Strategic Planning Analogy #479: Playing to Win

THE STORY
Back in the very early days of personal computers (before the IBM PC), there were a lot of small upstart companies that wanted to get into the business.  Most of them said something like the following:

“We may not be big enough or strong enough to become the market leader, but we think we can get about a 15% market share.  And that should be large enough to make a good return on investment.”

The problem with this approach was that:

1)      The leaders would already have about 50% of the market share in personal computers.

2)      There were about a dozen firms who wanted to get about 15% share out of the remaining 50% of share available (that math doesn’t work).

As a result, most of these upstart companies only got about 5% share or less.  This was insufficient for profitability and they quickly went bankrupt.

Later, when IBM entered the market with the first “PC” (and the first software from Microsoft), even most of the market leaders, like Radio Shack and Commodore, had to give up the business.

 

THE ANALOGY
If you look at the strategy of most of the early entrants to personal computing, they were not playing to win.  Instead, they were playing to exist.  The idea was they did not need to aggressively pursue superiority in positioning or features.  Instead, these companies felt that all they needed to do was “show up”, and the rapidly growing market would have enough space to absorb them at about 15% market share.

That approach was a dismal failure.  By not playing to win, they ended up with nothing.  When IBM entered the market, it was aggressively playing to win—and it was the clear winner for quite awhile.

When designing a strategy, are you approaching the market more like those early entrants (just show up and hope to get sufficient share) or like IBM (go big and play to win)?

 

THE PRINCIPLE
The principle here is based on Law #12 of my 22 Laws of Strategy.  This is the Law of Winning, which says, “If you do not play to win, you will lose.”  Playing to win requires:

a)      Designing and Achieving a Winning Position (unique, desirable)

b)      Aggressively Pursuing that Position in the Marketplace

c)      Developing a business model so that you can have superiority in your position and still make money.

This is not what those early personal computer manufacturers did.  They built “me-too” products using similar business models and shipped them out to whomever would buy them.  And by not playing to win, they lost.

IBM played to win.  They developed a superior product.  They installed superior software (MS DOS).  They aggressively advertised the brand (to the point where PC became a generic name for the whole category).  They put the full force of IBM behind it.  And they became a winner.

The Rule of 1.5

If anything, the importance of playing to win is even stronger in today’s economy.  One reason why “playing to exist” no longer works well is due to the rule of 1.5.  Back in the 1980’s it was called the rule of three, which stated that most businesses had 3 strong players:  a leader, a close challenger, and a rebel/innovator.  The prime example used back then was US colas: Leader=Coke; Challenger=Pepsi; Rebel/Innovator=RC.

However, over time, this paradigm has mostly disappeared.  The reason can be found in a 1995 book called the Winner-Take-All Society, by Frank and Cook.  The book showed that in industry after industry, the advantages of leadership were getting stronger and stronger.  Challengers were at an ever greater disadvantage.  Brands were beginning to realize that it made more sense for a challenger to reposition itself as a leader in different market position than to go directly after a leader.

The net result is what I call the rule of 1.5.  Now most markets have a single strong leader with only minor challengers.  Think about US retailing.  Where it used to be Best Buy vs. Circuit City, it is now only Best Buy.  Where it used to be Bed Bath & Beyond and Linens-N-Things, it is now just Bed Bath & Beyond.  And who is the strong challenger to Walmart or Amazon?

Even in colas, Coke has increased its dominance over Pepsi to the point where its greatest challenger is now Diet Coke (which leads in a different position).  And RC cola barely exists anymore (and survives via association with Dr. Pepper, a leader in its own category of beverages).

That is why you need to play to win, because there is no guarantee that there will even be room for a profitable number 2 or 3 or 4.   Take it from me…when I was working at Best Buy and founder Dick Schulze was still running the show, there was no doubt that he was aggressively and passionately playing to win.  And win they did.

Metcalf’s Law

If anything, the digital economy with the internet and social media has accelerated this phenomenon.  It was first described as Metcalf’s law, which states that the value of a network is equal to the square of the number of connections to that network (or U=y²).

The new digital/social/mobile economy is all about building networks.  And the bigger your network, the more powerful you are.  Look at Facebook.  It did not get its high stock valuation due to current profits.  The high value was due to Metcalf’s Law and the millions upon millions upon millions of users in its network.  Linked in and others are also following this principle and building the largest networks of members in their space.

Once you build up a huge network, there are incentives for people to join your network and stay in your network.  It is referred to as “stickiness.” Hence, the networking leaders tend to become even stronger leaders and the challengers become weaker.  Who is the major challenger to Facebook?  Can a new competitor just “show up” and expect to gain a large following in Facebook’s space?

Part of the appeal of Apple is the network of partners and features it puts around its products.  The apps, the app store, the interface connections, the partnership deals and so on make the sum of the network greater than the parts, and makes it harder for any single player to challenge that network.

If you do not play to win in creating the network, you will ultimately lose in this economy.

 

SUMMARY
The disproportionate advantages to being the market leader are huge and getting even stronger.  It is getting to the point where if you are not the leader, you will be hard pressed to even make an adequate profit.  As a result, every business needs a strategy built around leadership—a winning position in desirable space.  In addition, you need to aggressively pursue gaining and maintaining that position.  Others are also out there fighting to win, so if you are not equally fighting to win, they will become the winner instead of you.

Just showing up with a me-too product and hoping that the market is large enough to get you sufficient market share is no longer a viable strategy (if it ever was in the first place).  Those “just showing up” market shares are never as large as you think they should be and rarely lead to a viable business model.  Be aggressive and play to win or don’t play at all.

 

FINAL THOUGHTS
They say that imitation is the sincerest form of flattery.  That may be true, but imitation is not a very good approach to strategy.  Following the leader positions you as a follower, not a leader.  If you do not have a business model and an aggressiveness to get to a place where you can lead (or win), then all you have is a blueprint for losing.  The world already has a Facebook, Amazon and Walmart.  It doesn’t need an imitation of them.  Instead the world needs new positions to be conquered.  Are you scaling the mountain of imitation or a mountain where you can be first to the top and win? 

 

Strategic Planning Analogy #466: You’ve Got Personality

THE STORY

Over the past year or so, I’ve been splitting my time between looking for clients for my strategy consulting business and looking for a full-time strategy job.  This has given me the opportunity to talk to a lot of executives at a number of companies.

In the vast majority of cases, I eventually received a rejection.  Now, one might at first think that these rejections would make me feel more negative towards these companies.  After all, they rejected me.

However, just the opposite is true.  After meeting with the people at these companies, I like the companies a lot more.  I feel that I’ll be more likely to patronize them than before and I even feel a bit more loyal to them—even though they rejected me.

 

THE ANALOGY
Before I met with these companies, they were just faceless, impersonal businesses—just words and numbers.  There wasn’t much of any reason to feel any personal connection with them.  But after I met and talked with people in the business, that all changed.  I got to see the people behind the company.  I got to hear the passion in the voices of the leaders.  I got to see people enthusiastically working at the company to do something great.  I got to see the awards in the lobby display cases, hear the chatter in the lunch room.

In other words, the company was no longer a faceless, impersonal entity.  Now it was a real living breathing entity with a personality.  I could feel the drive and the passion.  I could see there were people who cared.  Now I could relate to the business on a deeper, more personal level.  The emotional bonds became stronger, because now because there was a deeper connection.

Most businesses would be tickled to death if they could create these deeper, more loyal ties with their customers.   In my case, these great feelings continued in spite of being rejected.  Wouldn’t it be great if customers had such strong feelings towards your business that it could even overcome an occasional consumer disappointment?

In most businesses, it would not be practical to fly all of one’s customers to headquarters to talk to senior leadership about the business, like I was doing for interviews and business pitches.  But anything a company can do to move from being a faceless, impersonal entity to being a personality that customers can relate to is a move in the right direction.

 

THE PRINCIPLE
The principle here is that the personality of the brand or company matters.  If done properly, it can help deepen the bonds between company and customers.  If done improperly, it can create an image that will turn people away from the company.  Therefore, as part of a strategic plan, one should consider the proper personality for the business and tactics for bringing it alive to the potential consumers.  The personality needs to be managed, just like any other asset.

Example: Best Buy

I first realized the importance of this fact when I was working at Best Buy.  I was shown some research Best Buy had done before my time there.  I believe the research was from the early to mid 1990s. 

The research was asking customers their opinions of the various consumer electronics retailers in the US.  At the time, there was a dozen or so regional retailers in this space who wanted to become national leaders.  It included retailers such as Circuit City, Silo, Highland, Fretter’s, Best Buy, and many others.  Today, all of them have long since disappeared—except for Best Buy.

Did Best Buy survive when others failed because consumers saw it as a far superior consumer electronics retailer?  This research at that time would say no.  In fact, consumers saw all of these retailers as pretty much the same.  On all of the rational variables of retailing (price, selection, etc.), all of the brands were rated fairly equally.  There wasn’t much of any reason to prefer one retail brand over the other.

As I say in my book “The Most Important Question,” one of the most important tasks of strategy is to discover and strengthen reasons for customers to naturally prefer your company or brand more than the alternatives.  In this case, the consumer electronics retailers were failing on this most important point.  There was no reason to prefer a particular store because they were seen as indistinguishable from each other.

That is, except for one little difference.  At that time, Best Buy had a person who would dress up in a costume which looked like a giant price tag.  This walking price tag would interact with customers in Best Buy’s advertising. 

According to the survey, people liked this giant walking price tag.  Why?  Because it helped give Best Buy a personality.  They liked the way it interacted with the customers.  It seemed to enjoy the same fun, entertaining things they did.  It had a personality as being like one of them.

In a sea of faceless competition, the personality which came from the giant Best Buy Tag gave customers deeper, more positive feelings towards Best Buy than towards any of the competitors.  It gave a reason to like Best Buy more, to prefer it.

Now I’m not claiming that all of Best Buy’s success was due to that giant price tag.  Success comes from doing a lot of things correctly.  But I do believe that the uniqueness of having a personality gave Best Buy an edge at a critical time when industry consolidation was about to occur.  It bought time in order for Best Buy to improve a lot of other variables, so that Best Buy could be the superior brand which survived the consolidation.  Without that personality edge, I am not sure Best Buy would have survived the transition.

Lately, however, Best Buy’s future seems to be under threat.  There are many reasons for that, and it will take many changes to return strength to the Best Buy brand.  But I am willing to bet that if you asked consumers to describe the personality of Best Buy today, you would get a lot of negative attributes.

Based on the chatter I read on the internet, Best Buy appears to have lost control over managing that personality.  It is being redefined by disgruntled customers in a negative way.  That is not a good thing.  Now Best Buy has to fight an additional war.  Not only does it need to fix the problem of becoming irrelevant in a changing marketplace, it needs to overcome a bad personality.  It would have been easier to transition to relevancy if it had the advantage of a likeable personality on its side.  Then people would be more forgiving during the transition, just as I liked companies even though they rejected me.

Suggestions

So how can we manage the personality for our benefit?

1.      First, think about personality strategically.  Decide which personality is most in sync with your strategic point of preference.  Figure out how to instill that personality into everything you do.

2.      Consider a more public profile for the leadership, so that they can bring their face and personality to an otherwise faceless firm.  Richard Branson is a great example of this.  His strong personality is very public and has helped give a strong personality to all of the Virgin divisions.

3.      In lieu of real employees, one can use symbolic representations to make the personality come to life.  This can be things as crazy as a giant price tag, or the Geico Gekko. 

4.      Actively manage your interactions with customers.  Some lowly sales clerk on the front lines may be the only human interaction a customer has with your firm.  If that clerk has a bad personality, it can reflect negatively on the entire brand, since it is the only human reference point.  Work to instill the proper personality into all employees based on the way you hire, the way you train, the way you reward.  Zappos provides a good example of this.  They were so intent on having a staff with the right personality that they only hire people with the personality which fits their culture and mission.  It  a huge part of the interview process.  To make sure employees are there for the mission and not just the money, after someone has been employed for a week they offer them $2000 if they want to leave.  That weeds out the people who only work for the money.

 

5.      Actively manage your interactions with society.  Society expects businesses to be good citizens.  They want you to give back.  This is particularly true with the younger adult generations.  If you are not seen as a good corporate citizen, it will damage your personality and you will lose business.

6.      React quickly to threats to your personality.   Monitor what people are saying about you.  As soon as your personality is being threatened, act to rectify the situation.  Don’t let little issues grow into big negatives.  Be fast and aggressive in protecting that reputation.  Cisco is a company which takes this very seriously and has developed tools to help others do the same.

 

SUMMARY

Personalities help companies build stronger bonds with their customers.  These company/brand personalities need to be managed like any other strategic asset.  Incorporate personality development/management/protection into your strategic planning.

 

FINAL THOUGHTS

Ask the marketplace this question:  If my company were a person, what type of personality would it have?  You might be shocked at what you hear.

 

 

 

Strategic Planning Analogy #446: The Mighty Fall, Too

THE STORY
I had a summer job in college going door to door in the worst sections of the inner city of Detroit. My job was to interview residents at each house to get information for creating a directory.

It was a tough job. I had people come to the door with rifles and attack dogs. I had my life threatened. I had my car stolen. All so that I could get the information for the directory.

It seems kind of silly now all these decades later. Today, people voluntarily give up more information than I was asking for to Facebook all the time. And if you want to learn about people, there are all sorts of web sites you can go to. It can all be done digitally, from the privacy of your own home. There is no need to go outdoors and put your life at risk like I did.

THE ANALOGY
Over time, the idea of what is a “normal” activity changes. When I was in college, the normal way to get data was out of books and printed directories. The people who put those directories together made a lot of money because that data was scarce. The publishers could afford to send out thousands of people like me to go door to door to get that data.

Today, that activity seems abnormal. Data is easy to come by and quite often free. All you have to do is go to the internet. And the data on the internet is often volunteered for free. That is the new normal activity. And as we will see below, this new normal is causing the directory business to fall apart.

When a business finds a way to exploit the normal way things get done, its leaders can get complacent. By becoming a huge, highly profitable player within that “normal,” you can start to feel invulnerable—too big to fail.

Unfortunately, today’s normal can become tomorrow’s idea of silliness. And being #1 at something people find to be silly and antiquated isn’t worth much. Yes, even the very big can become irrelevant if the new normal makes them obsolete.

THE PRINCIPLE
The principle here is that all strategies eventually fail—even the really good and really successful ones. The reason all strategies eventually fail is because the environmental context in which that strategy operates does not stay constant. It changes over time. Eventually that environment will change so much that your old strategy is no longer relevant.

Normal is not permanent. It only lasts for a limited time. Then a new normal appears. And these days, that time span keeps getting shorter. And being big and highly successful in the past is no guarantee that you will even survive in the new normal.

Two recent stories in the news point this out.

The Demise of Phone Directories
On Monday, April 9th, AT&T announced that it was selling off a majority stake in its Yellow Pages phone directory business. They did this because the profitability of the Yellow Pages model was falling apart. Revenues had declined 30% in just two years. Impairment charges were wiping out the profits. Verizon sold off its competing unit in 2006, which filed for bankruptcy in 2009.

At one time, the Yellow Pages were one of the most profitable legal enterprises on the planet. Businesses paid a fortune to get a tiny ad in the directory because it was a highly valued place to be. After all, the normal way people found businesses was to look in the yellow pages. It was such a valuable book, that people wanted to steal copies. As a result, places in the past would chain the directory to the wall so that it could not be removed.

Now, that old normal seems a little silly. Why trust a book full of biased ads when you can go to places on the internet like Yelp or Angie’s List and see unbiased reviews from people who used the service in question. That’s why one of the most profitable businesses of the 20th century is now becoming obsolete. It no longer makes sense in the new normal.

The Demise of Big Box Stores
On Tuesday, April 10th, Best Buy announced that its CEO Brian Dunn was immediately stepping down. Although there were a lot of reasons for this, part of it was due to the recent poor performance of the company. Sales, traffic and profitability were all going down, and it appeared they would continue to go down. The stock price for Best Buy has dropped over 55% from where it was five years ago.

What happened? Best Buy dominated electronics retailing for two decades. It was huge. It was highly profitable. Now, it cannot find enough profitable items to fill up its large stores.

One of the problems is a concept called “showrooming.” This is where people come to the store to find out what they want and then go buy it at a cheaper price from an online competitor. Customers bring their smartphones into the store and check to see if they can get a better deal somewhere else before picking up the item. And since there is almost always somebody online willing to sell cheaper than the big box store, the big box store loses. This is the new normal.

It used to be that customers were confused about all of the new digital products. They went to places like Best Buy to get expert advice. That was the old normal. In the new normal, that seems silly because:

1) Consumers can find more information on the internet than what can be found from asking the so-called expert sales help; and

2) Digital items aren’t new anymore. They are becoming familiar commodities that you feel comfortable buying anywhere on your own.

As a result, one commentator said, “Best Buy is dying because the free standing consumer electronics stores model is obsolete.” It no longer fits well with the new normal.

So What Should We Do
So if pillars of past success like the Yellow Pages and Best Buy can fall, so can anyone. There is no “too big” or “too successful” to fail. Even the most valued and prized option can become irrelevant if it falls out of step with where normal behavior is heading.

So what is a company to do? Remember two words—Best and Bold.

a) Be Best at the Right Thing
Nearly every company or brand tries to be the best at something. Unfortunately not all of these goals to be best are suitable to an ever-changing normal. In particular, there is a big difference between being the best at who you are verses being the best at solving a problem.

For example, if you are a telephone directory business or a big box retailer, you can try to become the best telephone directory or the best big box retailer. Unfortunately, if nobody wants that product any more, being the best doesn’t get you very much. Being the best at who you are is only relevant if people like who you are. And with a changing normal, that will not last long.

By contrast, one could have instead tried to provide the best solution, such as the best source for finding a business or the best source for buying electronics. This implies that you may need to radically change who you are in order to stay the best as normal changes. Although this is a lot of work, it is better than becoming obsolete.

Unfortunately, I see so many companies focused just on becoming better at who they are. They are looking for incremental improvements to the current model rather than new models which better serve the changing normal. This is a recipe for obsolescence. The better recipe is to also have an eye open for new ways to stay relevant by offering the best solution—even if it is radically different than the old offering.

b) Be Bold in your Change
If you find a need to replace your business model to remain relevant, do it boldly. Remember that your new competition is boldly moving forward because they have nothing at stake in the old business model. Amazon was much bolder than Best Buy in pursuing ecommerce. Yelp and others were much bolder than AT&T in embracing a social media approach to finding companies. If you are timid in your transformation, you will not win against people like these.

Also keep in mind that it can be futile to hold back in an attempt to prevent your new venture from cannibalizing the old. Just because you are not willing to cannibalize your core does not mean that others won’t do it to you. Ford was timid about introducing minivans for fear of hurting its station wagon business. So Chrysler did it instead and Ford still lost the station wagon business. The same thing happened to Kodak, who was timid about digital imaging for fear of hurting its core analog film business. It still went away. It is better to be bold and have a business left after the old one goes away.

SUMMARY
Because the world keeps changing, the concept of what is normal behavior changes over time. Therefore, if you want to remain relevant, you have to change as well. To stay relevant, focus on being the best solution and be bold about it.

FINAL THOUGHTS
When’s the last time you really thought seriously about how silly your offering may appear to the next generation?

Strategic Planning Analogy #429: Musical Chairs

THE STORY
When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

THE ANALOGY
The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

THE PRINCIPLE
The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

SUMMARY
Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

FINAL THOUGHTS
Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Strategic Planning Analogy #343: Where to Look

THE STORY
As the old story goes, one evening there was a man named Bob crawling on his hands and knees outdoors under a bright streetlight. Another man came along, named Jim, who was curious as to what was going on.

Jim asked Bob, “What are you doing?”

Bob replied, “I’m looking for my lost car keys.”

“Where did you last see your car keys?” inquired Jim.

Bob replied, “A couple of blocks down the road, next to my car.”

Puzzled, Jim asked, “Well, if you last saw the car keys down there, why are you looking for them here?”

Bob answered, “Because the light is better here.”

THE ANALOGY
Looking for something is not the same as finding something. If you look in the wrong place, you will never find what you are looking for, no matter how intense your effort is. Bob will never find his car keys because he is looking in the wrong place.

Businesses are looking for great opportunities for growth and prosperity. These opportunities will only be found if the business looks in the places where the opportunity exists (not the places where they want to look).

It may feel more comfortable looking where the most light is, but that doesn’t mean that what you are looking for is there. In the business world, the greatest amount of light (the data which illuminates our mind and helps us to see the world around us) is usually focused on the status quo. However, new opportunities usually require us to reinvent the status quo a bit, making current wisdom somewhat obsolete.

The great opportunities of the future tend to be on the darker fringes of today’s status quo. If you want to find them, you may have to leave the bright lights and spend time out in the fringes.

THE PRINCIPLE
You will only find the things located within the areas where you look. If an item is located outside the area of your search, you will not find it. How you define your search parameters determines where you will look. Therefore, if you want to find growth opportunities, be sure to define your search zone to include areas where there are the best growth opportunities are located. This usually requires defining a search zone including areas which is not located under the bright lights of the status quo.

In the last blog, we looked at the importance in defining for your customers the category you compete in. Customers, however, are not the only stakeholders in the success of your business. Another key category is your employees.

Just as it is important to get customers to properly categorize your product, it is important to get employees to properly categorize your company. Some of my greatest successes in the business world came from getting executives to re-define how they thought about their company—the business category it was in. By redefining the category, I was able to open their eyes to wonderful new potential opportunities which fell outside the old, narrow category definition.

The way you define your company limits where you look. If you define yourself in terms of the status quo, you will only see ways to incrementally improve the status quo. You will never find the “next big thing” which will make the status quo obsolete, because your narrow definition has kept you from looking where the next big thing is coming from. Sure, there is less data to examine out on the fringes, but that is where the new opportunities are. Include it in your search.

Shopko
Back in the 1980s when I worked at Shopko, Shopko was facing a problem. It was a discount department store competing against Wal-Mart, Target and K Mart. Wal-Mart had a lock on the best position for Discount Department Stores—lowest prices. Target had the second best position in the category—cheap chic. Although K Mart’s position was weak, it was large, so it wouldn’t be going away soon. So what do you do if you are Shopko: the #4 discount department store in a market where you don’t need four alternatives and the best two positions are already taken?

The first thing I did was convince management to redefine their category. Instead of defining themselves as a “Discount Department Store Company,” I convinced them to redefine themselves as a “Value-Based, Category-Owning Merchant.”

Changing the definition of the category sounds like a small thing, but the implications were huge. I had redefined the search area for new ideas, so we found more great new opportunities.

In the past, because they defined themselves as a Discount Department Store, Shopko thought they had to act like all the other Discount Department Stores. They had to carry the same products, in the same way, in the same depth. It meant trying to figure out how to beat Wal-Mart in a head-on competition with a similar offering. This was a path to disaster. Shopko would never stand out from the crowd if it acted like everyone else in the crowd.

“Value-Based, Category-Owning Merchants,” however, have the flexibility to do things that “Discount Department Stores” do not. We could carry different products in different quantities and sell them in different ways. The idea was simple. Rather than carry a medium assortment of every category sold in a discount department store (like everyone else), we would choose the extremes. In departments where we thought we could win, we would carry far more depth than the typical discount store. In areas where we did not think we could win, we would either eliminate the department or only carry a convenience assortment. The idea was no longer to compete head-on against Wal-Mart, but to peacefully co-exist through careful choices regarding where we wanted to play to win.

Over time, this redefinition of the Shopko business helped Shopko experiment in all sorts of “fringe” areas it probably never would have considered under the old definition.

Back in the 1980s, there were close to 100 other regional discount department store chains in existence in the US. Today, virtually all of them have disappeared. Shopko, however, is still in existence today, a testimony to the power of redefining your category.

Best Buy
A similar situation existed at Best Buy when I got there in the late 1990s. Best Buy at the time basically defined itself as a “US-based, Big-Box Consumer Electronics Retailer.” Its key competitive differentiation was the elimination of commissioned sales people. This was a narrow definition which limited future opportunities.

My team helped Best Buy management to see the company in a new light. We redefined Best Buy as a “Key Player in the Entertainment and Technology Business Ecosystems.” This opened up the potential to numerous new business opportunities, including things like technology services (through the Geek Squad), working upstream to help determine the evolution of new technology, working more directly with key players in the entertainment industry, selling products in a different way (Magnolia high-end, higher service entertainment retailing and Best Buy Mobile Kiosks), and going international.

By changing the definition of the business category, Best Buy started looking in more places for more opportunities. This brought in new streams of cash flow, allowing them to lower the prices on the consumer electronics they sold. Circuit City, which still pretty much operated under the older, narrower definition, tried to match the Best Buy prices, but because they had not expanded into all of those other businesses, they could not afford to match Best Buy prices. Eventually Circuit City had to file for bankruptcy. Best Buy is still going strong.

SUMMARY
If you want to find great new opportunities, you need to look where the great new opportunities lie. Usually they lie outside the status quo. Therefore, if you want to find them, you’d better define your business broadly enough that you are not trapped by only looking within the status quo for your future.

FINAL THOUGHTS
Broadening one’s business definition does not mean saying “I’ll do anything to make a profit.” There still needs to be limits. The idea is to not just find new opportunities, but to find opportunities in areas where you can win. Your core competencies, size and other such factors limit the number of opportunities where you can win. Keep these factors in mind when re-drawing your search parameters. Even in the broadened definitions of Shopko and Best Buy, there were still limits.

Strategic Planning Analogy #265: Two Stores, Two Stories

THE STORY
Ritz Camera, the largest specialty camera and imaging retail chain in the US, filed for bankruptcy in February 2009. Now, it has recently said that if it does not find a buyer soon for the chain, it will liquidate its assets in an open auction.

At the beginning of 2009, Ritz Camera had more than 800 stores in operation. It is now less than half that size.

By contrast, Best Buy is doing rather well. Its balance sheet is very healthy and it is gaining market share. Although the recession has had its impact on Best Buy, the company will survive and looks poised to thrive for quite awhile.

Why such different fates for these chains? A friend of mine used to work in the photography specialty retail business many years ago. He said that when taking good photos was very difficult, many flocked to photography as a “hobby.” These photo hobbyists carried around bags of gear to make better photos—lots of lenses, filters, light meters and shades. They would have a darkroom in their basement with lots of chemicals and enlargers, so that they could develop their own film and photos and crop them to be “just right.”

All of this took skill, knowledge, dedication and lots of practice—as well as lots of money. It was not for the average “amateur.” These hobbyists could take great pride in their unique skills and abilities. Others marveled in jealousy at the “magic” of their great photographs.

Then something happened. Technology got sophisticated enough that cameras could take pretty good pictures all on their own—just point and shoot. Now everyone could take pretty good pictures without any advanced training, skills or lots of gear. Being a photo hobbyist no longer carried the same cache. It wasn’t all that special anymore once the average Joe could do just about as well.

As a result, those who looked to their hobby as their point of pride and status saw that being a photo hobbyist no longer satisfied that ego stroking. Therefore, many quit photography and found new hobbies in areas which still held status, like electronics or computers.

Now, with the digital revolution, everyone has access to cheap and easy tools to take, edit, modify and photoshop their pictures into great works of art—and place them on the internet for all to see. And you don’t even need a camera. I was recently at the zoo—a place full of young families. I looked around me and noticed that I was the only one with a camera. Everyone else around me was taking photos with their cell phone.

It is getting harder to even think of photography as a hobby. It’s just something people do, like breathing. And nobody thinks of breathing as a hobby. Without a large hobby segment, there is no reason to for a large photo hobby specialty store like Ritz. Hence the problems at Ritz: it’s camera focus fell out of touch with where pictures evolved.

By contrast, Best buy has frequently changed its product focus. I remember back in the 1980s, when their big emphasis was on microwave ovens. It was the cool new technology, and people flocked to Best Buy because they held seminars and cooking classes on how to use this cool new gizmo. Soon thereafter microwave ovens became mature and were treated like a toaster that you replace at Walmart when they break.

Of course, by then Best Buy had moved on to the next cool new gizmo—VCRs. Then when that started to get mature, they went on to follow with computers, then DVDs, then Digital TV and now Mobile Devices. The idea was to abandon categories before they matured and replace them with the next new thing. That way Best Buy was always hot and always successful.

THE ANALOGY
As a business, companies have two strategic choices. They can either define themselves primarily by specializing in the type of products they sell (like Ritz Camera) or they can define themselves primarily by the specializing in the place in the product lifecycle where they want to be.

This is a critical strategic decision which can dramatically impact how your company evolves. How you answer this question can even be one of the major reasons why you succeed (like Best Buy) or fail (like Ritz Camera).

THE PRINCIPLE
The principle here is that the decision to focus on product versus lifestage is critical. It needs to be a conscious choice, because it will drive so many of your other strategic decisions. If done well, there are opportunities to succeed with either approach. But to do so takes hard work, tough choices and significant strategic modifications. You have to be fully committed to one side or the other. A half-hearted middle approach will tend to fail.

Let’s look at either option in detail to illustrate the particular types of risks and tough choices which apply to either decision.

Focus On Product
The biggest problem on a product focus is that products evolve and go through a lifecycle. At first, they are the cool new thing, desired by leading edge hobbyists who desire the status of taking the time to become an expert when others aren’t. Second, the experts help the rest of us “get it” so that the product achieves mass demand. It is the hot thing everyone wants. Then, it becomes just another thing that everyone already has. Your sales shift from first-timers to replacement purchases and the priority shifts from expertise/service to low price. Finally, your product becomes a lowly commodity at best, and an obsolete has-been at worst, which is replaced by the next new cool thing.

Therefore, if you focus on the product, then your greatest strategic challenge is to align your business with the changing demands from managing to the life cycle. For example, if the basic product you sell doesn’t change, then you have to change, to have the most appropriate business model for the particular period in the lifecycle where that product lies. At the beginning, you need to be creative, inventive and cool, and you have fat profit margins to pull it off. At the end, you have to think like a commodities manufacturer, with razor-thin margins and a merciless emphasis on cost reduction. That’s a big cultural change. Distribution channels can change over time, too, from dealing with boutiques to dealing with Walmart.

The second strategic challenge is to slow-down the natural progress of the life cycle, to keep it as alive and cool as possible for as long as possible. Rapid obsolescence via frequent product upgrades can help to keep it cool longer. Strong image advertising can help keep some status with the product longer. Look at the mature automobile industry. Cars can last a decade, but clever strategies like leasing and restyling induce people to want to change cars every 3 to 4 years. Relentless beer image advertising has helped beer brands keep at least some preference and status rub-off in that mature business.

The third strategic challenge is to try to outlast all the competition, so that in the end-game you have a near monopoly. That is what Budweiser has done in the US beer market. Everything has pretty much consolidated into their lap, so that they still have enough volume and clout to make a killing.

The biggest risk is that your company dies when the product eventually dies. If you’re in the newspaper business and nobody wants newspapers, you’re in big trouble.

I think the problem at Ritz Camera was:

1) They picked the wrong product (cameras instead of photos)
2) They did not try aggressively enough to own all the new places where photo status was going (scrapbooking, on-line editing software, You-Tube, etc.)
3) They did not try to develop and get an exclusive on the ultimate cool photo-phone.
4) They did not change their business model enough to win when things get commoditized and margins go away (i.e., their stores could not beat Walmart when the product matured).

In other words, they did not manage the lifecycle well because they did not realize how much of a priority that was, so they lost.

Focus On Lifestage
The other option is to be more like Best Buy and focus on staying in a particular lifestage. For example, if you focus on the early stage, when products lose their cool, you switch to the next cool thing. This is also pretty much how GE has worked over the years. As industries they were in starting to get mature, they would sell off the division and add a new division still in the early cool stage. That way, the portfolio stayed hot (and profitable). The benefits here are that a) you can focus on perfecting a management style for that life stage; and b) your lifespan is not tied to the lifespan of a particular product.

With this strategy, the biggest issues are timing and transitioning. By timing, I mean knowing when to let go of old products and when to dive into new products. If you sell off too quickly, you may walk away from a lot of profit. If you stay too long, you may not find a profitable way to exit the business.

If you enter a new business too early, it may take too long to get a return (and you are more likely to guess wrong on whether it will get hot). If you enter too late, you may have to pay too much to enter and be too far behind in the race for leadership.

By transitioning, the problem is getting people to accept that your brand has a right to be in that new space. If you are too far afield, then the customers will not give you credit in that new space. Also the farther away the transition is from your core, the less likely you will have the proper skills needed to win. For example, if Best had gotten into high end designer handbags when they were hot, it would have failed because it does not line up well with the brand customer or the brand image, and they know nothing about designer fashion. That transition would not have worked.

Best Buy has succeeded because their timing was great and they always transitioned into products that were consistent with the brand and its core customer’s desires. They were also willing to be very aggressive in the transition—killing off old categories entirely and going full-out to win in the new category. This is not a game for the half-hearted.

SUMMARY
Great strategies tend to be explicit on whether the company is going to focus on a type of product or a particular lifecycle stage. Then one needs to aggressively adapt the company over time to stay true to the chosen path. Half-hearted efforts on either path can lead to failure.

FINAL THOUGHTS
You don’t have to only focus on the early stage of the life-cycle. Pinnacle Foods has done well by purchasing the cast-off mature food brands from the food companies trying to get out of mature businesses. They own brands like Duncan Hines, Hungry Man, Aunt Jemima and Swanson. Because they are experts in running brands in their late maturity, they can make them successful when their former parents found them to be a drag on profits.

Strategic Planning Analogy #130: Strategy Gifts

THE STORY
There is a story told about boxer Mike Tyson. Mike grew up under less than ideal conditions. He was born into poverty in a bad section of Brooklyn. His father left when Mike was only two years old, leaving his mother to try to find the means to raise the family.

Mike was expelled from junior high school for fighting and spent a number of years in juvenile detention centers. To raise money, Mike got involved in petty crime. By the age of 13, he had been arrested 38 times. Eventually, Mike Tyson ended up being placed in the Tryon School for boys in Catskill, New York.

It was here that his boxing skills were discovered and he was put on a path that would eventually lead him to becoming the world heavyweight boxing champion in 1986. With the fame came money. For the first time, Mike Tyson was not in financial need.

Companies wanted their products associated with a successful boxer like Mike Tyson, so they started showering him with cash or free products to try to get his endorsement. All of this amazed Mike.

He is claimed to have remarked on this strange phenomenon by saying something like the following: “When I was poor, I begged people to help me and nobody would pay attention to me. Now that I am rich and can afford to buy things on my own, people give me stuff for free...even a new free car. Where were all you people when I needed the help?”

THE ANALOGY
There’s an old saying that “The rich get richer and the poor get poorer.” This seemed to be the case for Mike Tyson. When Mike Tyson was poor, there didn’t seem to be any way out of the poverty cycle. Things just seemed to continue to get worse. However, when he got his lucky break of being discovered at the Tryon School, it put him on a path to boxing wealth. That wealth lead to a great number of opportunities to get even wealthier.

Mike Tyson really didn’t have any strategy to get all of those extra sources of income. He just knew how to do one thing well (boxing), and that success created its own opportunities for other successes, all initiated by others.

Similarly, there are businesses that do only one thing well, which place them in a powerful position. Others, who want to take advantage of that success start throwing great business opportunities at them. This creates greater success for the firm. It didn’t come by any pre-planned strategy. The ideas just came unsolicited by people who wanted to use the company for mutual gain.

Sometimes, the only strategy one needs is to create a point of power in the marketplace. Once the power is created, others will supply you with preferential access to all of the future opportunities one needs. Your only strategic responsibility at that point is to determine which of the many opportunities are best for your company.

THE PRINCIPLE
The principle here is “the power of the gatekeeper.” Gatekeepers provide access to something you cannot reach on your own. That could be access to distribution channels, access to customers, access to money or whatever. Mike Tyson was a gatekeeper providing access to a certain type of demographic (his fans) who tend to be difficult to reach with traditional media. As a result, firms were willing to offer a large number of great deals to Mike in the attempt to access that demographic.

If you can create a strategy where you become a powerful gatekeeper, then others will shower you with opportunities as they did for Mike. Look at Oprah Winfrey. She is such a powerful gatekeeper that everyone wants to jump on her bandwagon. If you are an author, Oprah can be a great gatekeeper to readers. Huge numbers of firms want to pay large sums to advertise on her show or in her magazines. The opportunities are unlimited, creating great wealth and making Oprah a billionaire.

The Chicken McNugget was not invented by McDonalds. It was invented by Tyson Foods (not related to Mike Tyson). Tyson Foods believed they had a potential hit on their hands, but they needed a gatekeeper to give them access to the fast food channel. Since McDonald’s was the strongest gatekeeper in the channel, they started there. At first McDonald’s was reluctant to take on the product. It took a lot of time and a lot of coaxing by Tyson Foods to get McDonald’s to try the idea. It eventually became one of their greatest product launches.

There was no strategy here. McDonalds had no desire to get into the chicken business. They had no creativity to invent something like a McNugget. At first they even rejected the idea. It was only through the creativity and persistence of an outsider that they got into the business.

I had a conversation with a former strategy executive at McDonalds. He told me that when he first came to McDonald’s, he expected to find great masterminds at marketing. Instead, he found very little marketing expertise. Either they bought it from an ad agency, or the ideas came to them from outsiders who wanted to tap into their power. He said the only thing they were really great at was running a highly efficient restaurant process. That high level of efficiency, combined with rapid expansion, created the market presence that lead to gatekeeper power with fast food and for families with small children. The rest of the success just sort of fell into their laps.

Whenever a new technology opportunity comes up, there are competing forces trying to determine how it will evolve. The question is which of the competing technology standard will win. For example, which high definition TV technology will win? Which high definition video disk technology will win? And so on. Anyone who wants to set the standards for new technology in their favor knows that their potential for success is much greater if they can get powerful gatekeepers on their side. Best Buy has tremendous gatekeeper power in accessing people interested in leading edge technology. Therefore, firms with new technology do whatever they can to become the preferred technology standard at Best Buy.

Best Buy understands the power it has and has created a strategy around exploiting this gatekeeper power. They often essentially pit one standard against the other and see which one will offer Best Buy the biggest prize. Then they back the one that offers the best results for Best Buy.

The point here is that in some cases, one does not need to fully flesh out all of the strategic detail. All you need is a strategy to create gatekeeper power and a strategy to exploit it. If done properly, this will put your firm in position so powerful that you do not need to be geniuses in creating opportunities. Other firms will do all that for you and shove more opportunities into your face than you can absorb. You just need to be wise in picking amongst all the ripe opportunities put in front of you (and wise in properly negotiating the deals with these people).

Now becoming a strong gatekeeper is not easy. If it were easy, there would be more of them and they would command less power. This alone can be serious, time consuming strategic work. The trick is to pick something that other businesses desire, yet find difficult to access. Then you specialize in finding ways to gain that access and then let others start throwing money at you.

This is a common ploy in the dot com world, where if you can create great access to a desirable group of people, then advertisers will be all over you. For example, Google used technology to allow firms access to people interested in a particular search word. This type of gatekeeper power has proven to be very successful for google.

Go out there and find your gatekeeper opportunity.

SUMMARY
One approach to strategic success is to own the best access to a desirable resource, such as a particular type of customer, technology, distribution channel, raw materials, a particular type of labor force (highly skilled or highly inexpensive), or some other item. Once you have locked up the access to that resource, the firms who want to access that resource will provide you with all kinds of business opportunities. These opportunity “gifts” will supply more than enough ways to increase your wealth.

FINAL THOUGHTS
Of course, if you manage that gatekeeping poorly, it can lead to ruin. Mike Tyson did not continue to perfect his one point of expertise which lead to his gatekeeping power (boxing). This quickly lead to others becoming the heavyweight champion. In addition, he did not do a good job of proactively exploiting the gatekeeper power at the time when he had it. As a result, in 2003 Mike Tyson had to declare bankruptcy.

Early Bird

THE STORY
Back in the late 1990s a phenomenon was sweeping through US protestant churches. Some churches were changing the style of worship music. Instead of singing traditional hymns backed by a large organ, they went to singing contemporary praise songs backed by a “praise band,” with electric guitars and drums. Choirs were replaced with song leaders and soloists.

This change in music seemed to strike a chord (pun intended) with a good number of people. The early churches which adopted this change in music started growing in membership very quickly. Many became “mega-churches”, with congregations of several thousand.

People in religious circles started to take notice. “Experts” in church growth started writing about it and, when consulting with churches that wanted to grow, advised them that they needed to ditch the hymns and go with praise songs.

At first, the advice seemed to work. Those churches that were early adopters of this new worship format saw similar types of rapid growth. However, after awhile, the later adopting churches which changed their format more recently were not seeing a similar type of growth. Instead, they were seeing the opposite—more people were leaving than coming.

It’s the same strategy as before. It’s still working for the early adopter churches. Why isn’t it working for the later adopters?

THE ANALOGY
The early adopting churches of contemporary worship were providing something new and different to worshippers. Since only a small minority of churches were doing it at first, the people who wanted to worship this way had to flock to the few places that were offering it. This caused the membership in these early adopter churches to swell in size.

The later adopters were facing a different problem. First of all, many of the people at these churches were there because they did not desire a contemporary worship service. If they had really wanted contemporary worship that badly, they would have switched to worshipping at one of the early adopter churches.

Second, by switching over to contemporary worship late in the game, these churches were not really offering anything new that wasn’t already available. Those that preferred contemporary worship would already be worshipping at one of the early adopter churches of contemporary worship. There would be no reason for them to switch to the late adopter church.

Finally, the early adopter churches had attracted some of the best musicians of contemporary worship in the neighborhood. They had been at it for awhile and were pretty good at it. The later adopters were still adjusting to the change and were in most cases not as polished as what the early adopters had become by this time. So the later adopters would appear at first to not be as good at contemporary worship as those more established in the format.

Therefore, many of the ones who were in the later adopting churches who did not want the contemporary worship left those churches and few who preferred contemporary worship came to take their place.

Businesses can fall into the same pattern. Early adopters get a competitive advantage by getting into a new strategic trend while it is still relatively unique. Businesses who enter into the same strategy at a later date do not achieve anywhere near the same benefit as the early adaptors, even though it is the same strategy which worked for the early adaptors.

As they say, the early bird gets the worm.

THE PRINCIPLE
The principle here is the principle of early adoption. In general, early adopters of a strategy get more benefits out of the strategy than later adopters. There are three reasons for this:

1. Negotiating Benefits
2. Differentiating Benefits
3. Perpetuating Benefits

This picture helps illustrate these benefits. These are explained below.

1) Negotiating Benefits
In the business world, when you have something new and different to offer, it is often difficult to get that first big customer. Nobody wants to be the first one to put their reputation on the line in case the new idea doesn’t pan out. However, once you land that first big customer and you can prove success, others will quickly fall in line around your product.

Since getting that first big account is so important, one is often willing to bend over backwards to get that business. You may offer that first customer a lot more than what the following customers get. This could include things like:

a) A lower price
b) More on hands help from the seller
c) More promotional dollars
d) Exclusivity for a period of time
e) Perhaps even a piece of equity in the company

The early adopter is in a much more powerful position when negotiating the deal. They can ask for and typically get more than if they wait, because the early adopter has to power to make or break a new concept or product.

I remember back when Sears introduced the Discover card. At first, no other retailer wanted to honor the card. It looked like it was going to be a dismal failure. Eventually, however, the Dayton Hudson company (now Target Corp.) decided to honor the Discover Card at its department stores and discount stores. Once Dayton Hudson signed up, others soon fell in line and started to honor the card. I would imagine that Dayton Hudson got a pretty good deal when they signed up to honor the card. It was most likely a better deal than what the followers got.

Best Buy discovered Netflix long before it was a popular brand. Best Buy approached Netflix with an offer to help make it a success. Of course, Best Buy was in a more powerful position than Netflix. Assistance by Best Buy could be the difference between Netflix succeeding or failing. So Best Buy negotiated a sweet offer and helped to make Netflix the powerful brand it is today. I highly doubt that those who came along later to help sell Netflix got as good a deal as Best Buy.

The point is that if you think a new idea or concept is going to take off, it is better to get in early, because that is when you have the most negotiating power to get a better slice of the new business.

2) Differentiating Benefits
As we saw with the churches, the ones who were early adopters created differentiation in the marketplace. They were offering something new and different. This gave people a reason to switch to the early adopters. By the time the late adopters got around to the change, it was not longer differentiating. It was just like others in the marketplace, providing little reason to switch to them.

You can see that with Best Buy and its Geek Squad. Best Buy was the first major retailer to provide great service on high technology. This gave them a competitive edge for a time…a reason to go to Best Buy over the competition. It was so successful that others eventually felt the need to copy the idea, such as Circuit City with Firedog and Staples with “Easy Tech” service. However, by coming in later, they were not offering anything new or differentiating. They were just playing catch up (and I’ll bet Best Buy picked off the best service people by being first, so that they will have a hard time catching up in quality of the service).

When you are the first to offer something that is truly new and desirable, one can often (for a time) charge a premium price and still grow market share. By the time the late adopters get into the game, it is more competitive. The premium price goes away through price wars. In the end, most everyone ends up with a similar offering, but the early adopter got more profits out of it during the time when it was a differentiating strategy rather than a “me too” strategy. So if you are all going to end up offering the service eventually, it pays to get in when there are still differentiation benefits (for market share and profit margin).

3) Perpetuating Benefits
If you are an early adopter, you get to reap the benefits of early negotiation and early differentiation. These help give you an advantage versus competition, who did not get the additional profitability and market share like the early adopter. These additional benefits can be plowed back into the business to make it even stronger than before (making it ever harder for competitors to catch up).

In addition, when others come along with the next big new thing, they will probably first go to the one who has the reputation for being an early adopter. You get to be first in line to get all those advantages again, which can further strengthen your position in the marketplace.

As a result, early adopters get into a perpetuating virtuous cycle, where they keep increasing their advantage relative to competition.

SUMMARY
Eventually all great new things eventually become the norm—the radical becomes tomorrow’s traditional. If you wait until they are the new tradition before jumping in, you miss out on all of the advantages gained by the early adopter. If the transition is going to happen anyway, one may as well get in early.

FINAL THOUGHTS
Getting in early does not mean jumping into every half-baked scheme which comes along. Most new ideas are bad ideas. Be choosy. Just don’t wait until it is already a proven success before jumping in. Take calculated risks.

Cutting Your Way to Prosperity? (part 2)

THE STORY
One of my favorite comic strips of all time was Pogo, by the late Walt Kelly. In one of his comic strips, Albert the Alligator was running as fast as he could through the swamp. Pogo the ‘possum was desparately trying to keep up with the pace. While they were still running, Pogo asked Albert where he was going. Albert answered something to the effect that he didn’t really have a particular destination in mind. In response, Pogo replied, “If you don’t know where you are going, then why are you running so fast to get there?”

This story is not that dissimilar to what happened to Alice in Wonderland. Alice was confused, so she asked the Cheshire cat which way she should go. The Cheshire cat asked Alice where she was trying to get to. Alice said that she didn’t know. In response, the Cheshire cat said that if you don’t know where you are going, then it really doesn’t matter which path you take.

THE ANALOGY
Strategic planning is all about finding the right destination for your business and the right path (journey) to get you to your destination. Both are necessary ingredients to success. A goal without a means to get there is worthless. Similarly, tactics which lead nowhere are also worthless.

Sometimes, we can fall into the trap that captured both Albert the Alligator and Alice in Wonderland—disconnecting the journey from the destination. Albert was so intent on making progress on the path that he failed to take the time to choose a destination. A lot of activity and movement was enough to make him happy. And as Pogo pointed out, if the journey has no purpose, striving to do it faster or more efficiently does little, if any good.

Alice had a similar problem. She was so intent on leaving her current situation that she failed to take time to determine a better location. She was seeking guidance on which path to take to move away from a position she did not like. And as the wise cat responded, if you have not planned your destination, then it really doesn’t matter what you do or where you go.

Although it may seem silly to think that a business would be as foolish as Albert or Alice, it does happen. During the dot com boom, people were saying that choosing a destination is obsolete. All you need to do is race like Albert to get to the next “killer application” before someone else. Some of those dot com “geniuses” don’t look so smart anymore.

Another time when leaders are tempted to disconnect action from destination is during tough times. When tough times hit, there is pressure to make a lot of cuts in order to make it through until good times return. These cuts can be across the board, regardless of any strategic concern. Like Alice they are looking at avoiding the current bad situation rather than seeking out a better situation. The analogy I hear often goes something like this:

“I don’t have time to worry about fancy things like strategy and positioning. My patient is dying. I’ll worry about that luxury later. Right now I have to focus on stopping the bleeding.” And, of course, stopping the bleeding means stopping the flow of red ink by cutting costs as much as one can (and without thought as to how it will impact the strategy). However, if you do not know what is wrong with the patient and how to cure the underlying problem, stopping the bleeding will not ultimately solve the problem.

THE PRINCIPLE
This blog is the second in a series on avoiding pitfalls when in a cost-cutting mode. In the prior blog (see “Cutting Your Way to Prosperity (part 1)”), we looked at the pitfall of when cuts are really not cuts, but rather just a shifting of costs from one location to another. In today’s blog, we are looking at what happens when cost cutting is done without concern for its impact on reaching a strategic destination.

Three principles should be considered when making cuts to ensure that it doesn’t get disconnected from strategy:

1) Prioritization
2) Process
3) Preemption

These are covered in more detail below.

1) Prioritization
Across the board cuts can not only cut the fat in your business, but also the meat. I recall two discount store chains that cut their merchandise buying across the board. Unfortunately, not all merchandise sells at the same rate. Fast turning items like health & beauty care, household chemicals or candy sell through much faster than clothing. In one store, the only thing consumable item left in stock after inventory cuts was 2001 flushes, so that’s what an entire aisle was filled with. In another store, I saw more than three aisles filled with just one item—red licorice rope. I doubt if this left a good impression on the customer who was looking for the items which used to be on those shelves. Sometimes, you have to cut things differently, due to their different characteristics.

Rather than cut everything equally, one needs to make priorities. In general, areas that are most near and dear to one’s competitive advantage need to be cut the least. You’ve worked hard to build that reputation. Don’t give it all away at the first sign of panic.

Areas that are least crucial to your strategy should take the brunt of the cuts. Of course, this assumes that:

A. The people doing the cutting understand the strategic priorities of the company and what is most crucial to success; and
B. They understand how various cuts might impact the ability to continue down the path to one’s strategic goal.

Before making a cut, first ask yourself:

- Will there be a noticeable difference to my customers, enough to turn them away?

- Will this cut change the nature of who I am, to the point that I have inadvertently changed my strategy without knowing it? For example, if your historical strategy hinges on being known for superior service, and you cut the life out of your people providing the service, then you have really changed your strategy to no longer be about service.

2) Process
It takes a certain amount of input (people, money, equipment) to get a job done in a particular way. If you cut back on one or more of these inputs and do not change the expectations of the way a process gets done, you may be courting disaster by guaranteeing failure, since the same process cannot be done with the lower input. Decisions about cuts in inputs should not be divorced from decisions about the process creating the outputs.

Two types of process decisions can be made. First one can look at the various tradeoffs involved in cutting the inputs. For example, it you need to cut back on your service one can choose a tradeoff between speed and quality—either keep the quality and make it take longer to get the service, or keep the speed, but lower the quality. Depending on your strategy, one tradeoff may be better than the other. Hence, you alter your process based on which tradeoff you want to make. Making such a tradeoff is usually better than cutting back both quality and speed.

The second type of process decision may be to change the process to best fit the cut in inputs. For example, let’s say that the advertising budget gets cut. Since the original process cannot be achieved on the lower budget, maybe it’s time to do things differently, like maybe switch from TV advertising to radio, or move from mass-oriented advertising to just advertising to a narrow niche…or cluster fewer ad dollars into less frequent, but bigger bursts, instead of dribbling it evenly throughout the year.

Again, it is easier to know how to alter the process if you know your strategic direction, because it will help direct which alternative processes are most in tune with your strategic direction and destination.

Preemption:
Sometimes tough times are caused more by our own lack of strategic direction than by any outside forces. To quote from Pogo again, you may be in a situation where, “We have met the enemy, and he is us.” If your strategy is weak, you are more vulnerable to competitive onslaughts and economic downturns. Conversely, if your strategy is strong, you may be able to weather an economic downturn without much difficulty. You may not even have to cut much at all, because the strength of your strategy will carry you through.

The plummet in prices on digital TVs is hurting all the consumer electronics retailers with weak positions. Circuit City has been furiously trying to cut costs. Tweeter this week filed chapter 11. Best Buy, however, is still going strong due to its years of building a strong strategic position.

In other words, the best way to deal with price cuts is to avoid them completely by creating such a strong strategy that you are less vulnerable to downturns. This would be preempting cuts via strategic forethought.

SUMMARY
During tough times or economic downturns, there can be a tendency to forget strategy and just rush to cut costs. Spending a little time first thinking about strategic implications can make cost cutting far more productive, and may even eliminate the need to make the cuts in the first place.

FINAL THOUGHTS
The best time to prepare for the tough times is when you are still in the good times. During the good times, you have the luxury of time to figure out your strategy and what is really critical to its success (the destination and the path). As a result, instead of acting irrationally or emotionally in panic when the bad times come, you can calmly go back to what you learned in the good times and do what makes sense both near term and long term.