Wednesday, April 11, 2012

Strategic Planning Analogy #446: The Mighty Fall, Too

I had a summer job in college going door to door in the worst sections of the inner city of Detroit. My job was to interview residents at each house to get information for creating a directory.

It was a tough job. I had people come to the door with rifles and attack dogs. I had my life threatened. I had my car stolen. All so that I could get the information for the directory.

It seems kind of silly now all these decades later. Today, people voluntarily give up more information than I was asking for to Facebook all the time. And if you want to learn about people, there are all sorts of web sites you can go to. It can all be done digitally, from the privacy of your own home. There is no need to go outdoors and put your life at risk like I did.

Over time, the idea of what is a “normal” activity changes. When I was in college, the normal way to get data was out of books and printed directories. The people who put those directories together made a lot of money because that data was scarce. The publishers could afford to send out thousands of people like me to go door to door to get that data.

Today, that activity seems abnormal. Data is easy to come by and quite often free. All you have to do is go to the internet. And the data on the internet is often volunteered for free. That is the new normal activity. And as we will see below, this new normal is causing the directory business to fall apart.

When a business finds a way to exploit the normal way things get done, its leaders can get complacent. By becoming a huge, highly profitable player within that “normal,” you can start to feel invulnerable—too big to fail.

Unfortunately, today’s normal can become tomorrow’s idea of silliness. And being #1 at something people find to be silly and antiquated isn’t worth much. Yes, even the very big can become irrelevant if the new normal makes them obsolete.

The principle here is that all strategies eventually fail—even the really good and really successful ones. The reason all strategies eventually fail is because the environmental context in which that strategy operates does not stay constant. It changes over time. Eventually that environment will change so much that your old strategy is no longer relevant.

Normal is not permanent. It only lasts for a limited time. Then a new normal appears. And these days, that time span keeps getting shorter. And being big and highly successful in the past is no guarantee that you will even survive in the new normal.

Two recent stories in the news point this out.

The Demise of Phone Directories
On Monday, April 9th, AT&T announced that it was selling off a majority stake in its Yellow Pages phone directory business. They did this because the profitability of the Yellow Pages model was falling apart. Revenues had declined 30% in just two years. Impairment charges were wiping out the profits. Verizon sold off its competing unit in 2006, which filed for bankruptcy in 2009.

At one time, the Yellow Pages were one of the most profitable legal enterprises on the planet. Businesses paid a fortune to get a tiny ad in the directory because it was a highly valued place to be. After all, the normal way people found businesses was to look in the yellow pages. It was such a valuable book, that people wanted to steal copies. As a result, places in the past would chain the directory to the wall so that it could not be removed.

Now, that old normal seems a little silly. Why trust a book full of biased ads when you can go to places on the internet like Yelp or Angie’s List and see unbiased reviews from people who used the service in question. That’s why one of the most profitable businesses of the 20th century is now becoming obsolete. It no longer makes sense in the new normal.

The Demise of Big Box Stores
On Tuesday, April 10th, Best Buy announced that its CEO Brian Dunn was immediately stepping down. Although there were a lot of reasons for this, part of it was due to the recent poor performance of the company. Sales, traffic and profitability were all going down, and it appeared they would continue to go down. The stock price for Best Buy has dropped over 55% from where it was five years ago.

What happened? Best Buy dominated electronics retailing for two decades. It was huge. It was highly profitable. Now, it cannot find enough profitable items to fill up its large stores.

One of the problems is a concept called “showrooming.” This is where people come to the store to find out what they want and then go buy it at a cheaper price from an online competitor. Customers bring their smartphones into the store and check to see if they can get a better deal somewhere else before picking up the item. And since there is almost always somebody online willing to sell cheaper than the big box store, the big box store loses. This is the new normal.

It used to be that customers were confused about all of the new digital products. They went to places like Best Buy to get expert advice. That was the old normal. In the new normal, that seems silly because:

1) Consumers can find more information on the internet than what can be found from asking the so-called expert sales help; and

2) Digital items aren’t new anymore. They are becoming familiar commodities that you feel comfortable buying anywhere on your own.

As a result, one commentator said, “Best Buy is dying because the free standing consumer electronics stores model is obsolete.” It no longer fits well with the new normal.

So What Should We Do
So if pillars of past success like the Yellow Pages and Best Buy can fall, so can anyone. There is no “too big” or “too successful” to fail. Even the most valued and prized option can become irrelevant if it falls out of step with where normal behavior is heading.

So what is a company to do? Remember two words—Best and Bold.

a) Be Best at the Right Thing
Nearly every company or brand tries to be the best at something. Unfortunately not all of these goals to be best are suitable to an ever-changing normal. In particular, there is a big difference between being the best at who you are verses being the best at solving a problem.

For example, if you are a telephone directory business or a big box retailer, you can try to become the best telephone directory or the best big box retailer. Unfortunately, if nobody wants that product any more, being the best doesn’t get you very much. Being the best at who you are is only relevant if people like who you are. And with a changing normal, that will not last long.

By contrast, one could have instead tried to provide the best solution, such as the best source for finding a business or the best source for buying electronics. This implies that you may need to radically change who you are in order to stay the best as normal changes. Although this is a lot of work, it is better than becoming obsolete.

Unfortunately, I see so many companies focused just on becoming better at who they are. They are looking for incremental improvements to the current model rather than new models which better serve the changing normal. This is a recipe for obsolescence. The better recipe is to also have an eye open for new ways to stay relevant by offering the best solution—even if it is radically different than the old offering.

b) Be Bold in your Change
If you find a need to replace your business model to remain relevant, do it boldly. Remember that your new competition is boldly moving forward because they have nothing at stake in the old business model. Amazon was much bolder than Best Buy in pursuing ecommerce. Yelp and others were much bolder than AT&T in embracing a social media approach to finding companies. If you are timid in your transformation, you will not win against people like these.

Also keep in mind that it can be futile to hold back in an attempt to prevent your new venture from cannibalizing the old. Just because you are not willing to cannibalize your core does not mean that others won’t do it to you. Ford was timid about introducing minivans for fear of hurting its station wagon business. So Chrysler did it instead and Ford still lost the station wagon business. The same thing happened to Kodak, who was timid about digital imaging for fear of hurting its core analog film business. It still went away. It is better to be bold and have a business left after the old one goes away.

Because the world keeps changing, the concept of what is normal behavior changes over time. Therefore, if you want to remain relevant, you have to change as well. To stay relevant, focus on being the best solution and be bold about it.

When’s the last time you really thought seriously about how silly your offering may appear to the next generation?

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