Monday, February 21, 2011

Strategic Planning Analogy #377: Equality Does Not Lead to Greatness

Watching the Olympics doesn’t seem as exciting as it used to be when I was younger. Yes, the athletes competing today are performing so much better than many decades ago, be it running or skating or whatever. The times are faster and the difficulty levels are higher.

However, it seems that all the Olympic athletes are getting better at equal levels. Rarely does an athlete pull meaningfully away from the rest of the Olympic crowd they compete with. Many are competing at nearly identical levels of greatness. Races are won with the narrowest of margins, like a one-hundredth of a second.

You get the feeling that the leaders are so closely matched that if you did the same event 100 times, the top five athletes would each win about 20 times. That makes it harder for me to get excited about who wins the actual Olympic contest. It’s almost random among the leaders. Rarely does a single athlete appear so dominant that they stand out as the clearly superior athlete.

Those great Olympic heroes of the past who stood clearly above the others are being replaced by hoards of indistinguishable equals. And even though these modern hoards of equals can outperform the heroes of the past, it all seems less heroic when they do it equally well.

As all the athletes get better conditioning and training, it seems that they start to hit the wall of maximum human performance. The science of athleticism has allowed athletes the world over to similarly reach that same maximum performance level. As a result, even though performance overall has improved, success has become more elusive. It is harder to get an edge over the competition when everyone is equally great.

This same type of phenomenon occurs in the business world. As industries mature, the leading firms all seem to reach a point where they are similarly achieving maximum performance on the industry’s business model. It becomes ever more difficult to stand out from the crowd, because all the leading competitors have figured out how execute at high levels on the rules of how the industry business model works.

It used to be that being great was all you needed to be a hero. Now, with greatness more evenly distributed, it takes something more, something different. If all you focus on is being great, then you will not achieve an edge, be it in Olympics or in the business world.

The principle here is that average performance never leads to exceptional results. Even if the execution level is extremely high, it will not lead to exceptional results if the competition’s performance is equally high. If you want to have better performance than the industry average, you need a business model which is different than the industry norm—a difference that can give you an edge which goes beyond mere execution.

The Problem of Trying to Outdo Others At the Same Rules
The temptation is to stick with the proven industry business model and just try to execute it better than everyone else. After all, shouldn’t superior execution lead to superior results?

The problem with this approach is that it is increasingly difficult to create meaningful superiority in execution within the standard business model in today’s economy. Consider the following:

1. With all the outsourcing going on, everyone has access to high quality alternatives for the whole business model (even in places where they are weak internally).

2. With the free flow of employees between firms, knowledge developed in one place eventually spreads to others.

3. Once vendors and consultants figure out how to help one firm in the industry, they will try to sell that expertise again to others in the industry.

4. The idea of proprietary IT systems has given way to using common industry platforms.

5. In the modern digital era, it is hard to keep much of anything secret from the competition. Everything is much more transparent.

As a result, it is extremely difficult to get much of any sustainable edge on the competition when using the same basic business model. About the only advantage to superior execution on the normal business model is that it helps you survive longer in an industry consolidation. The weak players get weeded out early (just like weak athletes don’t get to the Olympics).

Of course, given the intense competition in the typical consolidated industry, there is usually not a lot of profit to be found for the survivors. It’s all given away in competitive prices. And since all the survivors are already pretty good (or they wouldn’t have survived), it is very difficult to create any meaningful advantage within that group (while using the same business model) which translates into meaningfully superior profitability.

Think of the automotive industry. Benchmarking has made all the leaders similarly strong at execution. Everyone has pretty much caught up with Toyota in quality and reliability. And because all the players were outsourcing a large part of the production to China, they created an infrastructure in China that is allowing Chinese manufacturers to play by the same rules and quickly close the gap in performance with their own brands (putting pressure on prices). Capacity exceeds demand, so nobody can meaningfully raise prices. Superior performance is harder to come by.

Therefore, if you want to break away into superiority, you need to set aside the notion of doing the same thing better and shift to doing something different.

Tweaking the Business Model
Working differently does not necessarily require doing everything differently. But it does require doing enough things differently to create additional profit streams which cannot be captured in the traditional business model. Allow me to give some examples.

In its simplest form, the traditional business model for retailing is to:

a) Buy merchandise from a vendor.

b) Re-Sell the merchandise to a consumer.

c) Make money by changing the customer more than what it costs the retailer to purchase and sell the merchandise.

It is difficult to get superior performance as a retailer by just trying to do this a little bit better. No, the retailers with superior performance tweak the business model.

Consider Best Buy. They asked the simple question “Why should purchasers be the only ones who pay us?” Best Buy discovered that they could get vendors to pay them to get inside a bundled Best Buy purchase. Over the years, many vendors have paid to get into Best Buy transactions, such as the spamware on the Best Buy computers, deals on, Netflix, magazine subscriptions and many others.

Because the Best Buy business model did not depend as much on purchasers for its income, Best Buy could afford to lower its prices to consumers (because the money was coming from somewhere else). Other companies, like Circuit City, tried to match those retail prices, but because they were not at good at the alternative business model, they couldn’t afford to match prices. Eventually Circuit City went bankrupt.

Many years ago, I worked with a European retailer. They tweaked the traditional business model in a different way. At the time, it was extremely difficult to get approval for building large retail centers in Europe. They were a scarce commodity. So what this retailer did was to essentially run his large anchor stores at near break-even prices. This would create such a huge consumer draw that everyone would want to locate their small stores nearby. Since this retailer controlled all the nearby real estate approved for retail, he could charge a large premium in rent for the privilege of being near his anchor. As a result, more money was made off the real estate than off the traditional retail business model.

Consider what Apple did in the mobile phone industry. Rather than play by the normal industry business model for mobile devices, Apple tweaked it. By building a closed, integrated system which included device, software, apps and an apps store, it created many sources of income that were not available in the traditional business model. This allowed Apple to achieve superior results and place Nokia’s traditional business model at a big disadvantage. Rather than try to beat Nokia at its game, Apple created a different game.

Superior financial performance rarely comes from superior execution of the same thing everyone else is doing. Usually, superior execution cannot create a meaningful enough difference to deserve abnormally higher than average income. Therefore, if you want meaningfully superior performance, do something different. Tweak the business to create new avenues of cash not found in the old business model. Use your strategic planning efforts to seek better business models instead of merely seeking ways to do the old model better.

In this day and age, the Olympic athletes who get noticed are the one’s who invent a new athletic move in their sport. For example, Shaun White creates a lot of attention for himself by inventing new snowboading tricks for the Olympics, like the back-to-back double cork. Because these are tricks that nobody else is doing, they stand out. If you want your business to stand out, create new tricks that nobody else is doing.

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