Wednesday, January 28, 2015

Strategic Planning Analogy #546: It Depends on Company Fit

To earn money during college, I worked on a landscaping crew. We had two types of mowers: large riding mowers and small trimmer mowers that you had to push. The riding mowers were great on large, open, flat lawns. The push mowers were great around trees, fences and other such objects, where the large mowers wouldn’t fit or cut delicately enough.

The old timers on the landscaping crew always took the easy job of sitting on the large mowers. The college students got the tougher job of trimming around the trees with the small mowers. At least I got a tan and built up some muscles.

Are the big riding mowers better for cutting grass or are the small push mowers better? Well, it depends. If you have a large flat lawn, the large riding mowers are better. If you are trying to trim grass around trees, the small push mowers are better. Each mower is appropriate for one type of job and inappropriate for the other type of job. The trick is to choose the appropriate tool for the job you have.

The same can be said of strategy. Some strategies are more likely to be successful in the hands of large companies. Other strategies are more likely to succeed in the hands of small companies. If you put a strategy into the hands of the wrong company, it won’t work.

That’s why you cannot evaluate strategies in isolation. Most of the time one cannot say “This strategy is universally good” or “This strategy is universally bad.” The better answer is “It depends on what company is executing the strategy.” The same strategy may be great or terrible, depending on who is trying to execute it.

So, just as choosing the right tool matters when cutting grass, choosing the right company matters when executing strategy.

This is the second of two blogs looking at what makes a strategy good or bad. The first blog looked at how timing impacts success. This blog looks at how the type of company impacts success.

The principle here is that there needs to be a fit between strategy and those being called to execute it. If the fit is good, then the likelihood of success goes way up. If the fit is poor, the likelihood of success goes way down. Therefore, one needs to choose strategies which align best with who they are.

This would seem to be an obvious principle, but I see it violated all the time. A typical case is when a company in an industry does something successful. Others in the industry see that success and try to imitate it. These imitators think “That company has found a good strategy. I should have a good strategy, so I will imitate their strategy.”

However, just because the strategy worked for that first company does not mean it will work for all of the other companies equally as well. It just may not be appropriate for who your business is. It would be as if your company was like the little trimmer mower who was trying to imitate the strategy which worked for the large riding mower. You won’t succeed, because your company isn’t built for success in that area.

There are many elements which influence whether your business is a good fit for a particular strategy. These elements include:

  • Culture
  • Values
  • Competencies & Expertise
  • Centralized or Decentralize Management
  • Tight or Flexible Controls
  • Access to Resources (Money, Talent)
  • Connections in the Supply Chain
  • Level of Patience on Financial Returns

This list can go on and on. However, to illustrate the principle, I will focus on two elements: Clout and Agility.

An agile company is a lot like that small trimmer mower. The trimmer mower has the flexibility to cut around all types of obstacles.  It can adjust quickly and make sharp turns when necessary. The same is true of an agile company. It can quickly adjust to lots of obstacles in its path.

Agile companies are well suited to strategies in new spaces where there are a lot of unknowns and where flexibility, speed, and unconventional approaches are keys to success. That is why most of the dramatic disruptions in an industry come from small upstart companies rather than the large status quo firms. The small upstart companies are better suited to having success with the disruption—they are more agile and have less to lose from disruption.

IBM understood this when it tried to invent the PC industry. Management knew that the core of IBM at that time was more like the large riding mower. It was great for mowing down the competition when going after large accounts with large processing needs in established industries. But it was the wrong tool to implement a PC invention strategy. They needed something more agile.

Therefore, in order to make the PC strategy succeed, IBM had to first create a business that was properly fit for the task—something more agile. IBM set up a separate business in a separate location with a culture dis-similar to the rest of IBM. Had they not first set up this separate, more agile culture for the strategy, most experts feel the PC strategy would have been a failure.

Other large companies often try to follow IBM’s example and set up separate, more agile divisions for their start-up strategies. But I’ve seen many of them screw it up by forcing the small division to still use the corporate shared services. The idea is that the shared services will make the start-up more efficient. Instead, I’ve seen the opposite. The start-up is strangulated by all the red tape and bureaucracy from the shared services. They end up becoming less efficient, and worse, less agile. It’s like taking a small trimmer mower and putting a huge engine and seat on it. It can no longer act like a small trimmer mower.

But small, agile companies are not the best for all strategies. Sometimes clout is more important than agility. As an expert in retail, I’ve been approached by others asking me if a particular retail strategy is good. Sometimes, I respond by saying, “That depends. Is Walmart going to implement the strategy or is it a small upstart?” The reason I say that is because some strategies can only work in the hands of someone with tremendous clout. In the consumer space, Walmart has clout that other can only dream about. So it can implement strategies others cannot.

Since Walmart is typically the largest customer of most consumer products companies, Walmart can ask its vendors to do all sorts of things—and the vendors will do it due to the clout Walmart has with them. Smaller firms would not be able to pull this off.

Walmart’s huge size gives them the scale to do things outside the scope of others. Because they handle so many transactions, Walmart has been able to transform portions of the financial industry. Because they have so many employees, they are now experimenting with reinventing how health care is managed. Size and clout can be your best asset when it comes to some types of strategies, where power is more important than agility.

In an earlier blog, I discussed the story of Clean Shower. Robert Black invented a product that helped clean the soap scum off shower walls. At first, the big consumer product companies wanted to buy him out, but Black initially refused and decided to run his small business on his own.

Unfortunately, his invention was easily copied by big consumer products companies. The consumer product companies used their superior clout in distribution and marketing to get advantageous product placement in the stores and brand preference with the consumers. Black did not have enough clout or resources to keep up with them. Eventually, Clean Shower ceased to exist. For Black, the better strategy would have been to sell out early to the ones who had the clout needed to succeed.

At one time I was trying to pitch a strategy to revitalize Sears. But that was when Sears still had reasonable clout in the marketplace. That clout has since dissipated quite a bit. Sears’ clout has so weakened that I doubt my strategy would work anymore. So was my strategy good or bad? It depends.

Therefore, you have two options when trying to successfully execute a strategy. Either you:

a)      Start by only considering strategies which have a strong fit with what your company is already good at executing, OR
b)      Look for ways to modify your company so that it can become a better fit with the strategy (like what IBM did for the PC).

Although the first option is probably the safest, it may limit you to only small, incremental improvements. If you want to make larger leaps, you may need the second option.

You cannot just look at a strategy in a vacuum to determine if it is good or bad. You have to look at in within a context. One element of that context is who is executing the strategy. If the fit between what the company is good at and what is needed to win is right, the strategy can be very good. If the fit is wrong, that same strategy can be very bad. Although many factors affect fit, two important ones are agility and clout. Sometimes smaller, more agile companies are better suited to a strategy. Other times, large companies with a lot of clout have a better chance of success. To ensure fit, you can either: 1) Only look at strategies which fit who you are today; or 2) Modify your company to improve the fit.

Strategies are only good if they work out in the marketplace. Therefore, before embarking on a new strategy, make sure you know what your company is capable of. Do you have what it takes to make it work out in the marketplace?

Monday, January 26, 2015

Strategic Planning Analogy #545: It Depends on Timing

When I was in college, I had a friend who was starting up a hobby of making wine. His early attempts were pretty bad.

First, he would get impatient and stop the fermentation too soon. That lead to odd-tasting juice rather than wine. To keep from making that mistake again, he poured a bunch of sugar into the mix to make the fermentation last longer. That lead to the fermentation ending before the sugar ran out, so the end result was too sweet to drink. 

I suppose he would have had good wine if he ever got the timing right, but after the early attempts, I never wanted to sample his wine again.

Over the years, I have had people show me a strategy and then ask me if I thought it was a good one. Usually, I would say “that depends.” He reason I say that is because the same identical strategy can be both good and bad depending on some other factors.

Two of the biggest factors are: 1) Who’s doing the strategy; and 2) When is the strategy being executed. In the next blog we will be looking at who’s doing the strategy. In this blog, we will be looking at the timing of the strategy. As we will see, if you get the timing wrong, a strategy can be a disaster, but if you get it right, you are a hero. Same strategy, but different outcomes depending on the timing.

As my friend found out in winemaking, being too early and being too late can both destroy your results. The same is true with strategies. Yes, there are advantages to being early, but history has shown that if you are too early, your venture will die before the idea catches on. You didn’t let the idea “ferment” enough.

Similarly, it’s nice to wait until you have everything figured out, but if you wait too long, you can miss out on getting in on the opportunity. The opportunity to “ferment” has already ended and all you have is a sweet gooey mess.

The principle here is that the timing of your strategy can be just as important as the content of your strategy. Therefore, spend as much effort on making sure you get the timing right as you do on the content.

Too Early
The primary problem with being too early has to do with the fact that strategies are not executed in a vacuum. You are typically part of a larger supply chain. On one side are your suppliers and on the other side are your customers. If your suppliers and/or customers are not ready, then your strategy will not work, no matter how “brilliant” it is.

For example, I was talking with the Netflix guys when they were just starting out. They said their original strategy was to do streaming of video over the internet. That’s why they called the company Netflix. However, they knew that the internet infrastructure was not ready yet for mass streaming of movies. The supply side was not there yet to send all those movies digitally and the customer did not have the tools to receive files that large. It was “too early.”

Therefore, Netflix initially went the route of putting DVDs in the mail, so that they could build a brand and some loyalty while waiting for the timing to be right for their real vision. If Netflix had not waited on internet distribution, it would have gone bankrupt long before the market was ready.

So was Netflix’s original strategy great? It all depends on when it would be put into effect. Fortunately, Netflix waited, so the results turned out well. But that same strategy could have been a disaster if they executed it too soon. They had to wait for the market to “ferment” to the right level.

Too Late
One way to avoid being too early is to wait until everything is in order—to wait until the whole supply chain is fully developed and the customer is fully ready to consume. But if you wait that long, your strategy can be just as much a disaster as being too early—because now you are too late.

Executing a strategy is a lot like working with clay. When the clay is soft and moist, you can mold it into lots of different shapes. But once the clay gets dry and hard, you cannot change its shape.

That’s what happens when you wait too long to enter a market. While you were waiting, others were getting involved, molding the market in their direction while the clay was still moist. But if you wait until the market is fully established, the clay is now hard. The channels are already established. Brand preferences have already been made. Habits are already in place. The new status quo has been formed and hardened. It’s too late to make your move.

Consider Facebook. Facebook was not the first social media site. There were others, like Friendster and MySpace, already out there when Facebook started. But the market was still early enough that the clay was moist. There was still time to make a big move. And Facebook made that move at the right time.

It was not too early, because it let others pave the way to get consumers and infrastructure in place to accept the strategy. But it got in before everything was settled. That’s good timing.

If someone were to take Facebook’s strategy and do an identical implementation today, it would probably be a horrific disaster. It’s too late. Another mass oriented, general sharing site for the internet is not needed or wanted. Thanks to network effects, the cost of switching out of the established networks to go to an upstart network is too large. Even if people grumble about the problems with Facebook, they don’t switch, because Facebook is where all the connections are. They clay is hard and holding the people inside Facebook.

Times have changed. To make a move today, you have to do something different than what Facebook did. You have to move to where the clay is still moist.

There’s a great quote by comedian Garry Shandling: “They should put expiration dates on clothing so we men will know when they go out of style.” You could say the same thing about strategies…they have expiration dates, too. Good luck to your financial health if you use a strategy past its expiration date.

Managing the Time
So are we totally at the mercy of factors outside our control when it comes to timing? Is it only luck that puts us in the right place at the right time?

No. There are things we can do to alter when the timing is right. But that will only happen if we incorporate “adjusting the timing” into our strategic plan.

Consider the Apple iPod, considered to have been a great success in digital music. But success was not guaranteed. There were dozens of companies who tried to build a business in digital music players before Apple attempted it. They had all failed. There were plenty of reasons to think that Apple would also fail.

The problem was that all the necessary pieces in the supply chain were not in place. You could have the most perfect mp3 music player in the world, but if the artists and music labels weren’t ready to sell mp3 files and the customers did not have an effective way to buy mp3 files, then the device is fairly worthless. And that was the situation Apple was walking into.

Therefore, the Apple iPod strategy had to incorporate more than just designing a great player. It also had to design a way to make sure the rest of the supply chain was ready for the player. In other words, Apple had to proactively adjust market timing.

So Apple found a path to get the artists and music labels ready. Then it designed a retail outlet (iTunes), so that consumers had a way to buy the music. Then Apple spent a fortune on advertising to create the demand. These efforts made the timing right for the iPod device. Without those efforts, the iPod would have been a disaster like all of the other players that came before it.

And because the Apple solution was a closed system, it effectively closed out competition from being able to fully participate in the market Apple developed. In other words, the same movements that made the timing right for Apple also served to quickly harden the clay so that others could not take advantage of the market Apple built. The strategy effectively opened and closed the timing so that only Apple could optimize the timing in the market for digital music.

You cannot just look at a strategy in a vacuum to determine if it is good or bad. You have to look at in within a context. One element of that context is timing. If the timing is right, the strategy can be very good. If the timing is wrong, that same strategy can be very bad. Therefore, timing issues need to be incorporated into your strategy. This involves two issues: 1) making sure you are not too early or too late; 2) Getting proactive to strategically alter timing more to your favor.

Gallo wines used to have a slogan: We will serve no wine before its time. That slogan works for strategies, too.

Monday, January 19, 2015

Strategic Planning Analogy #544: Competitor or Co-Conspirator

For decades—in fact for most of the 20th Century—baseball was America’s sport. It captivated the minds of the people and was their sporting passion. Nothing else came close.

There was all sorts of competition in baseball, with the players battling it out over the summer to see which team would come out on top and win the World Series Championship. The fans were captivated by every nuance in every game.

But gradually, over the latter part of the century, American Football started winning over the hearts of the sports enthusiasts. Today, football has become America’s sport. Sports enthusiasts are captivated by every nuance in every football game. Outside of New York City and Boston, most sports fans really only get a bit interested in baseball in the post-season. Television viewership of baseball during the season is miniscule compared to the ratings for football.

It makes you wonder…where did the real competitive battle in baseball take place? Was it on the field between baseball teams or was it in the hearts and minds of the sports fan at home? They may still be winning baseball games, but they lost the battle in the mind.

An important aspect of business strategy is competitive strategy. The idea is to develop a plan to win share versus the competition. Why? Winners tend to reap the majority of the financial rewards, so the goal is to find a way to beat the competition and win. The result is a strategy with a focus on the competition.

The problem is that the competition are not the ones purchasing products. The consumer is. The consumer is the one who ultimately determines your success, not the competition.

If you are not careful, you could end up in the situation like baseball. You could become so focused with beating the competition (the other baseball teams), that you fail to see that the consumer (the sports fan) is abandoning baseball and consuming football. You may win the baseball game, but lose the fan, which is the greater loss.

In business, Kodak was so focused on beating Fuji that it failed to act sufficiently on the customer abandoning both and moving to digital imaging. Target and Walmart were so busy battling each other that they let Amazon grab a huge chunk of the market. Pepsi and Coke spent years fighting each other while the market for cola in the US was shrinking and the customer was abandoning colas for coffee, tea and healthier alternatives.

Competitive strategies may be nice, but consumer strategies are better.

The principle here is that the real competition are not the companies that tend to look and act a lot like you. Instead, the real competitor is the one who can render your entire product category obsolete (or at least a lot less relevant). In baseball, the real competition was not other teams that wore similar baseball uniforms and played a similar game of baseball. No, the real competitor wore something a lot different (football uniforms) and played something a lot different (football).

In fact, I will contend that those who look like you really aren’t your competition, but are more like a co-conspirator. You actually work together to keep your category relevant. The noise you both make in the marketplace usually doesn’t change market share all that much. But is does draw attention to the category. So, in a sense, you are both working together on the same side—the side that wants customers to still be in love with your category.

Mature Market Stability
The more mature the market, the more this principle is true. Just look at the mature product categories found in the supermarket. Executives at the companies in these mature categories (like cereal and canned goods) go crazy with celebration when they can move their market share a small fraction of 1%.

Why are they so excited about so little? It is because mature markets tend to be very stable. Brand images are set, habits are ingrained, and preferences between brands in the category are etched in stone. There is little that can be done to move the needle, so any movement, even small ones, are celebrated.

We’re even starting to see this now in traditional computers. The market rankings are becoming stable and changes in share from quarter to quarter are hardly noticeable. The only sizable movement is from consumers moving their purchasing to other devices, like smartphones. So who is the real competition for computers? It’s the devices that don’t look like computers. That’s where the real gains and losses occur.

In fact, the vast majority of business categories are fairly mature. Rapid competitive movement is rare in most sectors. Unless someone comes up with a major technological breakthrough, share doesn’t move much. And even then, the gain is usually temporary as the others find a way to catch up.

The only meaningful movement is between categories. It’s a battle between teams wearing entirely different uniforms and playing different games.

The Response
With this in mind, how should companies respond?

First, they need to define themselves by what consumer needs they are satisfying rather than what product they sell. As mentioned earlier, the consumer is the one who decides the winner, not the competition. The customer is purchasing solutions to problems. If an entirely different product better solves their problem, then they will abandon their old category for an entirely new one. So if you want to win, see the world like the consumer and take off those product category blinders.

For example, Bausch & Lomb defined itself as being in the vision solution business rather than the lens manufacturing business. Bausch & Lomb saw its competition not as other lens makers but as anyone who was improving vision. As a result, when newer, non-lens businesses started offering better vision (like Lasik surgery), Bausch & Lomb was there, establishing a leading position.

If you define yourself by your product, your firm will die when your product category is replaced by something new. If you define yourself by consumer solutions, you will always have relevancy.

Second, don’t just focus on the same old competitors who are similar to you. Keep one eye on the periphery. Look for what the leading edge people are doing…what is coming next. Look for the new thing that will make you the obsolete thing. Look for the exciting thing wearing a different uniform. Look for the new rules that turn the tables.

Rarely is the real action taking place between competitors approaching the market in a similar way. Instead, the big action is between dis-similar solutions to the same problem. In fact, your traditional competition is more like a co-conspirator, working with you to create interest in your product category. Therefore, focus more of your effort on aligning with the consumer rather than beating up the similar competition. After all, the consumer is doing the spending, not the competition. And they aren’t limited to spending it just in your category.

I suppose that someday American Football will be replaced in popularity by something else. The wheel of change never stops.

Monday, January 12, 2015

Strategic Planning Analogy #543: Starving Artist

I love writing music. I’ve put together 16 CDs worth of music. The problem is that I have odd tastes in music. As a result, almost nobody else likes my music.

I suppose I could write a different kind of music—in a style more popular with the masses. But that would be less satisfying to me, both from an artistic as well as creative point of view. So I continue to write my music in a way that brings me great personal pleasure, even though it means that others find it difficult to listen to.

It’s a good thing I’m not trying to earn a living with my music. Otherwise, I’d be one of those “starving artists.”

It’s one thing to get great personal pleasure from what you do. It’s quite another thing to provide great pleasure to your customers/audience. Quite often, what gives you great pleasure does nothing for your customer and vice versa. I painfully learned this lesson with my music writing.

For a hobby, that’s not such a big deal, but for a business, that can destroy you.

I know that there is a lot of writing out there about trying to make the work environment enjoyable for employees. Many go further to talk about making the work projects themselves enjoyable and satisfying for employees.

This seems particularly important when companies want to hire a lot of great engineers, for which there seems to be a perpetual shortage. For example, Google has all of its exciting “Moon Shot” projects in part as a lure to get great engineers, who want to work on cool things.

But at the end of the day, businesses must ultimately provide some sort of excitement and pleasure for their customers. If they don’t, those customers will go somewhere else. Happy employees can be a great thing, but happy employees producing unwanted stuff doesn’t get you very far.

I may be content to be a starving artist with my music writing hobby, because I’m more interested in my hobby pleasing me than pleasing others. But you don’t want to have a “starving artist” company, since starving companies eventually die.

The principle here is that long-term success in business requires receiving an income from what your company does which exceeds its costs. Ultimately, the ones who buy what you’re selling determine your income. Therefore, if you are not offing something which people want to buy, your business is in trouble.

This sounds pretty obvious and you would think it does not need to be said. However, in the January 1, 2015 edition of Fortune magazine, they quote a study by CB Insights which caught my attention on this topic. CB Insights analyzed 101 failed startup companies to determine why these firms failed. Their conclusion? The number one reason these startups failed was “no market need.”

In other words, we’ve got tons of companies out there built around a strategy to create something that people don’t want. Incredible!

How did we get to a point where companies no longer think that they have to deliver something desired by customers (or don’t do enough work to find out what they really want)? I think it boils down to three things:

1. Easy Start-Up Funding
First, there is a lot more investment capital looking for great start-ups than there are great start-ups to invest in. With all that investment capital looking for a place to invest, you get money pouring into poorly conceived business models.

Why worry about getting money from customers when you can get all the funding you need from private capital? In a sense, capitalism gets distorted to the point where the private capital funds become the “customer” of the start-up. As long as you please them, you don’t have to worry about pleasing the true end customer. I spoke more about that in an earlier blog.

Living off equity funding may work for a while, but eventually the investors want to get a return on that investment. This requires either: finding more, bigger investors (sort of like a pyramid scheme), or getting the real customers to pay up. And it is the time gap from start-up to pay-up that allows businesses to get a bit lazy about staying laser-focused on pleasing the customer.

2. Disconnect Between Payer and User
Second, a lot of the startup business models have the user pay virtually nothing to use the product. Instead, the money is to come from advertisers or a small subset of “premium” users (the “Freemium” model). By disconnecting the user from the payer, one can get confused about who the customer is and how to please them.

In the advertising model, you have to please the advertisers in order to have a winning business model. They are the ones who pay, so they are your customer. However, many firms have taken the path of Twitter, and spent so much time making the users happy that they failed to figure out how to make the real customers (the advertisers) happy. That is a losing long-term model.

In the end, you typically get what you pay for. If you pay nothing, then you are less attached in your usage. Look at all the free games out there. To survive, the game businesses need to convert many of the free gamers into premium gamers who are willing to pay extra to get tokens or weapons or powers or whatever. It appears that people get bored quickly with these free games and often switch to another free game rather than pay in order to continue in the old game.

It seems the game wasn’t as good as the developers thought. It was played because it was free, not because it was good. Without the discipline of getting the user to pay, it is easy to build something that is not satisfying enough to ultimately produce income.
3. Building what the Builders Want
The third reason why we see companies not building what the customers want is because many of these businesses are more interested in building what the builders want to build. This seems especially true in engineering-driven firms. The engineers want to work on interesting challenges, cool features, and be the first to do something that will impress other engineers. Add to that the fact that the millennial generation (who tend to be running these startups) are more interested in attaching social causes to their business aspirations (sustainability, helping the less fortunate, etc.).

As mentioned earlier, many of today’s businesses focus on pleasing the employees over pleasing the customers. As a result, we end up with a lot of interesting challenges solved, a lot of jealous engineers, and some social good—but unsatisfied customers. We need look no further than the Amazon Fire phone. It did some cool stuff, like making a 3D screen without the need for special glasses. Unfortunately, customers weren’t looking for these things, so the phone was a flop.

Just because an offering does some cool stuff does not mean it is doing stuff people are willing to pay enough for to justify the cost of the feature. Truly “cool” stuff is stuff the customer wows over, not what the engineers or geeks wow over.

I read an article recently about how many retailers were spending all of their development money on building cool apps, when what the customer really wanted was just an easier way to sort through the inventory on line and easily make a purchase. Sure, inventory and purchase don’t sound as cool to an employee as building a lot of snazzy apps, but that’s what gets the customer excited…so it should be what we focus on.

Getting Back to The Customer
So although making employees happy is a good thing, the better thing is to make the customer happy. Happy customers pay the bills that keep you in business.

Don’t fall into the trap of forgetting the customer because you have tons of investor cash, a free offering, and happy employees. Eventually, the business needs to create income and the sooner you figure that out, the better. The idea of “we’ll build the cool thing now and figure out how to monetize it later” is what leads to that earlier finding that most startups fail because “there was no market need.”

Successful businesses need a business model where the money coming in ultimately exceeds the money going out. That only happens if you are offering something so pleasing to the customer that they are willing to pay more for it than what it costs to deliver. Therefore, the key to any business strategy is to please customers enough to make this happen. If you forget to focus on pleasing customers and instead focus on pleasing investors, employees or non-paying users, you can end up with a broken business.

There may be some creative satisfaction in being the starving artist, but you’re still starving.