Thursday, January 26, 2012

Strategic Planning Analogy #434: Want More, Get Zero

I was talking to an executive recruiter (also known as a “headhunter”) today. He says that he runs into a peculiar phenomenon when talking to many unemployed senior executives who are looking for a job.

The recruiter will ask these executives about what kind of financial compensation they want in their next position. Often, the answer goes something like this:

“At my last job, I made $250,000. I refuse to take anything less at my next job.”

Unfortunately, this unemployed executive is confronting some harsh realities. First, the great recession has changed how companies value certain skill-sets. His skill set isn’t valued as highly as it was prior to the great recession.

Second, the longer this executive remains unemployed, the larger is the perception that his skill-set is becoming outdated. By not being currently employed in this rapidly changing world, his skills may become obsolete.

Therefore, although he might see an offer of $200,000 for his skills, he will probably never see another offer of at least $250,000. So by refusing to take anything less than $250,000, he ends up with nothing. I don’t know about you, but even though $200,000 is less than $250,000, it is sure a lot more than nothing. In that situation, I’d take a $200,000 job if it were offered to me.

It’s human nature to not want a reduction in our wages. We like to believe that our income should continue to rise each year until we retire. Unfortunately, harsh reality does not always make that possible. In fact, I read recently that it is normal in the US for a worker’s wages to peak when they are in their late 40s and plateau or decline thereafter (in real terms). If the worker refuses to take a pay cut, their only alternative may be no pay at all.

A similar situation can occur in business. The harsh reality of a new, disruptive technology can have the potential to render a company’s current business model obsolete. However, a company may stubbornly refuse to migrate to the new technology, because it provides less income than the prior technology. By refusing to accept the lower returns of the new technology, the company eventually ends up with no returns at all.

Take Kodak, for example. Back in 1975, Kodak claims to have invented the first digital camera. However, Kodak did not bring the product to market. Why? As it turns out, there is a lot less profitability in digital imaging than there is in film-based imaging. The profit loss from no longer selling film or developing equipment/services is far larger than the replacement profits from digital imaging. By refusing to accept a new business model because it was less profitable than the old one, Kodak ended up with neither and had to file for bankruptcy.

Or how about Ford? They invented the minivan, but did not bring it to market because they thought it would merely cannibalize their highly profitable station wagon business. Splitting the market between two vehicle types would be less profitable. Of course, Chrysler brought out the minivan because they did not have a large station wagon business. In the end, the station wagon business virtually disappeared, and Ford was never a major player in minivans. By refusing to accept less up front, Ford ended up with almost nothing (no station wagons and no meaningful share of minivans).

I personally experienced this problem at Best Buy. During the early days of the transformation of music from CDs to digital files, one of my jobs at Best Buy was to look for a way to exploit this transformation. I looked at the music and entertainment industry from all possible angles. I created countless scenarios and strategies. The problem was that every strategy I examined in the new music space was less profitable than what Best Buy was making in the old music CD world. This made Best Buy somewhat reluctant to make fast, bold moves into the new space.

Apple, however, was earning nothing in the old CD world. Therefore, everything in the new transformation would be additional profits for them. As a result, they were fast and bold with the iPod and iTunes. And Best Buy is becoming increasingly irrelevant in music.

The newspaper industry was hesitant to move fast and bold into digital news because it was so much less profitable than the analog newspapers. By not wanting to cannibalize the more profitable printed paper, the newspaper industry let others take the lead in the digital space. Now, most newspaper firms are struggling to stay afloat.

So businesses can fall into the same trap as that unemployed executive. By refusing to accept less, they can end up with practically nothing.

So this is the strategic dilemma. What do you do if you realize that the next transformation in your industry will make your industry less profitable? How do you convince your stakeholders to make bold moves into the new space, when those bold moves appear to destroy more profits than they create? What is the right way to handle the transformation? How do you keep from being like the unemployed executive who refused to take less, which resulted in getting nothing?

Here are some principles to consider when confronted with this type of situation.

1) Make the Right Comparison
The unemployed executive in the story was making the wrong comparison. He was comparing new job offers to his prior job. Instead, he should have been comparing new job offers to his current unemployment. By comparing job offers to the old job, he was rejecting opportunities which were far better than the current unemployment.

The same is true in business. You cannot stop these business transformations. If nobody inside the industry wants to do it for fear of earning less, then someone from the outside will cause the transformation, because they have nothing from the old status quo to lose. Sony had no stake in film photography, so it rushed into digital photography. Apple had no stake in the CD business, so they rushed into iTunes. And so it goes.

Therefore, the real comparison is not today’s business model versus tomorrow’s. No, the real comparison is tomorrow’s business model versus nothing. That makes the need to adapt look more appealing.

2) Manage the Timing
Although the transformation may be unstoppable, you may be able to slow it down a bit. Kodak did not need to immediately abandon the film business back in 1975 and immediately plow every effort behind digital. They had room to wait a bit.

Delays can be good, because they help you build up a war chest of cash to use during the transformation. However, don’t wait too long. Eventually the race will get underway and if you wait too long, you will never catch up.

3) Keep Your Powder Dry
A delay is not an excuse to ignore the transformation. It is time to prepare for the transformation. Back when rifles were loaded with gunpowder, there was a saying to “keep your powder dry.” The idea was that you never knew when you would need to fire a shot, so you’d better prepare your gunpowder so that it could be used immediately (as a dry powder).

The same is true in business transformations. Eventually, you can delay no longer. Then you need to act quickly, strongly and boldly in order to remain relevant in the new world. You need your rifle to shoot immediately. Therefore, use the time of delay to “keep your powder dry” by working behind the scenes to prepare to win in the new space. Keep up the R&D. Develop prototypes. Invest in start-ups. Hire the proper talent. Do what it takes to get ready to win in the new space. That way, when it is time to move, you can move immediately, with great force.

4) Consider Creative Reorganization
To pull this off, you may find it beneficial to rethink your organizational structure. For example, you may want to place the old business model and the new business model into separate business entities. This can ease the resistance to self-cannibalism since you are different businesses with different leadership, different goals, and different compensation.

A separation also makes it easier to spin off either business. The old business can be sold while it still has some value (before it goes to zero). The new business can be spun out separately, so that all its growth is plus business rather than a decline from the past (since the past was not a part of its separate structure).

Separation also allows the new business to achieve a better (i.e., higher) valuation in the marketplace. These reasons help explain why so many businesses these days are splitting the growth part of the portfolio from the rest of the portfolio.

5) Switch
Another option is to consider switching industries. Fuji could see that the photographic film business was going away. It discovered that the chemical reactions with film are similar to the chemical reactions with skin. Therefore, Fuji redeployed its film knowledge to the cosmetic industry to create a significant new profit center to help replace some of what was being lost in film. So check to see if your core competencies provide opportunities to shift to better industries.

Firms like GE and Nokia have been successful for generations because they are willing to abandon core industries in decline and add on new initiatives in growing areas. In essence, GE made its core competency to be running business portfolios, which allows it to adapt to negative transformations by shifting the portfolio in a new direction.

6) Get Out Early
If the transformation looks bad and you can see no viable way forward, then sell out early, when others still see value in your business. The longer you wait, the worse it gets. Don’t wait so long (like Kodak) that nobody wants you anymore and the only option is bankruptcy. Those who sell out first usually get the highest price.

Often times, business transformations can result in new business models which provide less profitability than the old model. If you are a leader in the old model, this reduction in profitability may create resistance to migrate to the new model. However, by resisting the lower profits, you can end up with nothing, because the old business model will cease to exist. Fight the resistance and come up with a plan for dealing with the transformation.

A lifeboat is a lot smaller and less glamorous than a large ship. However, if that large ship is sinking, the lifeboat is a better place to be. Stop clinging to the sinking ship and swim to the lifeboat.

Wednesday, January 18, 2012

Strategic Planning Analogy #433: Constructive Energy

Although construction and destruction are opposite results, they can often come from the same source. For example, a nuclear power plant uses the same basic principles of nuclear physics as a nuclear bomb. Yet, the output from a nuclear power plant is constructive while the output from a nuclear bomb is destructive. Same source, but radically different outcomes.

In the same way an axe provides radically different results, depending upon how it is used. In the hands of a lumberjack, an axe is very constructive. In the hands of an axe murderer, the results are very destructive.

So is the power of the axe or of nuclear reactions good or bad? Is it a force for construction or destruction? In reality, it is just a source of power; an input. The outcome depends on how the power is controlled.

Another source of power, besides axes and nuclear reactions, is management. Over the years, I have seen examples of management doing things which are very positive and constructive to a business. I have also seen management do things which are very destructive to a business.

Sometimes, we are quick to place a value on the input based solely upon the outcome. We will say that all the managers who provided constructive outcomes were “good” managers and all of the managers who provided destructive outcomes were “bad” managers.

Now in some cases, this is true. There are some really good and really bad managers out there. But in general, I’d say that management tends to follow a bell-shaped curve, with most of the management in the middle rather than at the extremes of good or evil. I think this is particularly true at mid-management levels. Therefore, if we want good outcomes from the core of our business, we need to consider the lesson of the axe and nuclear reactions.

An axe is not inherently good or bad. The value of the axe is determined by the one using it (lumberjack or axe murderer). In the same way, most managers are not automatically always either extremely good or extremely bad. The outcome, good or bad, is highly influenced by how the company uses its management.

In a toxic business culture, it is difficult for any manager to be very constructive. Conversely, in a healthy culture, it is far more difficult for a manager to be destructive. So if you want good outcomes, it takes more than just finding good managers. You also need to place those managers in an environment where good outcomes are more likely to occur.

Just as the holder of the axe has to take some of the responsibility for the outcome of the axe, a business has to take some of the responsibility for the outcome of its management

Therefore, we should not automatically and hastily replace a manager just because the results were bad. Unless the environment changes, the next manager may be no more successful in his/her results than the last one. For example, I worked with a company division that went through about 4 presidents in a nine year period. Yet, despite frequent changes in management, the results continued on the essentially the same poor path. The bad corporate environment was more influential on results than the character of the leader.

So, before making a quick value judgment on a manager, consider the way in which the manager was used by the business. Perhaps the best way to improve results is not by replacing the manager, but by replacing the environment the manager is put in. And, as we will see in this blog, an increased emphasis on strategic planning can be an easy and effective way to improve that environment and allow your management to be more constructive in its outputs.

One of the biggest problems facing the strategic planning profession is the growing image of Strategic Planning as being irrelevant. The logic of those who believe in the irrelevance of strategic planning usually goes something like this:

a) The world is moving too fast; constant change makes it impossible to effectively plan the future.

b) Those annual planning meetings produce documents that are ignored and go on the shelf, and have no relevance to everyday decisions.

c)If we adequately empower the people on the front lines, they can get the job done without needing the advice of strategists stuck in the ivory tower away from where the action is.

As the image of strategic planning declines, so does the number of strategic planning jobs inside businesses. Just go and look at all those job boards on the internet. Titles like “VP of Strategic Planning” are disappearing. If you click on one of the drop lists of job types on these sites, strategy usually isn’t even on the list.

If you, like me, still believe in the benefits of strategic planning, then this is not good news. In response, one can try to change these people’s minds by attacking those three points above (and I think good rebuttals can be made). However, that may not be the best approach.

My suggestion is to counterattack on a different front. One such counterattack is to say that strategic planning makes all of those empowered people more effective. In other words, a small investment in strategic planning can increase the quality of the output of management, leading to far better financial results. Like the axe and the nuclear reactions, you can turn management output to greater good because you place them in a better environment.

Most Managers Are Ineffective
This can be seen in a study by academics Heike Bruch and the late Sumantra Ghoshal as reported by CBS Moneywatch. Bruch and Ghoshal defined managerial success as “decisive, purposeful action.” For them, good managerial output is action which results in leading the company forward.

What they discovered was that only about 10 percent of the managers they studied created decisive, purposeful action. In other words, about 90% of managers are not effective.

The rest of the management was classified as follows:

a) Approximately 40% energetic, but not focused (effort wasted);
b) Approximately 30% had low energy, little focus and tended to procrastinate; and
c) Approximately 10% were focused, but not very energetic.

Businesses should not be happy when approximately 90% of their managers are ineffective. This should be a call for change.

Strategic Planning Can Create Effectiveness
The largest segment of ineffective managers was those who had the energy, but not the proper direction (no focus). These are like the people who have the nuclear energy but make destructive bombs rather than constructive electricity. They have the capacity and the desire to do good work, but the effort is dissipated due to lack of proper focus.

Well, guess what is the best way to give managers focus? It is through strategic planning. Strategic planning provides focus and direction. It tells people what the goal is—where the vision lies and how to get there. Strategic planners can not only help set that focus, but help communicate that focus to all the managers and show them how their role fits into that focus.

If a company makes a relatively small investment in strategic planning, they can turn that 40% who are energetic and not focused into productive, focused managers. Suddenly, a typical company goes from having only about 10% of their managers productive to having about half of their managers productive.

What other similar-sized investment could a company make that could have such a dramatic increase in management effectiveness? I can’t think of any. It’s a no-brainer. Invest in strategic planning because it turns unproductive managers into productive managers.

This is an outstanding return on investment. And for that alone you can justify having strategic planners in the organization.

Success does not come from merely having powerful tools. Powerful tools can be both constructive or destructive, depending upon how they are used. In the same way, managers can be effective or ineffective, depending upon whether or not the company provides them the proper focus. Strategic planning can provide such a focus. Therefore, you can justify an investment in strategic planning merely by looking at its ability to turn ineffective management into effective management.

You can be the best strategist in the world, but if nobody wants it, then you cannot use your gift for good. Therefore, we need to continually defend the value of the discipline.

Monday, January 16, 2012

Strategic Planning Analogy #432: Shifting to Stay in Place

The university where I got my MBA used to send me annual updates of what the school was up to. My favorite statistic was the one showing which jobs the current graduating classes were taking. Over the decades, the top jobs kept shifting.

In the early 1980s, the most popular jobs taken by MBA graduates were in working for large industrial corporations. Then, starting in the mid 1980s, the most popular destination was in working as management consultants. During the 1990s, the most frequent career path moved to dotcom entrepreneurism. Then, after the dotcom market blew up, the most popular career path was investment banking. Now that investment banking has seen a bump, it seems that the shift is moving to international.

I learned two things from watching these statistics over the years. First, I learned the constant—no matter which year you looked at, the students flocked to where the money was. Second, I learned the non-constant—where the money was shifted over time.

So the irony is that if you want to stay in the same place (where the money is), you have to keep moving (since the money keeps moving).

This idea does not just apply to careers. It also applies to strategic positioning. Successful strategic positions are located where they optimally satisfy some high consumer demand. This high demand could be for something like “status” or “convenience” or “self-worth” or “freedom” or some similar basic need or emotion. These, like the MBA’s desire for a high-paying job, are a constant. They never go out of fashion. Just as you can count on most MBA graduates to desire a high-paying job—decade after decade—you can count on a large number of customers seeking one of those basic needs and emotions mentioned earlier.

However, the primary means by which these basic needs and emotions are satisfied does change over time. For example, what constitutes status changes frequently like fashions. In rapidly-developing third world countries, status in the past might have been best indicated by how many goats you had. Now, it may be the type of mobile phone you have.

So, just as the type of job which pays the most for an MBA shifts over time, the best way to achieve status or freedom shifts over time.

Therefore, strategists are stuck with the same dilemma as the MBA graduate. If they want to keep their positioning in the same place (in the middle of satisfying a core need), they have to keep moving the position (since the way people satisfy core needs keep changing).

The principle here has to do with positioning. The dilemma is determining what to do when your formerly solid position begins to move out of step with a shift in how consumers want to satisfy that position. Do you shift your offering to retain hold of the former position or do you reposition the offering to something more appropriate after the shift?

At first, one might think that the easiest option is to try to make minor adjustments to your offering in order to keep the old position. Unfortunately, some of the shifts are so dramatic, that minor modifications are not enough to hold the position. Instead you are forced to either completely change the offering or completely change the position.

Example #1: Clothes Vs. Gadgets
Let’s look at three examples. First, it used to be that one of the key ways for teens to establish status was with their clothes and their hair. Wearing the right fashion labels in the most current styles was the primary way to establish that teen status.

But then there was a shift. The primary indicator of status shifted to digital gadgets. The type and brand of smart phone or digital pad became a stronger driver than the brand of jeans. Just watch the status buzz when a teen has a newer, better gadget than their peers.

So what do you do if you sell teen clothing and your old position was to own the best solution for teen status? You cannot make minor modifications to a pair of jeans to turn it into the hottest smart phone. Many teen-based apparel manufacturers and retailers have been suffering because a lot of the teen status money which used to flow their way now goes to Apple brand stores. For the price of a wardrobe of fancy jeans, you can get a lot of cool gadgets with more status power.

Some of the more popular young fashion retailers today (like H&M and Forever 21) are shifting the positioning of teen clothes from high-priced status to value-priced fun (save money so you have more to spend on gadgets). This may be the easier move than trying to go head-to-head against cool gadgets (which is now a direct competitor for status money).

Example #2: Cars Vs. Facebook
Second, let’s look at young adults and cars. An article in the January 16, 2012 issue of the Detroit News talked about how a shift was hurting cars sales with youth. According to the article, cars used to be a key way for teens and young adults to satisfy their need for freedom, a way to get away from parents to be with friends. It fit that position well. However, recent research has shown that more than half of this consumer group now would actually rather meet up with their friends in cyberspace than face to face. The car is no longer needed to obtain the freedom they want.

In the article, John McFaland, senior manager for global marketing at Chevrolet said, "There's simply new and better and, frankly, more efficient alternatives to communication and getting that freedom that [young adults] used to rely on the auto industry to provide."

The car was losing out at being the best alternative for freedom to the internet. You cannot make minor modifications to a car and make it a superior Facebook. The auto manufacturers needed to consider taking a new position.

The article says that GM decided to shift its young adult position from being the powerful symbol of freedom to being the more practical way enable you to do things with friends. The new emphasis is on practicality and fuel economy, not flash or power.

Example #3: Malls Vs. Words with Friends
There was a time (especially back in the 1980s), when people loved to spend hours and hours every week in the shopping mall. Why? It was the best solution at the time for social entertainment. You could hang out with friends at the mall and be entertained by window shopping, eating in the food court, playing games in the arcade, and people watching.

Now, there are far more efficient ways to have social entertainment. Between You Tube, Netflix, home entertainment centers, 300 channels of cable TV, Facebook, and apps like Angry Bird, Farmville, or Words with Friends, you can have a lot better social entertainment by staying at home. The old mall arcade is inferior to the X-box in the living room.

Malls are left with only the primary function of being a place to buy something. And even there they have lots of competition from stay-at-home shopping options like Amazon. That is why the mall industry is in so much trouble today. Can malls take back the position of being the best social entertainment site from today’s digital home? I doubt it. They need to look elsewhere for a position of superiority.

So What Should Strategists Do?
Given this dilemma, what should strategists do? First they need to look ahead to see if shifts are starting to make your solution to a problem inferior. Is a wholly different offering starting to replace your offering as the best solution? Are you the clothes losing out to gadgets, or the cars losing out to Facebook, or the malls losing out to smart phone apps?

If that is beginning to occur, then one needs to make a choice. Do you:

a) Change your offering to recapture the solution? or
b) Shift your offering to meet a different solution? or
c) Sell out quickly, before the shift has made you obsolete.

Although basic, core needs and desires never go away, the way people satisfy them changes over time (like getting freedom via the internet instead of via a car). As a result, your offering, which may be best positioned to satisfy that need now, will eventually fall out of favor. Usually the replacement is not a minor variation of the past, but a radically different offering. Thus, it may be difficult to change enough to recapture your position. The better alternative may be to either find a new position/solution or to sell out before the shift fully takes place.

Movies often do a great job of capturing the culture of the time. However, if you look at that movie decades later, it can seem so out of touch with today’s culture that it is laughable. I remember laughing at an old movie where a teen got status and was the envy of the neighborhood because he was one of the first to have the old Atari game and could play Pac Man. Now, such a teen would be laughed at as out of date rather than be seen as having superior status. If you don’t want your business to be laughed at as out-of-date, then keep modifying your offering to be more appropriate for the times.

Monday, January 9, 2012

Strategic Planning Analogy #431: More Efficient "Bribery"

Moneyball is the story of Billy Beane, the general manager of the Oakland Athletics baseball team in the early 2000s. Billy’s problem was that he managed a team in a small market. As a result, he did not have as much money to spend on baseball talent as teams from larger markets. For example, his total athlete salary budget was about a third the size of teams from large markets like New York.

Since Billy Beane could not outspend the other teams to attract talent, he needed to be smarter about how he spent his money. To become smarter, he turned to detailed statistics and analytics. Billy learned that certain athlete statistics were better correlated to baseball success than others. Then he went after signing up players who were great on those statistics but would otherwise be overlooked by the big-market teams (because the players appeared weak on subjective issues not well correlated to success).

As a result of becoming smarter on talent, Billy Beane was able to put a competitive team on the field while spending a lot less money than the big-market teams. The story is so remarkable that in 2011, it was made into a movie.

Most athletes are not very loyal to their team. They will go play for whoever is willing to pay them the most money. The money is like a bribe. Whichever team bribes them with the most money gets the player.

This is a lot like the retail business marketplace. Consumers are not very loyal when it comes to where they shop. Instead, they shop at whichever store gives them the best deal. That is the bribe which gets them to the store.

This was pointed out in an article in the January 9, 2012 edition of Marketing Daily. The article talked about a study of 6,000 shoppers by Pricewaterhouse Coopers. The study found that consumers really don’t care much about retail loyalty programs. Loyalty programs were ranked last in a list of reasons for choosing a store. Only 1% of the shoppers cited loyalty programs as a reason for their store choice.

What was the #1 reason for store choice? It was price, mentioned by 55% of the shoppers. In other words, shoppers are like those athletes—not very loyal and can be bribed by being offered a better deal.

Yet about 92% of retailers have a loyalty program and many spend huge sums of money on their program. My keychain has three keys on it, but seven loyalty cards. I should probably call it a “loyalty chain” instead of a keychain. My wife is even worse. She carries two wallets—one is for credit cards and money and the other just holds loyalty cards.

Now, smart phones are making it even easier. They allow you to store all that information digitally, so you can, in essence, conveniently carry an infinite number of loyalty cards. If you are carrying a card for every store, then those cards are not making you very loyal to any particular store.

So what should retailers do? They should take a tip from Moneyball. Instead of offering ever larger “bribes” (deals) in the futile attempt to create loyalty, they need to get smarter. They need to use statistical analytics to make their spending more efficient.

The principle here is that many marketing expenditures have more in common with bribery than they do with loyalty. This is particularly true in retailing. Therefore, when creating marketing strategies, we should be more focused on increasing the “efficiency of the bribe” than the “effectiveness of the loyalty.”

Principle #1: Just Because it Looks Like Loyalty Does Not Mean it is Loyalty
At first, great bribery can look like great loyalty. Great bribery allows you to lure people back to the store, time after time after time (each time caused by a great bribe). Great loyalty means that customers voluntarily come back to the store, time after time after time. Since the behaviors appear similar (repeat purchasing), one may look at the behavior and mistakenly think that they are witnessing great loyalty when in fact they are witnessing great, sequential bribery.

Why is this distinction important? If the motivation is bribery, then the favorable behavior will stop when you stop the bribe, or a competitor offers a better bribe. If the motivation is loyalty, then you are better insulated from competitive attacks and less reliant on bribes for success.

If you get these two motivations confused, then you may create the wrong marketing strategy. For example, if you think you are building loyalty, then you may create a strategy with unaffordable discounts in the beginning, which you justify by saying that those discounts create long-term loyalty. Once loyal, you can then cut way back on the deals later and still keep the customer.

Terms like “lifetime value” are used to justify this approach. They say you can lose a lot of money up front if it creates a lifetime of loyalty. Then you make up for the losses in the beginning during the later years of the lifetime by cutting back on the size of the deals.

Of course, if your tactics are only creating a series of bribes, then you can never stop the bribery. If lifetime loyalty is a fallacy, then you will not only lose a lot of money up front under such a program, but you will lose it forever if you want return visits.

Therefore, if behavior is more bribe-induced than loyalty-induced, you need a way to bribe over the long term which is profitable. That requires a focus on bribe efficiency rather than lifetime loyalty value.

Principle #2: Loyalty Programs Aren’t Bad, They Are Just Misnamed
So, if loyalty is virtually non-existent, does that mean that loyalty programs should be abandoned? In general, I’d say no. They can still have great value as a bribery tool. It isn’t that the tool is bad; it is just misnamed. They should be thought of as “bribery programs” rather than loyalty programs.

Think back to Moneyball. Billy Beane could afford to pay less for quality baseball players because he was smarter about how he pursued players. He studied the statistics related to success and used that knowledge to find valuable players who could be lured with a lower bribe.

You can do the same. Those loyalty cards can provide a lot of data. They can help you get smarter about your customers. You can learn from their behavior. Analytics around this data can provide knowledge about which bribes are most effective with that customer. Using this knowledge, you can offer bribes more appropriate and more luring to that individual. And, in most cases, because the bribe is more specifically targeted to that individual, it will be more effective at a lower cost.

For example, you may find that a particular customer is easily lured by a small discount on cat food. Therefore, instead of offering huge bribes on lots of things, you can narrow your expense to a small bribe on cat food to get pretty much the same end result.

In other words, by using the data from loyalty programs, you may not make the customer more loyal, but you can make your bribery more cost efficient and more profitably effective. And that makes the program worthwhile.

Now, if you are NOT using the data from a loyalty program to get smarter, then you may be wasting a lot of money on that program. You’d probably be better off shutting down the program and using all that money to pay a bigger bribe to people at the cash register when they check out.

Principle #3: Metrics Are Valuable Only if You Use the Right Ones
In Moneyball, Billy Beane was successful because he focused on the right metrics. He looked at the statistics which really lead to wins and ignored the rest. By contrast, the big market teams were often evaluating the wrong metrics, things like how a player looked or their demeanor. By looking at the wrong metrics, the big market teams were paying too much for the wrong players.

The same problem applies to marketing. If you are looking at loyalty metrics instead of bribery metrics, you may end up rewarding the wrong behavior. Set up metrics to measure and reward efficient bribery rather than nearly non-existent loyalty.

Although businesses want loyalty from their customers, usually the primary customer motivation is not loyalty, but bribery. As a result, we should convert our loyalty programs into bribery programs. That requires using data and analytics to discover the most efficient ways to bribe, and then keep using the bribes forever in order have superiority over the competition.

Just because bribes may be the most effective motivator, that does not mean that you can ignore all the other operational variables. Bribes are more efficient when the other operating factors are working well, because then you have less negativity to have to overcome with a bribe (so the bribe can be smaller).

Wednesday, January 4, 2012

Income Inequality

The Harvard Business School runs a website called “Working Knowledge.” The site has links to current research and thinking at the Harvard Business School. One of Harvard’s professors, Jim Heskett, asks a question on the site each month for the readers to comment on. This month’s question was on Income Inequality.

Although the article discussed the question in more detail (you can see the full question and all the responses here), the shortened version of Prof. Heskett’s question went like this:

“Does income inequality promote or stunt economic growth? Inequality can serve capitalism as an incentive, but too much of it is not good for markets...What's the right amount of income disparity?”

I thought I'd share with you my answer to his question.

Three Short Stories come to mind:

1. I was talking to a top executive of Enron shortly before their collapse. I said that Enron had a reputation for working its employees through insanely brutal hours and pressures--all for a potential shot at insanely high stock options. I asked if they had trouble finding people to put up with such a harsh work environment. I was told that they had lots of applicants, especially from investment bankers.

2. I saw a survey once which asked investment bankers if they would stay in the profession if their insanely high levels of compensation went away and they got more "normal" wage levels. Somewhere around 75 to 80% of the investment bankers said they would leave the profession under those circumstances.

3. I was to interview for a job at one of the largest banks in the US shortly before the banking collapse. The headhunter wanted to pre-screen me because she said the bank had "a particular culture" which is not a good fit for many people. In the course of the pre-screening it became apparent that the "particular culture" was people focused on greed, status and conspicuous consumption.

And of course, Enron, the banking industry and investment banking have since gone into terribly poor situations. As Willie Sutton said, he robbed banks because that was where the money was. In the same way, modern-day "robbers" seek out jobs with obscenely high rewards (where the money is). And they leave destruction in their path.

What you want is people running businesses because they want to run that business. If they are only there for personal gain and really do not care about the profession, then you get the Enron and banking collapses. Pay less and you only get the people who want to be there and want to serve (rather than those who are bribed to be there—and would not otherwise be there).

What is that amount? It varies by person. The idea is to look at when motives switch from serving to grabbing.

An executive at a company told me they had to pay such high salaries in order to get that caliber of executives. Since I was not impressed by the caliber of his executives, I responded, "Does that mean that if you paid less, you'd get a different—and better—caliber of executives?" I still stand by that statement.

Tuesday, January 3, 2012

Strategic Planning Analogy #430: For the Birds

For Christmas this year, my wife got another bird feeder for our backyard. The old bird feeder was vertical in design. It brought finches and woodpeckers to the backyard. The new bird feeder is horizontal in design. It is bringing cardinals and blue jays to the backyard.

Now that we have both in the backyard, we are getting both types of birds to visit us. That makes for a pretty view from our window overlooking the backyard.

That is, until our cat goes into the backyard and sits next to the bird feeders. Then the birds go away.

We can think of those bird feeders as being like go-to-market business models. And we can think about the birds as being like customers. The interesting point is that different birds desire different types of bird feeders. Similarly, different customer segments are lured by different business models.

Finches and woodpeckers only eat from the vertical feeder. Cardinals and blue jays only eat from the horizontal feeder. If you don’t have the right kind of feeder, that type of bird won’t show up. In the same way, if you don’t have the right kind of business model, a particular customer segment won’t show up.

And if I tried to appeal to all birds with a single bird feeder, tilted at a 45 degree angle (the average of vertical and horizontal), I would most likely end up with no birds at all. In the same way, an “average” business model which tries to appeal to everyone will most likely fail, because consumers will “flock” to your competitors who do a better job of customizing to individual segments.

The principle here has to do with context. In particular, we are talking about the context of customers. It is impossible to know what the right business model to offer is unless you also know what the customer context is.

For example, if I live in an area without any horizontal feeding birds, my strategy will fail if I build a horizontal bird feeder. And if my goal is to reach finches, I’d better build a vertical feeder. In the same way, my strategic decisions about business models cannot be made in isolation. I must simultaneously consider customer issues during business model formulation. Otherwise, I will build a model inappropriate for the customer environment.

Learning #1: Don’t let Technology Be the Driver
With modern technology, we can do just about anything. But just because we can create just about anything does not mean we should. Not everything has a natural consumer draw. If your motivation is merely technology-driven, you will most likely fail.

Consider Sony. They were driven to exploit technology to develop robotic dogs and robotic servants for the home. These projects were costly failures, because they did not serve a specific segment better than the alternatives. Real pets provide greater satisfaction and can cost less.

Years ago, I was working with companies who were trying to create a “digital kitchen,” an attempt to bring the latest computer technology to kitchens. These companies came up with all sorts of inventions, from a refrigerator with a computer in the door to a kitchen-only computer (with a dishwasher safe keyboard!). All these products failed, because they were focused on doing something cool with technology rather than meeting real consumer needs.

Compare this to Dyson. They were driven by a consumer desire—to have a vacuum that does not lose suction. As it turns out, they used a lot of sophisticated technology to solve that problem. But the technology was secondary. The main goal was the consumer context—providing a higher suction cleaning machine, something consumers really wanted.

Apple makes cool technology, but that is not what makes Apple successful. Apple’s success is from customer context—building devices and systems which intuitively work with the customer in an easy manner. Without that intuitive ease of use, Apple would not have had such success.

Technology may allow me do build an exotic bird feeder, but if the birds don’t want it, it is a waste of time. Similarly, exotic products not anchored in providing a clear consumer advantage will fail. Are your R&D efforts focused on exploring the limits of technology or in solving real consumer issues?

Learning #2: Niches are Niches
The bird feeder story shows the value of targeting niches. For example, if I target only birds who want a vertical feeder, I can build the ideal vertical feeder and attract a lot of this niche segment.

The risk is that once you have the success with that niche, there will be a temptation to grow beyond that niche. The thinking usually goes something like this: “If we just add a couple of features to this product, we can broaden its appeal.” Therefore, additional features are added.

Subtly over time, these added features start compromising the superiority of the original product with the original niche. Either they add costs for features unnecessary to the original niche (causing the product to become too expensive for the original benefit), or the new features actually hurt the functioning for the original niche purpose. It’s as if that vertical feeder over time becomes a worthless 45 degree feeder.

This is the dilemma for the Honda Civic. Originally, the Civic was designed for a particular niche—people who wanted a cheap, simple, but reliable car. It was a great success with that niche. Then Honda tried to broaden its appeal by gradually making the Civic larger and offering more features.

Over the years, these changes meant that the Civic was no longer the best choice for those looking for a cheap, simple, but reliable car. There were better options from cars that kept to the original principles. At the same time, the larger, more feature filled Civic was not as good as other large, feature-rich cars. The Civic became the equivalent of the 45 degree bird feeder. And now the Civic is not as successful as before. By losing the context of the original niche, it made something not particularly suited for any niche.

If you want to broaden your appeal, do like my wife did in the backyard—put out two different bird feeders, one vertical, one horizontal. This is the idea of having a portfolio of niches. This is the Proctor and Gamble approach. They do not try to win everyone over with only one type of laundry detergent. They have a portfolio of cleaning products, each specifically designed to optimize a particular niche. All the birds flock to P&G because they have a specific lure for each niche.

Learning #3. Even the Masses are a Niche
Yes, many companies succeed by appealing to a “mass” audience, like Wal-Mart. But even the so-called mass market is not for everyone. Even the most popular bird feeder is not liked by all birds.

In many ways, the mass acts like a large niche. For example, Wal-Mart, for all its size, rarely gets more than a 35% share of any category it carries. There are still lots of people who refuse to shop a Wal-Mart and try to keep them from building a store in their neighborhood.

So just because you have a large, “mass” share, it does not give you the right to try to appeal to everyone. Whenever Wal-Mart has tried to go beyond its base to add higher-priced, more fashionable apparel, it has failed. This went beyond the scope of the “mass” space given to Wal-Mart. It was too much of a niche addition which was out of context inside a Wal-Mart store.

Similarly, when Wal-Mart added groceries to its general merchandise to broaden its appeal, the added size of the store turned off some of the original core. Hard discount dollar stores like Dollar General have been gaining market share from Wal-Mart because they are not burdened by the big size of a supercenter. These dollar stores can provide a level of convenience no longer available from Wal-Mart. Wal-Mart lost that feature in the attempt to broaden the mass.

So there are even limits in the mass realm.

When designing a go-to-market strategy, one needs to simultaneously consider how it impacts one’s consumer base. For example, a strategy driven by cool technology does not always translate into consumer acceptance. Technology needs to be subservient to the desires of a particular segment if it is to be accepted. In addition, once a niche is appealed to, be cautious about trying to expand the niche. By trying to appeal to new people, you may alienate some of your core. It is usually better to build a portfolio of highly targeted niche brands than to try to appeal to them all with a single offering.

There is a difference between trying to increase market share and trying to increase market satisfaction. If your attempt to increase share decreases satisfaction with the core, you may end up with neither.