Friday, June 24, 2011

Strategic Planning Analogy #399: The Most Important Question

I was talking one time with the president of a retail company. This company had just chosen a new strategic direction. In essence, they had decided to imitate a strategy which had been very successful for another retailer with whom they competed. Puzzled by the choice of strategy, I asked this president a few questions.

“Will you have lower prices than this competitor?” “Not really,” he replied. “Our prices will be about the same.”

“Will you offer a better assortment than this competitor?” “No,” he replied. “The assortment will be similar.”

“Well I know the competitor has superior store locations. So, I’m wondering…what is it about your strategy that will cause customers to prefer you over this competitor?” He didn’t have an answer.

It wasn’t too long after this conversation that this individual was no longer president of that retail company.

In the story, the president chose a strategy which had been very successful for a competitor. My guess is that the president concluded that since the strategy made his competitor successful, then it must be a good strategy. And if it is a good strategy, then it will work for his company as well.

Unfortunately, that’s not the way strategies work. In general, a strategy is not intrinsically good or bad on its own. It’s value is based on the context of the particular company using the strategy and the competitive landscape. In other words, a strategy is only good if it is good for you.

For example, a low price strategy may be excellent for the lowest cost operator, but a disaster for a high cost operator. So is the “Low Priced Strategy” a good strategy? It depends. And if you don’t have a good understanding of yourself and your marketplace, you may come to the wrong conclusion.

To help figure out if a strategic option is the best strategy for you, it is often a good idea to develop a process where you ask a lot of questions, as I was doing with this president. And one of the best questions you can ask yourself is this: What is it about your strategy which will cause customers to prefer you over the alternatives? In the story, the president did not have an answer to this question. And as a result, his strategy failed and he lost his job

The principle here has to do with the concept of superiority. Great strategies enable a particular company to achieve a position of superiority in the marketplace. And this superiority is only relevant if a meaningful percentage of the marketplace desires it. And one of the best ways to determine if you have achieved this relevant point of superiority is to ask the question: What is it about your strategy which will cause customers to prefer you over the alternatives?

No Reason To Prefer = No Reason To Exist
This is a critical area to spend time on, because preference is directly related to relevance. In other words, if consumers have no reason to prefer you, then you have no reason for existing.

A lot of businesses struggle to survive. I believe that most of these firms struggle because they never established a reason for why customers would need them to survive. They have never established a rationale for why someone should clearly prefer them over the alternatives. There is no clear superiority.

These struggling companies may say that they have good products/services at competitive prices. But so do nearly all the alternatives. Just look in the phone book or do a search on the web. There are lots and lots of alternatives. And most of them are pretty good. Just being as good as everyone else is not enough. That does not provide a reason for people to choose you. Mediocrity is not a viable strategy.

In an earlier blog, we asked about what would happen if your company ceased to exist. Would anyone care? Could they easily find a substitute and move on with their lives as if nothing happened? If that is the case, then you do not have a worthwhile strategy.

If you want to exist, then you need give people a reason for wanting you to exist—a point of superiority.

If You Know Why Consumers Should Prefer You, Then You Pretty Much Know Your Strategy
The real beauty to this question is that, once you know why consumers should prefer you, then the rest of the strategic process becomes relatively straightforward. It boils down to four words: Strengthen, Protect, Declare, and Leverage.

Strengthen: Keep strengthening your point of preference so that your level of superiority becomes even greater. This is where a disproportionate amount of your resources need to be applied. This is the “offense” part of the strategy.

Protect: This is the “defense” part of the strategy. This is where you monitor the competition and do what you can to keep them from catching up or surpassing you in superiority.

Declare: It does no good to have superiority if the customers are unaware of it. Have a plan in place to make sure your customer segment is fully aware and fully appreciates your point of superiority.

Leverage: A point of superiority opens up numerous profitable opportunities. The point of superiority needs to be exploited by leveraging it into as many profit opportunities as you (and your customers) can handle. This could mean adding new products/services, expanding into new countries, etc. As long as these actions take advantage of your point of superiority, they can successfully grow your business exponentially.

So, if you were Apple, you know that your superiority centers around having the coolest technology. So what is the strategy? Strengthen the coolness by continually improving the products. Don’t let anyone come up with anything cooler. Leverage your coolness into an expanding array of products: iMac, iPod, iPhone, iPad, etc. Surround them with cool stores and cool apps that exclude the competition. And tell the world about your coolness through cool media campaigns.

If you are Wal-Mart, your superiority centers around low prices. So what is the strategy? Do what you can on the cost side so as to strengthen your ability to afford to sell at even lower prices. Protect yourself from others who could get a price advantage. For example, when Wal-Mart discovered that supercenters could get a price advantage over discount stores, they pretty much abandoned the discount store strategy and started building supercenters. Leverage your strength by going international (which has the secondary benefit of increasing economies of scale and enabling even lover prices).

Even Knowing You Have No Point Of Leveage Makes Strategy Easier
Let’s say you find that there is no reason why customers should prefer you. Just knowing that makes the rest of the strategic process easy. You have four options: Create, Bribe, Intercept, or Exit.

Option #1 - Create: Choose a point of superiority (which you don’t own today) and make it a reality.

Option #2 – Bribe: Add something tangential to your mediocre offering which will create temporary excitement and preference. This usually takes the form of either a big price reduction or some sort of “gift”/“bonus” with purchase. It’s like a legal bribe. Since your offering alone isn’t good enough to stand out, you need to sweeten the deal with something extra.

Option #3 – Intercept: If you can’t get the customer to go out of their way to prefer you, then you need to go out of your way so that they cannot avoid you. Intercept them before they have the chance to find someone else. For example, if you are no better than anyone else, then the best way to increase your chance of being chosen may be to use an SEO strategy to make sure you show up on the top of the first page of a Google search. If you are a retailer, put your store in the busiest location or closest to the customer, so that it is a bigger struggle for them to go elsewhere. Have more aggressive salespeople than the competition.

Option #4 – Exit: If you have no reason to exist, then perhaps the best thing to do is to find a strategy to stop existing—as profitably as possible. Selling or shutting down is often the most prudent thing to do.

The most important question one can ask one’s self when doing strategy is this: What is it about your strategy which will cause customers to prefer you over the alternatives? Once you answer this question, the rest of the process becomes rather obvious and straightforward. The next steps become much clearer. If you have a point of superiority, the next steps are to Strengthen, Protect, Declare, and Leverage that point of superiority. If you do not have a point of superiority, then you need to either create one, “bribe” the customer, intercept the customer, or exit the business.

Following the leader will never get you in the front for the race to the customer. Instead of chasing behind the competition, find a race where you have the superiority to win.

1 comment:

  1. Gerald Nanninga,
    I still believe this post stands out as one of your most prominent posts. I like the SPDL Cycle (Strengthen, Protect, Declare, Leverage). It is relevant at all times