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.

Strategic Planning Analogy #241: Aging Athletes

THE STORY
Some athletes just don’t know when to quit. They may be old, fat, out of shape, and well past their prime, but they still try to compete.

It can be painful to watch. You remember them when they were in their prime. You hate to see them end their careers in such humiliation.

THE ANALOGY
Athletes don’t stay young forever. Eventually, time catches up with them, robbing them of their great athletic skills.

The same thing happens in business lifecycles. Growth businesses eventually mature and then go into decline. Unfortunately, some companies act like these pitiful athletes and continue to pretend they are growth companies, even though the days of great growth are well behind them.

It can be painful to watch. Every year they throw tons of money at the business to grow it (just like in the good old days), but the growth doesn’t happen like before. The glory growth days are history.

At a certain point, athletes need to realize when their time is up and they are no longer able to compete. Similarly, companies need to realize when their business has reached maturity and is no longer a rapid growth concept.

Knowing when it is time to move on is a key part of strategic planning.

THE PRINCIPLE
The principle here is about managing maturity. Don’t let it sneak up on you and surprise you. Plan it out in advance. There are three key elements to understand when managing for the shift from growth to maturity.

1. Avoid the Demon of Denial
One of the worst things you can do is live in denial and act as if your business model will be in rapid growth forever. You may end up being like the washed up athlete who still thinks he or she is in prime athletic form, but is now just a laughing stock.

When in denial, one can be pouring in capital to grow a business which no longer can justify that action. You end up destroying value, because there is no longer enough growth to justify the extra investment.

Starbucks for years kept building new cafes at breakneck speed, as if unlimited growth would go on forever. It doesn’t. First, there is limited capacity for these cafes. Second, if a business is doing well, there will be imitators who will start absorbing some of that capacity, as McDonalds is now doing in coffee.

Eventually, all those new Starbucks stores were merely stealing sales from other Starbucks already in place, which by the way were losing sales to McDonalds. The rapid growth phase was over. Now Starbucks is forced to admit that these latter stores were poor investments which needed to be closed. It would have been better if those stores had not been built. In a similar situation, Wal-Mart eventually got the message and ramped back expansion in the US., because the rapid growth phase was over. Profits and share prices responded positively.

Another problem with denial is that one can start looking for blame in the wrong places. Rather than admitting that problems are due to an obsolete business model designed for rapid growth which no longer exists, one looks elsewhere for blame. This leads to making the wrong decisions, which do not correct the core problem. You cannot fix the real problem (end of rapid growth) unless one first admits that the real problem exists.

2. Avoid the Doom of Diversification
Sometimes, people look to solve the problem of slowing growth through diversification. In other words, if one business is slowing down, add another business to the mix that is just starting its rapid growth. The logic is simple: if you want rapid growth, just buy your way into rapid growth via diversification into places where rapid growth potential still exists.

Although this sometimes works, it often leads to disaster. The problem is that mature companies and young startup companies require a different type of infrastructure and management style. If you try to mesh mature and startup companies under the same infrastructure and culture, you often end up sub-optimizing both of them.

I’ve seen this scenario play out in companies with disastrous results. Either potential outcome ends up bad. First, you can try to optimize synergies between the mature and the young by unsuccessfully meshing them together as much as possible. Neither gets the structure and style they need and both suffer. The other alternative is to keep them entirely separate and build a new “holding company” infrastructure on top. At this point, one wonders if you have added any value through diversification, since there are virtually no synergies and you have added a new layer of infrastructure which didn’t exist before.

Perhaps a better model is that of the “serial start-up” kings of the dotcom space. These entrepreneurs would start up a company. Once the company migrated to the next level, they would sell it off and then go start up another new company. This way they specialized in the start-up infrastructure/culture and did not need to mesh companies at different stages together.

3. Properly Manage the Switch
So perhaps the best way to manage the transition to maturity is through a switch. Either:

a) “Switch the strategy” to one which optimizes mature businesses; or

b) “Switch the Portfolio” by Selling/Spinning off the mature business and replacing it with something which better matches a rapid growth culture.

A good example of the switching the strategy Fuller Brush. When it became apparent that the door-to-door sales model of Fuller Brush was in decline, management totally revamped the strategy to optimize profits in a decline. The revamped strategy worked so well that Fuller Brush was able to throw off cash for a far longer period than originally envisioned.

Maturity can be a profitable time, because you start reaping the rewards of prior investments, without having to put a lot more investments back in. But to get those profits, you have to manage the business as mature, not rapid growth.

Some examples of firms who switched the portfolio are:

a) GE, which continually sells off mature businesses and adds growing businesses to the portfolio. As a result, it has moved from heavy industrial businesses to finance and entertainment businesses and now is moving to environmental/infrastructure businesses.

b) P&G, which moved out of mature food businesses and invested in growing health care and beauty businesses. In 1995, food was about 12% of the P&G portfolio. Now it is down to just Pringles snacks, which is around 2% of its business. During that same time, Health and Beauty has gone from about 29% of its sales to 51%. And even in their more mature product categories of paper and cleaning products, P&G uses innovation to find growth sub-sectors, like with Dryel and Febreeze.

c) Cardinal Foods saw the coming decline of food wholesaling, so it sold off its food distribution business and replaced it with faster growing health care distribution and other health businesses, eventually becoming Cardinal Health.

The secret here is to get the timing right. If you wait too long to make the switch, then it is hard to effectively get out of the old businesses. GM has waited too long to get out the Hummer division and cannot find suitable buyers. P&G got out of many food categories early, when there were still people clamoring to buy the brands at a good price.

Just as we like to see athletes retire when they are still on top, it is good to make the portfolio switch when the old brands still have strength.

SUMMARY
Just like the inevitability of death and taxes, all rapid growth businesses eventually mature. It is better to have a strategy which proactively manages this inevitability than to live in denial.

FINAL THOUGHTS
Just because a business model stops growing does not mean that a company has to stop growing. You just need to change the business model. And that’s the value of strategic planning…knowing how to change to the right model at the right time.

Analogy #156: Don’t Blame Me, It’s the Environment

THE STORY
I knew an old grocery wholesale executive who liked to tell the same story, year after year. After having heard it so many times, I can almost recite it by heart. Being in the grocery wholesale business, this executive spent a significant part of his time visiting grocery retailers. Whenever he would go to visit a grocery retailer whose store was not doing well, he would hear the grocer complain that it was not his fault that his store was doing poorly. He would blame his problems on the environment, saying things like:

“The economy is bad. There is too much unemployment in the area.”

“The weather is bad. Nobody shops much in this weather.”

“The population is declining. There aren’t enough people living here anymore.”

“People are eating out in restaurants more and not buying as many groceries.”

The retailer would then conclude by saying, “It’s not my fault…nobody could make money in this environment.”

At this point, the wholesale executive would leave the store, and in every case he could go down the street and find a different grocery store that was thriving in that same environment. His point was that there are ways to make money in any environment, and somebody will figure it out. It may as well be you. The environment is not the reason the store was failing. It was because the store manager did not know how to adapt to the environment.

THE ANALOGY
When things are going poorly, it is easier for executives to blame the external environment rather than blame themselves. “It’s not my fault,” they say. “No executive could have been successful in the environment I was faced with.”

However, at some point, shareholders do not care why your business is doing poorly. The shareholders will just move their money to a company that is thriving in that same environment. And trust me, there will always being a thriving company for the shareholders to invest in, that will give them a better return, regardless of the economy.

It’s true that the environment is not always favorable to a particular business model. But where is it written that a company has to stick to a particular business model that is no longer appropriate for the environment?

One of the most important reasons for doing strategic planning is to discover (with enough advance notice) those trends that will destroy your strategy so that a better strategy for that coming environment can be found and put in its place. If a company starts its transition soon enough, it will never find itself in a position where its strategy is out of tune with the environment.

If you wait until disaster surrounds you before taking action, your options are rather limited. However, if you do strategic planning in advance, you can anticipate future problems and prepare a plan to thrive in whatever the future has to offer.

THE PRINCIPLE
Back at the end of the 20th century, an industry whose entire livelihood was threatened by changes in the environment would have been the US grocery wholesale industry. These food wholesalers were suffering from two major environmental problems:

1) The primary customer of the food wholesaler, the independent grocery store, was disappearing.
During the 1980s and 1990s, the growth and consolidation of the large supermarket chains, combined with the rapid growth of the Wal-Mart Supercenter put the weaker independents out of business and was threatening the viability of even the stronger independent grocers. Between their economies of scale and the ability to use general merchandise to subsidize grocery prices, these chains were putting independents at a major disadvantage. Many independents gave up and sold their stores to these self-distributing chains. I don’t care how great you are at wholesaling food for independent grocers. If your customers are going away, then you are in trouble.

2) Even at its most efficient, the food wholesale business model was less efficient at distribution than a large, self-distributing chain.
Food wholesalers are at an efficiency disadvantage, because they service a wide variety of independent stores over which they have limited influence. Because all of the needs of their independent customers are different, they cannot design a warehouse and distribution network that is optimal for any one of them in particular. By contrast, a large supermarket chain can run all of its stores the same way. As a result, they can create their own warehouse and distribution network that optimizes for that type of store. This makes self-distribution for large chains more efficient than food wholesaling for independents.

Therefore, in many ways it does not matter how well run and efficient a food wholesaling business is managed. If your industry is running out of customers and the business model your industry uses is less efficient than the alternative, even the best executive will have difficulties. Consequently, a food wholesaling executive might say that their problems are not their fault. It is an environment where no executive could succeed.

That type of response, however, is unacceptable. The environment cannot be blamed for any company’s failure. This trend did not happen overnight. It gradually happened over many years. There was plenty of time for a food wholesaler to detect this trend and adapt by altering its strategy.

Executives in such a situation have two choices. Either:

a) Use strategic planning to change the business model to better adapt to the changing environment; or
b) Stay with the current business model let the environment dictate a more dire future for the business.

Let’s take a look at how three companies reacted to this situation: Fleming Companies, Supervalu, and Cardinal Foods.

Entering the 1980s, Fleming Companies was one of the largest and most successful food wholesalers in the US. Given its past success, it saw no reason to radically change its strategy. It decided to continue to concentrate primarily on wholesaling groceries, primarily to independents. Yes, the trends were working against them, but they thought they could beat the odds due to their size.

As Fleming continued to stick to its original strategy, the ever more hostile strategy took its toll. Its customer base of independents began to whither away. In desperation, it took on ever more risky business, including a very risky deal with K Mart. In further desperation, Fleming lied about its financial health by getting its vendors to help it use deceptive accounting practices.

Eventually K Mart declared bankruptcy and the SEC began an investigation into its accounting practices. As a result, in April 2003 Fleming declared bankruptcy. The Fleming Companies, as it was known, ceased to exist.

Fleming could claim to be a victim of a bad environment, a firm with few options. It could claim that bankruptcy was inevitable, given the harsh conditions of a declining client base. However, Supervalu and Cardinal Foods had a different outcome.

Going into the 1980s, Supervalu was about as large and as strong as Fleming. However, Supervalu could see the trends on the horizon and was willing to do something about it. Rather than depend solely on the fate of the independent grocer for its future, Supervalu decided to become its own customer. In other words, it changed its strategy. Supervalue started moving from being a wholesaler to becoming more of a retailer. It started slowly, in order to keep the independent customers from getting upset and fleeing.

Then it started looking for the big deal to get into grocery retailing in a big way. After several attempts, it bought the Albertsons chain, making it one of the top 5 grocery retailers in the United States. Now Supervalu is doing fine.

By contrast, Cardinal Foods was a small player in grocery retailing. In looking at the trends, it could see that there was no long term hope for a small grocery wholesaler. Such a strategy was doomed. Therefore, in the late 1970s, it decided to change its strategic direction. Cardinal Foods decided to take its wholesale distribution expertise to an area where the environment was more favorable—pharmaceutical distribution. Starting in 1979 Cardinal began to acquire a number of pharmacy distribution companies. By 1997, it had acquired 15 such firms, making it a major national player in pharmacy wholesaling. In fact, the pharmaceutical business was doing so well for Cardinal, that it changed its name to Cardinal Health and exited the food wholesale business in 1988.

Starting in the mid 1990s, Cardinal Health expanded further into the medical business, while continuing to strengthen its pharmacy distribution core. Now, Cardinal Health has sales of over $80 billion and is one of the largest companies in the US based on sales.

So, was sticking to a strategy of primarily being a wholesaler to independent grocers a failing strategy? Yes. Does that mean that companies in that industry were destined to fail? No. By using the tools of strategic planning, Supervalu and Cardinal Foods had the time and the initiative to modify their strategy so that they could survive in the new environment. Fleming has no excuse. It cannot blame the environment. It can only blame itself for not preparing in advance through effective strategic planning as Supervalu and Cardinal Health did.

SUMMARY
Although environmental trends may cause a particular business model to fail, it does not mean that the company using that business model has to fail. Good strategic planning includes understanding the impact of environmental trends on business models and proactively finding new models more appropriate for the changing environment. Over the long haul, management cannot use the environment as an excuse for poor performance. Good management anticipates the environmental changes and plans a new strategy that will thrive in the new environment.

FINAL THOUGHTS
In general, shareholders do not care if a management is operating an inappropriate business model as well as humanly possible. Perfecting the obsolete is not their goal. Their goal is financial success, which comes from excellent performance with the appropriate business model for the environment. Your goal should be the same. Don’t be afraid to adapt like Cardinal Health did.