Strategic Planning Analogy #512: Working on the House

THE STORY
I was recently eating at a Taco Bell restaurant where the inside temperature was only 63 degrees Fahrenheit (about 16 degrees Celsius). It was so cold, I had to eat lunch with my coat on (and it is only October). This got me to thinking…

Imagine that you have a home-based business and that your home is extremely cold. The extreme cold in your house causes your typical day to have problems like these:

1. Much of your day is spent trying to create warmth, doing things like:
1. Chopping wood for the fireplace.
2. Doing exercises to warm up.
3. Checking the thermostat.
4. Heating pots of water on the stove. 

2. Working on your laptop, smartphone and tablet is difficult because you are bundled up in bulky clothes and wearing mittens on your hands. 

3. Lots of money is wasted on utility costs in a futile attempt to warm the place. 

4. Because of the pre-occupation with the cold, you find it hard to concentrate on anything else (like your home-based business).

If you had to deal with problems like that day after day after day, I suspect that your home-based business would be a disaster.

Now let’s suppose that instead of focusing on trying to do work IN the house, you tried to do work ON the house. You go around inspecting the house. What you find is that there are several big holes in your wall exposing you to the cold outside environment. In addition, you find that the insulation in the walls is missing.

After spending a little time working ON the house (fixing walls and insulation), you quickly notice that it becomes a lot easier to do your business IN the house, because now it is comfortably warm all day.

1. You gain back all that time wasted on trying to heat the house.
2. It is easier to work on your devices when not wearing mittens.
3. Your utility bills go way down.
4. It is easier to concentrate on the business now that the distraction of being cold is gone.

And now the home-based business is a lot more successful.

THE ANALOGY
In the world of business, you have two choices on how to spend your time. You can spend your time either:

1. Working IN the business (doing the daily stuff which keeps the process in operation); or
2. Working ON the business (doing the big-picture stuff which improves the structure of the business and its ability to win in the marketplace).

Both are important; both need attention. But for leaders, more time needs to be spent working ON the business rather than IN the business.

I believe that leadership in most businesses under-allocates time working ON the business. It’s easy to understand why. Fixing the crisis of the day (IN the business) sucks up time leaving little left for the examining the big structure (ON the business). But, as we can see in the story, that approach is very unproductive.

The crisis of the day in the story was the cold temperature. Extensive time and money were wasted trying to find ways to get the work done in this environment. Dealing with trying to work through the crisis was crippling the business (working IN the business wasn’t working).

However, by taking time to step away from the day to day and look at the big picture, one could easily see that the overall structure of the house was inadequate. After fixing the structure (the holes and the insulation), the crisis went away. Productivity skyrocketed. By spending time ON the business, the work being done IN the business got a whole lot more productive—more productive than what could be achieved by merely working in the business.

THE PRINCIPLE
The principle here is that structure matters. How you structure the business can have a big impact on how effective the work is inside the business. Even if your employees are hardworking and want to succeed, if the structure is wrong, that effort will be as effective as trying to use devices with your mittens on.

Structural Questions

Structural issues would include questions like these:

1.     Do you have a winning position in the marketplace (a reason for customers to prefer you)? If you have no reason to win, then you will lose, even if you work hard. Working hard at mediocrity or in offering the same as everyone else will not get people to prefer you. The winning position is the foundation of your structure. Without a solid foundation, the structure will fall and crush your operations. Everyone gets all excited about the smartphone business, but keep in mind that only Apple and Samsung are making a profit in this segment. The others are working very hard IN the business of smartphones, but they are losing because they have not developed sustainable positions which create a natural reason to prefer them. Unless they first address this issue (working ON the position), their efforts IN the smartphone business will be wasted. You can read more about this concept here.

2.     Do you have a business model which is designed to give you an edge in achieving your position? Why should you expect to win if you do not have a structure designed to increase your odds of achieving superiority at your point of differentiation/winning? Just working harder in the business is usually not enough. Think about hard discount retailers like Aldi. They create a preference based on a low price position. These low prices are not achieved by merely working harder IN the grocery business. No, they are achieved by working ON a structure which makes low prices easier to obtain:

a.      Very Limited Assortments

b.     Virtually all Private Label Store Brands

c.      No Service

d.     Selling from pallets of open boxes rather than placing individual items on the shelf.

This structure gives an edge in achieving the low price position which businesses under a more conventional structure cannot touch.

3.     Have you supplied the business with adequate levels of capacity and competency? Working hard IN the business will not lead to success if your structure is missing the capacity and competency needed to win. Without an adequate supply chain (access to enough raw materials, manufacturing capacity, distribution capacity, etc.), your work IN the business will not be able to deliver on the promises. Similarly, without the needed knowledge, skills, and tools, harder work will be wasted work. The lack of capacity and competency is like the lack of insulation in that house. It prevents the work inside the house from being productive. In the modern economy of tech firms like Google, Yahoo, Facebook, Apple, and other social media firms, there is an understanding that if you cannot get an adequate capacity of engineering competency, you cannot deliver the winning position. Therefore, the winners design structures which create an edge in attracting and keeping this component.   

Role of Leaders

Answering these three questions is the role of leadership. They are the ones who need to step away from the day to day to think about the structure. Thinking back to the story, they need to ask: Where are the holes in the house? Where do I need more insulation? Do I need to build an addition to the house? Do I need to totally remodel the house?

If the leaders do not proactively make the time to step away from being IN the business to work ON the business, it will not get done. The crisis of the day will naturally choke it out. Like the story, you will spend so much time and effort dealing with the cold that there is little left for focusing on winning in the marketplace.

The lower levels are too closely tied to the day-to-day or their little area of specialty. They cannot see the whole structure. Only the leaders can wrap their arms around the bigger picture. And when you do, the improvements can be amazing.

And the fancy word we give to all this attention to structure is STRATEGY.

SUMMARY
Hard work is nice, but it can be a lot of wasted effort if the business structure is wrong. When all of your time is focused on finding ways to do more work IN the business rather than first working ON the business to make sure it is set up to win, you are merely creating action, not results. A good business structure has a winning position, a business model which supports the position, and enough capacity and competency to deliver on the promise of the position. If you do not work ON the business to build this kind of structure, your work IN the business is going to go nowhere.

FINAL THOUGHTS
The key here is delegation. Leaders need to delegate more of the day-to-day so that they can spend increased time on the bigger picture.

Strategic Planning Analogy #452: “X” marks the Spot?

THE STORY
How much would you pay to get a treasure map showing the exact location where one million dollars is buried?

There’s a big “X” on the map where the exact location of the treasure is—guaranteed! Sounds like that map would be worth a lot of money, doesn’t it?

Oh, there’s one more bit of detail about the map I should tell you about.  The only detail on the map is that “X” for the treasure.  The rest of the sheet of paper is completely blank.

Without any other details or reference points on the map, it is impossible to know how to reach that “X”.  Now how much do you think that map is worth?  Is it even worth anything at all?

THE ANALOGY
A key part of strategic planning is determining a desirable future position—a place where the company can win and succeed at a high level.  That desirable future state is a lot like a hidden treasure.  It is desirable and valuable once you get to it and make it a reality.

The problem is that just knowing what you want that desirable future position to be is not enough.  You have to achieve it in order to gain its value. 

In the story, we know of a treasure, but the map does not provide any detail on how to get to it.  That makes the map worthless.  In the same way, having a strategic goal, but no specifics on how to reach it, is worthless. 

Strategic planning needs to be more than just writing down an idealized vision on a piece of paper.  Like that X on a map, you need to flesh out the plan by showing a path on how to get to the X.  Discovering and managing the path is just as important a part of strategic planning as setting the goal (if not more so).  That is what adds value to the goal, because it creates a way to make the goal a reality.

THE PRINCIPLE

The principle here is that strategic planning does not end when the goals are set and the pro formas are saved in an Excel spreadsheet.  In many ways, that is just the beginning of the journey.  You still have all the work of taking and completing the journey.

It is like planning a vacation.  You may decide to vacation in Paris.  But just choosing the location is not enough.  You need to pick a date, arrange to get time off from work, determine how you are going to get to Paris, and how you are going to pay for it.  Otherwise the idea of vacationing in Paris is just that—only an idea. 

Just holding a business meeting to announce a strategic goal is like just announcing you are going to Paris.  There is absolutely no assurance that a large and diverse organization will automatically reach that goal.  There are too many forces at work to get in the way. 

In particular, the journey typically requires parts of the organization to abandon the familiar and work together in coordinated ways which they are not used to.  That will not happen by accident or natural consequence.  It has to be proactively managed.  It has to be planned.

For the rest of this blog, we will briefly look at some of the areas to consider when building that path.

1.  Commitment

Getting people to change and work in new ways is difficult enough when there is high desire to get it done.  It is virtually impossible if significant factions in the organization are resistant to the change.  Therefore a key part of the planning path needs to be concerned about finding ways to get people fully committed to the plan. 

Don’t just assume people will drop everything to bring the plan to life.  The change may hurt their power base or career plans.  The plan may interfere with maximizing a bonus.  The plan might require working with people they don’t like.  Or they may just think the ideas behind the plan are silly. 

They may not be very vocal in their opposition.  Instead they may just quietly and subtly sabotage the efforts during implementation.

Therefore, part of the strategic plan needs to find ways to gain commitment and deal with people who resist.  A little planning around this up front can eliminate a lot of grief later on.

2.  Competency

Once you have everyone emotionally committed to the task, one needs to determine if they have all the skill-sets and tools necessary to succeed.  After all, even the most committed individuals will fail to achieve the goal if they lack the competencies needed to get there.

Technologies and processes can quickly become obsolete.  Being the best at an obsolete skill does not guarantee that you will automatically succeed in the transformed environment.

Is training a part of your strategic plan?  Is acquiring new people with new skills embedded in your plan?  Does the plan have a methodology for dealing with people falling behind on competencies?  Do you have the tools in place to apply those competencies in the best way possible?

An even more basic question:  Do you even know which competencies are critical to success with the plan?  Do you have an internal assessment of where you stand today on those competencies?  Do you know where to get what is missing in your assessment (acquisitions, joint ventures, key hires, etc.)?

3. Capacity

Good intentions with smart people can still fail if you have not built an infrastructure capable of supporting those efforts.  There’s an old saying that an Army is only as strong as its supply chain.  If you cannot get sufficient food and ammunition to the troops, they cannot succeed.

Your infrastructure must have sufficient capacity to support your business to the magnitude of its vision.  For example, if your vision includes a major push into selling to China but you have only one-tenth of the selling capacity in China to meet those goals, then those goals will not be met.   You need to add more selling capacity.

Capacity can be critical in many areas, such as manufacturing capacity, supply chain capacity, sources of critical supply elements, and information technology.  If you cannot find a way to achieve the necessary capacity, then the strategy is severely flawed. 

I remember hearing stories of how capacity issues creates major changes at McDonalds.  For example, they had a great strategy for Shrimp McCocktails, but they determined that there were not enough shrimp available on the planet to supply projected demand, so the plan was scrapped.  When McDonald’s enters new regions, it often has to plan many years in advance to ensure there are enough of the proper cows and potatoes in the area to support the expansion.  Capacity has to be built before that expansion can occur.

 Does your plan calculate the necessary capacity in key areas?  Does it have a plan to achieve the necessary capacity?  Is the timing of the steps in the plan coordinated so that capacity comes on-line at the proper time?

4. Connections

Usually a plan’s success depends on the actions of others outside your direct control.  This can include suppliers, distributors, governments and customers, among others.  You need to find a way to make sure they have the proper commitment, competencies and capacities to achieve your plan as well.

Think about health care.  For a plan to work, you often need to get the cooperation of government to approve your approach, doctors to prescribe your approach, insurers (or governments) to pay for the approach, and patients to accept the approach.  Lose cooperation in any area and the strategy fails.

In a competitive world, it is often necessary to create stronger connections within your network of partners than the connections in competing networks.  You need to prevent defections.

 How strong is your network?  Are the strengths of your network connections specifically addressed within your plan?  Do you have a plan to make them capable of supporting your plan?  Do you need to add or change partners?  Do you need to acquire them?

SUMMARY

A plan does not magically come into being just because the leaders want it to.  To ensure that a strategic vision is more than just a wild dream, you need to proactively determine and control all the steps necessary to get there.  Otherwise the forces of inertia and self-interest will keep the vision from becoming a reality.  Areas to consider in this plan include commitment, competency, capacity and connections.  Without these considerations, all you have is a treasure marked with an X on an otherwise blank piece of paper—a goal without a means to attain it.
 

FINAL THOUGHTS
One of the biggest criticisms of strategic planning is that all those fancy plans never become reality.  Maybe if we spent more time proactively trying to manage the path, we’d have a lot more success in achieving the goal.  That will quiet the critics and increase our value.

Strategic Planning Analogy #388: Bad Habits

THE STORY
Back around the late 1990s, J.M. McGinnis and other medical researchers looked onto the causes of illness and death in the United States. The results appeared in several places, including a 2004 edition of the Journal of the American Medical Association and the website of the Robert Wood Johnson Foundation.

The conclusion of the research? “Dietary patterns and sedentary lifestyles represent the most common source of unnecessary death and disease among Americans.”

They claim that between 40 and 47% of the deaths reported in 1996 were attributable to our behavior patterns, including behaviors such as:

a) Poor Diet
b) Sedentary Lifestyles
c) Use of Tobacco, Alcohol or Drug Abuse
d) Sexual Behavior.

If you look at the 90.6 million illnesses and injuries requiring medical treatment in 1996, the results are even more dramatic. About 33% of the medical treatments were due to poor diet and exercise. About another 57% were due to alcohol, tobacco, drugs, and sexual behavior. In fact, over 90% of the illnesses and injuries were caused by our poor behavior patterns.

Although this data is a bit dated, the research said that since our behavior patterns have been trending in the wrong direction, these percentages are probably getting even worse.

Therefore, next time we want to point fingers at who is causing high health care costs, we’d better save a few fingers to point at ourselves.

ANALOGY
This story has some good news and some bad news. The good news is that we are in control of the key element behind illness, injuries and death. The bad news is that there is not a magical instant cure. We got into the problem through a lifetime of bad habits and it will take a major and lifelong change in lifestyle to fix it.

This same phenomenon also seems to apply to businesses. Businesses get sick or die for many reasons, but one major cause has to do with bad business habits and business lifestyles. As a result, there is some good news—we can fix the problem, because we control the cause. However, the bad news is that the fix requires a major overhaul in the way a company thinks and acts on a daily basis.

THE PRINCIPLE
I have had the privilege of spending time both with companies having long periods of health/success and companies with long periods of sickness/failure. What I have noticed is that the successful companies act differently from the unsuccessful—they have different behavior patterns. These behavior patterns impact results. Therefore, if we want a strategy which provides great results, we need to address how a company behaves on a day-to-day basis.

In this blog, we will look at three types of behavior patterns which can seriously impact business success.

1. Malnutrition
If you starve a body of nutritious food over a long period of time, there will be long-term health problems. The same is true of businesses. If you starve of business of nutritious investments, there will be long-term health problems.

Nutritious investments nourish a business’ health in one of three ways.

a) They add the COMPETENCIES needed to succeed. Healthy companies have the appropriate knowledge and skills needed to execute a strategy. This requires regular investments in areas like data gathering, education, training, and research. These are not random investments, but targeted specifically at improving the company’s ability to know what to do and how to do what it takes to win at their strategy. Since the environment and technology continues to change, one needs to continually invest in this competency nutrition to remain relevant.

b) They add the CAPACITY needed to succeed. You cannot become a large, successful company without investing in what is needed to operate a large successful company. Investments are needed to create an organization and infrastructure large enough to do the task at hand. For example, Wal-Mart is a large, successful company because they first invested in the capacity needed for succeeding at such a large size. Not only did they invest in building the necessary store capacity, but they invested in building a huge, world-class distribution network as well as one of the largest computer installations in the world. All are essential to Wal-Mart achieving their strategy. If you are not achieving the scale and scope you desire, perhaps it is because you have not invested enough in what is needed to achieve scale and scope (people, factories, points of distribution, sales force, etc.).

c) They add the DIFFERENTIATION needed to succeed. Successful strategies have a point of differentiation…an area where the company has a superior advantage over the competition. This competitive edge can wither away over time unless regular investments are made to enhance this point of differentiation.

The healthy companies regularly and continually make investments focused in these three areas (competency, capacity, and differentiation). It is a natural part of their day-to-day operations.

Unhealthy companies starve themselves of these investments. Either they regularly refuse to make any meaningful investments (for the short-term benefit of putting more cash on the bottom line today) or they invest in non-nutritious “junk food” (business fads, executive perks, or items unrelated to the strategy). These bad habits might make you feel good for a very short period, but in the long run they will make your business very sick.

2. Obesity
Being overweight can contribute to a large number of illnesses, including high blood pressure, excessive cholesterol, diabetes, among many others. Just as excessive fat in a human damages a body, excessive fat in a business damages a company. Business fat includes the following:

a) Excessive Bureaucracy (rules, procedures, silos, power bases, approval processes, paperwork, etc.)
b) Excessive Complexity (too many product versions, too many decision points, too much operational inefficiency)

Nearly all the problems you see in a Dilbert cartoon come from these types of obesity.

Successful companies work diligently on a regular basis to help keep these excesses out of their organizations. They take away as much of the weight of bureaucracy and complexity as they can, so that the people on the front lines are empowered and free to do the right thing on a timely basis. By never letting the fat build up, they never have the trauma of trying to get rid of it.

Unhealthy companies, on the other hand, keep piling on more fat until (like clogged arteries) nothing can move anymore. And once the movement stops, it is hard to eliminate the fat and get it moving again.

It’s not that people intentionally want to be fat. They just live a lifestyle which makes fat happen. The same is true for businesses. Be on the lookout for fat-causing habits.

3. Sedentary Lifestyle
Long periods of inactivity can cause atrophy and other health problems. By contrast, healthy bodies tend to come from a lifestyle of regular exercise on a frequent basis. The same is true for business.

Healthy companies have a bias towards action. They like to experiment and try new things (focused in the direction of the strategy). When there is a problem, their first reaction is to figure out what to do to make things right.

Unhealthy companies have a bias towards inaction. They prefer to stick with the status quo and resist change. When there is a problem, the first reaction is to try to place blame on someone else (and get someone else to fix it).

A company used to action on a regular basis can be more easily mobilized to act when needed in the future. Its muscles have been trained to move together and handle the load via regular exercise. By contrast, a company used to inaction will have significant difficulties when it is time for a major strategic reinvention.

SUMMARY
The goal of strategy is to create a stronger, more successful company. Strong, successful companies tend to behave differently from unsuccessful ones. Just as a person’s daily lifestyle and habits impact their health, the daily lifestyle and habits of a company impact long-term business health and success. Therefore, a strategic planning needs to address any of the bad habits which are hindering success. Examples of bad daily habits which can impede success are:

a) Insufficient Investments in Key Elements of the Business (starving the company).
b) Allowing Excessive Bureaucratic Fat and Complexity to Creep in (overburdening the company).
c) A bias Towards Inaction (unable to adapt and change when needed).

FINAL THOUGHTS
Most of the literature on strategic planning talks about the big picture issues, like Visions and Mission Statements. Although this type of activity is essential, it is a worthless endeavor if a company is not healthy enough to make the vision a reality.

We’ve all heard the complaints about the fact that most companies fail at ever achieving those big-picture goals and visions. If we want to stop the complaining, then we need to address those root causes of failure—the bad habits on a daily basis. Don’t just blame someone else for the poor implementation. Get involved.

Remember, at some point, all strategic activity is a waste of time if it is never achieved. If you personally do not want to be seen as a waste of time in your organization, then move beyond just setting the big picture and help bring it to reality by getting involved in how a company behaves on a day-to-day basis.

Strategic Planning Analogy #322: Problems of Scale

THE STORY
The rising prosperity in China is impacting Chinese eating habits. For example, between 1982 and 2002, daily per capita consumption of grain in China dropped 21%, from 509.7 grams to 401.7 grams. At the same time, meat consumption grew 132% and vegetable cooking oil consumption grew 153 % (Source: Chinese National Bureau of Statistics).

If you consider that fact that it takes about 7 or 8 grams of grain to produce one gram of meat, the grain requirements for China are growing rapidly, even though direct grain eating is going down. According to an article in the June 24, 2008 issue of the China Daily, if the Chinese started to eat meat at the same level as in the US, the world would need to produce an additional 277 million tons of grain to grow the meat. That would require finding an additional 68 million acres of quality farm land that is not currently being farmed (about one-sixth of the farmland in the USA).

Add to that the fact that if every Chinese adult drank just one additional can of beer in a year, China would need approximately 150 million more pounds of grain. This starts adding up in a hurry.

THE ANALOGY
It doesn’t sound like much when you say that it takes about 7 kg of grain to make 1 kg or meat, or that it takes about 0.08 kg of grain to make a can of beer. However, when you multiply that against a population in the billions, small changes in meat and beer assumption can really change grain consumption.

This is what happens when you apply scale to these equations. Suddenly, little movements in behavior create large swings in demands all up and down the supply chain. The bigger the scale, the larger the swings.

Strategy is usually concerned with finding ways to change behavior—to your benefit. The equations associated with current behavior may appear innocent enough, and you might apply them to your strategy. However, if there is enough scale to your behavior change, the current equations may no longer be applicable.

For example, changes in the diet of China are affecting global food availability and global food prices. The old cost of goods assumptions are no longer applicable, since the new consumption has altered prices of all sorts of cost components throughout the entire food production pipeline. Add to this the uncertainty of biofuel consumption and the formulas may need to change again.

Your strategic actions impact the environment in which the strategy will operate, rippling out changes in many directions. You need to take that into account when assessing your strategy viability, especially if it starts to scale large.

THE PRINCIPLE
The principle here is that strategies do not operate in a vacuum. If your strategy is to create large-scale changes in demand, then all the current assumptions about how the marketplace works need to be thrown away, because your changes will impact how the marketplace works.

Here are six factors to consider when contemplating large-scale strategies.

1. Is there Capacity to Satisfy Demand?
Years ago, I talked to someone at McDonalds. They were testing a new meal item—McShrimp Cocktails. The item tested very well. Based on the current economics, it looked like it could be priced to make a profit. Then they looked at what happens when you scale this up to the entire McDonald’s chain.

As it turns out, it would have taken more than 100% of the world’s capacity of shrimp to meet annual the demand projections. So McDonald’s couldn’t meet demand, even if they wanted to. Even scaling back demand, the change to the shrimp market would have been so huge that the old cost estimates would have been invalid. Scarcities would raise the price of shrimp, making it too expensive for the McDonald’s menu. A great test of McShrimp Cocktail was made invalid once consideration was given to scaling it up.

In the early days of Starbucks, Starbucks promoted itself as being a place to get superior coffee, because it was small and could afford to be choosy about the quality of beans it purchased. Now that Starbucks is huge, it has to buy so many beans that it cannot afford to be as choosy as it once was. There are not enough “superior” beans to meet the Starbucks demand. As a result, a promotional approach was no longer valid.

There are retailers who specialize is selling manufacturer overruns and other distressed or excess goods at a deep discount. Over time, some of those retail chains have gotten so large that there is not enough excess in the marketplace to fill their stores. They have to supplement their supply by purchasing goods the normal way, just like they retailers whom they are trying to under-price. Suddenly, the strategy doesn’t work like it used to.

2. Can the Supply Chain Handle the Shift?
I was talking to someone years ago at the Mars candy company. I complained that they had changed the recipe of their Mars Bar candy bar from hazelnuts to almonds. I told him I liked the old taste better.

His response was that the original Mars bar created a large scale change in hazelnut consumption. The hazelnut supply chain was not built to handle that kind of demand. As a result, Mars found that there was not a stable, predictable way to procure the hazelnuts they needed and that the pricing was not stable. By contrast, the almond ecosystem could easily absorb the demand of the Mars bar in a predictable way, so Mars shifted from hazelnuts to almonds.

A similar situation happened with General Mills and their introduction of a buckwheat based cereal. The demand for the cereal was strong. Unfortunately, the supply chain for buckwheat was not able to satisfy the sharp rise in demand created by this cereal. The supply chain was so bad that General Mills decided to stop making the popular cereal. So much for that great buckwheat cereal strategy—foiled because the supply chain ramifications weren’t adequately considered.

This is why, when McDonalds is expanding into new territories, they start years in advance to first change the local supply chain for products like beef and potatoes. They want to make sure the supply chain can handle their large scale before putting that scale into the marketplace. A similar process occurred for the Chipotle restaurant chain. They had to delay their rapid growth strategy until they could convince farmers to rapidly expand the capacity for avocados. Otherwise, there would not have been a stable supply chain for the restaurants.

3. How will your Scale Impact Pricing?
Supply and demand impact prices. If scale radically increases demand, and supply does not keep up, prices for your raw materials will skyrocket. This will make any strategy based on the old supply and demand relationships obsolete (and perhaps make your strategy no longer valid).

To get around this, your strategy may need to consider locking in long-term supply contracts at fixed prices…or maybe consider backwards integration into owning your sources of supply in order to guarantee adequate supply at a reasonable price.

Suppliers need to worry about this as well. In the US food business, the manufacturers saw their primary customer as the supermarket. When the wholesale clubs like Costco and Sam’s Club first started, their demand was tiny when compared to the supermarkets. It was seen as incremental business. Therefore, the temptation was to set prices to the clubs based more on incremental costs rather than full costs (which were disproportionately born by the supermarkets). Of course, once the clubs achieved huge scale, that pricing plan was no longer valid.

4. How Does Scale Impact Image?
Many goods are sold on the basis of image or prestige, such as luxury goods and fashion brands. Much of the appeal is based upon their scarcity—only available to the rich and famous. Once the item is widely available to the masses, the elite customers may abandon the brand.

It can be tempting to take a prestige brand and adapt it to a large scale for the masses. At first, it will create a huge spike in demand and in profits. However, if the large scale destroys the prestige image, the brand will eventually lose its luster. It will be quickly abandoned by the elite customers. And when the masses see the elite abandoning it, they will soon follow. Therefore, the short-term boost can lead to a long term disaster.

There may be greater long-term success by not scaling up for the masses.

5. How Does Scale Impact Competitor Reaction?
If you are a small niche, the big competitors may ignore you. However, if you scale up large enough to threaten the big players, they will retaliate. They will either try to destroy demand for your product or design competing products. Either way typically leads to a price war, which will destroy your profit margin.

Always assume that the scale which comes from success will result in increased competitive retaliation (for more on that, click here). Put the economic impact of those retaliations into your strategic model to see if you can sustain the price cuts and other pressures. It may be more profitable to remain a small niche.

Also, consider in your strategy ways to increase the barriers to entry, making it harder for the eventual retaliation. One of the reasons why the iPod was so successful was the integration of hardware, software and iTunes. By attacking all three fronts with a seamless and superior business system, it was harder for anyone else to break into the market and retaliate.

6. The Additional Scale Does Not Have to Come From You
Even if you do not upset the status quo with large increases in scale, that does not mean that the status quo will remain. Others may upset the scale. Your business will be impacted by the change even if you did not create the change.

For example, China’s rapidly growing economy is impacting the global oil market. That can impact your energy costs, even if your business has nothing to do with China.

There was a road near my house in Ohio that was closed for quite a while due to the lack of a bridge. The reason? The high demand for steel in China had created a global steel shortage. The community I lived in did not want to pay a premium price to get the steel quickly. Therefore, the bridge was not built until they could get cheaper steel (by being willing to wait). If construction in China could affect my little bridge in Ohio, think of what remote activities could affect you.

Scan the environment to see where surges in scale created by others might occur that could affect your strategy. Then come up with plans to deal with these surges caused by others.

SUMMARY
Large changes in the scale of demand make the mathematics of the status quo environment obsolete. If you do not change your modeling and assumptions to account for the ways the volume will impact the ecosystem, your strategy will be flawed.

FINAL THOUGHTS
The good news is that China may be opening up a great new surge in demand. The bad news is that China may be opening up a great new surge in demand. The ratio of good news to bad news can be impacted by how your strategy adapts to this news.

Analogy #208: Phone Tag

THE STORY
Who invented the telephone? Well, that depends on your point of view. Conventional wisdom is that Alexander Graham Bell invented the telephone in 1876. He has the patent to prove it.

However, in the recent book The Telephone Gambit, author Seth Shulman makes a compelling case that Elisha Gray invented the telephone. The book claims that Alexander Bell had gone to the patent office and seen some of Gray’s superior work on the phone. He then supposedly copied the work and got the patent hours before Gray tried to do the same.

Then again, in June of 2002, the US government officially declared that Antonio Meucci was the inventor of the telephone. Meucci had a working telephone as early as 1848 and a perfected version by 1871, years ahead of both Bell and Gray. Because Meucci was destitute, he could not afford the $250 fee for a US patent, so in 1871 he filed a one-year renewable notice of a pending patent. Three years later, in 1874, Meucci could not afford the $10 fee to renew the notice, so it lapsed. Had Meucci paid the $10 for the renewals, Bell would have never been granted his patent.

And then there are others with varying degrees of legitimacy to their claims to have invented the telephone. These names include Johann Reis, Innocenzo Manzetti, Charles Bourseul, Amos Dolbear, Sylvanus Cushman, Daniel Drawbaugh, Edward Farrar and James McDonough. For some background on the controversy, you can look here, here, here, and here.

In the end, I guess it doesn’t matter so much who invented the telephone as much as who was able to harness that knowledge and become the driving force behind making the telephone the important invention that it was.

THE ANALOGY
Coming up with a great invention is a lot like coming up with a great business strategy. One can become excited about dreaming up a great strategic positioning, but that claim isn’t worth much if you aren’t able to exploit it.

Gray and Meucci may have had greater claims to the invention of the telephone, but Bell was the one who got to exploit it. Meucci died in poverty...Bell became enormously wealthy.

Great strategic positions, like great inventions, are not always in abundance. It becomes a race to see who can get the opportunity to exploit the good ones first. Bell beat Gray in the race by a few hours. Those few hours made all the difference.

THE PRINCIPLE
The principle here is that it is not enough to just come up with a great strategy. You also have to win the race to execute the strategy and get credit for it in the minds of the public. I call this part of the strategic process “pursuit.”

In the last blog (see “Eight Questions”) we looked at the eight questions to ask when trying to invent a great position. In this blog, we will look at the three steps one must take to pursue and win with this position.

1) CAPACITY
To win and hold a position, one must defend it from those who would like to take that claim away from you. One way to stop them is to prevent them from any opportunities to establish a beachhead. In other words, if you can prevent them from having any openings to grab for staking a claim, then the only one who can claim the position is you.

To close these openings, one needs to quickly fill the market to capacity. This means getting your business into all places, all platforms and all potential as soon as feasible.

All Places: For example, if you start up your business in one country, as soon as you are ready try to go international. Otherwise, someone might come up with a similar strategy in another country and use that as a base to eventually fight you in your own country. Wal-Mart became what it is, because Kmart and the other discounters ignored the rural markets. By not filling rural markets to capacity, they left an opening for Wal-Mart back in the 1970s, which it used to build a power base to conquer the rest of the US. And now they are rapidly going international.

All Platforms: If you start your business in the physical world, eventually move it to the digital world (and vice versa). Any platform you do not conquer becomes available territory for someone else to conquer and use against you. Even in the digital world, there are various platforms like laptops, mobile, etc. AOL was the master of the slow speed dial-up world, but missed out on the high-speed platform. It lost its position and has not been able to catch up.

All Potential: Just being in a place or on a platform is not enough. You need to soak up as much of the market potential there as possible. Look at Starbucks. It didn’t just build a few coffee shops here and there. It saturated the markets, soaking up as much of the potential as possible, by building in every conceivable location. This allowed Starbucks to really grab ownership to the concept and not leave room for anyone else to profitably build another large chain. The capacity already belongs to Starbucks.

To summarize, if you want to own the capacity for a position be first, be fast and be full.

2) CAPABILITY
Strategic positions are built on tradeoffs. You excel at certain attributes by playing down others. For example, if you want to win at convenience, you may do things which keep you from being the low cost leader. That’s fine, as long as you can find enough customers who are willing to pay a little more for your convenience. The trick is that whatever you choose to emphasize in your position, you need to do it so well that it is worth people trading to you.

Whatever the capabilities are that create excellence in this area, you need to race to stay ahead of the crowd in getting these capabilities. New advances keep pushing the envelope, so what was excellent yesterday may be sub-standard today.

Therefore, you need to do two things:

a) Shore up any weaknesses you have in your capabilities to deliver on your promised position. This could include expertise, infrastructure, technology, human resources, or whatever.

b) Push the envelope by being innovative in the area most critical to your position. Stay one step ahead of the others in defining the new frontiers for your position.

Apple understands this concept. They want to excel at the attribute of having “cool technology” so they do whatever it takes to have greater capabilities to do so than anyone else. They are the best at cool product design. They built their own distribution channel in order to control the “cool” buying experience. They keep pushing the envelope on design and rapidly introduce upgrades and variations, so that no one else can leapfrog and become cooler. They even found a way to inject superior “coolness” into the advertising. Apple continually ensures that it has the capability to deliver on all fronts on this attribute.

3) CAPTURE (of Customers and their Cash)
It does little good to win on capacity and capability if you cannot translate it into cash. You need to connect it to consumption that people are willing to pay for.

Part of this has to do with bonding well to the customers most likely to enjoy your position. The more you can bond with these customers, the more likely they are to spend lots of money with you. If you look at a lot of the admired companies of today, like Apple, Starbucks and Google, you will see that they have amazingly loyal advocates for their brand. This strong brand loyalty makes them very receptive to your new offers and less likely to patronize others.

Today, one of the ways to increase this bonding is to include the customers more fully in the way you run your business, such as being included product design and marketing. Loyalty clubs are another tactic.

Another point to remember is that positions can be doorways to new product offerings. The more you have to offer, the more you can sell. Take, for example Kaplan. It started out as a tool to help people pass college entrance exams. However, because it gained such a strong position in the education space, Kaplan was able to grow into a multi-billion dollar education business, including even the selling college degrees.

By levering your customers and your strengths, you can take your position into profitable places you may not otherwise have been able to reach.

SUMMARY
Once you have a chosen position, there are only three things you must do to optimize your potential with that position: soak up as much capacity as you can, build up the capabilities to deliver as well as you can, and capture as many customers and selling opportunities as you can. The strategic planning process then is the act of choosing how to prioritize your actions in these areas, so that at any given time you have a manageable and achievable work load.

FINAL THOUGHTS
The race was not over when Alexander Graham Bell got the patent for the telephone. He had to continue to pursue to create the business which allowed him to reap the benefits of the invention. The race is never over. The day you think the race is done is the day your prospects for future success are done.