Friday, February 28, 2014

Strategic Planning Analogy #522: Timeless Timepieces

I used to work with a retailer who sold low-end watches. Suddenly the sales of these watches plummeted. Was it because someone had suddenly become better at selling low-end watches than this retailer? No.

What had happened was that one of the primary customers of this retailer was early adopters of cell phones. They were using their cell phones to tell time, so they stopped wearing watches…which meant they stopped buying watches.

This retailer wasn’t the only one seeing portions of the watch market vaporize due to people using their phones to tell time. Look at watch ads today. Watches are no longer sold as functional timepieces. They are either sold as a piece of jewelry or as an heirloom to be passed on to future generations.

Think about it…timepieces being sold as the epitome of timelessness. It can’t get much more bizarre than that.

Watches were originally designed as a portable way to tell time. They were the superior solution to solving that problem. But then along came the cell phone. For a large sector of the population, the cell phone became a superior solution to the problem of portable time-telling.

When watches became an inferior solution to the problem, the demand for them dropped. It wasn’t that the phones became less effective at what they did. They were as good as before. It’s that a totally new solution appeared that was superior. Suddenly, a watch’s biggest threat came from phones.

This problem does not just impact watches. All businesses succeed by providing a superior solution to a problem. As a result, businesses tend to work diligently on perfecting their solution. They want to keep getting better, faster, cheaper with their solution offering.

But then…BAM! Something from out of the blue blows your solution out of the water. It no longer matters how good of a watch you make. The best, most accurate watch suddenly became an inferior portable timepiece to the phone. Making a better, faster, cheaper phone won’t get them back. The rules have changed.

This can happen to any business. A solution from an entirely different industry can make your industry irrelevant. The best, fastest, cheapest obsolete item is still obsolete.

Watch out for the unrelated industry (like phones) which can make your entire strategy (like watches) suddenly obsolete.


The principle here is that while problems can be eternal, particular solutions to these problems can have a short time span of viability. This poses a risk to any business with a product mindset. While your product may be a great solution today to a given problem, that does not ensure that it will be the best solution tomorrow—no matter how well you execute on delivering that product.

  1. Laser Surgery has made eyeglasses an inferior solution to vision correction.
  2. Digital communication of news has made paper-based communication of news (newspapers and magazines) an inferior option.
  3. Every few months, somebody comes up with a new solution for losing weight. The solutions come from a wide variety of industries, from new food solutions to new exercise solutions to new surgical procedures to hypnosis to pills to whatever. Each solution’s time of relevance is so short that we call them “fads.”
Now you may be saying that this risk does not affect your business, because you are not product focused. You are “solution-focused.” You are always working to be a better solution for your customers.

Well, that may be true. But how broadly do you approach that solution? Do you only look for solution improvements within your industry? Are you only looking for better portable time solutions within the watch industry or are you considering solutions from different industries like phones?

Consider the situation facing GM which we talked about in an earlier blog. Teens and young adults used to look to cars as the superior solution to their desire for freedom. Suddenly, the youth of today fulfill their desire for freedom via their cell phone. Cars are no longer something to lust after to satisfy this freedom urge for this demographic. To many of them, cars are just a means of transportation. And given that the young adults of today often prefer to live in city centers, cars aren’t even seen as a particularly good solution to them for that solution. Mass transit, taxis and new car-sharing options like Zipcar appear cheaper and more convenient in an urban environment.

As a result, car ownership (and driver’s license ownership) is down in this demographic.

So GM is not just competing against other cars. On one front, it is competing against anything else that can do a better job of satisfying the urge to be free. On another front, they are competing against an urban lifestyle (where cars can be seen as a burden). And they are competing against new options to transportation ownership made possible through cell phones (like Zipcar). And they are competing against trends which reduce the need for transportation in the first place (working at home, shopping on-line, visiting via Skype, etc.).

Will traditional car ownership eventually fall victim to some form of the same fate as watches? I would certainly have some concern if I was in that industry.

Even teen/young adult clothing sales are down, due in part to a shift of spending from clothing to gadgets (like iphones and ipads). It used to be that clothing for teens was a superior solution for trying to be “cool” with their peers. Now, spending that money on gadgets creates a superior coolnesss. So gadgets get the money that used to go towards clothing.

So what does this imply for strategists?

1) Look Broadly for Solutions
First of all, if you want to own a solution over time, you’d better be prepared to look way outside your conventional industry, because the next leap in superiority may come from somewhere totally different.

Think about Bausch & Lomb. They used to be in the lens business because that was the superior way to improve eyesight. But they could see that non-lens solutions could do a better job at some eyesight solutions, so they diversified into areas far afield from lenses, like laser surgery and eye vitamins.

Proctor & Gamble used to look to chemistry for their cleaning solutions. Then they thought more broadly and looked to physics for cleaning solutions. The result is a number of new cleaning innovations like the Mr. Clean Magic Eraser.

How far afield from your core are you looking to find superior solutions to your core? Do you only read publications in your own industry and only go to trade shows in your own industry? You won’t find it there until it is too late.

2) Be Prepared to Redefine Solutions
Sometimes, if your product is no longer the best solution for a problem, you can reposition the product to be the right solution for a different problem. As mentioned above, watches are repositioning themselves as jewelry and heirloom solutions rather than timepiece solutions.

In the 1800s, circuses were the superior way for small communities to learn about the latest and newest things. When that no longer worked, they repositioned themselves to be a great solution for nostalgia. I talked about that here.

When Hamburger Helper was introduced, it was a superior solution for dinner convenience because it could be made much faster than a conventional dinner at that time. Later, when other alternatives (microwave, take-out, etc.) could provide dinners more conveniently (faster & with less effort), Hamburger Helper was no longer the winner on convenience. General Mills has tried to come up with other solutions for Hamburger Helper such as:

  1. The convenience meal your kids will actually eat; or
  2. The convenience meal you can feel better about serving because you actually took part in preparing it with your own fresh beef.
I’m not sure any of these tactics are working, but at least they are trying. You may need to do the same in order to stay relevant.

Problems may be eternal, but the best way to solve the problem changes over time. Often the superior replacement solves the problem in an entirely new way from an entirely different industry with entirely different skills, technologies and business models. It is not an incrementally better status quo, but rather something which makes anything remotely similar to the status quo obsolete. The long term solution is to either: a) Keep an eye outside the industry to discover solutions which can keep you from becoming obsolete; or b) Find a way to redefine your product so that it can be the superior solution to something else (where it can still be relevant).

The best timepiece on the wrist” is not a solution. It is a description. The solution is at a higher level—portable time-telling. If you don’t define the problem at the higher level, you will miss some of the creative ways to solve the problem.

Thursday, February 13, 2014

Strategic Planning Analogy #521: Abdication

There’s an old science tricks kids love. First, you take a glass bottle and put a lit piece of paper in it. Then you place a peeled hard-boiled egg on top of the bottle.

Eventually, the flame will go out on the paper in the bottle. Shortly thereafter, the egg will get sucked into the bottle.

The kids are amazed because the mouth of the bottle is so much smaller than the egg. They can’t push the egg through the hole, so how did it get in there?

The science experiment works on the principle of air pressure. The flame on the piece of paper uses up the oxygen in the bottle. This causes the air pressure in the bottle to be so low in comparison to the air pressure outside the bottle that the vacuum inside sucks the egg into bottle.

Businesses seem to be creating a vacuum as well. It is caused by not spending enough time working on strategy. The lack of strategy effort creates a “strategy vacuum” within the business. This vacuum then sucks in strategic alternatives offered from the outside. Like the egg that doesn’t fit but still finds a way in, alternative strategies from the outside often do not fit the company, yet still find a way in.

And then you are stuck with a strategy that doesn’t belong and hard to get rid of, like that egg in the bottle.  

The principle here has to do with abdication. If you abdicate your responsibility for developing and implementing a strategy, someone from the outside will fill the vacuum and supply a strategy for you. Sometimes it will come from an activist investor like Carl Icahn, Bill Ackman or Nelson Peltz. Sometimes it will come from another company which starts a hostile acquisition of your firm. Other times, a big private equity firm will decide to step in and make a lot of changes. Or maybe your debt holders step in with a strategy if your strategy vacuum causes you to break your debt covenants.

Many times their strategic suggestions make about as much sense to you as having an egg trapped in a bottle. But there it is…that egg is in the bottle anyway. And with these outside strategists, once they start filling your strategic vacuum, they are hard to get rid of—like that egg. And now you suffer the consequences.

Narrow Perspective
So what’s wrong with getting strategic help from outsiders? Isn’t help a good thing?
The problem is that these outsiders tend to be more interested in what is best for them than what is best long-term for the business. Occasionally, what they perceive as best for the outsider is also best for the company long-term. But in most cases, it is not.

For example, activist investors and private equity funds are usually looking for a very quick way to take a lot more money out of a business than they put in. All that money they take out has to come from somewhere. Often, it comes out of the balance sheet. They suck out the cash and fill the balance sheet with tons of debt.

Then the outsiders leave with their cash and you are stuck trying to move the company forward with all the debt. Rarely is a company’s strategic position improved when overburdened with high risk debt.

Remember, all that cash the outsiders suck out had to come from somewhere, and the cash they take out is cash no longer available to invest in a strategy for the future (once the outsiders leave). Yes, the company may temporarily get a bump in its stock price during the outside intervention. But once the dust settles, the price usually falls back (and then some).

And the debt holders tend to be even worse. They really don’t want to run the business and don’t care that much if the business continues to run. They are not even necessarily looking for a big profit. They just want to find enough cash to settle what’s owed them. This can lead to selling off and liquidating whatever is salable, no matter what the strategic implications. The result is that the company is often left as a hollow shell of only the properties that were difficult to sell because they aren’t worth much. How’s that for a strategy?

Just ask TWA how that type of dismantling worked for them. Oh, that’s right. You can’t ask them because they no longer exist.

Who is the Customer?
These outsiders also have a different opinion about who the customer is. For example, activist investors see themselves as the company’s customer—the one the company should focus on pleasing.

Private equity funds tend to see the next investor in the company (the one the private equity fund wants to eventually sell its equity to when it leaves) as the customer. They dress the company up for resale rather than invest in strategic projects with long paybacks. These private investors are like the people who “flip” houses for a living. They buy distressed homes and fix up only the cosmetic things most pleasing to the next one to buy the home—their customer—and ignore the structural issues.

The bankers tend to see the customer as whoever will take an asset off their hands and put money in their pocket.

As you can see, most outsiders never give much attention to the customer of the on-going business strategy—the one buying the goods and services being offered by the business model. I don’t see how ignoring or downplaying this customer improves one’s strategy.

So what is the solution? How do we keep these bad eggs from getting sucked into our bottle? How do we keep good strategies in place? There are three things one can do.

First, don’t abdicate your responsibility for designing and executing a great strategy. If you don’t create a strategy vacuum, then those eggs can’t be sucked in. Make having a great strategy a high priority. That way, you will be so successful that outsiders will be hard pressed to find excuses for why your strategy should be replaced with theirs. Even if you don’t like doing strategy, think of it as the lesser of two evils when compared to outside intervention.

Second, target the right partners. Not all investors are created equal. Some want a quick grab and run. Others want to be associated with enduring companies over the long term. Seek out the second type and court them. Make them your primary investor.

It can be done. There are people like Warren Buffett who invest for the long term. Amazon has cultivated an investor base which is willing to forego near-term profit bursts and instead prefer a longer-term strategic perspective. If you surround yourself with partners who want your long-term strategy to win, then they are less likely to try to replace your strategy.

Third, if you are a professional strategist, perhaps you should consider spending more time working with these outside private equity people. After all, if companies are willing to abdicate their responsibility for strategy and let it fall into the hands of outsiders, then the best way to influence strategy is by working with the outsiders.

One of the largest sources of income in my strategy consulting practice comes from the private equity sector. They often seem more interested in talking strategy than the companies. I try to help them see the bigger picture better. My desire is to help them see that they are better off if they help build enduring businesses rather than just grab and go.

If a company abdicates its responsibility for strategy then an outsider will step in and provide one. In most cases, you will not like the strategy imposed upon you. Therefore, keep them out by doing it right in first place.

There’s an old saying that “Nature Abhors a Vacuum.” You should, too, especially when it comes to strategy.