size your scope to include any other transportation option which has to potential to either threaten your core in that specialty or provide a diversification option with that same solution.

For example, Wal-Mart’s scope is sized as low price retailing. Whenever Wal-Mart sees something that could provide a better low price retail solution, it considers going into that business. This is why Wal-Mart diversified from discount stores into hypermarkets, supercenters and warehouse clubs. It goes wherever low price retailing goes. Wal-Mart avoids high end retailing because it is not within its scope.

2) The size of your capabilities
If the size of your scope is significantly broader than the scope of your capabilities, you are opening yourself up to entering places where you will fail. This is not to say that you shouldn’t have a little stretch in your scope, but in general the size of your scope “hole” should be similar to the size of your capability “window.”

Over time, you can enlarge the size of your scope as your company gains competencies. However, it is probably unwise to do it all at once. Take a look at Amazon. They started out with a narrow scope—selling books on the internet. However, as they got superior competency in internet selling, the scope was widened to include internet selling of other goods (and helping other companies sell on the internet). As they got superior competency and clout in the book business, Amazon expanded their scope into other areas of the publishing business, the most recent of which was the introduction of the Kindle ebook reader.

As Amazon CEO Jeff Bezos put it, "If you want to continuously revitalize the service that you offer to your customers, you cannot stop at what you are good at. You have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things." Then, when you get good at them, you can expand your scope to offer them.

Another example would be Cardinal Health. Cardinal Health started out in the US in the 1970s as Cardinal Foods, with the scope of being a grocery wholesaler. Then, in the 1980s, once they got good at being a wholesale distributor, they expanded the scope to include being a wholesaler of pharmaceutical and related products for drug stores and other health companies. The name was changed to Cardinal Distribution.

After getting to know their health care customers well, the scope was expanded to include a larger role in the health care industry. In 1994, the company was renamed Cardinal Health. Recently, it was determined that perhaps that health care scope was a bit too broad to be handled properly under one company, so in 2009, the company was split into two separate companies. The clinical and medical products were spun off into a new firm, called CareFusion. The scope of CareFusion is: To deliver clinically proven products and services that measurably improve patient care, principally by improving safety through reducing medication errors and healthcare-acquired infections. The remaining Cardinal Health now has a more focused and manageable scope within health care: To make healthcare more cost-effective through improving efficiency across the system, so our customers can focus on their patients.

It’s okay to redefine your scope over time. In fact, it is probably dangerous to never redefine your scope, since marketplace changes and capability changes may eventually make that original scope less than ideal. The trick is to time it properly so that good opportunities aren’t missed and bad opportunities (at least bad at a particular time for your firm) are avoided.

3)The size of your rope (lifeline)
Business strategies have a lifecycle. Unless you adapt and update, your strategy can die. If you can see the end of your strategy in the near horizon, it may be time to expand your scope as a means to expand your company’s lifeline. In other words, if you are hanging near the end of your rope, you may want to find a way to expand the length of that rope.

For example, had Cardinal Health (as Cardinal Foods) kept its scope focused on just serving independent grocers, there is a good chance the company would no longer be in existence, since the demise of the independent grocer in the US over time has eliminated nearly all narrow-focused publically held grocery wholesalers.

One of the key strategic decisions is that of defining a business’ scope. Define it too small and a company can miss many great opportunities. Define it too large and a company can lose focus and enter areas where it does not belong. To help size the focus appropriately, look at the breadth of your customers’ alternatives, the level of your expertise, and the length of the life within the current scope.

Just because business scope needs adjustments every so often does not mean that it should change frequently. Once you put new windows and siding on a house, you expect them to last many years. Similarly, if you scope your business properly, the scope should last many years as well.

No comments:

Post a Comment