Monday, March 12, 2012

Strategic Planning Analogy #441: Leaving Early

When I go to a sporting event, I like to stay until the very end. I figure that I paid for the whole game, so I may as well watch the whole game. And who knows, something exciting might happen at the very end.

Usually, however, the end is not very dramatic. And because I wait until the end, I get caught in terrible traffic jams. First, the jam of the people trying to get out, and then the jam of the cars trying to leave. It seems like forever to finally get on my way home. What a mess!!

The frustration of trying to leave gets larger than the excitement of seeing the game. At that point, I wish I would have left earlier.

For every strategic business initiative, there is an important question to ask—When is it time to leave this initiative and move on to something else? There is a tendency for executives to act like my behavior at sporting events and stick around until the very end. And just like in sports, if you stick around until the very end of a strategic initiative, you end up in a mess.

Usually nothing very exciting happens at the end of a business initiative life cycle. Sales slowly fall away and losses begin to mount. You could leave early without missing any excitement (and avoid the losses).

And, if you leave this business sector ahead of the crowd, you can avoid the mad rush to the exits of everyone else later on. At the end of the cycle, when everyone is trying to leave, there is virtually no value in what is left behind (everyone is selling and nobody is buying).

Therefore, we should resist the temptation to stay until the end of the game and leave early. After all, there is always another game to play, and the sooner you leave the old one, the sooner you can prepare for the new one.

The principle here is that a retreat or exit from a business is not necessarily a sign of failure. Often times, leaving early is the more successful alternative.

1. ALL Strategic Initiatives Eventually Die
The first thing to remember is that ALL strategic initiatives eventually die. Again, ALL strategic initiatives eventually die. Strategic initiatives follow a lifecycle of growth, maturity, decline, then death. If your company’s strategy is to ride an initiative all the way to the end, then you will die as well. If you don’t want to die along with that strategy, then you’d better leave early and move on to a replacement strategy.

Just because all strategic initiatives die is not to say that everything dies. Consumer desires for solutions to problems does not die. Consumer desires for status, comfort, performance, convenience and value do not die. The problem is that the way consumers satisfy these desires changes over time. New and better solutions (or business models) come about which are superior to the old ones. If you want consumers to continue getting their solutions from you, then you’d better keep advancing to the initiative with the superior solution.

Kodak stuck with analog film all the way to the end and died with the initiative. Had they left earlier, they would have had the opportunity to continue to thrive. After all, the consumer desire to capture memories still lives. The desire for visual imaging still lives. The desire to share experiences through pictures still lives. The only thing that died was the analog film initiative…and the companies who stuck with it until the end.

A large part of the entire social phenomenon on the internet is just a superior business model for solving the problems that Kodak used to solve—the sharing of experiences. By sticking around too long at the old game, Kodak got caught in the mess at the end and missed out on the new game of the social revolution (not to mention the whole digital imaging thing).

Don’t get caught into believing that you are the exception and that your strategic initiative will never die. At one time, Sears was by far the largest and most successful retailer on the planet. Consumers loved them. They seemed invincible. It looked like they would be successful forever. But times changed and Sears didn’t. Superior solutions appeared. Sears is now near death. Consumer purchasing did not die, but the Sears way of selling did.

2. Wanting to Win in the Worst Way Usually is the Worst Way
Failures don’t just happen at the end of the life cycle. Failures also occur during the process of innovation. Not every new idea is a good idea. In fact, most innovations fail.

In an earlier blog, we talked about some of the psychological biases which cause companies to want to stick with an innovation too long. Some of those factors include:

a) Innovation is Fun
b) Innovation Can Enhance a Career
c) All the Other Cool, Successful Companies are doing it.
d) My Ego/Reputation gets Entangled with the Reputation/Success of the Innovation.
e) The Budget/Plan is Depending on it.
f) There’s Nothing Else in the Product Development Pipeline, So it HAS to Work.

As a result, there is an inherent bias to stick with a bad innovation too long. We want so badly for the innovation to succeed that we try to create success out of our own desire when there really is no success to be found.

Wanting to succeed in the worst way is usually the worst way to try to succeed. We need to be rational and realize that and early exit from a doomed venture is often the smart move (and will save one from taking heavy losses and write-downs in the future).

3. The Last One Standing is Usually the Loser
A third place where sticking around too long can occur is when the “Roll-Up” strategy is used. The idea is to consolidate an industry by acquiring enough of your competitors to have the leading share (roll them all into one).

There is logic to using this roll-up consolidation approach. It creates economies of scale and there are benefits from reducing the number of competitors. It can also be a great way to expand geographically.

However, the roll-up strategy is best used near the beginning of the mature phase of the life cycle. After all, it does no good to be the great consolidator of a business if the business is near death. The consolidation only makes sense when there is still a demand large enough to want the large entity you are building.

During the 1970s through the early 1990s, Supervalu rolled up and consolidated the wholesale grocery industry. This strategy provided many years of success. However, the largest customer of the wholesale grocery industry is the small, independent grocer. Thanks to the rise of the Walmart Supercenter and the growth of large supermarket chains, the independent grocer was rapidly disappearing. Having the best wholesale grocery business is worthless if you no longer have independent grocery customers. The roll up strategy was starting to die.

Fortunately, Supervalu did not need to die. They changed strategies to become owners of large retail chains (primarily through the acquisition of Albertsons). Now they controlled their retail customer base. Another winner was the wholesaler Cardinal Foods. They sold out early in the consolidation and moved into the growing health care business, eventually becoming the successful Cardinal Health.

In a roll-up strategy, remember that when everyone is willing to leave (and sell you their business), you need to question why you want to buy them. Often, they are willing to sell out because either:

a) They think the business is dying; or

b) They think you are paying such a high premium to get the business that your price is far higher than the present value of future cash flows. In this case, you transferred all the value of the consolidation to the person who is leaving the business via your purchase price.

Either way, that is not a good sign for the consolidator. In the end, all strategic initiatives eventually fail, and consolidating a larger version of that initiative at the point when it fails just creates a larger failure.

Consolidating is nice at the beginning of maturity, but know when it is time to leave that strategy. Sell out early before the very end and let someone else be holding the large mess when the initiative is nearing death. After all, the last one standing when the initiative dies will die with the initiative. I spoke about this principle in more detail here.

4. Distinguishing Battles from Wars
Leaving an initiative early may look like failure, but an initiative is only one battle. The real goal should be to worry about winning the larger war, not a single battle.

The real war is to preserve and profitably grow the corporation. For a corporation to do so, it must continually shed its old initiatives and add new ones. Shedding the old is not a sign a failure, but a realization that the greater goal requires adapting to change. In fact, failure to shed is more likely to create ultimate failure.

Long-time enduring companies like Nokia and GE have had vastly different portfolios of businesses over the years. They were willing to leave industries before that game was over and move to the newer, better game. And when GE has temporarily faltered, it is usually because it stayed too long with a particular initiative.

Leaving a business early may at first seem like failure, but it is usually the more profitable option. Strategic initiatives eventually die and you cannot stop that. Therefore, to prevent your company from dying, you need to move on. And the sooner you move on, the easier and more profitable your exit will be. Also, the sooner you move on, the easier it is to own the next big thing which is replacing what is dying.

When you see others starting to leave the game, consider it a warning sign that perhaps you need to consider leaving as well.


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