Friday, March 30, 2012
Back in February, Peggy Noonan wrote an editorial in the Wall Street Journal about how enthusiasm for politics is declining in the US. In what many political pundits feel is an historic election year the US, the public is not all that engaged with the process.
According to Peggy Noonan:
a) Voting in primaries tends to be down compared to prior elections;
b) News viewership drops when election stories air;
c) Political stories on the web are not getting many clicks (far less than other news);
d) Cable news ratings aren’t going up as normal in an election year;
e) Viewership of the President’s speeches is down.
People in the US just don’t seem as interested in politics as before.
I have a theory about this. It goes back to the business principle of “Solution-Selling.” The idea is that consumers don’t really desire products. What they really desire are solutions to problems. Products are only the means to that end. And as soon as people are convinced that there is a better way to solve a problem, they will abandon the old products and go with the new alternatives offering the better solution.
A perfect example is weight loss. Most people really don’t desire exercise or diet or surgery. What they really desire is losing weight. Whatever method promises to be the fastest, easiest, most convenient and least costly way to lose weight will win. That’s why there are so many weight loss fads. People keep switching to the next fad in hopes that it will provide a better weight loss solution. I speak more about this solution-selling concept here, here, here and here.
I believe that a similar situation is occurring in politics. Yes, there are those political junkies out there who love politics as much as football junkies love football. However, for most people, politics in and of itself is not a desire. No, people are looking for solutions for life and for society.
For a time, politics and government appeared to be the best solution for solving many of these problems. However, I now believe that there is a growing movement towards the idea of a better “product” for solving those problems. That better product is a combination of social media and business.
As an example, I’d like us to consider sustainable fishing. There are many who believe that if you keep taking more fish out of the ocean than the replenishment rate, that eventually you will run out of fish. Therefore, there is a movement to support fishing practices which are more sustainable over the long term.
Trying to solve this problem via government is extremely difficult. The oceans don’t easy fall under government rule. There are many different vested interests in different countries, so universal compliance would be difficult. Even if you could get all the governing factors to agree to laws and standards, they would be nearly impossible to enforce, making the laws relatively worthless.
Now compare that to what has recently been happening. Social media pressure has been placed on the large companies which purchase the most fish. As a result of this pressure, many of these companies have enacted policies to only purchase fish from those who practice sustainable fishing. It looks like this pressure has impacted a critical mass of large fish purchasers (like Wal-Mart and Supervalu). The market equilibrium has shifted.
The fishing world is now faced with a dilemma. If they want to sell the fish they catch, they are more likely to do so if they practice sustainable fishing practices. It is in their best interests since that is what the largest customers demand. It is self enforcing.
Now compare the two alternatives to solving the sustainable fishing problem—government versus social/company. To me, it is a no-brainer. The social/company approach is faster, more efficient, and easier to enforce. So following the principles of solution-selling, market share should flow from “government as solution” to “social/business as solution.”
Hence, the decline in political interest. The people have found a better solution for many of their problems.
If this is true, the implications for business are enormous.
Expectations Have Changed
First of all consumer expectations have changed. An ever growing number of consumers now expect that businesses will take up some of the responsibilities formerly handed off to governments. They expect businesses to not only be good citizens, but to be proactive in using their clout to right many of the wrongs of the world, like sustainable fishing, reducing environmental waste, helping the poor, etc.
You see this in how the millenial generation acts. They are increasingly more interested in the social activity of the companies they choose to work at or purchase products from. The largest economic generation is using their clout to bend the businesses to their point of view. It is all expected as part of the new normal.
There is Nowhere to Hide
And if a company chooses not to comply with these new expectations, it will become known. In today’s society there is no place to hide. People will discover your actions (or lack thereof) and broadcast them across the social media spectrum.
Within literally moments, a groundswell of discontent can be pointed against your company. Remember, this social media helped topple heavily entrenched governments in the Middle East. Don’t assume you are so heavily entrenched that the social forces cannot “topple” your business.
This is serious stuff.
Your Strategic Plans Must Reflect the New Reality
If the new expectation is that businesses are supposed to take up responsibilities formerly given to governments AND failure to comply can lead to nearly instant and massive retaliation, then your strategic planning should reflect this. It needs to be at the discussion table.
First of all, one needs to determine which formerly governmental responsibilities they will pick up. This can be tricky, because of two factors. First, not everyone wants the same outcomes. As we have seen in the news, stands regarding contraception, homosexuality, and Planned Parenthood can create controversy no matter what you do. Therefore, be careful about the issues you choose to fight for.
Second, there can be unintended consequences to your actions. For example, Target Corporation decided to take a stand to promote the growth of business. Therefore, they made contributions to candidates pushing a pro-business agenda. Unfortunately, one of those individuals—in addition to their pro-business stance—also had a strong position on one of those controversial issues mentioned above. Word got out that Target was supporting one of these controversial issues because of their support for this candidate. The social media’s anger was pointed at Target. All for the wrong reason.
Then, you need to determine how to use your corporate clout to affect change. This is also equally tricky for many of the same reasons.
These decisions are easier if you understand your customer and understand how to use issues to reinforce one’s strategic positioning. For example, Wal-Mart’s position is about lowering prices for people who cannot afford to pay more. Wal-Mart has chosen to fight environmental waste. The connection is that environmental waste increases costs. If Wal-Mart eliminates environmental waste, they can afford to make prices even lower. In theory, it becomes a win for everyone—the environment, the customers, and Wal-Mart.
There appears to be a rising tide of opinion that the social/company approach can provide a superior solution to major problems better than the political/governmental process. As a result, companies are now expected to take on some of these governmental roles. If your strategic planning ignores or downplays this new role, you may suffer grave consequences.
Consumers are angry over their perception of the “do nothing” congress. Don’t follow in their path and get the perception of being a “do nothing” company.
Wednesday, March 28, 2012
Imagine what it would be like if car dealers had only one model of car available to sell. Regardless of who I am or what type of one model they had, I’m sure the salesperson would have a rationale for why that was the perfect car for a person like me.
And if the next customer was completely different from me, that salesperson would have a rationale for why that same car was the perfect match for them as well.
In fact, I’m sure that salesperson would have a rationale for almost anyone as to why that was the perfect car for them. After all, he only has one model to sell, so he has to convince you that this is the model for you to buy. Even if it is really not the car for you.
Beware of the salesperson with only one choice.
Although car dealers have lots of models to try to sell you, there are many businesses which have only one or two items to sell. Included in that second list is often many business gurus and consultants.
Often times, they have had success with a particular business approach in the past. They’ve probably written a book about it. Now they want to use that same approach at your business. They are like the car salesman with only one car to sell. They will try to convince you that their approach is just right for you. They will point out their prior successes to “prove” that you should do it, too. After all, it is the only thing they have to sell, so sell it they will—regardless of who you are.
Of course, the problem is that businesses are a lot like people. They aren’t all alike. Just as there is no one-size-fits-all automobile, there is no one-size-fits-all approach to business strategy.
There’s a reason why car dealerships have a variety of models to sell. Not everyone needs or wants the same thing. And all businesses should not need or want the same strategic solution.
Beware the business consultant with only one choice.
The principle here is that there is no one best strategic solution for everyone. And that’s a good thing. After all, if there was only one strategic solution, then you would only need one company within an industry—the one operating that one strategy best. Everyone else would be an inferior redundancy. And if you are not that one company, then there would be no reason for your company to exist.
Fortunately, the variety within the marketplace allows for a variety of go-to-market strategies. This provides viable options for lots of participants.
Start With the Right Question
So, to begin the strategy quest, be sure to start with the right question. The wrong first question to ask is “What is the best strategy?” That’s a bad question because there is no best strategy. Just as there is no one best car for everyone, there is no one best strategy for all businesses.
The right strategy for a small entrepreneur may be very different from the best strategy for a huge Fortune 100 multinational firm. They have different resources, different strengths, different capabilities. Forcing them to take the same approach to achieve the same ends would be a mistake.
Instead, the right first question to ask is “What is the best strategy for my business?” The point is that who you are is just as important as what you do. There must be a fit between the two. Until you understand who you are in relation to the marketplace, you don’t know what moves make the most sense for your business.
Strategies are about finding places where you can win. If you are short, you will not win at basketball, no matter how successful basketball may be for tall people. You need to find the sport where your talents have the best chance of winning.
So if a business consultant comes in saying “I have the best strategy solution,” tell that consultant they are answering the wrong question.
Judge a Salesperson by their Questions
How can you tell if a business consultant is answering the right question? Check to see if their opening moves are more about telling or more about asking. If they immediately start out by telling you what must be done, this probably means that they have a preconceived notion of what is best and they are going to shove it down your throats whether it is appropriate or not (like the car dealer with only one car).
By contrast, if they start out by asking a lot of questions about your business and your company, then they realize that the best solution depends on how it fits with who you are. Therefore, they need to ask you a lot of questions about who you are in order determine the best solution for you.
This is what a good consumer-centric car salesperson will do. They will ask you a lot of questions, like how you plan to use the vehicle, what are critical concerns, etc. Only after they first understand your situation will they begin to make a recommendation.
Beware of “Proof by Example”
The one-solution consultant will often try to impress you with how superior their solution is via examples. They show how others used this process to great success. Therefore, it should work for you, too.
But here is the problem with examples. Yes, you can find examples of businesses which succeeded with a particular approach. But if you look long enough, you can find examples of companies which failed with that same approach. In addition, you can find examples of successes and failures for all of the approaches. Consequently, an example of a success by one company with a particular approach does not guarantee that you will have a similar success with that approach. And it doesn’t prove that you wouldn’t have even more success with an alternative approach.
That is why in the US, the law requires that advertisements for weight loss products must put a disclaimer on their examples and say that not everyone will lose as much weight as those shown in the examples. Otherwise, the examples can be deceptive.
I remember reading about a company which had an inferior product that most customers didn’t like. They received lots of complaints. However, one day they got a letter from a satisfied customer (their first ever). They used that one satisfied customer in their advertising, and sales rose dramatically (even though the product was still bad). Yes, it was an example of success. But it was not a fair representation of reality.
So beware of blindly accepting examples as proof of future success. Ask yourself how similar your situation is to the one in the example. Check to see if there have been failures. Find out what the differences were between the successes and the failures.
Leaders Aren’t Imitators
Finally, there is the concept of “first mover advantage.” The principle is that those who stake an early claim to a strategic position tend to have an advantage over late-comers. Early participants have a better opportunity to claim ownership of the position in the consumers’ mind, because the consumer has no preconceived leader already in their head. These early arrivers easily claim the customers looking for this position at a time when there is less competition.
By the time the late-comers arrive, customers are already satisfied with the early arrivals. The customers now already have a firm leader in their mind (one of the early arrivals) who owns the space. The late-comer has to work harder to steal away well-entrenched market share. As a result, the early arriver tends to be more successful.
If the business consultant is proposing an approach which succeeded in the past, that success may have been a result of first mover advantage. Others following in their path will be late arrivers and not see the same advantages. Therefore, the approach may not work as well anymore. I spoke more about this concept here.
If you want success, that often requires staking out new claims in new territories with new business models. And this won’t happen if you are always trying to imitate successes of the past. If you imitate the leader, then you will always be a follower. And followers rarely have the advantage. So beware of consultants who want you to blindly follow old rules and will not take risks to be innovative with you.
Strategic planning is a very personal thing. The right strategy depends on the particular company and their particular situation. It is not a one-size-fits-all process. Therefore, it can be a mistake to just pull a strategy “off the shelf” which worked for others and expect it to work for your firm. If you call in a strategy consultant to help you with your strategy, make sure they understand this principle. Become very nervous if the consultant has a preconceived notion about a single approach that they want to force on every client.
There’s a reason why car salesmen and consultants are often held in low esteem by society.
Wednesday, March 21, 2012
I know someone who has a tendency to get panic attacks. She’s not alone, as it is estimated that 18% of adults have this condition. My friend’s problem has to do with crowds. If she is in an enclosed area jam-packed with people, she finds herself in a mild panic.
Her solution? Make a point of avoiding crowds as much as possible. For example, you will never see her Christmas shopping at the stores on Black Friday.
People aren’t the only ones who get panic attacks. So do companies.
Pressures at the company mount. Anxiety rises. The crisis of the day reaches epic proportions. Everyone begins to lose their cool and starts yelling at each other. Each department tries to shift the blame to somebody else. Progress grinds to a halt as the company collectively freezes into a panic attack.
Corporate panic attacks destroy productivity. Great thinking rarely occurs when one is in a panic. Since coping with the immediate is more than one can handle during a panic, long-term concerns fall completely off the agenda. Rather than thinking growth, one is focused on survival.
This is not good for the company. It is even worse for effective strategic planning.
The principle here is that even the best approaches to developing strategic plans will fail if a company’s mental state is not ready for it. If a company is in a panic, you are wasting your time. This also applies to strategy implementation. If the company is in a panic, implementation will fail.
So what do you about panic attacks?
1. Getting out of the Panic Becomes the New Strategy
If your company is currently in a panic attack, then traditional approaches to planning will fall on deaf ears. Therefore, the immediate strategy must be to first eliminate the panic.
This is not to say that you need to completely eliminate the source of the panic (like competitive threats or economic conditions). This is also not to say that you need to have a comprehensive solution for the current panic, either. After all, even if you had the solution, it might get trampled on in the crisis of the panic.
No, the task is to eliminate the feeling of panic IN SPITE of what is currently going on. Panic attacks are typically brought on by two feelings:
a) A feeling of being threatened (pressures rising); and
b) A feeling of not having control of the situation (can’t make the pressure disappear).
These feelings do not have to be rational. It doesn’t matter the factual extent to which the threat is real or if the lack of control is real. What matters is the extent to which the BELIEF is real.
Therefore, to quell the panic, you need a strategy which attacks the belief system. Again, your job at this point is not to eliminate threats or create control per se, but to change the beliefs about these areas to the better. THEN, when everything calms down, you can focus on fixing the mess and moving forward.
Attacking the belief systems usually requires a focus on symbolism. In other words, do things which provide a clear sign or signal to the organization that perceptions should change. And symbols tend to need to come from the top of the organization to create the greatest impact.
To quell the feeling of being threatened, one needs symbolic actions which show that the threat is not as threatening as one thinks. The right action depends on the nature of the threat, but some examples could be:
a) A believably optimistic demeanor in the people at the top.
b) A continuation of investment into the company.
c) A pledge that no jobs will be cut.
To quell the feeling of helplessness and having no control make bold moves in areas you control and can take immediate action. To some it extent, it doesn’t matter whether action makes a big difference to the immediate crisis. The point is that you are doing SOMETHING and that proves you are not completely helpless. Examples could be things like:
a) Changing the organization chart or shuffling executives around to new responsibilities.
b) Changing the advertising focus.
c) Forming a special committee.
d) Introducing a new innovation.
A century ago, RCA was shocked when Columbia introduced the 33 1/3 rpm record. It threatened to abolish the entire 78 rpm record business RCA depended on. To stop the panic, RCA needed to do something…anything. As it turns out, RCA had an innovation languishing on the shelf that they had decided not to pursue. They quickly changed their mind and introduced this innovation to the public to show that panic was unwarranted. And that is how the 45 rpm single was introduced.
Scott Adams, the creator of Dilbert has said that it really doesn’t matter what the business does when it changes. The mere fact change is occurring encourages people and stimulates positive action.
Remember the Hawthorne Effect? Back in the 1920s and 1930s, Western Electric tried all sorts of productivity experiments at their Hawthorne facility. No matter what they tried, productivity went up. The conclusion was that the mere fact that management was focusing on the situation and measuring it was enough to get more out of the employees. It wasn’t WHAT was done. It was the fact that SOMETHING was being done. So do something…anything. And show people that it is important by focusing a lot of attention on it.
2. Avoid Future Panics
Once a company is out of the panic and had time to move forward, it is important to try to avoid future panics. Here are two ideas for doing so.
a) Seek Blue Oceans
As my friend in the original story discovered, if crowds create panic then avoid crowds. This is sort of the principle behind the Blue Ocean strategy. The idea behind the blue ocean strategic approach is to try to position your company so that is not operating in a crowded space in the marketplace. In other words, if you go after a new, uncontested position in the marketplace, you will avoid a lot of the forces creating panic.
In a new, uncontested space, there are fewer competitors creating hellish battles over pricing and market share. It’s more monopolistic in nature. You get to make the rules. In other words, there are fewer external pressures bearing down on you and you have a sense of being more in control. That sounds like a good place to minimize panic.
And, by the way, Blue Ocean strategies tend to be desirable from a strategic perspective as well.
b) Trigger Points
One way to avoid walking into panic-inducing situations is to have advance notice. That’s where trigger points and measurement tools come into play. Determine what can trigger panic. It can be external factors and internal factors (like employee attitudes). Measure them on a regular basis. When the results of the measurements are moving in the wrong direction, take action to halt the trend before it reaches panic level.
For example, the Gallop organization has proven that the level of employee engagement has a direct impact on performance. If an employee is not engaged, performance suffers, regardless of the strategy. Panic is an extreme form of disengagement. Gallop has developed a tool to measure engagement so that specific actions can be taken early to avoid the disengagement.
A panic stricken company is not an environment where good long-term strategic planning can take place. Before one can tackle the strategic concerns, one must first eliminate the panic. This usually involves symbolic actions which show the company that the threat is either not a bad as believed or that the company is more powerful than they believe in being able to tackle the threat. Once the panic is gone, serious planning can take place. In addition efforts at reducing future panics should be part of the plan.
Although planning looks at the long term, panic abatement is more of a one-day-at-a-time approach. That is why it is so hard to do planning when panic sets in.
Thursday, March 15, 2012
During the 1920s and 1930s, Willie Sutton was one of the most prolific bank robbers in US history. During his lifetime, Willie Sutton robbed over 100 banks and made off with more than $2 million (which would be equivalent to about $30 to $60 million in today’s dollar).
Legend has it that when a reporter asked him why he robbed banks, Sutton replied, “Because that’s where the money is.”
The reporter’s question could be interpreted two ways—Why do you steal or Why do you steal from banks. The reporter meant the first, but Willie Sutton answered the second.
In a sense, the reporter was trying to figure out why Sutton chose a life profession (stealing) which most people found undesirable. Since Sutton had no problems with the profession of stealing, he focused on the most efficient way to do so (go to where the most money is).
This is similar to a strategic question businesses should ask themselves: Why did you choose this path to profitability?
And just as the way Willie Sutton answered his question said a lot about his character, the way you answer this second question may say a lot about the character of your business and its culture.
If your answer focuses primarily on the “path” part of the question, then your culture most likely tends to be focused on building business models that add value to the marketplace. And because you add value to the marketplace, you can extract a profit (a portion of the value added).
However, if your answer focuses primarily on the “profitability” part of the question (saying “because that’s where the money is”), then the character of greed may be starting to overtake your thinking. Rather than thinking about adding value, one is more focused on grabbing as much as possible from where the piles of cash already are. Rather than looking at where to add, you look at where to subtract (what piles to take money away from). It’s starting to slip towards the Willie Sutton mindset.
This is not to say that making a lot of money or profits is bad. But if the money is made in a way that does not add value to the marketplace, then the model is unsustainable over the long run. Just as banks don’t like to be robbed, customers don’t like to be taken advantage of. Willie Sutton spent about half of his adult life in prison and did not get to fully enjoy the fruit of his stealings. Similarly, businesses which do not focus on adding value are punished—taken out of the marketplace so that they can profit no longer.
The principle here has to do with the difference between a taking versus a receiving mindset. A “taking” mindset is focused on grabbing money by whatever means possible. A “receiving” mindset is focused on doing something so valuable that customers willingly shower them with money (no need to grab). In the long run, a receiving mindset leads to more enduring strategies.
This principle was brought to mind by the March 14, 2012 editorial in the New York Times by Greg Smith. Smith, an executive in the London office at Goldman Sachs, used the editorial as his resignation letter. In the article, he said he was leaving Goldman Sachs because, to use my terminology, the Goldman Sachs culture had become like Willie Sutton—all about taking rather than receiving. Rather than focusing on adding value to its clients, Smith claimed that Sachs was focused on doing whatever it takes to grab the clients’ money, even if it is not in the best interest of the client.
To quote from the editorial:
“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them...”
“What are three quick ways to become a leader [at Goldman Sachs]? a) Execute on the firm’s ‘axes,’ which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) ‘Hunt Elephants.’ In English: get your clients—some of whom are sophisticated, and some of whom aren’t—to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym…
“These days, the most common question I get from junior analysts about derivatives is, ‘How much money did we make off the client?’ It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.”
Smith also claimed that many leaders at Goldman Sachs referred to their clients as “muppets” in their emails. And I’m pretty sure that was not a term of endearment.
So what happens when this culture takes over? Smith got it right when he said “If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.”
A “taking” mindset may work for awhile, but eventually the people being taken figure it out. And they will stop letting you take from them any longer.
So what should you do to keep a Goldman Sachs type of situation from occurring at your business?
1) Be Careful how You Lead
Employees watch how the leaders operate. If the leaders show a “taking” mindset and refer to customers as muppets in emails, then the followers will see this as desirable behavior. The old phrase “do as I say and not as I do” doesn’t cut it. With today’s technology, leaders have nowhere to hide. They will be imitated. So set the right example.
2) Manage the Agenda
How much of your meeting time is spent on the taking agenda versus the receiving agenda? How much time is spent talking about adding value for customers versus taking their money? You have the power to control the agenda. Make sure the receiving agenda gets the proper amount of focus, especially at the point when actual decisions are being made. Make sure it is part of the decision-making equation.
When I was at Supervalu, a wholesaler to independent grocers, we had a saying that our job was to "make the independent grocer as wealthy as possible." This was a true value-added receiver approach, since it assumed we would only be a profitable wholesaler if we first made sure we had profitable retail customers. The problem was that I didn't always hear that phrase at the time when decisions were being made. There was room to improve in getting the phrase onto the agenda.
3) Measure the Pulse of the Organization
Don’t assume that everything is alright. You may have a situation like Goldman Sachs had in London, where the perception of right behavior had gotten out of control. Monitor the mood and culture in your organization on a regular basis. Learn about a drift in the wrong direction early, while there is still the opportunity to rectify the situation.
4) Treat Strategic Planning Seriously
Strategic planning helps focus a company on the bigger, longer term issues. And in the long term, a receiving mindset is almost always the best path. Use strategic planning as an excuse to find ways to add more value to your customers. Use it to build a business where customers want to shower you with money because it is worth it to them in what they get in return. Strategic planning is one of the rare times when you can get people out of their daily rhythm and get them properly focused on the larger goal. Don’t waste that opportunity.
There are two different mindsets one can bring to the goal of profitability. The “taking” mindset looks for ways to grab money out of people’s hands. The “receiving” mindset realizes that if you focus on building a superior business model for adding value to clients, they will voluntarily give you their money to obtain of that value. In the long run, the receiving approach is preferred, so make a point of proactively enforcing that mindset within the organization.
In the movie “It’s a Wonderful Life,” the George Bailey character runs his savings and loan business with a value-added mindset. His customers are all better off because of doing business with him. In fact, as the movie points out, if George Bailey hadn’t been alive to run that business with a receiver mindset, a lot of those people would have been in a terrible situation. As a result, when George Bailey gets into financial trouble, all his customers come and shower him with money (now that’s being a true receiver). Of course, it doesn’t always work out so dramatically in real life, but I think the title holds true. With a receiver mindset, it is a more wonderful life.
Monday, March 12, 2012
When I go to a sporting event, I like to stay until the very end. I figure that I paid for the whole game, so I may as well watch the whole game. And who knows, something exciting might happen at the very end.
Usually, however, the end is not very dramatic. And because I wait until the end, I get caught in terrible traffic jams. First, the jam of the people trying to get out, and then the jam of the cars trying to leave. It seems like forever to finally get on my way home. What a mess!!
The frustration of trying to leave gets larger than the excitement of seeing the game. At that point, I wish I would have left earlier.
For every strategic business initiative, there is an important question to ask—When is it time to leave this initiative and move on to something else? There is a tendency for executives to act like my behavior at sporting events and stick around until the very end. And just like in sports, if you stick around until the very end of a strategic initiative, you end up in a mess.
Usually nothing very exciting happens at the end of a business initiative life cycle. Sales slowly fall away and losses begin to mount. You could leave early without missing any excitement (and avoid the losses).
And, if you leave this business sector ahead of the crowd, you can avoid the mad rush to the exits of everyone else later on. At the end of the cycle, when everyone is trying to leave, there is virtually no value in what is left behind (everyone is selling and nobody is buying).
Therefore, we should resist the temptation to stay until the end of the game and leave early. After all, there is always another game to play, and the sooner you leave the old one, the sooner you can prepare for the new one.
The principle here is that a retreat or exit from a business is not necessarily a sign of failure. Often times, leaving early is the more successful alternative.
1. ALL Strategic Initiatives Eventually Die
The first thing to remember is that ALL strategic initiatives eventually die. Again, ALL strategic initiatives eventually die. Strategic initiatives follow a lifecycle of growth, maturity, decline, then death. If your company’s strategy is to ride an initiative all the way to the end, then you will die as well. If you don’t want to die along with that strategy, then you’d better leave early and move on to a replacement strategy.
Just because all strategic initiatives die is not to say that everything dies. Consumer desires for solutions to problems does not die. Consumer desires for status, comfort, performance, convenience and value do not die. The problem is that the way consumers satisfy these desires changes over time. New and better solutions (or business models) come about which are superior to the old ones. If you want consumers to continue getting their solutions from you, then you’d better keep advancing to the initiative with the superior solution.
Kodak stuck with analog film all the way to the end and died with the initiative. Had they left earlier, they would have had the opportunity to continue to thrive. After all, the consumer desire to capture memories still lives. The desire for visual imaging still lives. The desire to share experiences through pictures still lives. The only thing that died was the analog film initiative…and the companies who stuck with it until the end.
A large part of the entire social phenomenon on the internet is just a superior business model for solving the problems that Kodak used to solve—the sharing of experiences. By sticking around too long at the old game, Kodak got caught in the mess at the end and missed out on the new game of the social revolution (not to mention the whole digital imaging thing).
Don’t get caught into believing that you are the exception and that your strategic initiative will never die. At one time, Sears was by far the largest and most successful retailer on the planet. Consumers loved them. They seemed invincible. It looked like they would be successful forever. But times changed and Sears didn’t. Superior solutions appeared. Sears is now near death. Consumer purchasing did not die, but the Sears way of selling did.
2. Wanting to Win in the Worst Way Usually is the Worst Way
Failures don’t just happen at the end of the life cycle. Failures also occur during the process of innovation. Not every new idea is a good idea. In fact, most innovations fail.
In an earlier blog, we talked about some of the psychological biases which cause companies to want to stick with an innovation too long. Some of those factors include:
a) Innovation is Fun
b) Innovation Can Enhance a Career
c) All the Other Cool, Successful Companies are doing it.
d) My Ego/Reputation gets Entangled with the Reputation/Success of the Innovation.
e) The Budget/Plan is Depending on it.
f) There’s Nothing Else in the Product Development Pipeline, So it HAS to Work.
As a result, there is an inherent bias to stick with a bad innovation too long. We want so badly for the innovation to succeed that we try to create success out of our own desire when there really is no success to be found.
Wanting to succeed in the worst way is usually the worst way to try to succeed. We need to be rational and realize that and early exit from a doomed venture is often the smart move (and will save one from taking heavy losses and write-downs in the future).
3. The Last One Standing is Usually the Loser
A third place where sticking around too long can occur is when the “Roll-Up” strategy is used. The idea is to consolidate an industry by acquiring enough of your competitors to have the leading share (roll them all into one).
There is logic to using this roll-up consolidation approach. It creates economies of scale and there are benefits from reducing the number of competitors. It can also be a great way to expand geographically.
However, the roll-up strategy is best used near the beginning of the mature phase of the life cycle. After all, it does no good to be the great consolidator of a business if the business is near death. The consolidation only makes sense when there is still a demand large enough to want the large entity you are building.
During the 1970s through the early 1990s, Supervalu rolled up and consolidated the wholesale grocery industry. This strategy provided many years of success. However, the largest customer of the wholesale grocery industry is the small, independent grocer. Thanks to the rise of the Walmart Supercenter and the growth of large supermarket chains, the independent grocer was rapidly disappearing. Having the best wholesale grocery business is worthless if you no longer have independent grocery customers. The roll up strategy was starting to die.
Fortunately, Supervalu did not need to die. They changed strategies to become owners of large retail chains (primarily through the acquisition of Albertsons). Now they controlled their retail customer base. Another winner was the wholesaler Cardinal Foods. They sold out early in the consolidation and moved into the growing health care business, eventually becoming the successful Cardinal Health.
In a roll-up strategy, remember that when everyone is willing to leave (and sell you their business), you need to question why you want to buy them. Often, they are willing to sell out because either:
a) They think the business is dying; or
b) They think you are paying such a high premium to get the business that your price is far higher than the present value of future cash flows. In this case, you transferred all the value of the consolidation to the person who is leaving the business via your purchase price.
Either way, that is not a good sign for the consolidator. In the end, all strategic initiatives eventually fail, and consolidating a larger version of that initiative at the point when it fails just creates a larger failure.
Consolidating is nice at the beginning of maturity, but know when it is time to leave that strategy. Sell out early before the very end and let someone else be holding the large mess when the initiative is nearing death. After all, the last one standing when the initiative dies will die with the initiative. I spoke about this principle in more detail here.
4. Distinguishing Battles from Wars
Leaving an initiative early may look like failure, but an initiative is only one battle. The real goal should be to worry about winning the larger war, not a single battle.
The real war is to preserve and profitably grow the corporation. For a corporation to do so, it must continually shed its old initiatives and add new ones. Shedding the old is not a sign a failure, but a realization that the greater goal requires adapting to change. In fact, failure to shed is more likely to create ultimate failure.
Long-time enduring companies like Nokia and GE have had vastly different portfolios of businesses over the years. They were willing to leave industries before that game was over and move to the newer, better game. And when GE has temporarily faltered, it is usually because it stayed too long with a particular initiative.
Leaving a business early may at first seem like failure, but it is usually the more profitable option. Strategic initiatives eventually die and you cannot stop that. Therefore, to prevent your company from dying, you need to move on. And the sooner you move on, the easier and more profitable your exit will be. Also, the sooner you move on, the easier it is to own the next big thing which is replacing what is dying.
When you see others starting to leave the game, consider it a warning sign that perhaps you need to consider leaving as well.