Wednesday, June 11, 2014

Strategic Planning Analogy #529: Stick to Your Stage

I read a story recently about how John Breck introduced shampoo to the United States back around 1930. Before then, people used some form of soap to wash their hair. But John Breck showed how to use a pH-balanced detergent which more easily rinsed away from the hair and left the hair and scalp in better condition.

I was shocked to learn how recently shampoo, as we know it today, was invented. I started thinking about all those generations of people in the past who have not had the simple benefit of shampoo.

I guess there was a reason why royalty in the past liked to wear those big crowns on their heads and why the ancient pharaohs of Egypt shaved their heads. As royalty, they did not want to be seen with dirty hair.  

Shampoo is not the only common everyday consumer good that was invented relatively recently. Nearly all common consumer goods which fill our supermarkets are less than 100 years old. In fact, Uneeda Biscuits is considered to be the first broadly advertised branded food product. That happened in 1898. Before that, most food items were sold to grocers unbranded in bulk barrels—put into a plain brown bag for the customer by the local grocer.

Even self-service supermarkets, themselves, have only been around since abut the 1930s. They had to wait until all these products, like Breck Shampoo, were invented and branded so that consumers could choose items on their own.

You could say that a century ago, branded consumer products were the internet economy of their time. They were inventing whole new categories of products, like shampoo. They were changing the way people lived and spent their time and money. A radical transformation was going on in a burgeoning new industry. New trails were being blazed and new concepts were being invented (like couponing, which really didn’t begin to take off until all these branded products came about).

This was the era in which consumer product firms like Proctor & Gamble really grew into the huge and successful businesses they are. They were the masters of inventing new categories and inventing ways to market them to create incredibly large businesses which did not exist before (you could say that disposable diapers were like the Facebook of their day).

These consumer product companies understood how to use chemists and other scientists to invent major breakthroughs in performance (not unlike how companies in the digital economy use engineers). They blazed trails in new distribution and marketing channels, just as the digital economy did with marketing on the internet and smartphones.

Yes, less than 100 years ago, the big consumer branded product companies were Googles, Linkedins and Apples of their time.

But now look at those branded consumables found in supermarkets. Right next to them is a store brand that is just as good and costs a lot less. Sales growth is virtually non-existent. The old marketing tricks don’t move the sales needle much. It’s a very mature business driven mostly by cost control and price wars.

Consumer branded products are not at all anymore like the digital economy. And I suspect that at some point in the future, the digital economy will look a lot like the consumer branded goods industry today—very mature and without much growth. And it may happen sooner than many people think, just as I was surprised how soon shampoo went from a new category to extreme maturity.

The principle here is that industries go through life cycles. There’s the introduction stage, followed by rapid growth, maturity and decline. Each stage has its own challenges—the keys to success and the skills required to win vary by stage as well.

Two Strategic Choices
As a business, you can choose one of two strategies:

  1. Stick with your industry (become and industry expert) and ride the industry through its stages.
  2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.
Looking at history, it seems that the second option is the best. General Electric has been so successful for so long because it keeps changing its portfolio. It gets out of businesses that are maturing and reinvests in newer industries that can take advantage of its corporate strengths. Proctor and Gamble has succeeded by getting out of the mature industries it helped develop and reinvest in industries (like beauty care and health care) where it’s traditional skills are still valuable.

And today, we see a lot of “serial entrepreneurs”—people who are great at the start-up stage of a business. As soon as their business leaves the start-up stage, they sell it and work on their next start-up. They succeed because they stick to the stage of business they have mastered.

It’s easy to understand why the second option is preferable. It’s hard to change one’s nature and instincts. As industries move from one lifecycle stage to the next, what is required to win is different. You have to radically change your business model and culture to adapt to the change. Most companies find it difficult enough to excel when dealing with relative stability. It becomes exceedingly difficult to excel when moving into a phase where all the rules for success are changing.

So stick with what you know—and the most important thing you know (most likely) is how to operate in a particular life stage, not the particulars about your industry.

If your company stays with your industry, your company’s life cycle will follow the industry lifecycle. You’ll decline along with the industry. Is that what you want?

It all happens faster than you think
The second option is not without its own risks, though. The trick is knowing when is the right time to make the shift—to exit one industry and enter another. If you get the timing wrong, you miss out on a lion’s share of the value creation.

One point to keep in mind is that industries move through their stages a lot quicker than we usually think. When you are in the middle of the day to day within an industry, you can sometimes lose sight of the bigger external factors that about to shake your industry into the next phase. From the inside, today looks a lot like yesterday, and tomorrow looks like it will be a lot like today. So we get lulled into thinking things are moving slowly.

But then, one day, everything seems to change. It only surprises us because we didn’t keep a closer eye on what’s happening outside the industry—where the disruptions start.

Experts tell us that industry lifecycles are getting ever shorter; the transitions come ever sooner. While I am a bit surprised about how fast consumer branded products went from invention to complete maturity, that process occurred far more slowly than what is happening today.

Back in the early 2000s, I was working with Best Buy and was trying to convince them to look for a “post retail” strategy. My concern was that the traditional retail industry was going to get extremely mature relatively quickly and if they wanted to continue to be a growth company, they would need to think beyond retail.

Best Buy thought they had a lot of time, so they didn’t act. And now, only about a decade later, Best Buy finds itself struggling because its retail foundation is in maturity (or maybe even the beginnings of decline). This just goes to show how fast this change can sneak up on you if you are not watching carefully.

So to play the second strategy, one needs to keep one eye focused on the external environment, in order to know when the times are about to change.

Businesses have two strategic choices:

  1. Stick with your industry (become and industry expert) and ride the industry through its stages.
  2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.
In most cases, the second option is more likely to lead to lasting success. However, to make the second option really successful, you have to get your timing right on knowing when to shift your portfolio. That requires keeping an eye outside your industry—where the disruptions which cause your industry to shift occur.

Google is not content to think its current business foundation will be a growth industry forever. They keep investing in places where they think the next growth may come. You should

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