Strategic Planning Analogy #484: Adoption Curves

THE STORY

I knew someone who lived in Latin America back in the days when inflation was regularly 2,000 to 3,000% per year.  He told me that back then a popular occupation was to be a profession line-stander.  What these people did was stand in line outside of a store before it opened.  Then, once the store opened, they quickly bought a bunch of goods for the person who paid them to stand in line for them.

Why were so many people willing to pay others to shop for them?  The extremely high inflation rates made it a great economic investment.  When inflation is over 3000%, you want to convert your money into goods as soon as possible, because every moment you waited made your money far less valuable.  Even waiting a day or two to shop would significantly diminish how much you could buy with that money.

Therefore, if you were too busy to shop immediately after getting paid, it was worthwhile to pay someone to shop for you, because the cost of paying the line-stander was less than the value loss in the currency by waiting until you could get around to shopping for yourself.

So being at the front of the line was important when paying cash in that society.  However, what if you were paying credit in a hyper inflation environment?  Well, then you’d want to be last in line, because the longer you waited to pay, the less valuable was the money used to pay off the earlier debt.

THE ANALOGY

As the story illustrates, sometimes there can be great benefits to being first in line to get something.  Other times the benefits may flow to those at the back of the line.  This same idea applies to business strategy.  Under some circumstances it makes strategic sense to be a leader in adopting new ideas, new technologies, and new business models.  Under other circumstances, it makes sense to be closer to the back of the line.  And being in the middle tends not to get much of any advantage at all.

At first this may seem counter-intuitive.  After all, the normal consumer adoption curve typically looks like a bell-shaped curve.  There are a few early adopters, a few late adopters, and most people adopt somewhere in-between.

However, when it comes to strategic adoption rates for businesses, I think the preferred curve may look more like the inverted bell curve seen in the world of hyperinflation, with most of the advantages coming at either end, and little to be gained by adopting in the middle.

THE PRINCIPLE

The principle here is that the timing of when you make a strategic move may be almost as important as what the move is.  In most cases, early adoption is best.  In many cases later adoption makes sense.  Being in the middle rarely is the best strategic move.

When Early Adoption Makes Sense

There are three times when it makes strategic sense to be at the front of the line.  These are each discussed below.

1) Establishing a Strategic Position

A strategic position is the benefit where you want to win in the marketplace.  And almost without exception, there is value to being one of the first to stake out that position.  Why?  If you are the first, you are going after uncontested territory.  There is nobody there who already owns the position, so you can just claim it for yourself...unchallenged.  You can defines the rules in that space to be in your favor.  You become the first to come to mind when the position is thought of.  You are the “expert.”

Consider the opposite, where you try to win at a position which someone else has already claimed and won. The only way you can win is to unseat the current winner.  That effort can be extremely difficult, costly and time consuming…and usually still fails.  The early leader in grabbing a strategic position has so many advantages that they can enjoy success for a long time, even if they do not have the best offering.

That’s why Al Ries and Jack Trout, the experts in positioning, made their first law of marketing the Law of Leadership, which says “It’s better to be first than it is to be better.”

2) Gaining a Temporary Edge

There is a lot of imitation in business.  If someone comes up with an idea that gives them an advantage, others will copy it.  As a result, most advantages are temporary.  Therefore, you have two choices:  You can be at the front of the line on that innovation and get the temporary advantage until others catch up; OR you can wait to do the innovation later. 

If you wait, you get no advantage in the marketplace when you invest in the innovation, since the early adopters already took it.  All you are doing is erasing your market disadvantage so that you can regain parity with the early adopters. 

If it costs roughly the same to adopt an innovation early or late, then all the advantage goes to the early adopter.  This is because every firm will eventually have to make about the same investment in order to stay relevant, so the costs are the same.  But only the early investor gets the advantage in the marketplace.  The rest have a disadvantage at first and only parity later.  So be at the front of the line if it is an advantage which pretty much everyone will have to adopt eventually.

An example could be something like free on-line delivery.  The first to offer it get the advantage, become known for it, and build a loyal sales advantage.  The latecomers are eventually forced into offering free on-line delivery to stem their sales losses to the early movers.  But it does not result in huge market share gains for the latecomers, because those lured by free delivery are already satisfied by the early adopters of the policy.  There is little incentive to switch to the latecomer’s parity offering.  I speak more about this principle in an earlier blog.

3) The Guinea Pig

Sometimes the inventor of a new process or new technology has trouble achieving the critical mass of customers needed to make their product an industry standard.  In this B2B world, it is often to the inventor’s advantage to incent some companies to become their guinea pig.  In other words, if the inventing company essentially “pays” some potential customers to be test cases for their product, then they can build the critical mass that gets others to follow.

This is why brands in the fashion world give free samples to the tastemakers and celebrities which the masses like to copy.  For if the tastemakers and celebrities wear the fashion, then others will follow, making it worthwhile to give those leaders the items for free.

This can also happen for businesses which are opinion-leaders in their industry.  If you are willing to be an early adopter for these businesses desperate to create a critical mass of demand, you may get the product for free, or get other incentives to pay for training costs or costs of conversion.  Look at the great financial deal Nokia got from Microsoft to be one of the first to adopt the Microsoft smartphone software. The latecomers would not get all of those incentives.  They would have to pay full price for the item.  Hence,the early guinea pig gains an advantage over the latecomers.

When Late Adoption Makes Sense

There are also times when it is better to be nearer the end of the line.

1) Evolving Industry Standards

When there are a variety of conflicting technologies fighting to become the industry standard, it may make sense to wait until one better understands which technology will become the industry standard.  That way, you are less likely to invest in the wrong technology and then need to make a second investment in whichever technology ultimately became the standard.  This is especially important if you are a small player who does not have enough clout to influence which technology wins and not enough money to make the investment twice.

If the technology impacts your interaction with all the players in your supply chain, there may be little advantage to being first if the rest of the people you deal with in the supply chain are waiting until they see which technology wins.  The real advantage only comes when everyone is on the same page.  It may be better to wait to see what your key partners adopt before making your choice.

2) Price Deflation 

Some technologies and business systems are very expensive when they first come out and have their prices drop dramatically over time.  This would be a sort of high price deflation, the opposite of the high inflation in the Latin America story.  In the case of high deflation, there can be high incentives to wait.  If you wait long enough, you can get the same thing as the early adopters, but much cheaper.  That cost gap may be more than enough to compensate for entering the business a little later.

Not only might the later product version be cheaper to buy, but cheaper to operate.  The technology might go from difficult installation to “plug and play.”  So purchase cost, installation cost and ongoing maintenance/operating costs could benefit from waiting.

3) Avoiding Mistakes

Not all innovations turn out as originally promised.  They may bomb in the marketplace or need significant tweaking.  Sometimes, it pays to let others do all the difficult and expensive work of experimenting and testing.  Then, only once the formula for success is figured out, pounce on the marketplace with the winning formula.

This type of waiting is especially useful to market leaders who have significant influence on their supply chain.  For example, Coca Cola has rarely ever been the first with any innovations in their industry.  They were not the first to put soda in cans.  They were not the first to create a diet soda.  They were not the first with energy drinks.  What Coke likes to do is let others waste their time, money and effort on experimenting.  Then, once the right answer is known, Coke jumps in.  And because of Coke’s marketplace clout, they usually overcome the later start and overtake the innovator…and save all the innovation expense.

SUMMARY

Strategy is more than just knowing what to do…it is knowing when to do it.  Often the best strategic moves come to early adopters.  However, sometimes it makes more sense to wait.  The proper timing depends on issues like the riskiness of the innovation, expected price changes over time (up or down) and your relative market position.  There is no obvious answer for everyone in every situation.  So you have to figure it out, just like most other strategic issues.

FINAL THOUGHTS

Before getting in line, decide where in the line you want to be.

Strategic Planning Analogy #444: Beware of One Choice

THE STORY
Imagine what it would be like if car dealers had only one model of car available to sell. Regardless of who I am or what type of one model they had, I’m sure the salesperson would have a rationale for why that was the perfect car for a person like me.

And if the next customer was completely different from me, that salesperson would have a rationale for why that same car was the perfect match for them as well.

In fact, I’m sure that salesperson would have a rationale for almost anyone as to why that was the perfect car for them. After all, he only has one model to sell, so he has to convince you that this is the model for you to buy. Even if it is really not the car for you.

Beware of the salesperson with only one choice.

THE ANALOGY
Although car dealers have lots of models to try to sell you, there are many businesses which have only one or two items to sell. Included in that second list is often many business gurus and consultants.

Often times, they have had success with a particular business approach in the past. They’ve probably written a book about it. Now they want to use that same approach at your business. They are like the car salesman with only one car to sell. They will try to convince you that their approach is just right for you. They will point out their prior successes to “prove” that you should do it, too. After all, it is the only thing they have to sell, so sell it they will—regardless of who you are.

Of course, the problem is that businesses are a lot like people. They aren’t all alike. Just as there is no one-size-fits-all automobile, there is no one-size-fits-all approach to business strategy.

There’s a reason why car dealerships have a variety of models to sell. Not everyone needs or wants the same thing. And all businesses should not need or want the same strategic solution.

Beware the business consultant with only one choice.

THE PRINCIPLE
The principle here is that there is no one best strategic solution for everyone. And that’s a good thing. After all, if there was only one strategic solution, then you would only need one company within an industry—the one operating that one strategy best. Everyone else would be an inferior redundancy. And if you are not that one company, then there would be no reason for your company to exist.

Fortunately, the variety within the marketplace allows for a variety of go-to-market strategies. This provides viable options for lots of participants.

Start With the Right Question
So, to begin the strategy quest, be sure to start with the right question. The wrong first question to ask is “What is the best strategy?” That’s a bad question because there is no best strategy. Just as there is no one best car for everyone, there is no one best strategy for all businesses.

The right strategy for a small entrepreneur may be very different from the best strategy for a huge Fortune 100 multinational firm. They have different resources, different strengths, different capabilities. Forcing them to take the same approach to achieve the same ends would be a mistake.

Instead, the right first question to ask is “What is the best strategy for my business?” The point is that who you are is just as important as what you do. There must be a fit between the two. Until you understand who you are in relation to the marketplace, you don’t know what moves make the most sense for your business.

Strategies are about finding places where you can win. If you are short, you will not win at basketball, no matter how successful basketball may be for tall people. You need to find the sport where your talents have the best chance of winning.

So if a business consultant comes in saying “I have the best strategy solution,” tell that consultant they are answering the wrong question.

Judge a Salesperson by their Questions
How can you tell if a business consultant is answering the right question? Check to see if their opening moves are more about telling or more about asking. If they immediately start out by telling you what must be done, this probably means that they have a preconceived notion of what is best and they are going to shove it down your throats whether it is appropriate or not (like the car dealer with only one car).

By contrast, if they start out by asking a lot of questions about your business and your company, then they realize that the best solution depends on how it fits with who you are. Therefore, they need to ask you a lot of questions about who you are in order determine the best solution for you.

This is what a good consumer-centric car salesperson will do. They will ask you a lot of questions, like how you plan to use the vehicle, what are critical concerns, etc. Only after they first understand your situation will they begin to make a recommendation.

Beware of “Proof by Example”
The one-solution consultant will often try to impress you with how superior their solution is via examples. They show how others used this process to great success. Therefore, it should work for you, too.

But here is the problem with examples. Yes, you can find examples of businesses which succeeded with a particular approach. But if you look long enough, you can find examples of companies which failed with that same approach. In addition, you can find examples of successes and failures for all of the approaches. Consequently, an example of a success by one company with a particular approach does not guarantee that you will have a similar success with that approach. And it doesn’t prove that you wouldn’t have even more success with an alternative approach.

That is why in the US, the law requires that advertisements for weight loss products must put a disclaimer on their examples and say that not everyone will lose as much weight as those shown in the examples. Otherwise, the examples can be deceptive.

I remember reading about a company which had an inferior product that most customers didn’t like. They received lots of complaints. However, one day they got a letter from a satisfied customer (their first ever). They used that one satisfied customer in their advertising, and sales rose dramatically (even though the product was still bad). Yes, it was an example of success. But it was not a fair representation of reality.

So beware of blindly accepting examples as proof of future success. Ask yourself how similar your situation is to the one in the example. Check to see if there have been failures. Find out what the differences were between the successes and the failures.

Leaders Aren’t Imitators
Finally, there is the concept of “first mover advantage.” The principle is that those who stake an early claim to a strategic position tend to have an advantage over late-comers. Early participants have a better opportunity to claim ownership of the position in the consumers’ mind, because the consumer has no preconceived leader already in their head. These early arrivers easily claim the customers looking for this position at a time when there is less competition.

By the time the late-comers arrive, customers are already satisfied with the early arrivals. The customers now already have a firm leader in their mind (one of the early arrivals) who owns the space. The late-comer has to work harder to steal away well-entrenched market share. As a result, the early arriver tends to be more successful.

If the business consultant is proposing an approach which succeeded in the past, that success may have been a result of first mover advantage. Others following in their path will be late arrivers and not see the same advantages. Therefore, the approach may not work as well anymore. I spoke more about this concept here.

If you want success, that often requires staking out new claims in new territories with new business models. And this won’t happen if you are always trying to imitate successes of the past. If you imitate the leader, then you will always be a follower. And followers rarely have the advantage. So beware of consultants who want you to blindly follow old rules and will not take risks to be innovative with you.

SUMMARY
Strategic planning is a very personal thing. The right strategy depends on the particular company and their particular situation. It is not a one-size-fits-all process. Therefore, it can be a mistake to just pull a strategy “off the shelf” which worked for others and expect it to work for your firm. If you call in a strategy consultant to help you with your strategy, make sure they understand this principle. Become very nervous if the consultant has a preconceived notion about a single approach that they want to force on every client.

FINAL THOUGHTS
There’s a reason why car salesmen and consultants are often held in low esteem by society.

Early Bird

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

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

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

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

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

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

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

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

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

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

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

As they say, the early bird gets the worm.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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