Wednesday, July 18, 2012

Strategic Planning Analogy #461: Watersheds

Years ago, I was hiking in a wilderness area in northern Minnesota.  I felt like I was out in the middle of nowhere.  But there on the ground was a small plaque.  The plaque said that I was standing at the Hill of Three Waters.  This was the point where three great watersheds meet.

To the north of this point, all of the water flowed north to Hudson Bay in Canada and into the Arctic Ocean.  To the southeast of this point, the water flowed into the Great Lakes and the St. Lawrence Seaway, eventually flowing into the Atlantic Ocean.  To the southwest of this point, the water flowed south into the Mississippi River and eventually into the Gulf of Mexico.   All three watersheds get their start at this point in the wilderness. 

Of course, since this was the high point in the area, there really wasn’t any water here.  It had already drained into the three great watersheds.  So I poured a little water on the point to see which way it would flow.  It didn’t flow at all.  I was just absorbed into the dry ground. 

So much for my great experiment.

Watersheds are powerful systems.  They channel huge amounts of water into a singular direction.  The force of gravity pushes the water on its predetermined path.  The water doesn’t have a choice.  It goes in the direction dictated by the watershed it is in.

The water doesn’t get to vote on where it goes.  If it is in the Northern (also called Laurentian) Watershed, it will go to Hudson Bay.  If it is in the St. Lawrence Watershed, it will flow to the Atlantic Ocean.  If it is in the Mississippi Watershed, it will flow towards the Gulf of Mexico. 

Similar forces take place in society and in business systems.  Certain situations will come together in such a way that the pull on the economy will be like the gravity on the watershed.  Society will naturally flow in particular direction and you won’t be able to do much to change it.  If your strategy runs counter to the flow of society, it will have difficulty succeeding.  However, if it exploits the power of the watershed, then success can be multiplied many times over as cash naturally flows in your direction.

The principle here is that business ecosystems operate like watersheds.  Individual companies/brands have the power to not only exploit the forces of these watersheds, but to change the contour of the watershed.  Just as a bulldozer can change the contour of the land, a business can change the contour of the marketplace.  The result can cause even more cash to naturally flow in your direction.   Therefore, strategic planners need to consider more than just their own internal business.  They need to create plans which encompass the entire watershed.

We will now look at four key points in planning the watershed and then show examples of two companies which have done this well.

1) The Flow is Most Obvious Near the End of the Journey
When I was at the Hill of Three Waters, I could see no evidence of the three watersheds.  The land was dry.  This is because the beginnings of the water flow are very small.  However, if I were to go to the ends of these watersheds, I could easily see the power of the water flow.  As the Mississippi River gets near the Gulf of Mexico, or the St. Lawrence Seaway gets near the Atlantic Ocean, you can see the great accumulation of water moving strongly towards its goal.

But here is the problem.  By the time the flow of the watershed is that obvious, it is really strategically too late to do much.  The flow is already set in place.  And just as the end of the flow is a consolidation of huge number of earlier tributaries, mature business watersheds are consolidated into a small handful of firms.  It is too late to break in and make a big difference.  This is not the time to push into the system.  The winning company (river) has already been determined.

So the dilemma is this…the best time to make a strategic move into a business watershed is early on, when you have more power to control the flow to your advantage.  However, that is also the hardest time to detect where the great watersheds would be.  It is not as obvious. 

As a result, companies need to step away from the obvious of today and envision where future flows of cash could go.  This is part research (science) and part imagination (art).  Consider the beginnings of Starbucks.  The idea of converting a society used to buying cheap coffee as an ingredient in supermarkets to buying expensive finished product coffee in restaurants was not obvious.  That new ecosystem (watershed) really did not exist in the US at that time.  It looked like the dryness of the Hill of Three Waters. 

Yet instead of going down the established flow of the old system, Starbucks crossed the divide and created a new watershed.,,and was very successful.

This is somewhat akin to the Blue Ocean Strategy approach.  Rather than fight the flow of water when it is strongest against you (in a mature structure at the end of a watershed), go to a new location and build your own flow of water.  This is where you have the power to mold the flow to your advantage.

So don’t just strategize around where the water is today.  That game is likely already set against you.  Go to new watersheds, where you can build flows that come to you.

2) Manage the Entire Watershed
Depending on the contour of the land, more or less water will flow in your direction.  Similarly, the contour of the marketplace will determine how much flows towards a particular company.  Suppliers have choices.  Distributors have choices.  Customers have choices.  If you proactively contour the marketplace, there will be a natural desire for those choices to be made in your direction.  Just as gravity naturally moves water in a particular direction, your actions to shape the greater marketplace will move business in your direction.

Don’t assume that if you run your small part of the ecosystem well that everything will naturally flow your way.  It may not.  Take strategic steps outside your small part to encourage the rest of the ecosystem to give you preference.  By working together, Microsoft Windows and Intel created a strong “Wintel” watershed which made software developers and computer manufacturers naturally prefer to work with them over any competing system.  It became a near-monopoly standard.  Like gravity, practically the entire business computing world flowed in the direction of Windows and Intel, because they locked up all the key players into their watershed.

As we shall see below, Apple and Wal-Mart have also been extremely successful because they built strategies to encompass the entire ecosystem.  This forced more business to flow through their core operations.  This doesn’t mean that you have to own the entire ecosystem.  But it does mean you need to exert a degree of control over it.   Spend time to find ways to create advantages with all the players in the system.  Help define the standard operating procedures for the entire system in your favor.   Make this a key part of your strategic plan.

3) Grow By Exploiting the Flow You Already Control
One part of strategic planning is to find new avenues for growth.  This is often best accomplished by taking advantage of the advantages one has already developed in the marketplace.  In other words, take advantage of the strong water flows you have already created, rather than start from scratch.  This is akin to the idea of building on one’s core.

The problem is that businesses which appear to be near the core may not necessarily benefit from your watershed.  Consider Anheuser Busch a few decades ago.  They saw the salty snack business as being very similar to their core beer business in the US.  Both businesses used direct store delivery to get to similar retailers.  Both businesses were relatively inexpensive indulgences.  They were often consumed together.  So Anheuser Busch made a big push into salty snacks with Eagle Snacks.  It failed.

Why?  As it turns out, all the power flowing through Anheuser Busch’s beer business really didn’t provide a competitive advantage in salty snacks.  Rather than being the same watershed, they were parallel watersheds.  And the salty snack watershed was already mature and flowing into Frito Lay.    

Example #1:  Wal-Mart
Wal-Mart was successful because it followed these principles of the watershed.  In the beginning, rather than fight the entrenched watershed of discount retailing which flowed through large cities, Wal-Mart crossed the divide and built a watershed flowing through small towns.  Here, the game was wide open and they could write the rules in their favor.

Second, Wal-Mart knew that to be successful in small towns, it would need to control the entire supply chain (watershed).  It built its own distribution network, to make it the most efficient path to reach small towns.  It built the most sophisticated data network, so that it knew what was happening across the system.  This created the superior system, so both customers and vendors flowed to its stores like gravity.

Finally, when Wal-Mart wanted to grow beyond its US base of discount stores, it stayed within its watershed.  It added food to the mix to create supercenters.  This took advantage of the infrastructure and power already in place and made it even stronger.

Example #2: Apple
When Steve jobs came back to Apple, he didn’t try to fight the entrenched Wintel watershed.  Instead, he crossed the divide and created a new watershed around specialized portable computers dedicated to music (the iPod).

Apple did not just create the iPod device.  Instead they created the entire ecosystem, with the iTunes store, the Apple store, the software to easily download tunes, and so on.  As a result, they had designed the contours of the digital music space so that they were the superior place for everything to flow.  It all worked together well because the entire system was strategically designed to work together well.

Finally, when it was time to diversify and grow, Apple built off the strengths of the iPod watershed and exploited them with the iPhone and the iPad.  They utilized many of the same strengths Apple had already built in the marketplace.  The music flows flowed into the phone and the pad.  The distribution channels, the strength in design, the app store as an extension of iTunes, and so on.  It was building on prior flows, rather than starting over.

Exceptional levels of success require exceptional levels of business activity to flow in your direction.  This does not occur by accident.  It occurs when one proactively makes plans for the entire business ecosystem.  And it is easiest to influence the direction of the ecosystem when it is still young.

Once your watershed is built and the water is flowing strongly in your direction, there can be a desire to just sit back and enjoy the flow.  Unfortunately, the business landscape is not as stable as a physical landscape.  Society may shift; competitors may dam up your river; rain may pour into a new watershed.  You need to remain diligent in managing the watershed.


  1. Gerald Nanniga,
    This is a great post. It covers the rules of business with great insight. Amazingly, I advocated the use of ones own pendulum to swing his way rather than follow the crowded pendulum swing..
    No words are suffice to cover the thoroughness of this post

  2. Thank you so much. Always love your posts, as they contain lots of good tidbits.

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