Wednesday, October 8, 2014

Strategic Planning Analogy #537: Three Questions (Part 2)

For as long as anyone can remember, there had been the ice brigade at the US Congress building. The 29 employees with this job had the responsibility of making sure every congressional office had a bucket of ice by its door before 9AM every morning.

Nobody remembers when it started, but the tradition pre-dates air conditioning and mini-refrigerators. The idea was that Washington, DC can get very hot. Ice could be used in a number of ways to help counter the heat, either externally or internally.

Of course, now that congress has air conditioning, mini-fridges and other ways to conquer the heat, those ice cubes were less necessary. Yet they still came, every day, like clockwork. Many of the ice buckets were just thrown away each day by congress people who did not want it.

Finally, in 1994, Republicans took over control of Congress and started a program to eliminate waste. They saw the ice delivery program as an unnecessary waste and the practice stopped May 1, 1995.

Another waste looked at during this time was the fact that even though every elevator in the building had self-service buttons which anyone was capable of pushing, each elevator had a paid employee to operate those buttons.

Time changes things. Something which may have made perfect sense in the past may be foolish today. Yes, there was a time long, long ago when ice deliveries to congressional offices made sense. But times changed, making that no longer necessary or even particularly desired. Yet the practice continued for decades.

Similarly, when elevators were first invented, it made sense to have elevator operators. But the elevator technology advanced over time to the point where elevator operators had become unnecessary and obsolete. Yet they were still there, working away in congressional elevators.

We may see these as silly and obvious examples of being out of touch with the changing times. Surely, our business would not get that out of touch with the changes in the world around us, would it?

Well, there are business bankruptcies every day, and many of those bankruptcies are due to the fact that a company did not adequately adapt to the changing times. The digital revolution made a lot of analog businesses look rather silly and out of touch—leading to many bankruptcies. For example, Kodak was an expert at analog film. But in a world of digital imaging, they seemed as necessary as elevator operators or ice deliverers in congress. The social revolution is having a similar impact.

Therefore, we must always be on guard to ensure that the times are not passing us by and making us silly relics of the past. Even congress eventually figured this out and did something about the relics around them. I assure you that the marketplace will act quicker than congress. 

This is the second of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

  1. What problem are you trying to solve?
  2. Why should the customer naturally prefer your solution over the alternatives?
  3. What are you doing differently to prove your superiority?

In the first blog, we looked at the first question. We saw that successful companies focus on solutions rather than products. Multiple products can be focused on the same solution, and multiple solutions can be had for the same product. Therefore, if you want to win in the marketplace, you need a strategy concerning which problem you want your product to solve.

Now we will turn our attention to the second question. Once one comes to understand that consumers choose based on which product is best at solving their problem, one realizes that the goal of their company must be to supply the best solution to their customer segment. In other words, you need to get a consumer segment to prefer your solution over all of the alternatives.

Understanding the Alternatives
If you want to be the preferred alternative, then you had better understand who the alternatives are. As we saw in the last blog, alternatives can come from products quite unlike your own. For example, many luxury brands can solve the problem of providing prestige or status. This could be anything from fashion clothing to automobiles to the latest technology to trophy wives to the liquor you drink to exotic vacations to yachts to whatever.

The point is that being the best at your particular product may not make you preferred if other products are better at solving the underlying problem.

For example, there is a big difference between the way high school students act today versus when I was in high school. The underlying problem for most high schoolers has not changed over the years. They are still looking for ways to achieve status and fit in with the cool group. The preferred solution, however, has changed.

In my day, clothing was a key way of solving this problem. If you wore the right status clothes, you got an edge in achieving status and fitting in with the cool group. Today, however, clothing is not the preferred solution. Just look at firms like Abercrombie & Fitch who built their entire strategy around being the best status clothing for high schoolers. These firms are doing poorly in the marketplace because students are looking for status somewhere other than in clothing.

Instead, students have found that having the coolest technology is the preferred solution over coolest clothes. In order to afford the coolest technology, students have shifted their clothing purchases to value brands like H&M or Forever 21. In fact, I just read where thrift stores are a hot place for teens and young adults. So now, clothing is looked at as a place to solve the problem of saving money in order to afford cool technology rather than as a solution for cool.

This leaves Abercrombie & Fitch out in the cold. Even if they are the coolest clothing retailer, it is irrelevant if the preferred cool solution is from technology, not clothes.

So understand the full spectrum of options for your customer. If your offering is not preferred over these alternatives, either change your offering or change your solution. Even Abercrombie & Fitch is starting to figure this out and is repositioning its Hollister brand to be less of a cool solution to more of a stretching your money solution.

Staying Relevant
Since times change, technology changes, competition changes and consumers change, one has to continually monitor the marketplace to ensure that your solution remains the preferred alternative.

For example, think of all the ways the smartphone and all its apps have changed people’s expectations and behaviors. Much of this new behavior is because the smartphone and its apps are being seen as preferred solutions over the older ways of doing things. If mobile is not a part of your solution, you may becoming as relevant as ice men at congress or Kodak in imaging.

Alternative If You Are Not Naturally Preferred
Let’s say you have not created a clear preference for your solution. Perhaps you have parity with the leaders or near-parity. You may think that’s pretty good.

But here’s the problem: if you cannot win them over with natural superiority, then you have to win them over with artificial superiority, which I call bribery. I don’t mean the illegal type of bribery. I just mean you have to sweeten the value by offering large discounts or added goodies. In other words, you are essentially paying them to pick you, because the natural offering alone is not enough to create preference.

And we all know what those discounts and added goodies do to our profitability formula. They transfer the benefit from us to the customer. There had better be an awful lot of price elasticity in order to cover the loss of profits per item. Unfortunately, in a highly competitive marketplace, the competition will tend to match your bribery, so no advantage is had anyway. You just lowered the profitability for the entire industry.

The goal here is not to be preferred by EVERYBODY. That is unrealistic since people are seeking value in different ways. You cannot be the best at pleasing everyone with the same offering. Trying to please everyone usually means you are preferred by no one.

Therefore, the goal is to choose a consumer segment for whom you can create the preferred solution. The chosen segment should be large enough to satisfy your requirements.

Of the three important questions, the second one is “Why should the customer naturally prefer your solution over the alternatives?” Preference is important because without natural preference, you have to lower profits through bribery in order to lure business. Worse yet, your solution may be so irrelevant that even bribery will not be enough to create preference.

Since times change, you have to be constantly on the lookout to ensure that your solution remains preferable through time. Otherwise, you may need to change your offering or change your solution.

Superiority is determined in the mind of the customer, not in your laboratory. When determining whether you are the preferred alternative, ask your customer segment, not your employees.

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