Tuesday, July 19, 2011

Strategic Planning Analogy #403: We’re All Number One

One of my first jobs after getting my MBA was to help a small retailer determine where to put its advertising dollars. All the local radio stations thought that I should be spending my advertising dollars with them. As a result, I was constantly being shown presentations by the radio stations about why I should be using them for my advertising.

What amazed me was that nearly every radio station in that market could use the ratings book to “prove” that their station was ranked number one. How could they all be #1? It was done by slicing up the market into sub-segments. As it turns out, for some time during the day for some sub-set of the demographics, each station could find a place where they were number one.

For example, one relatively weak station showed me that they were #1 with teenage girls at 2AM. I’m not sure how many teenage girls are listening to the radio at 2AM, and I’m not sure why I would want to talk to them at 2AM, but it was the rare opportunity when this one station could claim to be #1, so they bragged about it.

It didn’t take me long to figure out why the boss had given me the task of working with these radio stations. He knew from experience that these presentations were a waste of time. So to avoid them, he gave that job to me—the new guy.

These radio stations all saw an advantage to being able to claim that they were the market leader. Therefore, they sliced up the data until they found any obscure data point that would allow them to claim some form of leadership, no matter how meaningless.

A lot of business strategies and mission statements also put a high priority on leadership. You’ll find goals to be “a market leader” or “industry leader” (or something similar) in many of them. And there is a lot of evidence showing that there are strategic benefits to being a leader.

The problem is that not all types of leadership are created equal. As we saw with the radio stations, it is possible to find leadership within minutiae that is so obscure as to be practically meaningless.

This same problem can occur with all businesses. Like the radio stations, they can find a way to claim leadership. If you look hard enough, almost all businesses can find someplace where they are a leader. But is the leadership meaningful? Is the leadership claim strategically significant, or just some trivial point of data with no power?

The principle here has to do with smugness. Having a business which is a leader can be very satisfying. It can be a source of pride. It can make you feel like your strategic mission has been accomplished. It can make you feel smug…nothing left to do but put your feet up on the desk and watch the profits roll in.

In reality, however, there is no room for smugness in strategic planning. Just because you have found a way to define yourself as a leader today does not mean that you will remain a leader tomorrow. Worse yet, the type of leadership you have defined for yourself may not have any strategic power or significance.

While it may be true that all successful businesses are leaders, not all leaders are successful. You need leadership in a place worth leading.

Problem #1: Leaders Without Followers
The definition of a good leader is someone with lots of followers. Similarly, being #1 is only valuable if you are number one in a place with high demand. Being #1 in a place that everyone is abandoning is not much to brag about.

The largest threat to the power of leadership is obsolescence. It leaves the leader of the obsolete with nothing but memories, because their future is typically ruined. And pretty much everything eventually becomes obsolete. Therefore, if you smugly rest on your #1 position, refuse to abandoned your strategy, and hold on too long, you will eventually be a leader in a worthless position—abandoned by customers because it is obsolete.

This applies to leadership positions in specific products. Just think of all the analog products and business models made obsolete by the digital age. Being #1 in video tape players is worthless in a world of streaming movies off the internet.

Technology leadership is also vulnerable to obsolescence. Being the leader in the manufacturing of cathode ray TV picture tubes is worthless in a world of flat screen TVs. And as Clayton Christensen points out in his book on The Innovator’s Dilemma, data storage devices have gone through numerous technological transitions, and the leader in the former technology is rarely the leader in the next technology. Often, they cease to exist because they smugly clung too long to the obsolete technology.

Even entire industries can become obsolete. Think about the payphone industry. Being #1 in any aspect of the payphone industry is pretty worthless in a world of cell phones. Similarly, being #1 in the video rental store industry is fairly worthless, because the entire industry is obsolete. Just look at what happened to Blockbuster. Their leadership in the end could not save them.

Even leadership with a customer segment can be worthless if that segment goes away. I worked with a wholesale company whose core customer segment was small independent retailers. The small independents were disappearing due to the growth of Wal-Mart and other large chains. This wholesale company’s #1 position with independents was becoming worthless because independents (its customers) were becoming obsolete.

I know a story of a brewer who was looking at buying a beer brand. They did research and found out that although this brand had a leading regional position with a certain customer segment, that segment was starting to get old. They were starting to die off. No new customers were being added. In the not too distant future, so many members of the customer segment would be dying off that the leadership with this segment would be worthless. Dead customers are obsolete customers.

Problem #2: Leading in a Meaningless Place
Even in young, growing sectors, leadership can be worthless if the leadership is in a bad place. For example, some segments are just too small (like being #1 with teenage girls at 2AM). Even if you are the leader with 100% market share, it is not enough to provide an adequate return.

Think about satellite-based cell phones. About the only customers who desire them are people in places without access to cell phone towers. Unless you are out in the middle of the ocean (and few of us are) or in a very remote area (and by definition almost nobody can be in an area labeled “remote”), then you have virtually no reason to pay the extra expense for satellite-based phone service. Therefore, being #1 in satellite phones is fairly worthless. The returns will never justify the costs.

Another worthless place is being the leader in a broken business model. Even in young, rapidly growing businesses, if you cannot eventually find a path to profits, then that leadership is worthless. I can think of a lot of dotcom business which are leaders with a large number of followers. However, they have not discovered a way to adequately monetize that leadership. The business model is broken. In these situations, leadership will only allow you to burn through cash more quickly on your way to failure. The reason why dotcom bubbles and housing bubbles burst is because the industries are based on flawed models. Eventually, the flaw brings the market down, and even the leaders struggle to survive.

Avoiding the Problems
So how do you avoid these problems? First, don’t get smug and stop adjusting to the marketplace. Always be watching the marketplace for early signs that your position is in a place that is becoming obsolete. That will give you time to prepare to jump to the area that is making you obsolete. Better yet, consider initiating the act that will cause obsolescence. That way, you have a better shot at keeping leadership through the transition.

Second, don’t get smug and relax just because you were able to manipulate the data in such a way as to find some place where you are #1. It may be a worthless place of leadership. Do the math to make sure that all that effort to lead will end up in a place worth leading.

Third, once you have found the right place (a place where you can win and a place worth winning), work hard to be a leader there. This is when leadership really makes a difference, so work hard to get it.

Doing nothing is rarely a good strategy. Marketplace conditions are too fluid. Even a market leader can lose out if their point of leadership becomes obsolete or is threatened by others with a superior business model. There is never an excuse for becoming smug and stopping the attempt to get closer to where the market is going. Rather than looking for ways to redefine the status quo as some obscure version of leadership, look for areas where leadership is really valuable and move from the status quo to get there.

As Clayton Christensen likes to point out, leaders at one point in time rarely survive the transition to the new when the old becomes obsolete. They are replaced by new companies created just for the new. And a major reason, I believe, for that inability for the leader to survive the transition is because they become too smug.

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