Monday, October 12, 2015

Strategy Planning Analogy #558: Counting People


1. High School Survey

The US government used to do an annual survey of high school students. The objective of the survey was to track things like the levels of drug use and sexual activity in that age group. Because the writers of the survey were afraid that high school students would lie about their own personal activities, the government asked the students to estimate what percentage of students in their high school they felt were doing each of these types of things.

At first, the government would average all of the responses for each question to get an estimate of how prevalent various activities were. But then, someone dug deeper into the results. What they found was that although the average percentage number was somewhere in the middle, very few of the individual students ever answered with a number in the middle. Instead, there were two clusters of answers on each question—one cluster of students which gave a very high percentage answer and one cluster of students which gave a very low percentage answer. This caused the government to take a second look at the results.

As it turns out, the researchers found out that most students do not hang out with a large percentage of their fellow students. As a result, the students had no idea of the drug and sexual activity of the greater student body. Instead, they only had the reference point of their small band of close friends. 

And these close bands of friends tended to behave similarly to the others in the same band. So, if a student participated in these activities, most of their friends did also, so they concluded that most of the people in the school must also do these things. Similarly, if a student did not participate in these activities, most of their friends also did not, so the student would assume that most of the students in the entire school also did not.

Based on these insights, the government shifted its emphasis from tracking the change in the averages from year to year to tracking the relative sizes of the high and low clusters from year to year.

2. Amazon Music Reviews
Before buying music, I like to read the reviews in Amazon. Over time, I realized that the vast majority of all the music on Amazon has an average ranking of 4.5 out of 5. With nearly everything rated equally, it became impossible to use these average ratings to decide which music to purchase.

But then, I started thinking. The problem with Amazon music ratings is that they are voluntary. This is not a random sampling. People only turn in a rating when the mood hits them. And typically, the mood only hits them if something they hear is especially good or especially bad. And it in the vast majority of cases, the review came from people who thought the music was especially good.

Once I figured that out, I stopped looking at the average rankings of the review and instead started looking at the number of reviews in total for a particular piece of music. My logic was that if only the ones who loved the music send in a review, then the more reviews sent in, the more people loved that music.

This has turned out to be a far more effective way to use the Amazon review process.

Companies like to base their strategies on facts. Sometimes, they try to get their facts directly from the consumer. This tends to happen most often at three phases of strategic planning:

1.     At the beginning, when trying to understand the market place.
2.     In the middle, when testing concepts
3.     At the end, when assessing whether the strategy is working.

The good news is that in today’s interconnected world, there are lots of ways to get consumer input.

The problem is that these sources can often have flaws like the ones mentioned in the stories. Complainers and the people who rate companies online are not a random sample. They are biased towards people who like to rate or towards people with extreme views (like the Amazon music ratings). If you just look at the average ratings and comments, you will most likely come to the wrong conclusion. It may be better to count the reviews, rather than average them.

And even well designed surveys can with random sampling can have flaws. After spending decades in consumer research, I discovered that people will try to honestly answer all of your questions well, but they often just don’t know the answer, so they guess—and often very wrongly (like the high school survey). I have found this to be particularly true when asking people to predict their future behavior in areas where they have little experience (like how they would react to a new strategic scenario).

Therefore, we need to be careful in how we interpret this data.

The principle here is that one cannot run a strategic planning process based solely on research, especially if you only look at averages. Part of this is due to some of the research flaws mentioned earlier. Another part is due to the nature of strategic planning itself.

Strategic planning is looking for ways to build a new and better future. It can be about finding new white spaces which have never been exploited. It can be about inventing solutions which never before existed. It can be about building business models that break all the old rules. It can be about finding uncharted “Blue Oceans” of opportunity. In other words, strategy is a lot about trying to get ahead of the curve and be an early adopter of the next big thing.

Of course, if you are trying to lead the way into the future, you may be several steps ahead of the general population. Questioning the general population may not be very useful at such an early stage. 

However, if you wait to move until the consumers can speak as experts, it is too late to be at the front end of the strategic revolution. That’s one reason why Steve Jobs didn’t believe in consumer research. He knew that consumers can’t speak meaningfully about a future not yet envisioned.

But that doesn’t mean that research is useless. As seen in the stories above, there are creative ways to look at data to get insights. But may mean you cannot take the initial results at face value. For example, we saw that instead of averaging out what people say, it may be better to just count how many say something. Therefore, be careful when looking at your results. Don’t necessarily take it at face value. Search deeper for the true implications—especially as the questioning looks into the future or is not randomly sampled.

Other things to keep in mind:

  1. Although consumers may be unable to articulate how they will act in an inexperienced future, they can articulate what irritates them in the current state. Knowing the irritations of today can help you when designing the newer future.
  2. Some people may be living closer to the leading edge than others. Focusing research on leading edge people may give better results.
  3. Even though solutions my change over time, attitudes/concerns/desires regarding the problem may be more stable. If you focus on researching the more stable problem issues, it may give insights into how to develop better, innovative, new solutions.
But probably the most important thing to understand is that strategy is not pure math or pure science. It also has an element of artistic creativity. Creating the future is, by definition, creative. Eliminate the creative and you will never find what you are looking for.

Although we may want a data-based approach to strategy, relying only on data—or taking the data at face value—will probably lead you in the wrong direction. The future is not precise, so you cannot take just a precise approach to get there. The consumer is not always very helpful or knowledgeable in looking beyond incremental change. Therefore, one will need to also rely on artistic creativity to get to the future. In fact, the creative part is likely be more important than the scientific part.

You cannot find the future if you are only looking backwards. And looking backwards is where the consumers are. Sometimes you have to look forward, to the places where the customers have not yet arrived. Creative insight, rather than research, may be more useful.

Saturday, October 10, 2015

Strategy Planning Analogy #557: Procedurals Vs. Chapters

One of my favorite strategic planning stories is an interview of Steve Jobs by Richard Rumelt, a professor in strategy at the UCLA business school and a leader in his field. At the time of the interview, Steve Jobs had just returned to troubled Apple with the task of turning the company around and saving it from a path towards bankruptcy.

Rumelt was not sure there was a viable turnaround path for Apple. After all, Apple at the time had less than a 4% share of the personal computer market. The Microsoft/Intel business model (called “Wintel”) had a virtual monopoly on the space. There isn’t much you can do when your position is so insignificant.

So when Rumelt asked Jobs what the long term strategy was, Jobs just smiled and said, “I am going to wait for the next big thing.”

Jobs’ answer to the question would be hard for most boards of directors to take. In essence, Jobs was saying:

  1. I don’t know what the strategic direction should be right now.
  2. All I know is that it will come from exploiting the next big thing, whatever that is.
  3. And I don’t even know when the next big thing will show up. Our main task now is to wait.
  4. All I know is that sticking to the status quo is a path to destruction.
Does that give you warm feelings of confidence in the future of the company? As a board member would you accept that strategy?

Well, in retrospect, we know that the next big thing was the iPod and the next big thing after that was the iPhone. Jobs pounced on them and created one of the most valuable companies the world has ever seen.

So, when your company is stuck, perhaps waiting for the next big thing is not such a bad strategy after all.

The principle here is that some strategic positions are so weak that they cannot be repaired by merely adjusting the status quo. Sometimes you have to accept defeat in the status quo and move on to the next big thing, even if you do not know what the next big thing will be. All you can do is watch and wait. Then, if you pounce on the next big thing faster and more aggressively than the others, you can own the future and leave the former leaders in the dust.

This is what Apple did. And more recently, this is what NBC did.

A few years back, NBC’s position in prime time TV was not that different from Apple’s position when Steve Jobs came back. It was small and weak. CBS dominated the ratings. There was no easy way for NBC to tweak itself out of its downward spiral. So NBC borrowed the approach used by Apple—it waited for the next big thing.

When NBC was at the bottom, the key to ratings success tended to revolve around having the best “procedurals.” A procedural is a television drama with two distinct features:

1.     Each episode has a relatively independent plot that can stand on its own.
2.     What holds the series together is that fact that each episode follows essentially the same procedure—they all tend to be structured in a similar manner.

CBS was the king of the procedurals, with shows like CSI and NCIS. This helped put CBS at the top of the ratings. When a producer had an idea for a new procedural, they tended to take it to CBS first, because they knew it would be a stronger show inside that CBS lineup. This made it hard for NBC to catch up in getting its own good procedurals. And NBC had the problem that since very few people were watching their current shows, they had fewer opportunities to show viewers promotions for new shows. Hence, NBC was in a bit of a death spiral while CBS was in a sort of virtuous cycle.

At the time, viewers liked procedurals because it fit better with how they watched TV. People didn’t always have time to watch every episode in sequence and remember the plot line from week to week. Hence, they preferred shows where each episode stood on its own.

The networks liked procedurals because they did a lot better in summer reruns. Shows with connected story lines like the original version of Dallas did terribly in summer reruns because once you know how the plot worked out over time, an old episode from the middle was less compelling. By contrast, shows that stand on their own can be seen in any sequence without difficulty (and did better in the summer).

The producers liked procedurals because they were ideal for the secondary market of cable TV. Cable TV channels loved buying rights to show procedurals. They showed procedural shows at all hours of the day, sometimes clustered in blocks and sometimes one episode at a time. This made it almost impossible to follow the shows on cable in sequence. Therefore, the fact that procedurals did not need to be seen in sequence was desirable.
Procedurals are not the only way to make TV dramas. Another approach is called “chapters.” In chapters, a TV season is seen as being like a complete book and each episode is like a chapter of that book. This approach is very different from the procedural in two key ways:

  1. The plotline is connected from chapter to chapter. You have to see the episodes in sequential order for them to make sense, just like you need to reach chapters in sequential order in a novel.
  2. The nature of the way the drama unfolds varies a bit from episode to episode, depending on what is necessary to move the greater plot of the season along.
A good example of a chapter show is NBC’s The Blacklist.

NBC could see that the environment was changing in favor of chapters and away from procedurals. For example, more viewers were getting access to DVRs like TIVO so that they could watch prime time according to their schedule rather than the network’s schedule. Now, they would miss fewer episodes and could re-watch them prior to the next episode. This made chapter shows easier to watch.

The summer rerun issue for chapters was becoming less of an issue, because now nearly all shows did poorly as summer reruns and the networks had switched to alternative programming for the summer.  

The prime secondary market was switching from cable TV to digital services like Netflix, Hulu and Amazon Prime Video. Unlike cable, these services allow you to watch what you want to watch in the order you want to watch it. This lead to the phenomenon of binge TV—watching an entire season of a show back to back over a weekend. Binge watching is more powerful when watching chapters than procedurals.

So NBC jumped on loading its prime time with chapters. The hope is that procedurals will soon become obsolete and that NBCs aggressive move into chapters will allow them to capture the future, just like Apple did with the iPod and iPhone.

Waiting is Not Sleeping
When waiting for the next big thing, you don’t just take a nap and wait until opportunity knocks. Waiting is still a strategic activity. Waiting involves doing a lot of watching and speculating. The next big thing usually starts out small. You won’t find it if you are not actively looking for it.

As we saw in the NBC example, NBC had to observe the changing viewing environment to see where the new viewing favored new program styles. For Apple, they just so happened to be talking with their supplier community when they say saw a new type of processor which made would make the iPod possible. In both cases, they saw change and then figured out how to exploit it to create the next big thing.

Another thing to keep in mind is that NBC and Apple did not jump to new things in areas outside their expertise. Apple stayed in consumer technology and NBC stayed in TV entertainment. Leadership needs both the new idea and a way to bring it to life. If you don’t have the skills, you cannot bring the next big thing to life. So part of waiting for the next thing is knowing how to redeploy your competencies to exploit something new.

Sometimes a strategic position is so poor that it is not worth the effort to try to fix it. Instead, the best strategic move is to move on to the next big thing. Even if you do not yet know what that is, make that your strategy and start looking for it.

If your board of directors or leadership balk at the idea of declaring a strategy to move in a new direction which is still unknown, just show them how that strategy worked out for Apple.

Thursday, October 8, 2015

Strategic Planning Analogy #556: Position Vs. Proof

Imagine this conversation with an entertainment promoter. We’ll call him Bob.

Bob: I’m so excited! I just booked a night to use the stage at Carnegie Hall. This is such a great venue to perform in. Some of the greatest performers in the world have had some of their greatest performances at Carnegie Hall. This is the place where winners perform. Success is mine.

Me: So who will you have performing at Carnegie Hall? What will they perform?

Bob: I have no idea. That’s just a minor detail. The important thing is that whatever it is, it will be on that successful stage.

Me: If you don’t know what the act is, how do you plan to sell tickets?

Bob: I’ll just say that great stuff happens at Carnegie Hall. Come see the greatness.

Somehow, I don’t think Bob has this thing fully figured out.

In my long line of strategy blogs, one of my favorite topics to talk about is positioning. Dozens of times, I have talked about the necessity for businesses to choose a position if they want to succeed. They need to find a place where they can win.

Perhaps I have focused so much on the importance of positioning that people think that strategy is little more than choosing a position. But strategy is far more than just finding a position in the marketplace. In fact, if all you have is a position, you are likely to fail.

Consider the story above. Bob the promoter found the ideal position—a place where he could win. That place was Carnegie Hall. A lot of performers have won at that position.

But just because Bob had found the ideal place to play does not mean he would automatically succeed. To succeed, he needs to sell tickets. And to do that, Bob needs to figure out what to perform and how to convince people to pay to see it. Owning an empty stage will not draw crowds. Just saying “come see the greatness” won’t work.

In the same way, businesses only succeed if they convert their positioning into preference—a proposition that causes consumers to actually give their money to you (rather than someone else). Being on the right stage only matters if people pay to see it. Therefore, strategy needs to not only find they place where you can win, but a reason for customers to choose to support it.

The principle here is that positioning is mostly an internal strategy. It tells a company where to play. It talks about the solution it will own and how to structure the company to achieve it. A second strategy, which we will call “the compelling reason”, is needed to get customers as excited about the position as the company is—enough to spend their money with the company. That is the external strategy. Both are needed to win, just as Bob needed both the stage (the position of Carnegie Hall) and the compelling performance for that stage (a reason to come to Carnegie Hall).
It is easy to get confused and think that the position and the compelling reason are the same. After all, a position must be desirable to a consumer if it is to be successful, right? Yes, but in reality, what it takes to win internally is not the same as what it takes to win externally.

Trust Issue
Positions tend to rest on owning some idealized superiority, such as highest quality, most luxurious, easiest to use, coolest, cheapest, “ultimate driving machine”, and so on. This type of positioning is what Les Wexner of LBrands refers to as answering the question “What are you Best At?”

Yes, customers like things that are the best. The problem is that customers are jaded. They’ve been hearing claims of superiority their whole lives. After all, how many brands try to claim a position of mediocrity? No, everyone shouts about their superiority. They can’t all be best. Hence, there is a trust issue. You cannot just claim a position of superiority. Nobody will believe it merely because you claim it. No, you have to prove it in order to overcome their lack of trust.

There’s a reason why user and expert opinions/ratings are so sought after on the internet. It’s because consumers don’t blindly trust claims made by the brand. They want them verified by others. They want proof.

So “positioning” determines the claim to be made (what am I best at) and “the compelling reason” determines how to prove to the customer that the claim is true. The two are not the same.

Two Components of Proof
There are two components to the compelling reason. Without them, there is not enough proof to make the claim of the position believable.

The first component is difference. You have to prove that you are different from the alternatives. The logic is simple: If are seen as doing the same thing as others, then you cannot be seen as superior…only the same. You must do something different in order to be perceive as different from the others.
And to make the difference believable, it needs to be easily understood and verifiable.

The second component to the compelling reason is linkage. You need a way to link the difference to the position of superiority. Just saying we’re different because we wear green shirts won’t work, because there is no linkage between wearing green shirts and producing a superior product. The difference needs a direct link to the superiority—proof that the difference causes the superiority.

For example, Dove soap has the position of being “the best beauty soap.” Their point of difference is in saying that their soap is one-fourth moisturizing lotion (and the others aren’t). The linkage is that moisturizing lotion is associated with beauty, so soap with moisturizing lotion can be the superior beauty soap.

Back when Oxydol was the #1 laundry detergent, the position claimed was superiority in cleaning. The difference was putting little green crystals inside the detergent (which others didn’t do). The linkage was that the little green crystals supposedly added bleach to the detergent. And customers could believe that combining bleach to detergent would cause superior cleaning.   

Linkedin’s position is to be the best place for professionals to connect. The difference is that they have far more active professional people in their network than anyone else. The linkage is that you are more likely to make the professional connections you need in the place where the most connections with professionals are possible.

Uber’s position is to provide transportation as reliable as running water, everywhere for everyone. Their point of difference is that their business model abandons all of the conventions of taxis and public transportation. All the rules have been reinvented, including the mobile interface. The linkage is that these changes have dramatically increased the numbers of people providing transportation and improved the interaction with them, making transportation more reliable and more everywhere.

Two Messages
So, as you can see, the positioning message and the compelling reason messages are not the same. In fact, they move in different directions. The positioning message moves towards the broader, more generalized, more universal concepts and solutions. The compelling reason is more specific to a particular company and the “unique ingredients” in its offering.

The position lets you know if the company is relevant to your needs. The compelling reason lets you know if this particular brand is the best alternative in that space (compared to others claiming the same relevancy).

Positioning is about ideals. The compelling reason is about proof.

Both messages are essential. Both need to be a part of the strategy process.

Although positioning is a key component of strategy, it is not the only key component of strategy. Another key component is the compelling reason. A position is merely a claim that is made concerning where you have chosen to play to win. A compelling reason is the proof as to why customers should believe your claim. Although they are similar concepts, they are not identical. Therefore, if you have only created the position, you are not yet finished with the strategy process.

The problem with claiming a stage like Carnegie Hall is that it is not the only stage. Consumers have other alternatives. So even if Carnegie Hall is the best stage, consumers will go to another stage it they think they will enjoy a better performance. Therefore, you need to work on two fronts: finding your platform/stage AND making sure you are perceived as having the preferred performance.

Tuesday, October 6, 2015

Strategic Planning Analogy #555: Managing the Full Cycle

A friend of mine recently explained to me how his parents survived a lifetime of farming. He said their farm tended to run on a five-year cycle. In general, over that five-year span, one of the years would be extremely profitable, two would suffer big losses and two would be about break-even.

So this is what his parents did. When they had that one great year on the farm, they would shrewdly invest the windfall into the stock market. This investment would have enough of a return to get them through the four years of breakeven and losses. Then, when the next great year came again (about five years later), they’d start over again, investing the windfall in stocks to cover the next four years.

Over time, they got to be very good at stock investing. It makes you wonder if their true occupation was really farming or investing.

This family was able to survive a lifetime in farming because they did not think in terms of individual years or growing seasons. Instead, they planned their business around the full five-year cycle. They knew there would be highs and lows across the five-year cycle which they did not have a lot of control over. For example, commodity prices would swing wildly and weather would change dramatically. You can compensate for a bit of this in the short term, but not most of it. Hence the highs and the lows in farming were pretty much a given.

Therefore, my friend’s parents needed a bigger plan—one that invested during the high points, so that they would have supplemental income to get through the low points.

Other businesses tend to be no different. Margins rise and fall based on all sorts of market pricing issues outside a business’ control. And, like weather, the external environment for businesses can also dramatically change. Fickle customers can abandon your business category for the next fad and cause as much damage as when the rain stops falling on the farm and goes somewhere else.

Hence, all businesses should consider their actions in terms of the full cycle. They need to reinvest the highs in order to be prepared for the lows. Unfortunately, as we will see below, not all businesses do this.

The principle here is that if you try to optimize individual years rather than the full multi-year cycle, you will be on a path to destroy the business. First, if good years are optimized on their own, you end handing out the profits to all the stakeholders. That will not leave any money for the lean years. So then, the only way to optimize the lean years on their own is to cut back on everything (R&D, service, quality, etc.).

This starts the death spiral. The cutbacks in lean times make the company less viable when the good times return, so the highs get progressively smaller. Debt piles up in the lean years until it is unsustainable. None of the money ever gets reinvested for the long term, so the business gets old and unfit for the changing times. Bankruptcy is almost inevitable.

I was reminded of this principle when I saw a recent article online from Fortune. It was a list of the ten largest bankruptcies in U.S. retailing over the last few years. As I thought about this list, I realized that in a majority of these cases, the retailer failed because it did not plan for the full cycle. 

Bankruptcy usually came from a combination of:

1.     Taking out too much money in the good times (usually via a leveraged buyout)
2.     Taking on too much debt that could not be maintained when the bad times came.
3.     Was not ready when “bad weather” came (a negative change in the external environment).
4.     Did not invest the money from the good times into projects that would pay out in the future (adapting to the “new weather”).

Here are a few examples, which I’ve simplified for the sake of time.

Circuit City
Circuit City sold low margin electronics products. The margins suddenly got a lot lower when Wal-Mart and online retailers like Amazon aggressively went after the business. Circuit City did not have enough cushion to absorb the drop in prices. Then, Circuit City made matters worse in the lean times by cutting way back on sales service. It was the aggressive sales service team which was able to talk customers into buying the more profitable attachments and extended warranties for the low margin basic goods. Without the sales people to aggressively boost the margin in the shopping basket, the margins got even lower. Eventually the losses got too great to be sustainable.

Linens N Things
Linens N Things was almost identical to its competitor Bed Bath & Beyond. The only major difference was that Bed Bath and Beyond operated on a lower cost structure (a structure designed for lean times). When the lean times came, the lower cost structure allowed to Bed Bath & Beyond to still make money when Linens N Things could not. Bed Bath & Beyond became more aggressive with its coupon promotions, making it even harder for Linens N Things to compete in the lean times. Finally, Linens N Things sold out to leveraged buyout, which created a debt level that could not be maintained.

A&P is an example of a supermarket company that could not keep up with the changing weather. It had old stores, run the old way, with old union contracts. When the good times were there, A&P did not reinvest and modernize or build a lot of stores in the growing markets. Instead, it took the profits out of the stores. That left A&P with the oldest stores in the oldest neighborhoods without the changes needed for the modern grocery business. When the bad times came, A&P kept cutting back. But due to their old union contracts, they were forced to first lay off the younger, less expensive (and more productive) employees. This left them with even higher costs relative to competition. It’s hard to survive when you have a combination of the most outdated offerings and the highest cost structure.

Sbarro had most of their pizza restaurants in malls. They thrived in the good times by taking advantage of the traffic already created by the mall. Unfortunately, the weather changed. Malls became far less popular. Mall traffic dropped significantly. Eating in malls dropped significantly. Sbarro did not have a business model designed to draw its own traffic or survive on lower traffic. So when the mall traffic dried up, it was like when a farmer’s land dries up…profits evaporate. It didn’t help that Sbarro had also gone through a leveraged buyout, which drained them of the extra cash needed for lean times.

Blockbuster and Borders
Blockbuster and Borders were two retailers who sold tangible media (Blockbuster: movies; Borders: Books). The digital revolution changed their weather. When movies and books became digital, customers did not need brick and mortar stores any more. Plus, the price of digital movies and books were so low, that Blockbuster and Borders couldn’t compete on price. These company's failures wasn’t inevitable. Others invested to adapt to the new weather of the digital world. Blockbuster and Borders, however, did not make those heavy investments in a timely manner. Hence, they failed. They, like A&P, did not do like my friend’s parents and invest during the good times. You cannot live off the investments you do not make. And without investments into the new, you become obsolete.

Quicksilver is a retailer specializing in clothing and gear for the surfing culture. Teens paid a premium to shop at Quicksilver because appearing to be part of the surfing culture made you look cool. But then the weather changed. Cool transferred from surfing culture to smartphone culture. The Apple store was now the cool destination. Money that used to go to clothes went to technology. The clothes still bought tended to come from cheaper stores, like H&M, because the money you saved on clothing could be used to buy more cool technology. Quicksilver could not adapt its cost structure and merchandising for these leaner times.

Business life is not a straight line of consistency. Instead, there are periods of ups and downs. Many of the ups and downs are influenced by external factors that are not completely under your control.

Therefore, if you want your company to last over the long haul, it must be built in such a way as to survive the entire cycle of good times and bad times. That means, that in the good times, you should:

  1. Put some money aside for the bad times.
  2. Invest some money in things that will improve your relevancy as markets evolve.
  3. Not let your cost structure rise to levels that can only be supported in good times.
Then, in the bad times:

  1. Live off some of the money set aside in the good times rather than destroy your offering (and image) through overly excessive cost cutting.
  2. If it looks like the weather has changed permanently for the worse, be ready to make radical moves to become relevant again. Don’t just try to wait it out if it looks like business is not ever coming back to your business model. In the best case scenario, you would have started investing in these changes back when times were still good.

To be a good farmer, my friend’s parents had to know more than just how to farm. They also had to be good investors. Similarly, good businesses cannot just be managed by people who only know how to operate the current business model. They also have to know how to invest in what will replace the current business model.