Sunday, November 14, 2010

Strategic Planning Analogy #364: Product-Focus vs. Solution-Focus

Beginning in the mid 1980s, Kodak and Fujifilm became embroiled in a fierce and bitter battle for global leadership in photographic film. Year after year after year, the companies focused on each other while trying to gain a competitive edge. Tons of money were poured into research to continually make their respective photographic film better and better. For awhile Fuji would have the technological lead. Then Kodak’s advances would retake the technological lead. Then it would go back to Fuji, and so on.

Since neither could get a sustainable edge on quality, they also focused on manufacturing costs and pricing. Again, the goal was to try to get a pricing edge on the other firm. However, pricing was kept so competitive, that there wasn’t much of a sustainable advantage here, either.

Fuji was able to make inroads through innovation by being the first to widely distribute the disposable camera. Of course, Kodak eventually retaliated…and they had a few innovations of their own as well.

This battle continued for decades.

After all of this focus and effort on getting an edge in photographic film, where is Kodak’s photographic business today? Well, by the late 2000s, demand for photographic film had dropped so low that Kodak only did one manufacturing run of its famous Kodachrome film per year—just a mile long sheet that would be cut into a mere 20,000 rolls. By 2009, there was only company left in the world developing Kodachrome film—Dwayne’s Photo—and they were only processing a few hundred rolls a day.

On June 22, 2009, Kodak announced that it would no longer make the Kodachrome film. The film business today is virtually non-existent. Over the last few years, Kodak’s share price has tumbled. $100 worth of Kodak shares in December 2004 was worth only $14.47 by December 2009. And Kodak hasn’t made a profit in quite awhile.

Of course, the irony is that while Kodak was busy internally focusing on beating Fuji in film, outsiders took leadership and ownership of the digital imaging business. And, by comparison, those folks are doing quite fine financially.

In the past, we’ve talked about many things that are like strategic planning. Today, we are talking about something many think is like strategic planning, but really is not.

Strategic planning is about improving a company’s long-term prospects. This is not the same as improving a company’s products. Kodak spent decades focusing on improving its photographic film business. It continually worked on improving the film quality and value. Unfortunately, by focusing on the product, Kodak nearly destroyed the company. The long-term prospects for Kodak do not look very solid anymore.

The sad news is that there are lots of companies out there like Kodak. They mistakenly confuse product planning with corporate planning. They mistakenly assume that if they keep making the product better, the company will automatically be better.

Products, however, have lifecycles…they arrive, grow, mature, decline and then disappear (like photographic film). Over time, lifecycles have been getting ever shorter. If you only focus on the product, your company will die when your products die. And that could be rather soon.

To create an enduring, long-term prosperity for your company, you have to think beyond the current portfolio and focus on how to extend life beyond the current cash sources. Otherwise, the cash will dry up and you will have nothing in the pipeline to replace it.

The principle here is that solutions make a better anchor for strategy than products. Why? Solutions are eternal…products are fleeting. I’d rather bet on eternal solutions than fleeting products.

For example, think about losing weight. This is an eternal problem. There will always be a strong demand for solutions to this problem. But the products people have introduced to solve this problem come and go rather quickly. Individual weight loss fads are fleeting—here today and gone tomorrow.

I remember when low carb products were dominant weight loss fad. I lot of companies created long term strategies around a focus on low carb products. One firm was developing a strategy to build a chain of low-carb only supermarkets.

Of course, the low carb fad went away…and a lot of those firms who had a product-based focus on low carb went away as well. They would have been better off positioning themselves to be a weight loss solution leader, who can shift products while staying true to the solution.

This is what Kodak missed. It focused on the product (film) rather than the solution (visual memories). Consumers don’t want products—they want solutions. If someone comes up with a superior solution, the consumers will abandon the old product and flock to the new one.

Digital imaging is a superior solution over film for visual memories. Therefore consumers abandoned the film and went digital. It really didn’t matter how much better Kodak made the film. The best film was still an inferior solution for visual memories.

I was excited this past week when I saw an example of a company that “gets it” and did not follow the path of Kodak. The company was Northrop Grumman Corp. Northrop Grumman had to make a choice—would they anchor their strategy to products or solutions. They chose solutions.

The solution they chose was to help governments win wars. This is an eternal problem. However, the way wars are won varies over time. Back in the 20th century, wars were won by efficiently moving troops across land and sea. Having a strong Navy would be a crucial part of a war solution.

The wars of the future, however, will be different. Rather than being fought on the ground, they will often be fought on the internet. Instead of moving troops, one uses unmanned drones. Instead of a confrontation between troops, you have terrorists using letter bombs and individual attacks on civilians. Winning the war on data will be more important than winning the war of real estate.

As a result, Northrop Grumman is willing to abandon products which no longer provide the best military solution and shift its portfolio to superior solutions to military problems. According to a recent article in the Wall Street Journal, Northrop Grumman is seriously considering abandoning the shipbuilding business, even though they are one of the largest military shipbuilders in the world. And in their aircraft division, they are shifting the emphasis to unmanned vehicles.

For the future, the big thrust for Northrop Grumman is into the high tech tools designed to win in a digital era: robotic systems, information technology and high-end surveillance equipment. This is where superior solutions to the eternal problem will be found.

Northrop Grumman could have continued its focus on building better warships. It would take advantage of the company’s strengths. And navy ships are still being requested by governments. Isn’t that what strategy is all about? Not when your strengths are focused on perfecting on obsolete solution. That would be like Kodak continuing to squeeze the last sales out of film when digital imaging is known to be the superior solution of the future.

Big navy warships will eventually be as desirable as photographic film. Better to get out when you can still find a buyer for the division than wait until the bitter end, like Kodak, and end up with nothing.

Therefore, it is better to build a strategy around superior solutions and design a plan to become the winner with that superior solution—even if it doesn’t play to your current product strengths. You should even do this if it means hastening the demise of your current product. After all, if you don’t move to the superior solution, someone else will, so your old product will become obsolete either way.

Focusing on building the best product is worthless if your product is an inferior solution for your potential customers. Given product lifecycles, all products will eventually become obsolete. If you want your company to outlast the lifecycle of your product, focus on superior solutions, rather than superior products.

Kodak saw their enemy as Fuji, a company focused on the same product. In the end, the companies which took away all of Kodak’s business weren’t even in the film business—firms like Sony, HP and Flikr. Often times, the superior solution comes from somewhere far afield—totally unlike your product. Therefore, since replacement solutions often come from outside the industry, keep your strategic eyes looking beyond your industry.

1 comment:

  1. Hello Gerald Nanninga, this post is consistent with a previous one you wrote some time ago about the Minnesota train. The idea is to have a lasting emotional value. Cosmetic companies learnt this lesson by selling cosmetics to beautify life. This is a lasting value and not a transient one. I enjoyed this post.