Strategic Planning Analogy #575: You’re Fighting the Wrong War

THE STORY
There’s an old military saying that goes something like this: In peace time, military leaders prepare for the next war as if it is going to be played by the same rules as the last war. Unfortunately, each new war comes with a new set of rules, making all that planning obsolete.

In other words, instead of looking backwards to figure out how you could have done better in the last war, anticipate the rules of the next war and prepare a way to win under the new rules.

THE ANALOGY

This recommendation does not only apply to military strategy. It also applies to business strategy. The rules of the game in business strategy keep changing, just as in warfare. The leaders in many businesses are older and got to the top by following the old rules. As a result, these leaders have a tendency to prepare for the future by falling back on those old rules which made them a success in the first place.

Unfortunately, as times change, those old rules become obsolete. If CEOs continue to run their businesses by those old rules, their businesses (and themselves) run the risk of becoming obsolete. To prevent that, strategists must continually update their mindset to stay in tune with the rules of the times.

THE PRINCIPLE
In my opinion, we seem to be at a point where the rules of strategy are shifting again. This would be the third major set of rules during my adult lifetime. If the rules are changing as I think they are, then it is time for strategists to update their mindset again.

Ruleset #1: the Three P’s

Back for most of the latter half of the 20^th century, the rules of strategy revolved around what I called “the 3 P’s.”

During this period, the major strategic objective was to maximize cash flow over a sustained period of time. The best way to do this was by focusing on three areas:

1. Positioning: The idea behind positioning was to convince consumers to associate your product/brand with being the superior solution for a meaningful problem. Make the problem and your solution inseparable in the consumer’s mind so that no other brand can unseat you as the best way to resolve the problem. For example, different brands of toothpaste became associated with different solutions: Crest for getting rid of cavities, Sensodyne for sensitive teeth, Plus White for smokers, Colgate for healthy teeth and gums, and so on.

2. Pursuit: To hold a position over the long haul, a business had to act quickly and invest in whatever it took to maintain that position. For example, Walmart wanted to hold the position of being the low price alternative, so it would invest in whatever retail format had the advantage in holding the low price position. That is why Walmart migrated from discount stores to supercenters and added Sam’s Club. It was pursuing the winning path to hold the position.

3. Productivity: To maximize cash flow, the cost of investments in positioning and pursuit had to be less than the profit margins available from the business. Therefore companies also kept a keen eye on keeping costs down, pursuing tactics like re-engineering.

Ruleset #2: The Three F’s

As the 20^th century was winding down, a new strategic ruleset was evolving. One of the key forces behind this change was the movement from selling physical products (atoms) to selling apps. This was the world which spawned companies like Google & Facebook (and all the people that wanted to copy their success). Under the new rules of that era, there was a new major strategic objective. Instead of trying to maximize cash flow over the long term, the objective was to maximize the selling price when you flipped the ownership.

Not only was the idea of maximizing cash flow out, the entire idea of profits lost favor. It was okay to lose money so long as a future buyer would pay a lot for your business. In other words, your return did not come from the ongoing business but from what you could make when the business changed ownership. I spoke about that in more detail here.

And the idea of managing for the long haul was also tossed out. After all, if you are going to flip the business to a new owner in a few years, your time horizon is only as long as it takes to cash out.

In this new environment, the strategic rules were as follows:

1. Fund: Find venture capitalists who are willing to fund your business. This is where the money comes from, not the user of the app. So, in reality, the venture capitalist is the customer of your business and the product you are selling them is access to all the people using your app.

2. Flex: In the wild world of apps, one has to keep flexing the model until a version is found that resonates with a critical mass of users. Venture capitalists of the time knew that the end product app was rarely the same as what was originally pitched to them to get the money. Therefore, the venture capitalists were betting more on the flexing ability of the founders to eventually hit on a winner rather than on the original pitch.

3. Flip: Since all the value is created at the time the ownership changes, the strategic emphasis is on optimizing the flip—who to sell to and for how much. For example, a lot of people of the time thought that Cisco Systems might be a good potential buyer. Cysco said it would only buy businesses located in Silicon Valley CA, Austin TX or Research Triangle NC. Therefore, if you wanted to flip to Cisco, your strategy would be to locate in one of those three areas. If your plan was to sell out via an IPO, the strategic emphasis was placed on maximizing those factors/metrics which would sell well in the IPO pitch.

Ruleset #3: The Three S’s

Just as people were getting used to this set of rules, it appears to be changing again before our eyes. There are many reasons for this. First, future innovations do not appear to lend themselves to start-ups in the garage. They are too complex and costly. Starting small and flipping no longer works as well.

Second, the innovations of the digital age have sucked a lot of the value out of entire industries. For example, the news and entertainment industries have seen the overall profits of the whole industry shrink dramatically. When people expect things for virtually free, it is hard to rake in huge profits. A new way to move money in your direction is needed.

Third, the more recent flips in general are nowhere near as dramatic as in the days when Google and Facebook flipped. If flipping is much less of a “sure thing”, investors will hold back and IPOs won’t be as easy to create. The whole idea of flipping is being questioned as a primary way to think about business. You can’t sell to investors if they aren’t investing in the old type of startups like before.

So what is replacing it? I call it the three S’s.

In the world of the 3 S’s, the key objective is to exert maximum control/power over an entire business ecosystem. It is no longer good enough to just have a good product or a leading app. You need to control the entire business system in which you exist. If you do not control how the ecosystem evolves, it will evolve in a way that blocks you from achieving adequate profitability. Power becomes the great goal, because power dictates where the limited amount of money goes.

To do this, you follow the 3 S’s:

1. Size-Up: This strategic approach requires thinking big. You need to not only size up the space you compete in, but the entire ecosystem your space lives within. This includes not only your traditional competitors. It includes anyone who has influence on how your ecosystem will evolve and how ecosystem profits are divvied up. It can include governments, businesses and advocacy groups. You need to size it all up to get your arms around the magnitude of the ecosystem.

2. System: Your strategy must encompass more than just how your business works. It has to encompass how you want the whole ecosystem to work. You have to strategize for the entire system. Your best individual performance will still leave you in trouble if the ecosystem defines the rules against you. Therefore, you have to make sure you have a powerful seat at the table where the rules are made. And you only get such a chair if your planning takes an entire system point of view.

3. Structure: To get the system to work in your favor, you have to help determine how it is structured. You have to put all the ecosystem building blocks together into a structure where you have a disproportionately larger influence than others. Some of these building blocks you will own. Others will be partnerships. Others will be voluntary followers of your plan because your power makes it in their best interest to comply with your wishes.

Here are some recent examples of this type of strategic approach:

1.      CVS: CVS realized that it needed to be more than just a major pharmacy/drug store chain in the US. It needed to have control over the entire healthcare ecosystem. To accomplish this, it started in 2006 by acquiring MinuteClinic, who operated health care facilities inside a retail setting. This gave CVS some control over the practice of medicine. In 2007, CVS acquired the Caremark pharmacy benefit management company in 2007. This helped them have influence over how company pharmacy benefit plans would impact CVS. In 2015, it acquired Omnicare, a leader in pharmacy distribution to institutions. And this year, CVS announced the acquisition of Aetna, one of the leading health insurance providers in the US. CVS is no longer a drug store company. It is a strong player throughout the entire healthcare ecosystem. It even changed its name to CVS Health.

2.      Disney: Disney realizes it cannot just be good at parts of the entertainment system. It needs control over the entire entertainment ecosystem. As the digital aspects of the entertainment ecosystem evolve, Disney could get squeezed if it does not influence how the rules are written. Therefore, Disney just announced the acquisition of a huge chunk of 21^st Century Fox. The logic is that the combined content and distribution controlled by such a combination will be so powerful that nobody will want to make any moves in entertainment without them.

3.      Another recent announcement include the merger of Ascension and Providence to create the largest hospital chain in the US. It is like CVS in that it is trying to exert more power in healthcare. It is like Disney in trying to get such a large chokehold over a major aspect of its ecosystem that it becomes a force that cannot be ignored. In their words, they are trying to create a voice “that can’t be ignored.”

And Target recently announced the purchase of Shipt. Shipt is one of the largest providers of the software and trucks used in the home delivery of items like food.  In this way, Target is expanding its influence in the consumer retail ecosystem by getting a big share of the out-of-store experience.

This is just the beginning….

SUMMARY
The environment is always changing, so the rules of strategy must adapt. We’ve moved from the 3 P’s to the 3 F’s. Now we are moving to the 3 S’s. If you’re still doing your strategy under the older rules, you may lose your grip on the future and be left out in the cold.

FINAL THOUGHTS
Don’t fight future wars with the rules from prior wars. Fight with the rules appropriate to the times.

Strategic Planning Analogy #453: What Are You Really Selling?

THE STORY
A few days ago, I wanted to get an idea of what I might save if I changed my insurance.  I went to a web site to get a FREE estimate.  All it asked was a small handful of questions.  Then I hit the “submit” button.

Almost immediately after hitting that button, my phone started ringing.  It was someone offering to talk to me about insurance.  At first, I thought that was an odd coincidence, since the insurance company which called was representing a different company than the one on the internet.  While I was talking to this new company on the phone, I got three messages on my phone saying that three other insurance companies were also trying to contact me. 

For the next four days, my phone rang virtually non-stop from dozens upon dozens upon dozens of insurance companies eager to talk to me about my insurance.  It was a nightmare that wouldn’t stop.

I soon realized that I did not receive a FREE service from that internet site.  I paid dearly with time and aggravation.  

I also began to realize that I had never really been a “customer” for that web site.  No, I was the “product.”  They were trying to sell me like a slave to all of these bidding insurance companies. 

Just before hitting that “submit” button, I did not see anything in the fine print saying I agreed to sell my soul to that company (for no charge) nor that I agreed they could re-sell me like a slave in a bidding auction.

And then, after all that aggravation, I decided that my current insurance was a better deal and did not switch to any of those companies.

THE ANALOGY

In the story, I was initially confused about what was the product and who was the customer.  At first, I thought that I was the customer and the insurance was the product.  As it turned out, I was the product and competing insurance companies bidding for me were the customer.   

A similar confusion can happen when designing strategic business plans.  A successful business plan sells a product (or service) to a customer.  And hopefully, the cost to the business of obtaining or manufacturing/producing that product is less than the price the customer is willing to pay for it, so that you can make a profit.

As we will see in this blog, there are a lot of choices one can make regarding products and customers.  And the most obvious choices might not be the most profitable choices.  Therefore, careful consideration needs to be given to these choices.  It should be an important part in the development of one’s strategy.

In addition, if you are not clear in your business plan as to what is the product and who is the customer, you may create confusion within your organization.  People could focus on producing the wrong thing for the wrong person.  The confusion could create inefficiencies and reduce the profitability of the business model.

 

THE PRINCIPLE
The principle here is that depending upon how you define the customer and the product, you’ll come up with a different strategy.  And if you want an innovative new strategy, consider less-conventional definitions of products and customers.

1) Selling Slaves

Usually, we think of the people we are appealing to (or advertising to) as the customer.  However, as we saw in the story, you can also look upon these people as the product you are selling.

There’s a popular saying that goes something like this: “If the customer is not paying, then they are not really the customer—they are merely the product being sold to the one who is really paying.”

There could be many options for the real customers who are bidding for your “human slave” product.

a) Insurance Companies – In the story, we saw insurance companies as the real customer.  But here’s another example.  Ever see those commercials on TV where lawyers offer to represent you for free if you suffered from something where a lawyer can successfully sue for damages?  You are not the customer.  You are product, being “sold” to the insurance company on the hook to pay damages. 

b) Government – Governments hand out all sorts of money for things like health care, aid to the poor, help for the disadvantaged, etc.  There are plenty of opportunities to represent people in order to tap into government funds.  The people are the product you are selling to the government.  For example, consider all of those TV advertisements for medical devices and supplies.  The commercial says that this stuff is FREE to you, provided you are on government medical assistance.  Another example is commercial universities which aggressively manufacture students in order to tap government student loan assistance.

 
c) Advertisers – Advertisers are buying exposure to their ads.  That exposure is to people, so what they are really buying are people.  Therefore, the media are not really selling their media as much as they are selling the people they attract to the media.  So much of the internet business models are based on giving their content away for free in order to attract other sources of income, like advertising.  When you use these internet sites, you are the product being sold, like when Google sells you in order to get paid ads on their search page.  When internet companies talk about monetizing their sites, what they are really saying is that they are looking for more ways to sell you to more people.

d) Investors - For a lot of start-up companies, the original proposal is not the same as what eventually ends up being the business model.  The service can change and the target market can change.  Knowing this, start-ups understand that the real customer is the investor in the start-up.  The people lured to the start-up are merely the product.  The real selling pitch is to the investment community, because they are the only one paying the bills in the start-up phase.  If the investor wants something else, you change the model to please them, because they are the customer.

Using your imagination, I’m sure you can think of a lot of additional customer types which differ from the users (like parents for children’s products, large employers for daycare centers, future acquirers for small start-ups, etc.).

2) Manufacturing the Right Kind of Slaves

If people are merely slaves to be sold in your business model, then you need to think about them differently.  You are in the business of manufacturing people.  Therefore, you need to think of them in the same way other manufacturers think about their product.

When developing a manufacturing a process, a manufacturer must consider several things, including the QUALITY of the product (% of defects), the APPROPRIATENESS of the product (is it what the customer really desires), the FUNCTIONALITY of the product (does it deliver on the desired features), and the PRICE of the product (can you manufacture it cheaply enough).

So, if you’re selling people, you need to consider these same things about your people-manufacturing model.  It’s not just about gathering lots of people.  They need to be the right people (with the right quality, appropriateness, functionality and price).  And what is “right” depends on the people who are paying the bills (your real customer). 

That’s why it’s so important to clearly define the real customer.  Otherwise you won’t know what they want so you won’t manufacture the right kind of people.

Think about Disney.  One of the most important products Disney creates are people who pay to surround themselves (or someone they love) with manifestations of an icon.  In other words, their best product is someone who would buy everything associated with one of their icons, like Buzz Lightyear.  These are the people who buy all the Buzz Lightyear videos, toys, games, dolls, amusement park rides, posters, pajamas, sheets, underwear, and whatever else the image of Buzz Lightyear is on.  Disney sells this person to all of its divisions as well as to any business who wants to license the icon.

Therefore, the manufacturing of an icon lover goes something like this.  First you create an icon.  Then you create a way to get people to fall in love with the icon (like a movie).  Next, you create all the tie-ins to all the ways for this icon lover person/product to be valuable to others.  Then you sell this person to them, principally through licensing fees.

Therefore, Disney’s goal is not just to have a movie which draws a lot of people.  It has to be the right kind of people—icon lovers.  That’s why the movies are designed to create lovable icons more than to create great entertainment.  Those creating the movie have to understand that in order efficiently manufacture the right kind of movie-goers.

Internet sites need to see themselves in a similar fashion.  The goal is not just to attract a lot of eyeballs.  They need to be eyeballs specifically manufactured to appeal to someone who wants to buy those kinds of eyeballs.    And you cannot do this if you don’t specifically plan the whole thing as seamless manufacturing process.   

And if you want to justify your marketing effort to manufacture that person, use the same type of criteria used to justify efficient manufacturing.  Is it the right type of product and is it produced at a lower cost than you can sell it to others for?

SUMMARY
The real customer is the one who gives you the money.  And in many business models, these customers give you the money in order to access the people you have accumulated.  To optimize this model, one needs to clearly identify the real customer and then find the most efficient way to manufacture the type of people these customers specifically want. 

FINAL THOUGHTS
This is a two-step strategy.  First you manufacture something to lure the right type of people.  Then you package these people so that they are the most desirable to the people who will pay for them.  In the end, that insurance web site didn’t care if I was made happy (which I wasn’t).  What they wanted was to make those other insurance sellers happy, because they were the customer.  I was merely the second stage of their manufacturing process.

Undercurrents

THE STORY
I love to stare at maps. I find them fascinating. If you stare at them long enough, you start seeing some interesting things. For example, we think of Minneapolis/St. Paul as a very cold and northerly location. However, when you look at the same latitude as Minneapolis in Europe, you end up in the south of France, a place we do not usually think of as cold and northerly. Yet, the fact is that Minneapolis is about the same distance from the North Pole at Southern France.

Detroit, Chicago and Boston are also thought of as being relatively cold and northerly. Yet they are about as close to the equator as places like Rome, Italy and Barcelona, Spain in the heart of the Mediterranean Sea. Not exactly the same climate zone, even though the same latitude.

And what about our friend London, England? Well, if you take the same latitude as London and come over to North America, you end up on the north shore of Ontario, Canada in James Bay, about 1,100 miles north of Toronto. Sure, London can get cold, but nothing like James Bay.

So if someone tells you to pack your bags for a vacation, and the only thing they tell you is the latitude of your destination, you really don’t know very much. You have no idea what clothes are appropriate to bring.

THE ANALOGY
There’s a reason why you can have so many different climate zones at the same latitude. Climate is determined by more than one’s distance from the equator. Not only do you have to consider latitude, but you also have to consider altitude. And, more importantly, one has to take into account climate changers like ocean currents. Northern Europe is kept warm due to the Atlantic Meridonal Overturning Current, otherwise known as the Atlantic Conveyor.

The Atlantic Conveyor works to warm Northern Europe in two ways. First, it brings warm water from the Gulf of Mexico to Northern Europe. Second, it promotes “chimneys” in the ocean which push the coldest water straight down to the ocean bottom so that the warmer water stays closer to the surface. These factors are estimated to account for 10 to 15 degrees Fahrenheit of additional warmth for Northern Europe. The difference between 50 degrees Fahrenheit and 75 degrees is certainly enough to change your wardrobe.

In Southern Europe, Mediterranean Sea currents help keep coastal areas warm. Northerly winds off the Mediterranean even help to keep Germany warmer than it would otherwise be.

What makes this so deceptive is that all the warmth-providing activity is taking place below the surface. You cannot really see it with the naked eye. It is happening deep in the oceans and seas, and requires thousands of miles of territory in order to measure the full impact.

The latitude is something that is easy to measure. You can quickly look up any city in an atlas and get its latitude (or even faster on the internet). The impact of complex ocean currents gets a bit more complicated.

This same principle can hold true in the business world. We like to make strategic decisions based on facts. In this day and age, it is easy to get overloaded with a lot of facts. All of these facts can lull us into a sense of confidence about our decision-making. However, if you just look at the surface facts, you can come to some wrong conclusions, just like you can come to the wrong conclusions about climate from just looking at latitudes.

To get a complete picture of a market, one needs to find those undercurrents which are not immediately discernable on the surface, yet have a major impact on customer behavior. A business climate can be as complex as a weather climate. Your chances of bringing the right baggage for the job will require looking for those hidden factors which influence behavior.

THE PRINCIPLE
The principle here is that just because two groups of customers may share vary similar demographic characteristics, it does not necessarily mean that they will react the same way to your strategy.

Think of DNA, a measurable trait. A human and a chimpanzee have nearly identical DNA, yet I think that if you marketed to chimpanzees the same way as you do to humans, you would not get the same results. The same is true on other measurable traits.

We can see this in a demographic factor like ethnicity. Just because someone is a Hispanic in the United States does not mean that they behave the same way or can be appealed to in the same way. Some of these differences are due to factors thousands of miles away, just like the impact of the Gulf of Mexico on England’s climate. For example, if a Hispanic immigrated to the US from Puerto Rico, they will have different characteristics from a Hispanic originally from Mexico, because the Hispanics bring a bit of their culture of origin with them to the US.

Another major impact is time. A third generation Hispanic in the US is typically not very different from mainstream Americans, whereas a first generation Hispanic acts very differently. One has to dig a little deeper below the surface to segregate Hispanics by generation in the US.

If one looks globally at a factor like household income, one can see vastly different standards of living, even though the amount of money earned is about the same. “Middle Class” behavior often has only a tangential relationship to income, just like temperature is only tangentially related to latitude.

I remember over a decade ago when Marsh Supermarkets, out of Indianapolis, Indiana decided to build a large supermarket in India. The “facts” seemed to show a rising percentage of households in India with incomes large enough to afford the benefits of supermarket shopping. Based on facts like this, they built a store in India. It was an utter disaster.

What Marsh discovered was that the due to a different labor market than in the US, the people in India who could afford to shop at supermarkets could also afford cheap labor to do their grocery shopping for them. These shoppers preferred to patronize the small independent shops, because these shopkeepers were their friends and were more in tune with the culture of these hired hands. Hence, the culture of the hired hands was more important than the affluence of the family who hired them when it came to choosing where to purchase groceries. I guess that even though Indianapolis starts with the word “India,” that does not make you an expert on the nuances of Indian culture.

Recently, the Wall Street Journal wrote an article on the fact that Disney has finally decided to no longer go it alone when entering cultures different from the US. They are forming partnerships with local companies who know the undercurrents of the local culture. In India, Disney formed a partnership with Yash Raj Films, a local family-oriented film company in the Bollywood tradition.

To quote the Wall Street Journal,
“Disney's traditional approach was largely to force-feed its U.S. products from its Burbank, Calif., headquarters. The company ultimately concluded the cookie-cutter approach wouldn't work, and now it is going country by country, with a particular focus on five hot markets: India, China, Russia, Latin America and South Korea. ‘We're building Disney from scratch,’ in countries such as India, said Mr. Iger, citing the company's founder and namesake: Just ‘as Walt did in the U.S. over 50 years ago.’"

SUMMARY
Surface statistics, like latitude or demographics, only tell part of the story and can lead to wrong strategic conclusions. Often, underlying currents of culture and history can have a greater impact than the surface statistics. It pays to dig a little deeper under the surface (or find people who are already intimate with these undercurrents).

FINAL THOUGHTS
Just knowing the distance from the equator can be very misleading about climate if you do not differentiate between miles north versus miles south. The Northern Hemisphere has opposite seasons from the Southern Hemisphere. Now that would really throw off your ability to pack the right clothing.