Monday, July 7, 2014

Strategic Planning Analogy #532: Planning for Others

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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