Wednesday, June 23, 2010
Strategic Planning Analogy #334: Where It’s At
Shortly after the fall of the USSR, the company I worked for started working with Russian partners to bring western-style supermarkets to Russia. It was a very difficult project, in part due to the Russian infrastructure.
In general, it is easier to transport processed food than un-processed food, since processed food is already packaged in a way that reduces spoilage. That is why, in most western countries, the food processing factories are located near where the food is grown. That way, the food can be processed shortly after being picked—reducing wastage and rot.
In Russia, however, we found that the food processing factories tended to be located closer to the big cities. The problem was that due to the poor transportation network in Russia, a lot of the food became spoiled and damaged before it reached the factories. The quality of the processed food suffered as well.
As a result, most of the food in our Russian supermarkets had to be imported from outside Russia. It made the products more expensive, but the customers appreciated the higher quality.
A simple little concept—where to put the food processing factory—made a big difference in the Russian food chain. Russians needed to import food—not because they couldn’t grow it, but because so much of it spoiled before it could get consumed. Had they only located the factories closer to the growing fields, there would have been fewer food shortages.
Every product or service needs to be located somewhere, be it food processing or business consulting or whatever. Just as poor location choices had a detrimental impact on the Russian food chain, poor strategic choices of location in your business could have disastrous results. Conversely, if you are clever in your locational decisions, you may create exciting new business opportunities.
Therefore, when creating your business strategy, it may be wise to ponder new locational alternatives. It might revolutionize your industry.
This is another in a series of blogs on innovative business models. In the last blog, we looked at innovation via changing who owns the product/service. In this blog, we will look at innovation base on where the product/service is created/sold.
Although we can often think of location as a given, there actually is quite a bit of variability in where one can provide a good or service, if you think creatively. If you decide to make location decisions differently from conventional wisdom, you may create an exciting new growth opportunity.
1) Locate Where the Customer Is
Often, people must travel to the store or service shop in order to get a good or service. But what if you brought the store or service shop to the customer? Take cars, for example. There are firms that will drive their service operations to the location of your car rather than you having to drive your car to the service shop. This includes a variety of services, such as windshield replacement, cleaning, and even mobile oil change trucks.
Enterprise rent a car came up with an ingenious locational idea. Their great insight? If you need to rent a car, then there is a good chance that you do not have transportation to drive to the car rental location. Therefore, Enterprise will drive the rental car to where you are located.
And how about shopping? Firms like Tupperware, Avon, Amway and Mary Kay do the selling right at your house…no need to go to the store. And of course there are all the etail options where you can buy from your laptop.
Firms like SnapOn Tools and Mac Tools drive their inventory of tools to the worksite to sell right where the work gets done. Lunch Wagons will drive the restaurant right to the work site as well. Consultants or other contract workers can be located at their place or your place…whatever works best.
You can get grooming services (for you or your pet) to come to where you are. And if your computer isn’t working right, the Geek Squad will drive to your home or work location and fix it right there…or they might do it remotely through the internet. No need to lug your computer to a shop.
Perhaps you can think of a business typically done remotely which can be revolutionized by moving it closer to the customer.
2) Locate Away From The Customer
The opposite can work as well—taking jobs usually done on customer’s site and move it somewhere else. For example, homes are traditionally built at the site where the home will be lived in. Howevever, that is not the only way it can be done. Pre-manufactured homes can be built in a factory and merely assembled on site.
“Home-Cooked” meals are traditionally made at home—hence the term “home-cooked.” However, there are a number of firms like Dream Dinners which provide an off-site kitchen, where groups of customers come in and cook a week’s worth of meals at the same time—then take them home to freeze for later.
Modern technology and internet connections are making remote diagnostics posssible, so that problems can be repaired without visiting the home. We already talked about this with computers. But now there are home devices which can monitor health (and are remotely connected to medical providers). Similarly, if some business equipment (like copiers) fail, they can sometimes be repaired remotely through the internet. You can check up on your home remotely, to see if there are any burglars, or to change the lighting or heat settings.
There are people looking to do the same thing for home appliances. Why have a repairman drive out to the home if you can fix it with a software patch sent to the appliance over the internet? In fact, if the appliance starts feeling “sick,” it may remotely contact the repairman on its own.
Perhaps you can think of a business typically done near the customer which can be revolutionized by moving it somewhere remote.
3) Upstream Considerations
Not only can you make innovative changes by changing the locational orientation with the customer. You can also change the locational orientation with suppliers. We saw in the story how building food processing factories closer to the farms can be beneficial. This same principle can apply to other supplier issues.
For example, breweries consume a lot of water. It makes sense to locate breweries near cheap, high quality water. Otherwise, you would go broke trying to import water to the brewery
Sometimes the economies of scale are such that it makes sense to centralize production. Other times, distribution costs may be for of a factor than production, so it could be better to spread production closer to your customers.
Labor costs vary by area. If you have a high labor process, perhaps it makes more sense to locate closer to cheaper labor. Then again, if you get creative, you might be able to reinvent an industry by bucking that conventional wisdom.
Take, for example Zara, the fast fashion retailer owned by Inditex. Where most clothing retailers source their apparel from cheap labor markets in Asia, Zara gets much of its inventory from higher-cost nearby Italy. Zara found that by avoiding Asia and using nearby Italy, they increased their flexibility and speed to market tremendously. Then, they designed a business model for Zara which exploited this speed and flexibility. It has been fabulously successful. The higher labor costs are more than compensated for by the competitive advantage in speed and flexibility due to the different location choice.
Location decisions do not have to be “automatic.” Although conventional wisdom may cause everyone to locate their business or service in the same way, it doesn’t mean that it is the only way it can be done. By creatively changing the traditional location where goods and services are produced or sold, you may create an innovative new industry with plenty of growth potential.
In retailing, they say that the three most important factors for success are “location, location, and location.” If you get clever, perhaps location can be the key to your success.