Friday, October 26, 2012

Strategic Planning Analogy #473: Multiple Choice

When I was a child in school, I preferred multiple choice tests over true or false tests.  With multiple choice tests, I found it relatively easy to guess when I did not know the answer.  In nearly all cases, the correct answer would be the option that had the most words in it.  So when I didn’t know the right answer, I’d pick the wordiest option.

True or False answers were harder to guess.   You either wrote a “T” for true or an “F” for false.  One was not wordier than the other.  For awhile, I tried to perfect the writing of an answer that looked half-way between a T or an F.  It sort of looked like it could be either a T or an F.   My hope was that the teacher would be biased towards correct answers when grading and that my half-way letter would be interpreted as the correct answer due to that bias.  But that method was not as reliable as the multiple choice guessing method.

In the business world, it often seems as if executives look at sales as being like a true or false test.  The question goes something like this:  “Did you get the sale? (T or F).”  And from the point of view of the executive answering the question, this seems logical.

The problem with this approach is that it does not provide any insight into the selling process.  It doesn’t help us answer a variety of essay questions, like:

  1. Why did we get (or not get) the sale?
  2. What would cause us to get more sales?
  3. What is causing us to lose sales?
  4. What approach should I use to get the next sale?
  5. How can we make our sales more profitable?

Worse yet, I think the true or false approach wrongly distorts the way we look at the selling process.  Yes, from the company’s perspective, getting the sale is a true or false event.  However, from the point of view of the potential customer, the event is much more like a multiple choice question. 

The consumer has lots of choices for how to spend their time and their money.  To them, the choice is rarely binary—it is not “Do I buy your product? (yes or no).”  Instead, the question to them is “Which of my many options is the best choice for how I spend my time and money?” 

The alternatives to the consumer are many.  It can be between very similar products such as “Brand X” soup versus “Brand Y” soup.  It can be a choice between related products, like eating soup at home versus going out to eat at a restaurant.  It can also be between vastly different products.  An extreme example could be a young woman’s choice between going back to college or having a baby.

Choices between extremely different options happen all the time.  For example, a teenager may want to be popular at school.  To get there, the teen may consider a number of different options, like spending their money on the latest clothing fashions, or buying the latest technology gadget, or buying drugs. 

The multiple choice answers are quite varied.  And unless you frame the question properly to understand the real problem being solved (“What will make me popular with my peers?”), you will not understand what is going on in the mind of that person when they are making that choice.    For example, if you sell teen clothing, your biggest problem may be in convincing that teen that your clothes will make them cooler with the in-crowd than the latest smartphone. 

That is why it is so important for executives to look at sales as a multiple choice exercise for the consumer.   It helps orient executives towards understanding:

1.      What problems the customer is trying to solve;

2.      What is the vast array of options that can solve that problem; and

3.      How can I make my product become the best answer for that multiple choice question.

And, as I found out as a child, the best multiple choice answer usually has the most words. Or in this case, the customer chooses the answer with the most attributes related to solving the problem.  And you won’t know which attributes are relevant unless you understand which multiple choice question is being asked.

The principle here is that if you want to increase sales, and do it profitably, you need to have a strategy which makes you the best option to a multiple choice question asked by a large segment of the population.  There are only two ways to create that superiority—natural advantages or bribes.

Natural Advantages
A rational natural advantage occurs when your product or service inherently has features making it meaningfully superior to the alternatives in solving a customer’s problem.  For example, if a consumer has a need for durability in their bicycle, the manufacturer making the most durable bicycle has a natural advantage over others trying to sell to that segment.  It is the natural preferred choice because the durability is a key part of the nature of that bicycle.

Natural advantages come in two varieties:  rational and emotional.  A rational natural advantage would be like that durability in the bicycle.  Durability is a rational excuse for preference.  It can also be rationally shown that the parts of a particular bicycle are stronger and longer lasting and more reliable.

By contrast, an emotional natural advantage occurs when your product or service provides makes consumers feel better about themselves. Usually, that means that your offering provides a superior feeling of self worth over the alternatives.  For example, a status-seeking woman would choose a Louis Vuitton handbag over others because that brand image provides a superior sense of self worth to her.  It’s really not about the durability of the handbag.  It’s the image and reputation of Louis Vuitton which transfers to the owner of the brand, making her feel better about herself.

Sometimes rational and emotional advantages can become intertwined. For example, if you have a movie star known for playing rugged, durable movie roles endorse the bicycle, some of the emotional connection with the actor will transfer to the bicycle, reinforcing the durability advantage.

WARNING: A natural advantage is not the same as a strength.  For example, you may be strong in “quality,” but that is not an advantage if:

a)      There is insufficient demand for quality as a solution with your market; or

b)      Others have a similar level of strength in quality (your quality is not meaningfully superior in the mind of the customer).

Therefore, the goal is not to become strong, but to become different and meaningful.  In other words, a strength must also make your solution superior to alternatives AND relevant in solving the particular problem faced by the customer.

Any efforts in areas which do not lead to difference or relevance are a waste of time.  Therefore, you strategy should emphasize trade-offs in the direction of difference and relevance.

If you do not have a natural advantage over the alternatives (or cannot create one), then the only way to sell your product is to layer on incentives, like deep reductions in price or gifts with purchase.  I refer to these added incentives as “bribes.”  In other words, if you cannot find a way to be “better” than the alternatives, then you need to bribe people to choose you by being cheaper or more convenient than the alternatives.

Bribery is the more difficult path to sales, because it is costly and easily neutralized by price-matching.  Look at Apple.  It has created strong natural advantages.  It has created rational superiority in ease of use and features.  It has created emotional superiority with the “Cool Factor” and the pride and self worth which comes from owning the Apple brand (big emotional attachment).  As a result, Apple can sell millions upon millions of units at a premium price.

By contrast, the competition has had difficulties creating natural advantages over Apple.  As a result, the competitors have to sell their products at a significantly lower price than Apple.  In essence, the competitors are bribing people to forgo the natural advantage of Apple because the price differential is big enough to shift the value equation.

Of course, that price reduction is a high price to pay to get sales.  It makes the competition far less profitable than Apple.  Less profitability makes it harder to keep up in innovation.  And if the competition ever starts getting closer to narrowing Apple’s advantage, all Apple has to do is lower its price a little to get the advantage back.

Therefore, the best sales strategy usually revolves around natural advantages rather than bribery.

So how do you create the natural advantages which lead to a rise in profitable sales? Two actions must take place.  First, you need to fully understand which problems people are trying to solve and all the factors going into how they choose amongst the wide variety of alternatives.  In other words, if you want to be the superior option for the multiple choice question, you need to know what the question is and how the person thinks about the solution (e.g., are my teenage clothes creating superior acceptance over smartphones with the peer group?).  Only after taking these steps will you know which strengths are worth pursuing.

Second, the only way to typically become superior in these strengths is to focus on them more than anyone else.  Given limited time, money and manpower, gaining superiority in one area means forgoing superiority in other areas.  It is a matter of trade-offs—do less in a non-relevant area in order to do more in a relevant area. 

The first step tells you what is relevant and the second step makes you relevant.

To the customer, purchase decisions are the result of answering a multiple choice question:  Which alternative best solves my problem or makes me feel better about myself?  If you want the customer to answer that question by purchasing your offering, then you need to provide superiority on the factors most relevant to the problem being considered.  That is best accomplished by determining the natural attributes which contribute to relevancy and then making the proper trade-offs needed to achieve superiority on those attributes.  Otherwise, you are stuck with the weaker option of bribery.

Relevant superiority in natural attributes does not happen by chance.  It requires forethought and a focused approach to trade-offs.  That only comes by having a strategy.  So if you want strong, profitable sales, start with a great strategy.

Thursday, October 18, 2012

Strategic Planning Analogy #472: Watering Seeds

This past summer was unseasonably hot and dry.  My lawn suffered from the harsh weather.  As a result, I needed to plant some grass seed this fall to fill in the dead spots. 

Getting grass seed to grow takes a lot more effort than just throwing some seeds on the ground.  First you have to loosen the soil.  Then you have to keep watering it on a regular basis for several weeks.  Then you have to fertilize it.  That was tough work.  Tossing the seeds on the ground was the easy part.

At first, I thought I wasn’t watering the grass enough.  But then I saw a cardinal giving himself a bird-bath in a puddle where I had watered.  So I guess I watered enough.

And now, my lawn is covered with new grass.

Strategy is like grass seed.  It is something new sown into the business with the hope of increasing the growth and value of the company.  And if you want to take the analogy further and think of US dollars as “greenbacks,” strategies are the grass seeds that create that green (money).

The problem is that just because one throws seed on the ground does not guarantee that the growth will occur.  If the ground is hard and dry, the seeds will just sit there until the birds eat it.  Similarly, if strategy is just thrown at a company, there is no guarantee that the strategy will take root. Just as it took a lot more than just tossing seeds to get grass, it takes a lot more than just delivering a strategy in order to achieve a strategy.

If you see the role of strategy as merely delivering a fancy document with all the clever ideas on it, then all you have done is just toss seeds at the company.  The document will then most likely just end up on a shelf and never be touched again.  It’s as if the birds ate all your seeds.

No, if you want a strategy which gets implemented, you have to get involved in all the other work—the ground preparation, the watering and the fertilizing.

The principle here is that strategies only succeed in a company which is committed to making it succeed.  And that does not usually happen naturally.  In fact, there is usually active resistance to strategies because they require changing the status quo—and that bothers those who are comfortable or have power in the status quo.  Therefore, if you want to successfully implement a strategy, you can’t just give it to the company—you have to actively counter that resistance as part of the strategy process. 

We will refer to those actions as preparing the soil, watering, and fertilizing.

1. Preparing the Soil
In grass-growing, you prepare the soil before planting the seed. The idea is to loosen the soil so the seed can penetrate and get buried in the soil.

A similar activity needs to take place in strategy.  Before presenting the strategy, you need to first prepare the audience so that the strategy will penetrate their wall of resistance.  Since that wall of resistance is in their minds, then the mind is where you need to prepare the soil.

The core idea is very simple.  People act based on the way they think.  Therefore, if you want to change the way they act, you must first change the way they think.  In other words, if you want the leaders embrace and willingly implement the strategy, then you must first get them to think that it is right to abandon the status quo and embrace the new strategy.

There are several ways to change that mind.  The first approach is “The Burning Platform.”  This is where you change how people think about the status quo.  The idea is to convince them to believe that remaining with the status quo is not a viable option for the long term.  It does not work in the changing environment.  Instead, it is like being on a platform which is burning up.  It is only a matter of time before it is all burned up.   And if we do not jump off that platform, we will burn up as well.  It is only a matter of time.  So we may as well jump as soon as possible.

The second approach is “The Locked Door.”  The idea here is to paint a picture of a glorious and prosperous future—a place so desirable that it makes your executives salivate with anticipation when thinking of it.  Then you convince them that there is a locked door between them and that glorious future.  That locked door is the status quo.  It is impossible to reach that future as long as we cling to the status quo, because that approach cannot get you there.  It is only by tearing down the status quo that we can enter that glorious future.

The first approach of thinking prevents actions of turning back and the second approach of thinking increases enthusiasm for actions moving forward.  Depending on the nature of your soil (type of resistance) you may need one of these or some other thinking approach to prepare them for proper acceptance and action.

2. Watering the Soil
Watering the soil is an intensified effort for the period immediately after planting the seed.  It is not a one-time act, but needs to be done continually until the grass seed has fully sprouted.  The strategic planning equivalent is working intensely with executives until they see the connection between the long-term strategy and their daily actions.

If executives do not see a connection between their daily decisions/actions and the long term strategy, then they will not change their daily decisions or actions.  And, as we all know, if the daily actions don’t change, then the long-term outcomes will not change.  The real strategic outcome of a company is the cumulative result of all those daily actions (not the result of that document on the shelf).  So if you want to get the new strategy implemented, if must be meaningfully represented at the point when daily decisions are made.   Watering the seed then means that strategists need to be present when daily decisions are being made—to teach people how the new strategy should influence how those decisions are made.

For example, new strategies are typically about winning a particular position.  And in order to have enough emphasis in the winning area, one usually needs to makes trade-offs with areas less critical to that success.  Therefore, our daily actions need to make the right trade-offs so that we choose in the direction of the winning position.  And if intensive effort is not placed on training people to make the right trade-offs, then wrong trade-offs will occur.

Think back a few years ago to the crisis at Toyota.  Their strategy was built upon winning in dependability.  However, for awhile, management’s daily decisions were not keeping dependability at the forefront.  Ideas of growth, expansion, and low prices got in the way.  As a result, dependability suffered (numerous crashes, lawsuits and recalls) and Toyota had a huge set-back.  Management had to go back and re-water the soil—to get everyone to realize that dependability is top priority and must penetrate every decision made on a daily basis.  Once the soil was sufficiently watered with that intensive effort, dependability came back and so did the prospects at Toyota.

3. Fertilizing the Soil
Fertilization is a brief activity which takes place at set intervals.  For example, many recommend fertilizing grass 5 times a year.  The equivalent activity in strategy is the strategic review.  The idea here is that just as periodic fertilization keeps the grass on track to grow, periodic strategic reviews help keep the strategy on track to proper implementation.

There are several methods to do this.  One is the dashboard approach.  The idea is to set desired near-term outcomes related to the strategy.  These are usually referred to as KPIs, or key performance indicators.  You then measure actual performance against the KPIs and display them on a dashboard.  Periodically you look at the performance on the dashboard and make the appropriate adjustments to get back on track.  Depending on how broadly you want to measure the strategy you will end up with different dashboards.  In the broadest approach, you end up with something like a Balanced Scorecard.

A strategic review which will occur less frequently is the review of assumptions.  The idea here is to periodically go back to the core assumptions behind the strategy to ensure that they are still relevant.  If they are no longer relevant, then it is time to modify the strategy.  Sometimes, this process makes use of scenario planning.  In scenario planning, several potential environmental assumptions are examined.  Strategies are developed for the most like sets of assumptions.  Then, at the periodic reviews, one looks to see which scenario is coming to pass, so that  one will know which path to take.

A third approach for strategic review is known as stage-gating, or real options.  The idea here is that large strategic initiatives are broken down into smaller parts.  Each part optimizes the strategy based on what is known at the moment the stage is started.  Then, based on what is learned over the interim of that stage, you choose the proper next stage, and so on.  The periodic reviews occur for each stage.

An example would be in oil drilling, where one buys an option to drill well before drilling begins.  Then one examines in more detail the likelihood of that being a good place to drill.  If yes, the next stage is to prepare drilling.  If no, you let the right to drill lapse.  The idea is to maximize action while minimizing risk.

Just having a strategy does not guarantee that the strategy will become a reality in the business.  To increase the likelihood that the strategy comes to pass, you also need three other activities:

  1. Preparing the Soil--Changing the way the company thinks, so that they naturally want to work hard to make the strategy come to pass.
  2. Watering the Soil—Intensive effort up-front to teach people how to incorporate the essentials of the strategy into everyday decision-making.
  3. Fertilizing the Soil—Periodic strategic reviews in order to make sure everything is on track, that the assumptions still hold, and that periodic adjustments can be made.

You can’t prepare the soil, water the soil and fertilize the soil if you are locked up in the ivory tower at corporate.  No, you have to get your hands dirty and get out into the field where the soil is.

Tuesday, October 9, 2012

Strategic Planning Analogy #471: Two Kinds of Niches

Every so often, I hear of a story about someone discovering a famous painting in amongst a pile of junk.  I remember an elderly Milwaukee couple back in 1991 finding an old Van Gogh which they sold for $1.43 million.  In 2009, a famous painting by famous Paris artist Ary Scheffer from 1851 was found in a janitor’s closet in a rural Minnesota church.  It was appraised at $53,000 and is now prominently displayed at a Minneapolis art museum. 

And just recently, in 2012, an estate was going up for sale in Switzerland.  As people were getting the estate ready for sale, they discovered a painting by Goya which nobody knew was there, called “Lot and his Daughters,” which was painted around 1770.  It was estimated to be worth about $700,000. 

There have been enough stories about people finding expensive art treasures amongst junk that there are many who spend their time going to garage sales and estate sales to buy lots of old art work in hopes of finding a hidden treasure somewhere in the pile.

That seems like a lot of work for low odds of success.

Just because a work of art is old does not mean that it is valuable.  There are tons of old pieces of art that are fairly worthless.  You can collect warehouses full of old art and end up with nothing but a big pile of relatively worthless junk. What makes a work of art valuable is when it is both old AND is associated with an artist who was a leader in a particular style of art (like Van Gogh or Goya).

A similar situation exists in the business world.  There are business gurus who are advocating the advantage of the small niche.  They say that it is very difficult to make money appealing to the broad, average middle market and that the real money is made working in smaller, specialized niches.  An example would be underperforming large department stores versus overperforming small specialty niche stores.

So then, word gets out that “small” is good.  But as it turns out, that advice is about as useful as telling an art collector that “old” is good.  Yes, old is good in art, but only if attached to an artist who was a leader in an important style of art.  Similarly, having a small share in a business strategy is only a good idea if you are also a leader in meaningful type of specialty.  It isn’t being small that’s important as much as it is in being a leader in some important way.  It is more important to become the “Van Gogh” or the “Goya” of your niche than to just aim to be small. 

The principle here is that there is a vast difference between owning a niche product and owning a niche category.  A niche product is merely a product or service with a small market share.  For example, you may be the 10th largest brand of toothpaste.  By contrast, a niche category is a solution desired by a minority of the population.  For example, a niche category would be those looking for toothpaste for sensitive teeth.

The key difference here is that a niche product is merely small in volume.  There are lots of reasons why a company can have a small volume, and many of those reasons are not good.  For example, it may just be an inferior product when compared to the higher selling brands. As is often the case, small volumes occur because consumers do not care to purchase the product.   In fact, most times, small volume does not lead to success any more than being old leads to artistic treasure.

Niche categories are different.  They may be small, but they have a purpose.  They have a strong appeal to a particular segment which will prefer it over a larger segment because it better suits their needs. Just as an old painting only becomes valuable when associated with category leadership (like Van Gogh in impressionism), a small volume toothpaste only becomes valuable if it is associated with leadership in a category niche (like best for sensitive teeth).  So the goal is not to have a strategy around being small, but around owning a category—even if the category is relatively small.

The Laws of Business Work Against The Merely Small
There are many business laws which work against the small volume niche product:

  1. The Law of Scale:  There are typically economies of scale in being large (production, labor, distribution, etc.) which make it more difficult for the small operator to compete.  They are at a natural cost disadvantage.
  2. The Law of Consolidation:  All markets eventually consolidate into a small handful of brands.  Sometimes only 2 or 3 meaningful brands remain. The third brand is often unprofitable and unless a smaller brand owns a niche, it is almost certainly not providing an adequate return on investment.  As a result, the lesser brands tend to disappear.
  3. The Law of Networking:  In the social networked economy, the importance of having the most connections is critical.  As a result, sometimes there can only be one major player (think Facebook).
  4. The Law of Bribery:  If there is no natural reason for people to prefer your brand, then they will choose other brands.  The only way to counter that trend is to “bribe” people to purchase from you via heavy price promotions or gimmicks.  This is typically not sustainable over the long term. 
  5. The Law of Losers:  If you get the image of being a “loser” brand, then customers will not want to associate with your product (since it will make them look like a loser for using it).  And it is easy for a small niche product to get a loser image since—if it were a winner—then you would expect it to have a high market share.

The Best Way To Fight These Laws is Via Category Ownership
If you are the leader in a category niche, you are better able to withstand those forces mentioned above, even if you are relatively small.  For example, you may still be at a cost advantage to the big brands, but you will have the cost advantage over the lesser brands within the category where you are a leader.  In addition, because you are better suited to the category because of your specialization, the category segment may be willing to pay a meaningful premium for your product (it meets their needs better than the big mass brands).

You can avoid the excessive bribery because of the natural demand which comes from being the most desired solution within that category.  In a world of consolidation, the category leader is typically immune (if the category is large enough).  And finally, if you own a category, you are not a “loser” to those who desire that category.

The Best Strategic Approach
Therefore, the first step in a good strategy is often to seek a place category leadership.  As I said in an earlier blog, there are eight questions to ask yourself when choosing where to seek category leadership:

      1)      Is the position Desirable?
      2)      Is the position Sizeable?
      3)      Is the position Ownable?
      4)      Is the position Preferable? 
      5)      Is the position Achievable?
      6)      Is the position Believable?
      7)      Is the position Understandable?
      8)      Is the position Profitable?

By answering these questions, you will find or create a category where you can win big.

The next step is to do what it takes to create, keep and strengthen that leadership position for yourself.  You need to convert the dream to a reality with an action plan.

Third, once you own the category, you can focus on growing the category.  Since you will gain the majority of the benefits of the category growth, it is worth investing in it, even if others also benefit a little bit. Think about how Campbell’s became a leader in the US soup category and shifted its emphasis to getting people to consume more soup. 

Or think about how Chaboni first worked to own the Greek yogurt niche category niche in the US.  Then it moved to make Greek yogurt an ever larger category in the US.   By contrast, Fage—the yogurt market leader in Greece—was content to be merely be a niche product in the US.  As a result, Fage ended up not only being a niche product in the overall US yogurt market but a distant niche product within the US Greek yogurt category (even though it was introduced to the US well before Chaboni).  By settling for merely being small, Fage ended up doing poorly in the US.  Chaboni, by owning a small category and then making the category big, did very well. 

Finally, once you become the category leader, you can devote more time to leveraging that leadership position.  In the digital world, this is often referred to as finding a way to “monetize” all those visitors.  For example, first Facebook tried to own its category.  Then they grew the category from college students to everyone.  Now they are focused on monetizing the category.  This has made it nearly impossible for anyone else to succeed in that space.  That is, except for firms like Linkedin, which decided to own a niche category—business and professional social networking—and is doing well because of that category ownership.

Although there are a lot of successful companies or brands which are small, that doesn’t mean that merely being small guarantees success.  In fact, there are many laws of business which work against the smaller players.  True success comes from being a category leader, even if the category is relatively small.  That’s because category leadership creates advantages which can be leveraged into growing the category or increasing the your share of the money made within the category.

On the PBS TV show Antiques Roadshow, people bring in old items from their homes to be appraised for their value as an antique.  The show likes to air all the examples where the appraisals are surprisingly high.  They tend not to emphasize all the instances where the appraisers tell the people what they own has little value.  This bias can give the false impression that almost anything really old is really valuable.  Similarly, the business press likes to tell the stories of all the little businesses which beat the odds and are successful.  This bias can give the false impression of the odds of success for small companies.  Don’t fall for the deception.  Only put small into your strategic goals if it is also accompanied by category ownership. 

Tuesday, October 2, 2012

Strategic Planning Analogy #470: Present For Whom?

There’s a popular story out there which has been around for generations in one form or another.  It usually goes something like this:

A little boy wanted to get a special present for his father for Christmas.  In the boy’s mind, the most special type of present he could think of was a toy.  After all, that’s the type of special thing the boy liked.  So, he decided to get his father a toy for Christmas.

Then, on Christmas day, the father opens the gift and finds a ball in the box.  Excitedly, the young boy says, “Daddy, now we can play catch together.  Isn’t that great?”

The father smiles and says “Thank you,” knowing that what the little boy really gave him was not really a gift for the father, but a gift for the son—more time to play with his father.

The little boy had good intentions, but the gift he gave to his father was really a gift to himself.  He couldn’t help himself.  Little boys have difficulty seeing the world from any perspective but their own.  What looked like a great gift through his eyes wasn’t necessarily the most appropriate gift when seen through the eyes of the receiver of the gift.

As we get older, we are better at seeing the world from other people’s perspectives.  But even then, we don’t always get the picture right.

In the business world, we are always dealing with others, be they customers or suppliers or other business stakeholders.   To get what we need out of the relationship, we usually need to give them something of value in return. 

Often times, we can end up like that boy.  We have good intentions of offering something of value to the stakeholder, but we end up offering the wrong gift because our thinking is too clouded with our own perspective rather than the perspective of the receiver.

Our strategy is not necessarily the same as their strategy.  Therefore, gifts which seem valuable from the perspective of our strategy may not be very valuable to our stakeholders because it is not relevant to their strategy.  Therefore, if we want our strategy to succeed, we may also need to think of ways to also promote the strategies of our stakeholders—even if the action does not directly benefit us.  The reason is because if we help our stakeholders, they are more likely to respond in ways that will benefit our strategy.

So, in a sense, achieving the strategies of our stakeholders becomes a part of our overall strategy.  Otherwise, we end up offering our stakeholders gifts which are really for ourselves.  And the stakeholders probably don’t love us as much as that father loved his son, so they will be less forgiving if we make that mistake.

The principle here is that if we do not fully understand the strategic perspective of our stakeholders, we may make the wrong decisions about how to deal with those stakeholders.  And those mistakes can damage the ability for us to achieve our own strategy.  Therefore, we need to not only understand our own strategy, but that of our stakeholders.

That may sound like an obvious statement, but I have seen examples where companies still don’t fully grasp it in the way they act towards their stakeholders.  I will illustrate this with the hypothetical example of a manufacturer trying to get a retail partner to carry his product.

The Manufacturer’s Pitch
The manufacturer in this example knows that he needs a compelling reason for the retailer to carry his product.  That compelling reason is the “gift” he gives the customer in return for carrying the good, just like the gift in the story.

The manufacturer decides that his gift is twofold.  First, he has a very desirable product.  Consumers love it.  Second, he has a high selling product.  Consumers buy it. 

The manufacturer figures that any retailer would jump at the chance to carry a product that consumers love and that sells in high volume.  Therefore, he prepares his sales presentation around the ideas of high desire and high sales volume.

The Retailer’s Response
After hearing the sales presentation, the retailer rejects the product and says she will not carry it.  The manufacturer is shocked!  He thinks, “Why would a retailer be stupid enough to reject a desirable, high selling product.”  But then he hears the rationale.

The retailer rejects the product because:

1.  “Desirable” to a retailer is a relative term.  The retailer explains, “Just about everything I have in my store is desirable.  And since my store is already full with product, the only way I can accept your product is if I get rid of something I already sell.  You have not proven to me that this product is more desirable than any of the other desirable products I already sell.  What product should I get rid of to sell this one?  Are you willing to drop one of the products you already sell me and replace it with this one?  If not, then why should I believe that this product is so much better than the good stuff I already sell?”

2. “Sales” to a retailer is a net number.  The retailer explains, “Yes, you may be able to sell a lot of this product, but that doesn’t necessarily mean that I am better off if I carry it.  It looks to me as if nearly all of your sales come from people who are replacing this product for items which I already sell.  In other words, the sales I gain from selling your product are nearly equal to the sales I lose when customers switch from their old preferences to this one.  My total sales in the department remain the same.  And when you add in the costs I incur to add your product and get rid of theirs, not only do total sales not increase, but profits go down.”

3. “Sales” are not the full story.  The retailer explains, “The items people currently buy take up less shelf space and are easier for my labor to handle than your product.  If people shift to your product, then I have the same sales, but my labor costs go up and I have to eliminate even more product to fit yours on the shelf.  This makes me less profitable.”

4. And then there are the other retailers.  The retailer explains, “This is a product which requires extra service to sell.  I am not a high-service retailer.  Therefore, this product gives a competitive advantage to other retailers who provide more service.  Why should I promote a product that gives my competitors a selling advantage?  This will encourage people to switch from buying products which sell better in my store to buying products which sell better in their store.  Where does that scenario benefit me?”

The Manufacturer’s Revised Pitch
After hearing the response from the retailer, the manufacturer realized he was like the boy in the story.  He did not fully appreciate the nuances of the retailer’s strategy.  He had only thought about his own needs and thought that the retailer would be happy when only the manufacturer’s strategy had been met.  So he changed a few things and made a revised pitch to the retailer.

First, he revised the formulation of the refills to the product so that refills had to be purchased a little more often.  This change meant that consumers would have to buy more refills than before, creating much higher total sales than the retailer made from the products this item would replace in the store.

Second, he made a special version of the product which would be exclusive for this retailer.  This special version required less service to sell than the original version.  By having an exclusive version suited to the retailer’s selling style, she should be able to compete better against the retail competition.  This special version also took up less shelf space.

Third, the manufacturer was going to help pay the cost of the retailer to add this product and delete another. 

Fourth, he did some consumer research which showed how the desirability of this product compared with other products, and could demonstrate specifically what made sense to eliminate in order to carry this product.

Although none of these changes directly benefitted the original strategy of the manufacturer, they really helped the strategy of the retailer.  As a result, the retailer decided to carry the product and promote it heavily.  And then the strategy of the manufacturer benefitted. 

It’s great to have a strategy and to have everyone in the company understand it.  It’s even better if you also understand the strategies of your stakeholders.  Then you can modify your strategy so that your stakeholders’ strategies are best served by cooperating with your strategy.   

If you give someone a really great gift, they are more likely to reciprocate by giving you a great gift.  So next time you meet with a stakeholder, think of it as a gift exchange.  Try to give them the perfect gift (from their perspective).  In the end, you’ll usually get more back that way.