Tuesday, June 14, 2011

Strategic Planning Analogy #397: When a “Best” Strategy Isn’t

There is an interesting story in the June 6, 2011 edition of Strategy+Business concerning the coffee business. About the time when Starbucks was beginning its rapid growth phase, the activity caught the attention of Folgers, the massively huge coffee brand then owned by Procter & Gamble.

The Folgers brand managers were concerned enough about the potential threat of Starbucks that they conducted independent taste tests. The tests results were reassuring for the gang at Folgers — most people preferred the Folgers taste to the more bitter Starbucks. Not only that, but Folgers cost a lot less than Starbucks—you could get a large can of Folgers coffee grounds for about the price of one serving of Starbucks.

With proof that Folgers tasted better and cost less, the Folgers managers relaxed under the assumption that Starbucks was a passing fad. Of course, history has shown their complacency to have been misguided; between 1993 and 2008, revenues at Starbucks grew from less than $200 million to $8 billion, a 40-fold increase. And Proctor & Gamble gave up on the Folgers brand and sold it.

Folgers fully embraced the philosophy of Procter & Gamble at that time. This philosophy believed that the best performing product typically wins. That is why Procter & Gamble spent so much money to ensure that its portfolio of products had technological advantages. By having products with superior performance, Procter & Gamble expected superior sales and market share.

Unfortunately, this “best features” approach lead Folgers into disaster. The worst-tasting, more expensive coffee won the day.

As it turns out, a lot of companies base their strategies on a similar assumption. The The results of Folgers versus Starbucks is enough to make one question the validity of this strategy.

In reality, striving to be the best is still a good strategy. The problem is in how one defines what they are trying to achieve this superiority in. If you choose the wrong thing to be best at, you will lose to a supposedly inferior competitor. So before embarking on a “best at” strategy, ask yourself these questions.

1) Better for Whom?
If you ask a company who they are trying to make a product or service better for, the typical initial answer would be for the customer. After all, the customer is the one using it, so their opinion of what is best is most important. Right?

Well not necessarily. Many people in the supply chain have a stake in the success of a product. If it is not “best” for them, it may never get to the consumer. For example, a new premium liquor introduction is rarely successful unless it receives a lot of bartender recommendations at the prestige bars and nightclubs. If you don’t find a way to make it the best liquor for them to recommend, the customer will never even get to taste it; and without the recommendation the customer will lose a key reason to perceive the liquor as superior.

Supermarkets are asked by vendors to stock more items than their shelves can hold. If you want to get on their shelf, you have to convince them that it is the best item for them to put there. Otherwise, the customer will never see it.

In the case of VHS vs. Beta, or Blu-Ray vs. HD-DVD, there are many players to please—the studios, the distributors, the retailers, the playback device manufacturers, etc. All of these players start to take sides depending on which option appears best for their particular self-interests. If you do not actively and aggressively manage all these players in your strategy, the appeal to the customer will be irrelevant.

And the medical field is probably the trickiest. You need to please doctors, hospitals, insurance companies, governments, and so on, before a customer ever has a chance at access to what you are selling. If you don’t convince all these parties that you are the best, then winning the consumer’s opinion is of little value.

In your business, all the players may not be this obvious, but consider them all before embarking on a “best at” strategy. Otherwise, you may be targeting your efforts at the wrong audience and focusing on the wrong features to emphasize.

2) Better at What?
In the attempt to be best, one needs to ask what one should try to be best at. The easy answer is to tackle attributes which can be easily measured, where one can easily show superiority, and something tangibly related to functionality of how the customer uses the product/service. Unfortunately, this is not always the best choice.

Customers are both rational and emotional beings—even business customers. Often, the softer emotional issues of prestige, status, acceptance, risk-aversion, and self-worth are more important determinants of choice than rational, functional attributes. Starbuck’s success wasn’t based primarily on rational features like taste and price. It won on emotional appeals to social factors, status and prestige. The “experience” of Starbucks transcended beyond mere coffee. This was an experience not to be found in a can of Folgers bought at the supermarket.

How much attention are you spending on the softer, emotional attributes?

3) How Much Better Do I Need to Be?
Before a customer switches from one product to another, they often need to consider the cost of switching. For example, if I decide to switch from one technology source to another, I have impacted a host of other issues:

• I have to give up a comfortable relationship with one vendor representative who I like and who understands me and form a new relationship with a stranger.

• I have to convert all my old files to the new technology…will they still work? Will I lose data?

• I have to throw away all the supplies and replacement parts I kept in stock to maintain the old technology and buy a whole new set for the new technology.

• There will be unproductive time as I adjust to the new technology.

Even if a new solution is superior to the old, it doesn’t automatically mean I will switch. To switch, I need to be convinced that the superiority is so great that it overcomes the costs of switching. Depending on how entrenched the status quo is and how much it costs to switch, you may not be able to create enough superiority to cause the switch to occur.

For example, there are people who are fully attached (rationally and emotionally) to products and services offered by Apple. Everything is all connected; they have access to all the apps at the app store, the status of owning Apple products, etc. How much superior to Apple would you need to be to get them to switch and lose all of that? Is it even possible to become that much superior to Apple?

4) What is the Context?
People are not always looking for the same type of attributes all the time. Depending on the circumstances, people’s preferences may change. For example, the attributes one looks for in the type of beer they drink at home alone may be different than the attributes they look for in a beer they drink in public with people they are trying to impress. The “best” beer for each situation may be entirely different because you are looking for something different.

If you don’t understand the context, you may choose the wrong attributes to become best at. Purchases are not made in a vacuum. They are made within a context. Does your strategy manage both your product and the context you desire for that product? If you don’t actively manage the context, it may not end up being the context you desired, thereby making your choice of attributes to be best at incorrect.

A strategy of just being better is not enough. You need to be better in the right way. You are more likely to be better at the right things in the right amount if you consider a) a broader list of “customers” within the supply chain; b) a list of both rational and emotional attributes; c) switching costs; and d) the context surrounding the use of the product/service. If you ignore these issues, you may find yourself with a superior product with inferior performance.

Sometimes, consumer research is used to determine what attributes to emphasize. Unfortunately, that research can often lead one astray, particularly if all you are doing is asking for opinions. Customers like to appear rational, so they may overestimate the rational attributes and underestimate the emotional. Consumers like to appear helpful and supportive, so they often underestimate the switching costs when asked how likely they would switch. Questionnaires are often asked in a different context then how the product will be used. As a result, be careful at taking opinion research at face value. Behavioral research is a much better indicator of how a product would really perform.

1 comment:

  1. Gerald Nanninga,

    This is a marvelous post. Be good is not enough unless one knows good at when, why and by how much. I am glad that you mention the emotional values and they may offset inferior or less than perfect attributes. Surely, emotional attributes over weigh physical attributes. I published a presentation on slideshare that is in full agreement with this post