THE STORY
Years ago, I worked for one of the largest grocery wholesalers in the world. They were very proud of being the best place for small, independent grocers to get their food supply. This wholesaler continued to put its effort behind becoming even better at supplying groceries to small independent grocers.
There was only one problem. Small, independent grocers were
disappearing at an alarming rate. The growth of large supermarket chains and
Walmart Supercenters were squeezing the small independent grocers out of
business. And many of the more successful, larger independents were being
acquired by the large supermarket chains.
As a result, the customer base for this wholesaler was
shrinking away. It really doesn’t matter how proud you are of serving your
customer if your customer is disappearing. Being the best at serving a
non-existent customer isn’t much to be proud of.
Strategists and business leaders work very hard to position themselves for success. They find a place where they can win and then work diligently to improve their ability to deliver that winning position.
The problem is that businesses do not operate in a vacuum. A
company’s success is also dependent upon external factors, like customers and
suppliers. If your customers and suppliers are going out of business, it really
doesn’t matter all that much how well you are executing your strategy. In spite
of all your internal efforts to greatness, your strategy will fail if your
external partners fail.
In the story, the company I worked for was trying ever
harder to perfect a business model designed to service small independent
grocers. As the small independent grocer was shrinking away, so was the
relevance of the wholesaler’s strategy. Better execution of that strategy would
not ultimately turn things around. Even a perfect wholesaler for small
independents will fail if its customers go away.
This is true for any organization which relies on having
suppliers and customers (which would include nearly all organizations). For
your plan to succeed, you need those partners to succeed.
The principle here is that our planning efforts must not just myopically focus internally on our own company. We need to broaden our planning to create strategies to ensure the success of our partners, be they suppliers or customers. If we do not actively plan to help others, then our own well designed and well executed internal strategy may collapse.
We should not rely on luck that our partners will do okay.
We should actively plan for their well-being along with our own.
Department Stores
This is not a new concept. Department store owners in the 19th
century spent a lot of time away from their stores and focused on boosting the
economy of their local community. Why? They knew that if the local economy was
strong, the sales at their department stores would be strong. Conversely, if
their cities became weak and the population shrank, then their department store
sales would shrink.
Therefore, the department store owners spent a significant
amount of their planning time planning for their cities. They wouldn’t take the
health of their customer base for granted. External planning for the city was
as important as internal planning for the department store.
Automotive
Industry
Early in the 20th century, Henry Ford did
something similar for the automotive industry when he dramatically raised wages
for his factory workers. There were many reasons why Henry Ford dramatically
raised factory wages, but one reason was very relevant to our discussion: You
needed a middle class income to afford a Ford automobile.
By setting a new wage standard, Ford was moving factory wages
to middle class levels. Therefore, as others followed Ford’s wage example, Ford
was dramatically increasing the number of people able to afford to buy one of
his cars. Ford was proactively planning his customers.
Over the decades, the automotive industry seemed to forget
this principle. The industry started squeezing their suppliers harder and
harder. They didn’t care how much they were hurting the suppliers as long as it
helped their internal bottom line. And then came the great recession and the
suppliers started going bankrupt. On top of that, the great tsunami hit Japan
around the same time, wiping out even more suppliers to the automotive
industry.
Because the automakers did not adequately plan alternative
sources of supply or other backup provisions, they suffered along with their
suppliers. Assembly lines were shut down for extended periods.
Modern Technology
As we all know, modern technology is very disruptive to the
status quo. Suppliers and customers appear and disappear rapidly. Being a great
traditional travel agent didn’t mean much when their customer base disappeared
and went directly to web travel sites. Building a near-monopoly in phone books
isn’t worth much if nobody is demanding them due to superior digital information
alternatives.
So What Should You
Do?
There are three strategic alternatives when planning for
your partners. The first is to alter your internal strategy to improve the
health of your partners. For example, the grocery wholesaler I worked for knew
that the small independent grocer would be stronger if it could be placed in
retail formats that competed less directly with Walmart and the big chains.
Therefore, they developed these types of formats and reinvented a portion of their
wholesale operations to optimize under these new formats. It was a different
way of doing business than in the past, but it created a business model that
was better for both the independent retailer and its wholesaler.
The second alternative is to alter your strategy to move to
where your partners are moving. Netflix redesigned its strategy when customers
who wanted DVDs in the mail were moving to getting their movies from the
internet. By shifting quickly to an internet option, Netflix migrated at the
same pace as their customers, so they were able to keep them connected to the Netflix
brand.
The third alternative is play the end game. As a market
shrinks, you can consolidate what is left and then cut costs until one can make
a profit. This is happening in many processed foods, where growth has
disappeared. The original players, like Proctor & Gamble have gotten out of
the business and moved to newer growth businesses. In their place are companies
like Pinnacle Foods, who are buying up all these brands and playing an endgame.
The grocery wholesale company in the story also played an
endgame with many of the traditional independent grocers who were left and did
not migrate to the new formats. Although there are far fewer of these
independents, the wholesaler has less competition for their business, so it can
still create a meaningful business with them.
Common Approaches
Regardless of the strategic outcome, there are common
approaches to success.
1)
Don’t just look internally at optimizing your own piece
of the puzzle. Optimize the whole puzzle.
2)
Keep an eye on the external environment to understand
when market shifts not only impact you, but also your partners.
3)
Treat your partners as partners, not enemies. Be
willing to plan jointly and share information for the betterment of all.
4)
Be willing to abandon or modify a strategy when customers
and suppliers are at risk of going away.
Businesses do not operate in a vacuum. Therefore, their strategies should not be developed in a vacuum, either. Don’t just plan your internal affairs. Consider plans for your customers and suppliers as well. And if they are moving away from your core business, you may need to change your business to follow them. After all, a “perfect” strategy for a customer who ceases to exist is really not perfect at all.
If you develop a win-lose proposition with your partners, eventually your partners will go away. Instead, build a win-win situation with your partners. That way, you can feed off each other’s success and succeed together for a long time.
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