Monday, June 25, 2012

New Different

In the last blog, we looked at the shortcomings in a strategy approach I call “More Better.”  The idea behind more better is this:  If you take the status quo and incrementally change it by either a) adding MORE features; or b) making the current features perform BETTER, then you will have improved success.

As we saw in that blog, “More Better” does not always improve success, and in many cases makes things a lot worse.  The Problems with More Better are that:

1) It focuses the strategy on what the offering can do rather than on what the customer experiences.  And More Better often makes the consumer experience worse.  Happier consumers beat out fancier products any day.

2) Eventually, performance can get so good across the entire industry that customers needs are well taken care of.  All the effort to improve beyond that point may not be noticed or appreciated.  It may cost more than people are willing to pay for it.

3) Adding more features to the status quo often adds confusion and complexity, which can lessen the consumer experience.  In addition, it is hard to excel in performance in any given area when you are trying to offer everything.  The added features tend to cancel each other out and create an overall mediocre offering.

4) There are barriers to a consumer switching to your offering, such as having to learn a new product, getting rid of replacement parts, forming new supply relationships, having to make new capital investments, having to take a risk on an unfamiliar or less prestigious brand, and so on.  You may not be able to create a large enough improvement to the status quo to overcome these barriers.  As Al Reis and Jack Trout put it, you need to be at least three times better to unseat the market leader.  That is hard to do.

5) As markets consolidate, there are fewer players to take market share from and they are harder to take share from because the remaining firms are all strong.  It they are all playing the More Better game, it will be nearly impossible to reap large gains from merely doing More Better.  

If More Better is a risky strategic approach, can we find a better approach?  Often times, the superior approach is something I call “New Different.”  The idea behind New Different is as follows:

1)  Rather than adding more features to the status quo, consider eliminating status quo features.  Perhaps even eliminate nearly all the ways the status quo performs and create an approach which is totally new.

2) Rather than measure performance the old way, find a solution which works on a different business model.  By focusing on the consumer experience rather than current offerings, you may find a way to please customers in a completely different manner that the status quo.

Here are some examples of New Different at work.

1) Apple
One of my favorite strategy stories is the one told by strategy professor Richard Rumelt.  Back in 1998, Rumelt had a chance to speak with Steve Jobs.  When Jobs returned to Apple, the company was in a bit of a mess and was so small that it was on the verge of becoming a totally irrelevant company.  Rumelt was curious as to what strategy Jobs would use to try to grow the company long-term.  So he asks Jobs what the long-term strategy was.  Job’s response?  “I am going to wait for the next big thing.”

The point here is that Jobs refused to fall into the More Better trap.  He was not going to try to win by making the Apple computers do more functions or just make them a little bit better.  No, he was going to do the New Different approach.  Good bye status quo, hello next big thing.

Rather than add new functionality to the Apple computer, he took away nearly all the functions and just focused on music.  And rather than do music the same way it had always been done, he took a radically different approach by making a seamless closed system for buying, storing and playing music.  The result was iPod and iTunes and all the rest of the new business model for music.

And I’m sure that Apple could have never achieved the level of success it had with iPod by merely doing a More Better approach with the Apple computer status quo. 

2) Cirque du Soleil
The circus industry has been on a long, agonizing path to obsolescence. People had used “More Better” to try to resurrect the industry.  Let’s add more acts; let’s make it bigger.  That didn’t work because the competition was not other circuses, but other entertainment.  Even the biggest and the best version of the status quo circus would provide an inferior customer experience when compared to all of the other modern entertainment choices.

Then along came Guy Lalibert√©.  He wasn’t a circus expert.  Lalibert√© was a street performer.  And rather than focus on how to improve the circus, he focused on how to improve the consumer’s experience of live performance.  Out of this process came the wildly successful Cirque do Soleil.

Rather than trying to do more, Cirque du Soleil does less.  It eliminated the animals.  It eliminated all the little stories in a circus and replaced it with a single theme for the entire performance.  Then it redid the entire business model, including a new targeted audience, new venues, new marketing, new performances, and changes to everything behind the scenes.  This was not a More Better circus.  It was a New Different entertainment experience.

3) Weight Loss
Over the years, the way to win in the weight loss business is not to try to take the current fad and make it bigger and better.  No, success comes from doing something completely different.  If the current fad is around a particular diet, then replace it with a new exercise.  Then replace the exercise with a medical device or pill.  Then replace the medical device with yet another way to look at food.  Then replace that with a surgical approach, then a way to lose weight while you sleep, and so on.

The idea here is that instead of focusing on the particular offering, focus on the customer problem.  If the customer is frustrated with the current fad (and eventually all lead to frustration), then doing it bigger and better won’t solve the problem.  Instead, try something totally different.

I remember near the end of the high carb diet fad, someone wanted to do the ultimate More Better approach.  They designed an entire grocery store to sell nothing but high carb foods.  Shortly after that, the fad ended and went on to something else, and I’m sure that grocery store soon died.

In many ways, the New Different approach is similar to the Blue Ocean strategy.  The idea is that if you go into a highly competitive, relatively mature environment, you are in for a blood bath.  The fighting is intense and the profits meager.  The return on More Better is very low.

By contrast, if you seek out new, unclaimed territory, then there is less competition.  You get to set the rules in your favor.  You can become the leader by default and reap the rewards of leadership.

This is accomplished by moving away from seeking incremental improvements and add-ons to the status quo.  Instead, start with the consumer experience and re-engineer the entire business model to create an entirely new approach.

Given the problems with the More Better approach to strategy, greater emphasis should be given to the New Different approach.   

It takes guts to go against the flow of the status quo and sail out to the Blue Ocean.  But no guts, no glory.


Friday, June 22, 2012

Strategic Planning Analogy #458: When Superior is Inferior

It seems like it isn’t good enough to just build an automobile.  Now it has to be an automobile plus something else.  Some cars are both automobiles and entertainment centers.  Some cars are both automobiles and communication/computer centers.

How about a combination car and kitchen?  After all, a high percentage of meals are already eaten in a car.  Why not cook the meals in the car as well?

I can see it now…When you try to start up the car, the dashboard has dozens of cooking icons all over it.  It takes forever to find the icon for driving.  And if you want to heat the car, you have to be careful, because if you turn the heating dial the wrong way it will turn on the oven or the stovetop coils above the dash.  And the legroom is cut in half to make room for the refrigerator.  And every time you press on the brakes, the dishes fall out of the cupboards and the saucepan falls off the stovetop, spilling hot liquid on your lap.  And if you want to cook at home, you have to do it in the garage, because all the appliances are in the car.

On second thought, the combination kitchen and car is not such a good idea after all.  Maybe the “More Features” approach doesn’t work so well afterall.

In the business world, there is a strategic approach which I refer to as “More Better.”  The idea is that if you take the status quo and either a) add more features, or b) make the current features perform better, then you have something superior to what you had before.  And this superiority will drive great market share gains and great profit improvements.

Sometimes, the More Better approach works.  However, in a large percentage of cases, More Better fails miserably.  You often end up with something like my kitchen car.  Sure, the kitchen car can do more than just a kitchen or more than just a car.  But is it really a superior offering when you put them together?

The combination kitchen car makes both driving and cooking a disaster.  Instead of making everything better, it has made everything worse.  It is now an inferior option.

But what about the “Better” approach?  What if we made the engine a lot better, so that the car could go 700 miles per hour (or about 1,125 km per hour, or roughly 3 times the average speed of the drivers of the Indianapolis 500)?  Does that really make the car better?  First, there is virtually nowhere where you could safely or legally drive at that speed, so the feature is pretty useless.  Second, the engine would weigh so much and be so inefficient that it would waste a lot of expensive fuel even at normal speeds.  And to fit such an engine in the car would require eliminating half of the car interior space.  And you probably couldn’t afford a car like that or its insurance.  So, in this case the “better” approach isn’t really better.

Yes, these may be ridiculous examples, but as we will see, even more seemingly rational attempts at More Better can create a disaster.

The principle here is that true superiority must be defined from the perspective of the consumer, not the product.   More Better is focused on WHAT THE OFFERING CAN DO (more features, better performance).  This does not necessarily lead to higher share or higher profits.  No, true superiority comes from convincing a customer that his/her problem is solved better.  It focuses on WHAT THE CUSTOMER EXPERIENCES.   And this includes the whole experience of purchasing, price paid, usage, maintenance, upgrades, feeling of status, and so on.  And in many cases, the customer experience is improved when the offering is less and not as advanced.

There are three main reasons why More Better frequently does not lead to increased share and increased profits.

1) Diminishing Returns on Investment
Back in the 1980s and 1990s, each new advance in the Intel chip and the Microsoft operating system were quantum leaps of improvement for the computer.  The usefulness and productivity enhancements with each stage were so large that people would rapidly abandon the old and adopt the new. 

But after the Windows XP era, things started to change.  Many businesses found out that the hardware and software associated with XP did pretty much everything most people needed to do in the office in a pretty efficient way.  As a result, when the next generation Vista came out (Windows Vista), a lot of companies did not automatically upgrade everything as they would have in the past.  They decided the XP was good enough for their needs and stayed with the old.

That’s part of the problem with focusing on improving features.  Eventually, the features get pretty good…good enough that additional improvements to the features have very little impact on consumer experience. 

Since XP, most of the Microsoft improvements have either been cosmetic or have involved tweaks on the fringes for features the majority of people do not regularly use.   It’s hard to justify purchases when the additional benefits have such little impact on an experience which was already good enough.

This is also happening all over the place with CPG (consumer packaged goods).  How much better can you make canned vegetables or peanut butter?  Will anyone even notice the difference in a taste test? 

In a lot of mature categories, needs are already met.  Spending tons of money on R&D to create small improvements may not be a good return on investment.  There’s a reason why P&G has sold off a lot of its mature categories—they no longer reacted well to the More Better mindset.

And the situation can be even worse when you try to add more features, because the new features can cancel out the old features.  There’s an old saying that you cannot excel at all three features of cheap, quality, and fast to market at the same time.  The reason is because becoming superior in any two of them makes it impossible to also excel at the third, because the very structural requirements needed to meet the two work against being able to attain the third.

In other words, the more features you add, the more your offering gravitates towards average across the board.  You no longer excel at anything, because the added features cancel out the consumer experiences.  You have actually made things worse.

2) Increasing Hurdles to Switch
Not only are there diminishing returns to improvements, there are increasing hurdles preventing consumers from wanting to adopt those improvements.  These hurdles include:

a) Pricing – The improved products usually cost more.  When you factor in the price, the total value experience may be worse than before.  Private labels are exploding in growth because consumers see a superior value.  The name brands cannot create enough superiority to justify the higher price.  P&G discovered that recently when they tried to raise prices and saw volume drop.

b) Switching Costs – Switching to the new item may require consumers to create new vendor relationships, learn a new way to operate, have difficulties in getting rid of old products and a warehouse of obsolete replacement parts, experience near-term cash flow issues, a loss in productivity as they learn the new product, and so on.  A product has to be more than a little bit better to overcome all of the negatives associated with switching.  Just ask the people competing against John Deere farm machinery.  The users love their relationship with the local John Deere dealer so much that even modest improvement by a competing brand leads to little market share movement, since the customers do not want to switch away from the dealers they love.  That is a key to total experience.

c) Added Complexity – “More” often means “more complexity.”  Complexity rarely improves consumer experience.  The complexity of a kitchen car makes cooking and driving worse.  Ford’s reliability ratings have recently gone down.  Is it because the cars don’t drive as well?  Actually, most of the decline is due to problems with all the added computerized communication features being added to the car.  The complexity is weighing them down.  Branding genius Al Reis says that convergence products rarely excel in the marketplace when compared to narrowly focused products.  The focused brands are the ones that win the war.

3) Consolidating Markets
Increasing market share requires lots of market share available to take.  In mature markets, that is not usually the case.  First, you already have a sizable share of the market (less available to incrementally gain).  Second, the weaker players are already gone.  The remaining share is mostly in the hands equally strong players who are doing More Better about as well you are.  Large, lasting, sustainable superiority is almost impossible to come by.  As a result, large sustainable gains in share are hard to come by.  So all that work and money on More Better doesn’t lead to corresponding gains in share or profits.

During the great recession, Walmart tried a massive price rollback to gain share.  The problem was that they already owned most of the customers most susceptible to low prices.  So very few new customers were added by the move.  And since the current customers also benefitted from the lower prices, the total sales per store went down.

So when you add up these three factors—decreasing returns, increasing hurdles, and consolidating markets—you can see how the More Better strategy by itself can destroy value.  It leads to products that may have more features and better specs, but often diminishes the value to consumers while increasing your costs of business.  Rather than trying More Better with status quo offerings, you may be better off moving to totally new approaches which use a wholly different business model to solve customer problems.

Digital downloads of music are replacing sales of music CDs, even though the music on a CD is of a measurably superior audio quality.  Even though New Coke had superior specs when it came to taste, it lost out to the supposedly inferior tasting Classic Coke.  In both cases, the superior quality product lost out because it did not create a superior total consumer experience.  Never forget that.    

Monday, June 18, 2012

Strategic Planning Analogy #457: Doorways and Destinations

Let’s assume you’re an expert at building doors.  You may be able to create the most beautiful door, or the most technologically advanced door, the most secure door, the highest quality door, or some other type of superlative door.  But if that door doesn’t lead to anything, it’s really rather useless. 

The main purpose of a door is to provide a passageway to get from one side of the door to the other.  If there is nothing worth going to on the other side, or if you can get to the other side without using the door, then the door really has no value.

It reminds me of the western comedy movie Blazing Saddles, where a toll booth was placed out in the middle of the desert (see photo above).  There was no road anywhere near the tollbooth.  It just sat out there in the middle of a huge abandoned area.  There was nothing stopping you from getting to the other side by just going around the toll booth (after all, there weren’t any roads anywhere near the toll booth).   Hence, the tollbooth had no value, because you could easily cross the desert by avoiding it.  Yet, the humor in the movie was that the cowboys, as you can see in the picture above, stopped to pay the toll anyway.

So if you want to make a door really valuable, the irony is that you really don’t need to spend much time focusing on the door.  Instead, the door is made most valuable if you focus on two non-door issues:

   a) Does the door get you access to something valuable?; and

   b) Is it the only way to get to that location?

The digital world is full of doors and destinations.  For example, devices, like smartphones, ipads, computers, gaming devices and cable TV systems can all act like doors.   They are the passageway to get to desirable digital content. 

You could also look at certain digital sites as doors as well.  The Google search site can be seen as a door to reach knowledge.  The Apple Apps store can be seen as a door to get to valuable apps.  Your Outlook or email portal can be a door to get to messages from your friends.  Netflix is a door to get to desirable movies.

You can even look at digital content as a door.  Although in this case, the purpose of the door often is so that businesses can get access to you.  For example, television shows can be a door to allow brands access to viewers via commercials.  Zynga’s free digital games can be seen as a door to allow Zynga to reach players to sell them game enhancements.  Google’s search results are a powerful door for advertisers wishing to have access to people when a specific subject is on their mind.

There is all sorts of talk about strategies to extract value out of the digital space.  Often, the best way to look for value in the digital space is similar to how one gets maximum value out of a door.  In other words, does your digital offering:

     a) Get people to a valuable destination?; and

     b) Is it the only way (or best way) to get to that destination?

The principle of doors is this:  A door is only valuable in its relationship to destinations and those seeking the destinations.  If the door doesn’t lead to a desirable destination, or if there are lots of other doors going to the same destination, then the value of that one door is very small.  Conversely, if you are the one providing exclusive access to something highly desired, then you have a very valuable door.

There are several factors to keep in mind when applying this principle. 

1) Choose what you want to be and actively manage it.
Often times, the same digital entity can be positioned as either a door or a destination.  For example, Facebook could be positioned as a door to get to your friends or as a destination where friends want to hang out.  You have a positioning choice to make.  And you had better be clear about that choice so that you know what to do and how you are going to win.

And don’t forget that competitors may want to position you differently than your own choice.  For example, Facebook may want itself to be positioned as a destination, but Google+ may want to re-position Facebook as merely a door and then tell people that Google+ is a superior door for accessing those same friends.  And, if Facebook becomes too abusive in the way it increases monetization of its “destination,” customers may get fed up and migrate to a better door to reach each other.

Similarly, cable TV has traditionally tried to position itself as the destination for TV entertainment.  They even call the content “cable TV” (as if it were theirs), not “TV as seen via cable.” But now, there are all sorts of internet startups, like Hulu who are saying that cable TV is just a door to that entertainment and that the internet can be a superior door to reach that same content.  And the formerly unthinkable is happening—people are cancelling their cable TV and getting that same content through an internet-based door like Hulu.

So the battle is not just in making a one-time positioning choice.  One also needs to continually monitor how the market is positioning you, so that you can control your position.  And as technology and business models evolve, your old positioning strategy may need to be modified from time to time in order to stay relevant.

2) Value depends on which side of the door is most conjested.
Sometimes the door is more valuable than the content (the destination) and sometimes the content is more valuable than the door.   It all depends on the relative congestion on either side of the door.   If the customer side is more congested than the content side, then the content usually has the most power.  This situation occurs when a highly desired movie can only be accessed by a limited number of outlets. There are lots of people rushing to get access to one movie.

In this case, outlets will bid very high to get access to that movie and can often end up giving access to consumers at a loss, hoping to make up for it with sales of popcorn or advertising.  So the strategy for the door to win is to find alternative monetization schemes to exploit all the people coming in at a loss who don’t care about the door.  The strategy for the movie is to raise the bid to access it.

The opposite extreme could be something like You Tube.  There are millions upon millions of inconsequential videos wanting to reach people who have no idea that the content exists.  In this case there are lots of videos rushing to get access to the same people.  Here, the door is disproportionally more powerful because of its role as an aggregator.    Without the help of an aggregator like You Tube, all these videos would find it almost impossible to get the attention of the public.  This puts You tube in the driver’s seat in negotiating how to monetize the content.  So here, a key to the door strategy is to build a superior aggregation tool, making it the easy destination to sort out all the content confusion.

Money can be made in both situations (for both the doors and the destinations), but it is made differently because the power levels are different.  So one of the things one needs to consider in a strategy is which side of the door is the most congested.  

3) Have a strategic approach to exclusivity/control
Having the only door to content can be very valuable.  One thousand doors to that content diminish the value of a particular door.  Therefore, control of value for your door means controlling how many other doors other people can make.  If you can tie up content through exclusivity or close up the potential for others to build doors, then you have made yourself more valuable.

One of the keys to Apple’s success is its passion over controlling a relatively closed system.  Apple wants to own all of the doors—the device door (phones, pads, computers, etc.), the apps/iTunes door, rules for how content interacts with those doors, etc.  Apple not only owns all the doors, they try to own the whole house and every room in it.  This closed system forces everyone on a path that benefits Apple.

Now if you are Amazon and you see Apple owning all the doors to content and see Apple’s doors completely bypassing Amazon, you can get justifiably very nervous.  As a result, Amazon needed to aggressively invent and promote its own doors, via Kindle and Amazon Prime, so that an alternative path would become viable.  And the more exclusive content Amazon can tie up, the more viable its path becomes relative to Apple.

Control and exclusivity can also relate to the other side of the door.  The more you can tie up customers into loyalty programs or long-term contracts, the harder it is to get them to try someone else’s door.

So, if the nature of the relationship to content is what makes your door valuable, actively manage that relationship to create as much control and exclusivity as possible.  Create strategies to broaden your door while narrowing others…from both directions.

4) Don’t build the most beautiful door to nowhere
If you only focus on your door and ignore where it leads, you can create a worthless door.  As mentioned earlier, the best door is not necessarily the prettiest one, or the most advanced one or the one with the most features.  It is the one that does the best job of managing the whole relationship on both sides of the door. 

Sony has been going through troubled times in recent years.  A lot of that has to do with their heritage of focusing on just making great devices.  In other words, they put all their effort into making great doors rather than a great system connecting all the pieces on both sides of the door.  By thinking devices instead of systems, they are missing out on the best value-making business models.  One reason why Playstation tended to be one of Sony’s better performers was because it was the division with the best systems-based business model.

Just as a bridge to nowhere is a worthless bridge, a door to nowhere is a worthless door.  Don’t just focus on making a better door.  Manage the bigger picture.

In the digital economy, money flows through a system of digital doors.  If you do not exert enough control over the complete system, others will direct the flow through that system so that very little gets to your door.  Therefore, your strategy must take a holistic approach to consider more than just your small piece of the puzzle.  You need to consider how to get your door near desirable content and customers and how to block other doors from doing the same. 

Did you ever notice that very little thought is given to real doors?  We take them for granted.  About the only time we think about them is when they are not working properly.  In the digital space, however, one should never take those digital doors for granted.  We need to consider them all the time.

Monday, June 11, 2012

Strategic Planning Analogy #456: Who Do They Love?

When I was in college, I was a DJ on the college radio station.  Every day the radio station used to get a pile full of new albums from the record labels.  I was shocked by the huge amount of music being issued.  And pretty much all of these albums were selling at least in some quantity to the public.

I understood why most of the top selling albums sold.  It was pretty good music.  What baffled me were the less popular albums.  Who was buying them?

At first, I thought there just must be a lot of people out there with unusual tastes, who loved a different kind of music than the mainstream.  And to a small degree, this was true.

But when I did my investigation in the sales of these lesser albums, I found out that most were not sold to people who loved these bands more than normal people.  No, most of the people buying their records agreed with the majority that they were lesser albums.

The difference was that these people really, really loved music and loved buying music.  They happened to buy more music than normal people.  As a result, these people first bought all the popular music and still wanted to buy more, so they also bought the lesser albums (because that is what’s left to buy after you already have the popular ones).

So, for the most part, people weren’t buying music from these lesser bands because they loved these bands, but because they loved having as much music as possible.

I don’t think that information would have encouraged those lesser bands.  It implied that even though they sold a bit of music, they really didn’t have many avid fans.  They were just getting money from people who would spend it rather indiscriminately on almost ANY band.  So they didn’t get the money out of love, but out of convenience.   

In the business world, a successful business needs a stream of income.  That’s why we get so happy when sales go up.

But let’s not fall into the trap of thinking that every purchase of our goods and services is an indication of their undying love for us.  As we saw in the story, lesser bands weren’t receiving a lot of love with their sales.  Their customers still loved the popular bands more.  The lesser bands were just getting some of the leftover money from heavy spenders after they had already purchased music from the bands they loved more.

In fact, people often make purchases from companies they hate.  For example, when AT&T was the only service connected to the iPhone, people who loved the iPhone purchased their mobile services from AT&T, even though many of them hated the AT&T coverage and service levels.

So, when considering the sales component of your strategic plan, don’t automatically assume a direct correlation between sales and love.  Otherwise, you may create the wrong strategy.

The principle here is that just because your business has an income does not mean that people love you.  And depending upon the type of love relationship you have with your customers, you may need a different strategy.

Let’s face it.  We can’t all be the best or the most popular.  We can’t all even be above average.  And if your offering is not the best, then “best at” strategies won’t work.  For example, if you are not the lowest cost operator, it doesn’t make sense to pursue a lowest price strategy.  It won’t work for you.  Strategies designed to exploit strengths don’t work very well if you do not have a strength to exploit.

So what should you do if you find yourself in such a situation?  Listed below are four tactics to consider doing and two tactics to not do.

“To Do” Option #1: Connect to Another Love
If people don’t love you, then find ways to get yourself associated with something people really love.  As we saw earlier, in order to get sales AT&T connected itself with the iPhone, something people really loved.  AT&T hid themselves in the package.  If you wanted the much-loved iPhone, you had to take the “unloved” AT&T. 

The more and the tighter you can bundle yourself into packages with other items people love, the better you are.  Kmart is not one of the most loved retail brands, so it tries to tie itself to brands that are more loved.  It has done so over the years by creating exclusive selling arrangements with names more loved than its own, like Sesame Street, Martha Stewart, Jaclyn Smith, Selena Gomez, and Sofia Vergara.

“To Do” Option #2: Become Most Convenient
Sometimes being “good enough” is good enough.  That occurs when you exceed the minimum threshold of acceptance and are more convenient than superior offerings.  In other words, it you create barriers making it more difficult to get the superior product, people may say the extra effort isn’t worth it and then settle for your slightly inferior offering. 

For example, you can pursue a distribution strategy which makes it easier for customers to stumble upon your product than the competition.  You can try to tie up shelf space in the most popular stores to block ease of access to competitors.   You can buy up all the key words on search engines to make it more convenient for people to click to your site.

If you are not loved enough to get people to come closer to you, then go out to become closer to them.  For example, those unloved bands can sell more music and more tickets if they get closer than other bands to where the music lovers are.  They can hang out at the music festivals where you can find the people who have more desire for and are more in the mood to spend on music.  Seeking out these people will work better than waiting for them to seek you. You imposed more convenience through your efforts to get closer.

In both option #1 and #2, the idea is to make it harder for a customer to substitute a competitor’s product for your own.  Product bundling, exclusivities, and other such tactics can often serve both purposes—get you closer to where customers want to be and make it harder for competitors to do the same.  

“To Do” Option #3:  Find a Niche
Sometimes, if you narrow your focus, you can find a way to become the best alternative to a niche audience.  You won’t be the best option for everyone, but if the niche is large enough, you will be the best with enough people to make a good profit.  You can then use a “best at” strategy within that targeted niche.

To do so, you may need to change your business model a bit.  You may need to move away from more conventional approaches and make bigger trade-offs.  This could even make you less desirable to the masses.  But if it makes you more loved by a niche, then it can be worth it. 

Many retailers found they could succeed against Wal-Mart by going after the niches Wal-Mart left behind in areas such as superior quality, superior service, a higher level of fashion taste, etc.  Becoming best for a niche ignored by Wal-Mart was a better strategy than being an inferior Wal-Mart imitator. 

“To Do” Option #4: Exit the Business
One of the first questions I like to ask in a strategy session is this:  Why should anyone naturally prefer your offering over the competition?  If you cannot think of a meaningful reason for people to naturally prefer you, I have a second question:  Why, then, should you stay in business?   If you are unloved now, and the first three options aren’t viable, the best option may be to exit the business.

“Not To Do” Option #1: Get Overconfident
If you think that your sales are there mainly because people love you, then you may try to exploit that love by raising prices, cutting features, etc.  But if that love is not really there, then attempts to exploit it could backfire.  For example, if one of those lesser bands charges too much for their music, the money will go to a different lesser band.

Most of the time, customers have alternatives.  Even if you think you have a monopoly, there can still be alternatives.  For example, even if you own 100% of the rail business, people can use other forms of transportation, or maybe telecommute via Skype.  And if you haven’t been using the options mentioned above to curtail alternatives, these alternatives may be even more abundant with easier switching than you think.

Therefore, think it over carefully before trying to exploit the love you think you have. 

“Not To Do” Option #2: Assume Unwavering Loyalty
The marketplace continues to evolve; circumstances change over time.  If you are not well loved, those changes could work against you to cause massive customer defections from your offering.

For example, you may be the most convenient option now, but that does not mean it will always stay that way.  Blockbuster video rental stores used to be the most convenient way to get video.  But then Redbox put video vending machines in far more convenient locations and Netflix let you download video from the convenience of your sofa.  Suddenly, Blockbuster went from most convenient to less convenient.  And since Blockbuster did not have much of any superiority anywhere else, people switched away from Blockbuster in droves.

Similarly, AT&T lost sales opportunities when the iPhone became available on other systems.  Kmart lost business when Martha Stewart took her brand away from Kmart and put it in Macy’s. 

Since preferences are more fickle with unloved brands, one needs to be more vigilant in holding on to whatever small advantage one can maintain.  If convenience is your advantage, keep on top of any developments that can become even more convenient.  If tie-ups with others is your advantage, make sure that you are always tied up with the best deal of the moment.

Never get comfortable in thinking the loyalty is locked in forever.

If your offering is not the best in the industry, then don’t try to win with a “best at” strategy.  Instead, look for ways to bundle with others more popular, become more convenient or create a niche.  

It’s human nature to think well of our own offerings.  We may love the products and services we sell.  But our opinion is not the one that matters.  In many cases, the consumers may hold a much lower opinion of them than we do.  So pay attention to their opinion and don’t get caught up in your own sense of loyalty.

Friday, June 8, 2012

Strategic Planning Analogy #455: Evict the Dentists!

When I took a statistics class in college, the professor told us about the fact that there was a high correlation between the crime rate and the number of dentists in a neighborhood.  When the number of dentists went up, so did the crime rate.  The correlation was a provable fact.

After making this statement, the professor suggested that if you want to reduce crime, all you have to do is evict the dentists from the neighborhood.  Doesn’t that conclusion fit the facts?

Of course, the point the professor was making was that just because one observes a high correlation does not mean that you understand the nature of the relationship.  For example, you may not know which is the cause and which is the effect. 

Or, in this case, the crime and dentists worked together because of a third factor—both criminals and dentists prefer nice neighborhoods.  Dentists like them because they can afford them.  Criminals like them because there is nice stuff to steal.

In other words, there is no direct connection between crime and dentists.  If you eliminate the dentists, you still have nice neighborhoods, so the crime will stay.  So don’t be hasty in your conclusions when you see a correlation.

Strategies are based on assumptions.  The better one’s assumptions about the environment, the more likely one will have created a strategy relevant to the environment.

Today, we live in a world where big data and statistics are becoming a larger part of the decision-making process.  Big computers can crunch all kinds of data and point out all sorts of correlations. 

But just because we can crunch out ever larger lists of correlations does not necessarily mean we understand the environment better than before.  Like in the example in the story, a factual correlation between crime and dentists can be misunderstood and lead to the wrong conclusion.

We can make the wrong assumption about the direction of causality (which is cause and which is effect).  Or we may be missing out on a third factor which connects the other two (like the desirability of nice neighborhoods).

If we do not understand the underlying relationship in the correlation, we will make the wrong assumptions.  And this will lead to having the wrong strategy.

The principle here is that it is wise to spend time critically examining our assumptions before plunging into strategic solutions.  After all, a “great” strategy based on incorrect assumptions is really in the end a bad strategy, because it is irrelevant to the marketplace in which it will be implemented.

An Example
This point was made clear to me in an article I was recently reading about social media and shopping.  The article talked about a correlation fact: customers who are heavily involved in a retailer’s social media spend a lot more money with that retailer than those who aren’t involved in that company’s social media.  The article then concluded that based on this fact, retailers should put a lot of effort behind getting as many people involved in their social media as possible.

Now what assumption did that author make?  Based on that conclusion, the author apparently assumed that social media activity leads to greater shopping.  But is that really true?

What if the correlation works in the opposite direction?  Doesn’t it make more sense that those who really want to spend a lot of money at a particular store would be the ones most likely to also like their social media?

So does more social media usage create heavier store shopping or does heavy store shopping create more social media usage?  The answer to this question can make a big difference on what strategy one chooses.

If the author is correct, then one should spend all sorts of money to get as many people as possible involved in your social media, regardless of who they are and how you got them there.  After all, the social media usage is supposed to magically convert them into heavy users, so it is worth the effort.

Another fact is that the most effective way to get people involved in social media is via “bribery.”  In other words, if you offer money, prizes, coupons or contests (which are really nothing more than bribes), you will get more people to sign in and “like” you.  So if you have an assumption like that author, you will endorse a strategy including lots of this kind of bribery.

But think about this for a minute.  If the only way you can get someone into your social media is due to bribery, why do you think this will lead to a lot more loyalty and a lot more purchasing?

Now what if the other assumption is true, that heavy spending leads to heavier use of the brand’s social media?  Then, one would look at their social media as targeted tool for communicating with some of their best customers.  In this case, the bulk of the strategy might be pointed at trying to increase the amount of money these already loyal shoppers are spending with you.   So instead of primarily trying to get more people to the site, you primarily try to extract money from those who naturally want to be there.

For example, you might come up with new offers of new products or services that would appeal to heavy users.  Or maybe you offer them a loyalty program which rewards spending even more with your company (which, since they already like you, might be relatively cost effective).

If this second assumption is true, the tactics of the first assumption could be a disaster.  For example, if you clog up the social media with a lot of people who really aren’t that interested in the brand, it might make the social media less inviting to your serious shoppers.  This could chase away your best customers from the site and reduce the ability to have meaningful (and productive) conversations with your best customers. 

Second, if bribery is what got them to the site, then significant levels of additional bribery are probably needed to convert these social visits into shopping.  That could end up being a highly unprofitable loyalty program if you add up the bribes to get them to the site and then additional bribes to convert them into shoppers.  At the very least, it would probably be less effective than a loyalty program only focused on people already favorably pre-disposed to your brand (where the needed bribes could potentially be far smaller, since they already have more loyalty towards you).

So, as you can see, assumptions can really impact strategic effectiveness, both positively and negatively.

So What Should We Do?
This being the case, what should we do?  First, become explicit in outlining your assumptions.  Make sure you get those assumptions out in the open.  Always ask yourself these questions:  What assumption needs to true for this strategy to succeed?  What assumption is embedded in my conclusion?

Second, take the time to really study and test the validity of those assumptions.  Don’t rush to a conclusion merely because you see a correlation.  Make sure that you test the directionality of the relationship or check to see if there is a third variable holding the correlation together.  Do a test before you roll out your plan to see if the assumption holds true.

Third, consider the downside risks if your assumption is wrong.  The greater the potential negative impact to a small error, the more you should study the validity of your assumptions.

Finally, don’t lull yourself into a false sense of confidence just because increased analytics has supplied you with a lot more correlations.  You still have to figure out what it all means.  More data may just lead to more misperceptions and more false assumptions.  More data means more to analyze and study, not an excuse to plunge ahead faster.  

If you want a strategy ideally suited to your environment, then you’d better have an accurate view of what that environment really is.  Our point of view is based on the assumptions we make about how that environment works.  Therefore, we need to take time to identify and test the assumptions inherent to our conclusions.  Otherwise, our conclusions could be wrong and lead us to the wrong strategy.

Before you go around shouting for eviction of the dentists, think through the logic which lead you to that thought.  Remember, a little time spent up front to fine tune the assumptions can save you a whole lot of grief later on.

Wednesday, June 6, 2012

Strategic Planning Analogy #454: Strategy Cut-Outs

A couple of years ago, I was at a tourist location while on vacation.  There was a section of the area devoted to souvenir shops.  These shops had quite a variety of souvenirs to offer—everything from T-shirts to antiques.  Most of the items had something printed on them referring to the phenomenon which drew tourists to the location in the first place.

But there was one store which stood out.  It was selling life-sized photographs of famous celebrities, cut and mounted on wood so that you could have them stand next to you.  In particular, the store was pushing life-size cut-outs of Justin Bieber, the hottest celebrity of that moment.

I thought it might be interesting to have one of these in my home (until I saw how expensive they were). 

But it got me thinking.  What if I had one of these Justin Bieber cut-outs in my house and suddenly the real Justin Bieber showed up?  The natural reaction would be to ignore the cut-out and pay attention to the real person.  All that money paid for the cut-out would have been a waste, because it has very little value when you have access to the real thing.

And if you saw someone ignore the real Justin Bieber to spend time with the cut-out photograph, you’d think they were a little bit crazy.

Sometimes, I think strategic planners can get a little crazy, like someone who would rather hang out with a photograph of Justin Bieber than the real person.

Strategic plans are an attempt to represent what is going on in the environment and how we would like to change it for our company’s benefit.  They are not reality themselves, but merely a representation of that reality (and the future reality we desire).  They are a “cut-out” rather than the real thing. 

But, as strategist, we tend to love those planning documents.  There can be great joy in getting such a document completed.  And sometimes strategists can get all caught up with all their other documents, and data, and graphs, and spreadsheets.  There’s just so much of it to occupy our time that there is no need to ever leave the office.

But reality takes place outside the office out in the marketplace.  We can go out there and see our real Justin Bieber (the world we compete in) any time we want.  But instead, we seem content to embrace our hand-made cut-out version of Justin Bieber and never leave the office.

Yeah, the cut-out is nice, but isn’t visiting the real thing occasionally even nicer?

The principle here is that great strategic planning goes beyond dreaming up great theories in offices or in printing up thick strategy books.  The best strategies are most in tune with the marketplace.  Therefore, it is helpful if the planning process spends time interacting with the marketplace where the strategy gets played out.

1) Get Out in the Field
When was the last time your strategists went on a sales call with your sales team, or spent time listening in at the call center, or visited (or worked at) the factory, or spent time in direct contact with your customers?  These are the types of places where your strategy either succeeds or fails.  The better you understand them, the better you can prepare to win there.

At most of the retail companies where I have worked, I have insisted that whenever my team traveled on business, they should carve out extra time to get out and experience the local marketplace.  I told them to visit our stores, the stores of competition and even stores that had nothing to do with us.  After all, you never know where you will learn something new that will be useful in strategy.

I was appalled one time when a retailer I worked for opened up the first prototype for a new retail concept.  The top executives got on the corporate jet and then drove directly to the store.  They cut the ribbon for the grand opening and then went directly back home.  No time was spent observing or talking to customers.  No time was spent visiting the competition.  What a missed opportunity to learn.

When H. Ross Perot was placed on the board of directors for General Motors, one of the first things he did was go to a GM dealership to buy a car.  He wanted to experience what consumers experienced when buying a car.  He also wanted to own and drive a GM car to better understand the product.  Later, Perot was shocked to find out that many of the other board members no longer bought cars—they were given to them by the company.  And most of them no longer drove cars—they had drivers.  And at least one no longer even had a valid driver’s license.  How do you build strategies for the marketplace when you are so out of touch with the marketplace?

Granted, you cannot go everywhere and see everything.  But you should at least spend some time experiencing the world of the line employees and your customers.  This gives you some “real life” context for evaluating strategic options.  And just as you can learn more spending time with the real Justin Bieber than you can with a photo cut-out of Justin Bieber, you can learn things out in the field that would never show up just looking at numbers and documents in your office.

And to supplement personal experience, include more input from those who live out in the field.  Invite input from line employees, customers, suppliers and distributors.  With all the social media tools out there, it has never been easier to include all the voices of the marketplace in your planning process.  Not only will this allow you to learn more for strategy design, but it will create greater buy-in and cooperation from the field during strategy execution (because they were part of the design process).

2) We’re Not in the Publishing Business
A lot of strategists get upset when all of their strategy documents and presentations get ignored.  After the strategy meetings, everything given to the leaders gets put on their shelf, never to be touched again.

Why does this happen?  To a lot of the leaders, all that material is like the photo cut-out of Justin Bieber—not quite fully real to their regular day job.   After the planning meeting, they have to go back to living life out in the field with the real Justin Bieber.  And given the choice of spending time with the cut-out or the real thing, they naturally opt for the real thing. 

Remember, a company’s strategy is not what is put in a book, but is the result of all the daily decisions made throughout the organization.  If the written strategy is not made real at the point where all the decisions are made, then it is not the real strategy.

Strategists are not publishers.  Our end products are not books, Powerpoint decks, budgets and so on.  Our end product is a transformed company which is moving in the direction of the vision.  Therefore, to succeed, we need to make our strategy relevant in the minds of the people making the daily decisions.  To do that, the strategy needs to get translated into the context of the reality of where decisions are made.

To do that, strategists need to spend time at the beginning out in the field so as to understand that
context.  In addition, strategists need to spend time out in the field after the strategy is crafted, helping the decision-makers see how to relate the strategy to their daily decisions.  And that cannot be done by just hanging around your office.

Successful strategies are the ones which impact what happens out in the marketplace.  That impact is increased when a) the strategy is built upon the knowledge of the realities of the marketplace; and b) those who are making the daily decisions out in the marketplace understand how the strategy is relevant to the choices they make.  This requires that strategist do more than just produce books, spreadsheets and Powerpoint decks.  They need to spend time out in the reality of the marketplace.

All of this is not to imply that analytics, budgets, spreadsheets, presentations, strategy books and vision statements are a waste of time.  No, they help to quantify and communicate the core strategy.  They also help to flesh out strategic insights and concepts.  But unless one has a deeper, more intimate knowledge of the reality of the marketplace—something that cannot be found just studying sterile numbers—you will not fully comprehend the context and relevancy of that information.

It is like designing a house without understanding the terrain the house is to be built on.  It may look great on the blueprint, but it cannot become a reality because it is inappropriate for the terrain.  First, go out to the site and learn the terrain, so that the house you design on the blueprint can actually be built and be the right structure for that location.