Wednesday, January 16, 2013

Strategic Planning Analogy #485: Unconventionality

Sometimes when my wife and I are on a road trip together, I’ll have fun by telling her that I want to race her to the destination.  Of course, that’s a silly suggestion, because we’re both in the same car.  As a result, we will both get to the destination at the same time.

I think that the very silliness of the suggestion is hilarious.  My wife thinks the very silliness of the suggestion is quite stupid.  So I laugh and she frowns.  But every once in awhile, I still bring up the suggestion when on a road trip.   

If everyone is in the same car, they will arrive at the destination at the same time.  It kind of takes the fun out of being in the race, because there is no way to get a lead over everyone else.  It makes the whole idea of racing kind of silly.

Yet, I see businesses doing this all the time.  The company will set up all kinds of goals to win and to exceed the performance of everyone else in their industry.  The goals are quite impressive.

But when you ask them how they are going to win and achieve those goals, the game plan is to operate by the traditional rules of their industry.  My response is, “How do you plan on beating everyone else if you are doing the same exact conventional activities as everyone else in the industry.”

To me, that makes as much sense as trying to win a road race by piling all the drivers into the same car.  For if everyone in the industry is playing by the same conventional rules of operation, you are in the same car—the car of conventionality.   You are running the race the same way, with the same tools, same business models, the same processes, the same strategies. 

How can you expect to pull away and win a decisive victory under those circumstances?  I don’t care how impressive your goals are.  You haven’t shown me a way to pull ahead and win.

The principle here deals with another one of my 23 laws of strategy, the Law of Unconventionality.  This law states that: “You do not achieve unconventional profitability with conventional business models.”  In other words, you do not meaningfully beat your competition if you are doing the same thing they are.  If you want unconventionally high levels of profits, you have to do unconventional things.  You have to get out of the same car of conventionality that everyone else is in and get a car of your own—a car that runs a better race.

Why Conventionality Won’t Win the Race
The problem with conventional methods is that they provide little room for differentiation.  If everyone is going after essentially the same customer in mostly the same way with basically the same offering, all the competitors will look about the same to the consumer base.  There is no natural reason for a customer to prefer one competitor over the other.

Without any meaningful natural differentiation, the only way to get an edge is by “bribing” customers with lower prices or added freebies.  Of course, the other competitors will follow, causing a downward price and profit spiral.

That is why the profitability of industries tend to drop over time and mature industries have returns which are about the same as the industry cost of capital. 

The Need to Differentiate
If there is an outlier in an industry who is beating these odds and making high levels of profits, I’ll bet you it is because they are not following the conventional rules of the industry.  They are doing something very different—playing by different rules.

Southwest Airlines has superior profits over conventional airlines because it doesn’t play by conventional airline rules.  It runs a point to point system with different rules on seating, ticketing (won’t use other ticketing sites online), baggage, fuel purchasing, employee relations and host of different things.  By playing by different rules, it has a lower cost structure and an offering which is superior to a significant sector of the population.

Geico made a splash in the insurance industry by running against the conventional approach of selling insurance personally through a huge network of insurance agents.  Instead, they put the money into advertising and call centers and cut out the agent fee, putting that money into other benefits.

Ashley Furniture gets higher than average returns for furniture retailers by direct sourcing much of its furniture from low cost countries and bypassing the branded furniture manufacturers which the conventional furniture retailers use.

Amancio Ortega became the third richest person in the world by re-writing the rules of the fashion industry.  Instead of running the business around a handful of fashion seasons each year, he built a system based on continuous replenishment.  This system supports his Zara stores in a new way, called “fast fashion,” which is very profitable, because it is a much more productive use of capital and inventory than the conventional fashion operators.

Apple became one of the highest valued companies by avoiding the conventional approach of specializing in either hardware, software or distribution and build an integrated, closed system.  It also changed the rules by focusing on elegance rather than just functionality.

Differentiation Breaks the Bribery Trap
When you do things differently, you give yourself a natural edge.  Either you create cost savings the competition cannot copy so that you can profitably underprice them, or you create superior preference so that customers are willing to pay more for your offering.  Either way, you get to zoom past the conventional operators in the race to profits.

Apple has had long lines of people waiting to full price for their integrated offerings, because many consumers thought their different approach made it worth the effort to get one. 

Because Zara sells through its offerings so quickly and replaces them with something different, people learn that it is useless to wait for items to go on sale.  You have to buy it at full price right away.  And because of their different cost structure, Zara’s full price is still a good deal relative to conventional operators.

The Limitations of Bechmarking
This is why benchmarking is only of limited value.  It helps you to understand how others do things, but it doesn’t tell you how to do things differently from everyone else.

If you are falling behind in the race, benchmarking can help you find a way to get into the car of conventionality.  At least then you are no worse than average and can ride with the rest of the conventional operators.

Or, if you see someone breaking away from the pack, benchmarking can help you figure out how to get inside their car.  For example, others like H&M and Forever 21 have copied much of Zara’s business model, which is starting to make that the “new conventional” model.

But benchmarking won’t tell you how to become the next Southwest, Geico, Apple or Zara.

Sources of Differentiation
There are lots of ways to become unconventional.  It can be done by going after a different customer base, offering a different bundle of benefits, offering a radically different way to solve an old problem, changing how a solution is delivered, changing how an offering is paid for, and so on.  There is not enough room in this blog for all the creative ways to break the mold.  Look for your creative way and you’ll be pleased with the results.

If you run your business the same way as everyone else in the industry, you will never break away from the pack.  You will be stuck in a world lacking differentiation—and the added profits which come from differentiation.  Only unconventional approaches lead to unconventional returns.

A popular old circus act was to have dozens and dozens of clowns pile out of a tiny car.  If you stick to doing things the conventional way, you are like one of those clowns stuffed into the car of conventionality.  And those clowns get laughed at.  Do you want to be laughed at?  If not, get a car of your own.

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