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 #318: Measured Approach

THE STORY
I’m not very handy when it comes to home improvements. Once, I was going to replace some windows on my house. I went to the home improvement store expecting to see some standard-sized windows that I could just slip in to replace the old ones. As it turns out, there really is no such thing as a standard-sized window, especially for an old home like mine.

I would have to measure the opening and get custom-made windows. I knew that my skills at properly measuring the hole the window would go into would be poor, so I didn’t even try. Instead, I decided to call in a professional. They sent two people to my home—one to look at the windows in the house and one to talk about options and prices. As it turns out, while the one person was telling my wife and me about options and prices, the other one was going around the house stealing things from us.

Another time, I decided to put new siding on the outside of my home. At the time, I was living in Minnesota, which gets very, very cold in the winter. Since winter is the slow time in Minnesota to get new siding, I got a really good deal on the price. Unfortunately, when the workers took off the old siding and insulation, the pipes in my house froze.

When the job was eventually finished, it looked really nice. However, something happened that following summer, when it got very warm. The siding on the walls expanded with the heat and no longer properly fit the dimensions of the house. It became extremely difficult in the summer to open the door to the house, because the expanded siding was pushing against the door frame, making it too small for the door.

THE ANALOGY
In home improvements, making the proper measurement is very important. If you cut things too large or too small, they will not fit. You will have wasted your time and have a disaster to deal with. Nothing seems to come in standard sizes, so it is up to you to make sure the measured size is right. Even when you outsource the measurement to so-called experts, you can have problems.

The same is true when it comes to defining the scope of your business. There is no standardized scope which is the same for everyone. You have to define the unique size of the scope which is right for your business.

Back in the 1960s, Theodore Levitt wrote one of the most popular articles ever to appear in the Harvard Business Review, called “Marketing Myopia.” In this article, he claimed that many businesses measure their scope too small. Levitt talked about how the railroad industry got into serious difficulties because they narrowly defined their scope as being in the “railroad” business when they should have used the larger scope of defining themselves in the “transportation” business. Other transportation options (planes, trucks, etc.) were growing while the railroad industry was shrinking. Levitt claimed that if the railroad companies had defined a larger scope, they could have continued to grow by diversifying into these related growing transportation businesses.

Then there is management/strategic planning professor Henry Mintzberg. Mintzberg claims that many businesses get into trouble by defining their scope too broadly. A large scope can lead to a lack of focus and dissipation of effort. Mintzberg claims that if the railroads had redefined themselves as in the transportation business, they would have failed due to lack of focus and stretching their resources too thinly across too many areas.

Marketing expert Al Ries would agree that focus is one of the cornerstones of business success. Ries claims that most brand extensions fail because they destroy the power of what the formerly focused brand stood for in the minds of the customer.

So measuring the proper scope for your business is as tricky as measuring the windows or siding for your house. Measure it too small, and you can miss all the growth opportunities. Measure it too large, and you can never get focused enough to accomplish anything.

So how do you know what is the right size for your custom-fit business scope?

THE PRINCIPLE
The principle here is that the size of holes should be defined based on the size of what you are trying to put in the hole. In other words, holes for windows should be defined based on the size of the window you are putting in the hole. So before you define the scope of your business, make sure you know what kind of “window” you are putting in that hole.

So what is the “window” equivalent when defining scope? Well, here are few to consider:

1) The size of the customer alternatives
Consumers have alternatives. They can choose your firm or choose something else. Some of those alternatives can be very different from what you are offering. For example, if the customer wants to lose weight, they can choose from a wide range of diverse alternatives, from diet supplements to exercise programs to cosmetic surgery. The size of the “window” is the breadth of alternatives which are relevant to your core customer.

Returning to the railroad example, it is probably too large a leap to go from railroads to transportation. I think you need to understand which type of transportation solution you are specializing. For example, one could specialize in low-cost transportation, bulk container transportation, rapid transportation, small batch transportation, etc. Determine your solution specialty and then size your scope to include any other transportation option which has to potential to either threaten your core in that specialty or provide a diversification option with that same solution.

For example, Wal-Mart’s scope is sized as low price retailing. Whenever Wal-Mart sees something that could provide a better low price retail solution, it considers going into that business. This is why Wal-Mart diversified from discount stores into hypermarkets, supercenters and warehouse clubs. It goes wherever low price retailing goes. Wal-Mart avoids high end retailing because it is not within its scope.

2) The size of your capabilities
If the size of your scope is significantly broader than the scope of your capabilities, you are opening yourself up to entering places where you will fail. This is not to say that you shouldn’t have a little stretch in your scope, but in general the size of your scope “hole” should be similar to the size of your capability “window.”

Over time, you can enlarge the size of your scope as your company gains competencies. However, it is probably unwise to do it all at once. Take a look at Amazon. They started out with a narrow scope—selling books on the internet. However, as they got superior competency in internet selling, the scope was widened to include internet selling of other goods (and helping other companies sell on the internet). As they got superior competency and clout in the book business, Amazon expanded their scope into other areas of the publishing business, the most recent of which was the introduction of the Kindle ebook reader.

As Amazon CEO Jeff Bezos put it, "If you want to continuously revitalize the service that you offer to your customers, you cannot stop at what you are good at. You have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things." Then, when you get good at them, you can expand your scope to offer them.

Another example would be Cardinal Health. Cardinal Health started out in the US in the 1970s as Cardinal Foods, with the scope of being a grocery wholesaler. Then, in the 1980s, once they got good at being a wholesale distributor, they expanded the scope to include being a wholesaler of pharmaceutical and related products for drug stores and other health companies. The name was changed to Cardinal Distribution.

After getting to know their health care customers well, the scope was expanded to include a larger role in the health care industry. In 1994, the company was renamed Cardinal Health. Recently, it was determined that perhaps that health care scope was a bit too broad to be handled properly under one company, so in 2009, the company was split into two separate companies. The clinical and medical products were spun off into a new firm, called CareFusion. The scope of CareFusion is: To deliver clinically proven products and services that measurably improve patient care, principally by improving safety through reducing medication errors and healthcare-acquired infections. The remaining Cardinal Health now has a more focused and manageable scope within health care: To make healthcare more cost-effective through improving efficiency across the system, so our customers can focus on their patients.

It’s okay to redefine your scope over time. In fact, it is probably dangerous to never redefine your scope, since marketplace changes and capability changes may eventually make that original scope less than ideal. The trick is to time it properly so that good opportunities aren’t missed and bad opportunities (at least bad at a particular time for your firm) are avoided.

3)The size of your rope (lifeline)
Business strategies have a lifecycle. Unless you adapt and update, your strategy can die. If you can see the end of your strategy in the near horizon, it may be time to expand your scope as a means to expand your company’s lifeline. In other words, if you are hanging near the end of your rope, you may want to find a way to expand the length of that rope.

For example, had Cardinal Health (as Cardinal Foods) kept its scope focused on just serving independent grocers, there is a good chance the company would no longer be in existence, since the demise of the independent grocer in the US over time has eliminated nearly all narrow-focused publically held grocery wholesalers.

SUMMARY
One of the key strategic decisions is that of defining a business’ scope. Define it too small and a company can miss many great opportunities. Define it too large and a company can lose focus and enter areas where it does not belong. To help size the focus appropriately, look at the breadth of your customers’ alternatives, the level of your expertise, and the length of the life within the current scope.

FINAL THOUGHTS
Just because business scope needs adjustments every so often does not mean that it should change frequently. Once you put new windows and siding on a house, you expect them to last many years. Similarly, if you scope your business properly, the scope should last many years as well.