Strategic Planning Analogy #573: Aldi Adds Frills?

THE STORY

Today I went to the grand re-opening of an Aldi store. As you probably know, the reason for Aldi’s existence is to offer a limited assortment of groceries in a bare-bones, no-frills environment. By cutting all the costs of assortment and frills, they can offer their food cheaper than the competition.

Well, the newly grand-opened Aldi moved the store a little bit more up-market. The fixturing and signage looked a lot nicer. It didn’t feel as “no-frills” as it used to.

What’s this world coming to when a store whose success is based on a no-frills image decides it has to look a lot nicer?

THE ANALOGY
Aldi claims that they need to make their stores nicer because the competition is making it harder for them to provide prices low enough to get enough customers to put up with the low-frills atmosphere. Almost everybody sells groceries at low prices now, so Aldi can’t create a price gap sufficient enough to get lots of people to give up the niceties of the other stores to go to Aldi.

This is typical of a market in maturity. It gets difficult for companies in mature markets to make the old levels of profitability using the old models that made them a success in the first place. So the companies start tinkering with the formula. If they are not careful, the tinkering may end up destroying the business model.

Is there really a place for the “More Upscale No-Frills Store”? I guess we’ll see.

Why should we care about this? Well, the overwhelming majority of companies are in mature businesses. They have pressures to rebuild profitability and growth. Those pressures could lead to the kind of tinkering that—instead of fixing things—ruins things.

THE PRINCIPLE
Since most businesses are in mature businesses, they need to have strategies for maturity. Strategies in maturity aren’t as sexy as strategies for growth industries, so they tend to get less attention than they deserve. As a result, companies may be missing out on how to optimize in a mature business.

The major problems in maturity are threefold:

1) Over Capacity (Too Many Competitors)

Barriers to exit can be so high that mature industries can end up with too much capacity. I saw a statistic a while back that said that there is so much excess manufacturing capacity in the automotive industry that there is no scenario that would allow you to get enough auto sales to have all those factories running near capacity.

Not only is there too much production, but too many brands and companies fighting in the space. When you spread all that overcapacity over too many companies, you end up with a lot of companies that are teetering on the edge of bankruptcy.

2) Too Little Growth

The over-capacity and over-abundance of companies might not be so bad if the market was growing rapidly. Unfortunately, there is very little growth in mature industries. Often, the costs of doing business in the mature industry may be growing faster than sales. This is a formula for disaster.

3) Not Enough Differentiation

By the time you get to maturity, all the weak players are gone. The remaining companies have a quality offering in the marketplace. In fact, the remaining players tend to have fairly similar offerings. They are all good enough to be a viable option, but not different enough to get significant preference over the alternatives. They are almost certainly not different enough to command much of any price premium.

Two Disastrous Outcomes

Low growth, overcapacity and insufficient differentiation often lead to two disastrous outcomes. Either you get into a profit-destroying price war or you make compromising changes to your core strategy that can destroy your reason for being (like trying to be the upscale low-frills alternative). By trying to be more things to more people, you can end up being adequate for many, but best for none.

Better Alternatives

Here are some better alternative strategies when faced with maturity.

Alternative #1: Flee the Industry

Just because an industry is mature does not mean your company needs to be mature. You can shift your portfolio to areas less mature. GE has succeeded for over a century by constantly shifting its portfolio. It routinely leaves problematic mature businesses and adds businesses that are less mature. (I spoke more about this concept here and here).

The more mature an industry gets, the less valuable a company in that industry tends to become. Therefore, if you want to get out, get out early, when you can command the highest price for your business. Early exit is often the best alternative.

Alternative #2: Consolidate the Industry

If you are the market leader, the best approach may be to accelerate the consolidation of the industry. Do what you can to reduce the number of players and the amount of capacity. This often requires buying up a lot of the more marginal players. At the end, you may end up with a near-monopoly. 

Even in a very mature business, you can usually make money if you have a near-monopoly. This was the approach taken by Macy’s in the US. It essentially bought up all the major full-line department store brands, closed a bunch of them down, and converted all the rest under the single brand of Macy’s. Now it has a near-monopoly in the space.

Alternative #3: Move From Mass To Niche

The mass market may be mature, but there may still be great growth and opportunity on the fringes. Fast Food restaurants may be mature, but the upscale niche Shake Shack is growing. Traditional supermarkets may be mature, but the organic/produce/health food niche stores like Sprouts and Fresh Thyme are growing. The traditional automotive market is mature, but the niche taken by Tesla is growing like crazy. The leadership at Proctor & Gamble is trying to move their company further away from the mature mass into the growing niches.

Alternative #4: Create a Mature Infrastructure

There are a lot of costs involved in running a business operating in a growth industry. Many of these costs are no longer necessary when a market hits maturity. Places to cut can include:

·         Extensive marketing organizations, and marketing budgets

·         Extensive sales organizations

·         Large engineering and product development organizations

·         Large R&D departments

You can probably get away with lower-priced executives across the board, too. In essence, you make your headquarters as no frills as Aldi’s stores used to be. By gutting the headquarters, you can now survive on the amount of business and margins a mature market provides.

A few years back, Home Depot got a big bump up in profitability when they decided to essentially no longer build new stores. They got rid of all the costs associated with new store growth (including the cannibalization of sales from older stores). When they eliminated all those costs associated with growth, it all flowed to the bottom line.

In another example, who do you think bought up all the Fast Moving Consumer Product Group brands when the big, bloated companies divested all the marginal and most mature parts of their portfolios several years back? It was the no-frills companies who were built specifically to survive in maturity, like Pinnacle Foods.

This type of strategy has to be more than just cutting costs. It needs to include changing the corporate culture to embrace no-frills management. Otherwise, the costs will just creep back in.

SUMMARY
The conditions of a mature market tend to severely squeeze industry profitability. This can force a company into considering a change to their strategy. But not all change is good change. Bad change is to start price wars or damage your appeal by trying to be everything to everyone and end up not being preferred by anyone. Good change includes strategies like fleeing the industry, consolidating the industry, moving from mass to niche, or redesigning your infrastructure for maturity.

FINAL THOUGHTS
I had stopped writing this blog last year because I thought strategic planning had gotten too mature and did not need this blog any more. However, I got some feedback asking me to bring the blog back, so I will periodically add new blogs. Thanks for your support.

Strategic Planning Analogy #552: Dead By 45

THE STORY
A few years ago, I went to a conference on Big Data put on by IBM. The first thing I noticed was that almost everyone attending (other than myself) looked younger than my children (who were in their early 30s).

After a particular seminar session at this conference, one of these young attenders asked the speaker a question that went something like this:

“What do I do about these old people in my company (old defined as over 40) who don’t get it and are don’t want to get things accomplished our way?”

The speaker answered the question something like this:

“I used to tell people like you to be patient. Those old people will be irrelevant soon enough and then you can proceed. But now I see that they are already irrelevant, so just ignore them and move on. Treat them as if they were dead.”

That was not very assuring to people like me, who still think 40 is young.

THE ANALOGY
If you read the literature about the new economy, it is common to find references to the idea that anyone over 45 should be treated as dead. The idea is that if you haven’t made your millions by 45, you never will, so anyone over 45 who hasn’t already made it is irrelevant…they may as well just give up.

You may not buy into this philosophy, but it is common among the many of the key players in the new economy. And since people act based upon what they believe, this belief system is impacting the way the new economy acts.

All strategies work within the context of the environment around them. If you want your strategy to succeed in the new economy, you should consider how the “death at 45” philosophy impacts the context in which you are trying to succeed. If you don’t, death of your business is a very real possibility. You really will become irrelevant.

THE PRINCIPLE
The principle here is that even if you do not want to play by the rules of “Death at 45,” many of your competitors may be. This may cause them to take actions which seem irrational to you and your rules. But it will be very rational based on THEIR rules. And their actions will disrupt your business in ways that will be nearly impossible to deal with unless you get a grip on their mindset.

Therefore, we will first look at how the “death at 45” system works. Then we will see how it impacts the status quo and what the status quo can do strategically in this new world.

The Rules of “Death at 45”

The rules of “Death at 45” are as follows:

1. The only way to (legally) make it big by 45 is to cash out. You have to transfer the ownership of your concept to someone else who is willing to pay you big dollars for it. That would be to one of three choices: private equity, going public, or selling the business to another, larger business (like selling to Google).
2. Since there is really only one meaningful transaction (when you cash out), there is really only one meaningful customer (the one you sell out to). All the other transactions related to running your business pale by comparison. They are little more than “proof of concept” examples to show to your one meaningful customer.
3. The only income statement that matters is the personal income statement (how well did I do when I cashed out). It really isn’t all that relevant if your business model is profitable or even if there is not a clear path to profitability in the future. If you play the game well, even poor business models can cash out at a high price.
4. Given the weak ties between financial performance and cash out potential, the game is played a lot like the lottery. Both the buyers and the sellers do a lot of transactions because they don’t know which venture will be the big one. Since the best way to win the lottery is by purchasing a lot of tickets, the best way to win by 45 is to pursue a lot of potential cash out ventures. If it looks like the current business model isn’t leading to a quick cash out, either radically change the model or dump it and move on to the next one.

Competing Against Death at 45 Businesses

So let’s say you are an older, status quo company trying to compete against an upstart playing by these rules. They can make your life very difficult, because their rules allow them to play differently than your rules allow you play.

1. The large, established firm has pretty much already cashed out a long time ago. Without another strong cash out option, the established firm has fewer ways to make it big. It is stuck in the old, slow process of trying to increase sales and decrease costs with a relatively mature model. The new firms don’t concern themselves as much with this, because they have better options.
2. The potential owners of the “Death at 45” companies aren’t necessarily looking for profits, especially not in the near term. By contrast, the established companies have owners who want to see increasing profits on a quarterly basis. It is very difficult to increase profits quarterly when your competitor isn’t all that interested in making any profit at all.
3. Even if the established company tries to instill some of the culture of a business start-up into their system, it won’t be the same, because employees in the established firm won’t see as clear a path to their personal cash out potential. Since the big company they work for isn’t on a full cash out path, all that entrepreneurism effort will not reward them as well as it would in working for the right “Death at 45” company.
4. When you are a tiny start-up, it is easy to radically flip the business model or shut down and start over again if things aren’t leading to a quick cash out. It is much more difficult for a large, established firm to be as flexible.

The increased flexibility and lack of a need to make immediate profits gives the “Death by 45” companies an apparent “unfair” advantage. But fair or not, that is reality.

What to Do?

So what should the established players consider doing to better compete in this environment?

1. Structure your firm to be more like a holding company. Rather than defining yourself as being in a particular singular business (working in a singular manner), define yourself as a flexible holder of many types of business models and structures which can come and go as needed to be in the right place at the right time. For example, GE has used a holding company approach to effectively flex over many decades. It is now flexing away from lending and flexing towards the Internet of Things. Taking the holding company route will cause you to act more like a private equity firm. It will give you more opportunities to cash out.
2. Work on changing the profile of your equity holders. Amazon can cause a lot of problems for its competition because its shareholders are less interested in near-term profit than the shareholders of its competitors. Just think of what you could do if you had Amazon-like shareholders behind you.
3. Play YOUR game. Just as the little guys can do things you can’t do, you can do cool things they can’t do. You have economies of scale, distribution, a brand name, business synergies, people who have a lot of experience, and so on. Play a game that puts THEM on the defensive.

SUMMARY
Although we only scratched the surface of this topic, we have seen that different mindsets will cause you to operate your business differently. Someone operating under the “Death by 45” mentality will have strategies very different from people in older, larger, established firms. The problem occurs when these two types of firms compete against each other in the marketplace. Their different approaches create an unlevel playing field. For example, the “Death by 45” company is less encumbered with a need to make money versus the establishment counterpart.

To win in such a world, it helps to first understand the thinking behind all the players you are competing with. That will help you understand the rules they play by. Second, one needs to find a strategic path that neutralizes the advantages of other mental models while taking advantage of what your position offers.

FINAL THOUGHTS
It is important to remember that nearly all the attempts to make it big by 45 fail. For every successful Google, there are millions of attempts that never make it to the cash out stage. The odds of personally winning with this strategy are extremely low. By comparison, the established firm has much better odds of carrying on.

Strategic Planning Analogy #501: The Power of Control

THE STORY

In the early 1970s, there was a fellow named Robert Taylor, who owned a small soap company, called Minnetonka. Taylor came up with the idea to sell liquid soap in small dispensable pump containers. Although a great idea, there was no way to patent it. After all, liquid soap and pump dispensers already existed.

This caused a dilemma. If the Minnetonka liquid-soap-in-a-pump idea was successful, then larger, more established soap companies could legally steal his idea and use their scale and clout to put him out of business. So even if the idea was great, Minnetonka would probably not be able to benefit from it, right?

Maybe not.

Taylor got bold. He decided to corner the market on pump dispensers. By raising $12 million dollars—more than his company's net worth—Taylor ordered 100 million of the pump dispensers from the only two companies that manufactured them in the U.S. An order of this size gobbled up the entire manufacturing capacity for these two manufacturers for at least a year, and maybe two. That gave Minnetonka plenty of time to establish itself in the marketplace without any real competition.

It worked. Taylor’s product, called SoftSoap, was a huge hit and owned the category because competitors couldn’t get their hands on an adequate supply of pumps.

In Taylor’s second smart move, he sold the business to Colgate-Palmolive for $61 million around two years after introduction. This would be about the time Taylor’s control of the dispenser manufacturers’ capacity was running out and anyone could enter the market—which they did, causing SoftSoap to dramatically lose market share (which hurt Colgate-Palmolive, not Taylor).

THE ANALOGY

Companies hate it when they have no competitive advantage. Without an advantage, there is no advantage to exploit. Without an advantage, anyone who wants to can copy your business model and directly compete against you. Barriers to entry and exit fall. A price war begins and usually only the largest and best financed survive. Profits are minimal.

So to avoid this, firms try to build competitive advantages. The problem is that firms tend to focus on finding their competitive advantage within the product or service they are selling. After all, that is what people are buying—it is what the money is paying for, right? So firms try to create uniqueness into their product which cannot be easily imitated, using tools like patents and unique capabilities.

My favorite story in this regard was when General Mills introduced Frosted Cheerios cereal. In designing the product, General Mills did not just take their regular, oat-based Cheerios and put frosting on it. Instead, General Mills made the frosted Cheerio out of a secret blend of multiple grains. Was this done to make it tastier? No. Was this done because it would make it more desirable to customers? No.

The new formulation, according to General Mills, was done to make it harder for private label competitors to accurately imitate the product. It was done to create a small internal advantage, which I doubt will have much impact on the imitators.

Sometimes, the best advantages come from not from internal formulations, but from actions taken external to the product.

SoftSoap did not have any internal advantages. It had no exclusivity to the idea of putting liquid soap in pump dispensers. In fact, it was at a major disadvantage, because Minnetonka was a small player competing in a marketplace controlled by giant consumer products companies.

So instead of looking internally, Minnetonka looked externally. It decided to create its advantage in the upstream supply chain.  By locking up the supply of pump bottles, Minnetonka created an external advantage. It prevented copying by competition not by making its product unique, but by making it impossible for competitors to get their hands on a key ingredient from a third party.

So, when looking for your competitive advantage, don’t just look internally at your product or service. Be like Robert Taylor and look for external ways to create that advantage.

THE PRINCIPLE

The principle here has to do with control. If you control access to a scarce asset, you have a competitive advantage. This type of external control can create even stronger competitive advantages than internal product uniqueness. As we saw with SoftSoap, control of the external supply of pumps overcame no real internal advantage. And we also saw that Taylor was smart enough to sell the business before the effect of that external control was lost, since once that control was lost, so was SoftSoap’s value.

Upstream Control

One place to look for that external control is upstream in the supply chain. That is what SoftSoap did. It went upstream to control the supply of pumps.

Another example would be Apple. They have been accused multiple times of using a similar tactic. Sometimes, they’ve been accused of locking up the supply of key electronic components needed by their competitors (their equivalent of soap pumps). Other times, they have been accused of locking up the shipping capacity from key technology manufacturing centers in Asia to the US, thereby making it difficult for their competitors to ship their products to the US in time for Christmas. Either way, the external control by Apple gives them a competitive advantage.

Downstream Control

Another approach would be to control the downstream capacity in a supply chain. For example, I remember talking to someone at Andersen Windows shortly after they signed the deal to be the exclusive replacement window vendor for Home Depot. Although Home Depot is not the only outlet for replacement windows, it is one of the largest and most powerful distributors in the space. By being the only replacement window available at Home Depot, Andersen Windows had no direct competition inside Home Depot. That is an important downstream competitive advantage.

GE did something similar with its appliances. GE made solid connections with most of the major home builders in the US. As a result, they locked in a number of deals to be the vendor of choice for appliances which come with a new home. Other appliance manufacturers were frozen out. The ones buying these new houses could pick which GE appliance they got, but not appliances from other brands. This was a big competitive advantage.

And Apple plays in this space as well. By owning the largest distributor of digital music (the iTunes site), it controlled how the entire digital music industry evolved (to Apple’s benefit). Having only Apple products in the cool Apple stores is a similar example.

And then there is Microsoft. Microsoft would probably not exist today if it hadn’t structured the deal the way it did for selling its first product (MS-DOS) product to IBM. Normally, in these types of deals, IBM would have owned distribution rights the operating system they commissioned. But Bill Gates took a lower fee in exchange for controlling distribution rights to MS-DOS. This allowed Microsoft to sell the operating system to every other PC manufacturer, creating the de-facto standard and a lock on PC software for decades to come.

Promotional Control

Another scarce external resource can be advertising/promotional capacity. If you lock up all the key promotional capacity, you can weaken competition’s ability to get the word out about their offering. You see something similar with consumer electronics manufacturers, who try to get massive publicity just before a competitor’s new product launch, in order to minimize the competitor’s ability to create buzz in the promotional marketplace.

Now, one might think that in today’s internet culture, it is harder to create promotional control. But think about this. If you lock up all the relevant key words on Google, you can lock up the ad space on the search engine and freeze others out a key source for getting clicks to their site.

SUMMARY

Looking internally at what you offer is not the only place to seek competitive advantage. Controlling access to external factors can also create competitive advantage. In many cases, this external control can be a more powerful advantage than anything you can do internally. Therefore, consider external control when designing your competitive strategy.

FINAL THOUGHTS

In the end, who do you think got the biggest benefit from their competitive advantage efforts—SoftSoap with its external control of supply, or General Mills with its internal control of a slightly (perhaps even inperceptively) modified recipe for the Cheerios hidden under the flavor blast of frosting?

Strategic Planning Analogy #500: Be Careful Who You Follow

THE STORY

In the wintertime, Minnesota can have some nasty snowstorms. If they come just before the rush hour commute, they can grind traffic on the highways to a stop for hours. When that would happen to me, I would get off the highway and try to make my way home via the back roads.

With everything covered in white (and even more coming down), it would be hard to see where you were driving. And if the back roads took you into unfamiliar territory, it would be even more difficult to know how to get home. Therefore, when I got onto the back roads under these conditions, I would try to find another driver who appeared to know what they were doing and then follow them.

On one of these evenings, I found a car that really seemed to know all the back road shortcuts, so I started to follow it. Everything was working out quite well until that car I was following suddenly turned up a driveway and went into its garage. It was home. I was not. And I really wasn’t very sure about where I was.

I just kept driving and luckily I soon came to a main road which I recognized. From there, I was able to find my own way home. If I hadn’t come across that familiar road, I might have been wandering aimlessly out in that winter storm for many additional hours.

THE ANALOGY

Following someone can make life a lot easier—so long as the person you are following is going to your destination. But if that person is going somewhere else, they can lead you in the wrong direction.

When that car I was following turned up its driveway, I was in big trouble because he had led me into a neighborhood I did not know and where I did not belong. He had reached his destination. Unfortunately, his destination was nowhere near my destination. I was left in a place where I was lost.

The same thing can happen in the business world. It is usually easier to follow someone else’s strategy than create one of your own. This seems easy to justify, especially if you are following the market leader. After all, that strategy made them a huge success. Won’t it do the same for me?

The problem is that they are the market leader and you are not. They have different capabilities and resources than you do. As a result, the right strategic destination for them is most likely not the right destination for you. Trying to win with a strategy designed to take advantage of someone else’s strengths (not your own) will lead you to a place where you do not belong.

But even if you are roughly similar businesses, it is usually a mistake to blindly follow the leader. After all, each strategic position can only be owned by one firm in the mind of the customer. If the leader already owns that position, then the customers will view you as an inferior version of that position, even if you do essentially the same strategic actions. Instead, it is usually better to find your own unique position (where you can win) than to be seen as an inferior copy of someone else’s position. In other words, you need to find your own home to drive to rather than follow the leader to their home and not be invited in.

A great example is Walmart versus Target. Walmart’s strategic destination was “lowest cost structure/lowest prices.” Target could have tried to follow Walmart with a similar approach, but it probably would have been a failure. Just look at the evidence. There used to be dozens of discount store chains in the US chasing Walmart which have all gone bankrupt. But Target is still going strong because it decided not to follow the Walmart strategy and went to a different destination.

Target’s heritage from its parent company was the more upscale, more fashionable department store business. This was an advantage they could leverage against Walmart. So Target chose the destination of “Cheap Chic,” the more upscale, more fashionable alternative to Walmart.

Being a desirable alternative to Walmart is much better than being an inferior Walmart clone. Both chains now could successfully coexist, because they were winning in their respective, differentiating positions. They had each chosen different strategic “homes” and took different paths to get to their homes.

THE PRINCIPLE

The principle here is that a strategy of following someone else is usually a mistake. Most of the time, it is better to develop a different strategy—one specifically suited to your unique situation (skillsets and market position).

Why Following is Usually a Mistake #1: Differences

We have already discussed many of the reasons why following is usually a mistake. First of all, every company is different. There are differences in capabilities, resources, corporate culture, geography, prior investments, product portfolio, patents, market perceptions, and so on. What works for one firm won’t work for another because of these differences. You need to choose your strategy based on what makes you unique, because it is your uniqueness which provides the competitive edge needed to win.

There is no single best strategy for everyone in an industry. If there were, we’d be in trouble, because then you would only need one company per industry—the one best at executing that single strategy. Fortunately, there are many different ways to win a segment of the industry. You can choose to win on a variety of attributes, like price, service, customization, quality, speed, or specialization to a particular segment (such as a particular customer segment, geographic segment, usage segment, or solution segment). Rather than imitate someone else, find the place among these options which is best for your unique situation.

Throughout history, there have been business leaders who have had a great reputation for success. At one time, it was Jack Welch at GE. More recently, it was Steve Jobs at Apple.  Each time one of these business superstars appears, I’ve seen many leaders trying to implement the identical leadership styles (and strategic approaches) of these superstars in their own businesses. They try to follow these leaders just like I followed that car in the Minnesota winter. And usually, the results are similar to my experience. They end up lost rather than having success similar to these superstars.

Why? Well, the personality style of these superstars may be different than the natural style of those trying to imitate them. That difference makes it hard to be genuine and effective with that unnatural style. In addition, you are placing that leadership style into a different context. That style may not be the best for that context. These differences can make following these superstars a mistake.

Consider the fact that even Steve Jobs was not incredibly successful everywhere he went (think about when he ran NeXT). And many of the people highly trained at GE in the Jack Welch style had unsatisfactory results when they left GE to run companies in a different context. If they couldn’t pull it off when the situation is different, why do you think you can?  Differences matter and can make imitation inappropriate.

Why Following is Usually a Mistake #2: Only One Leader at a Time

Another problem with following has to do with the laws of positioning. As Al Reis and Jack Trout pointed out in their works on positioning, consumers will mentally place only one firm as a leader in a particular position. Everyone else is seen as inferior. And once someone locks into that leadership position, it becomes extremely difficult to unseat them from that top position. As a result, Reis and Trout recommend that if you are not the leader in a particular position, go and find a different, uncontested position where you can win.

This is like when Target did not try to unseat Walmart from its position but found a different place where it could win. Another example would be social networking where anyone essentially trying to copy the success of Facebook (like Google+) is failing. However, Linkedin differentiated by going after a different customer segment (business professionals) and has done well.

There was a time, generations ago, when industries held more financially viable players for a given position. But due to consolidations, the power of networks, price wars, and greater transparency, the number of profitable players in a given position keeps shrinking. Often, only one player per a given position makes a respectable return on investment. If you are not the top player in your position, you will probably be a poor investment. So, instead of copying someone else’s position, find a different place where you can win.

Exceptions to the Rule

Does this mean that following is always a bad idea? No, there are a few situations where following is okay.  One such situation is when critical mass is needed to get an industry started. For example, when the next generation of DVDs was being developed, there were two competing technologies—Blu Ray versus HD-DVD. This created uncertainty in the marketplace. Customers were reluctant to purchase either one for fear that they would choose the wrong format. It wasn’t until the players in the supply chain (movie studios, media player manufacturers, retailers, etc.) started following each other in one direction (Blu Ray) that the critical mass was formed to get customers to buy.

Another example could be electric cars. Until consumers are comfortable that the right technology is found (and the compatible charging infrastructure for it is in place), they will hesitate to buy.  

This is similar to the Blue Ocean strategy which talks about abandoning the status quo to open up entirely new industries. Sometimes you need a critical mass of players following each other into the new blue ocean in order to make to new industry look real and viable.  If the new market is big enough, it may be worth following to get the market jump-started.

Another time to follow is when an industry is still developing and you have special leapfrogging skills. The idea hear is to let others test the waters of innovation and take all the risks of failure. Then, when they hit upon the rare success, be a fast follower and overtake them in the race for leadership. This has been the strategy of Coca Cola for decades. Coke lets other people invent markets (like diet cola, cola in cans, bottled water, sports drinks, energy drinks) and then they use their superior distribution skills to overtake the upstarts and dominate the new business. As long as an industry is still unsettled, the fast follower approach can work if you have the capabilities to outrun the innovator.

However, even in these two cases, the benefits of following are temporary. Eventually, the markets will mature, and following won’t work anymore.

SUMMARY

Although following someone successful may seem like a path to similar success, history would say otherwise. The followers usually lose because either:

a)     They are in a different situation than the leader which makes their strategy not applicable; or

b)     The leadership in that position is already owned by the leader and you cannot take that leadership advantage away from them.

Therefore, rather than follow someone else, find the unique path that is just right for you.  

FINAL THOUGHTS

Eventually, I mapped out my own back roads for when a storm hit in Minnesota. That way, when the storms came, I was following my own path, rather than the path of someone else. That worked out a lot better. You should do the same.

Strategic Planning Analogy #488: Two Stories on Change Management

THE PRINCIPLE

Turning a strategy into reality often requires significant change from the status quo. Unfortunately, whenever change is asked for, resistance will occur. If this resistance is not dealt with, the strategy implementation can fail.

In most cases, you should be able to come up with compelling arguments as to why the change is right and necessary. After all, if you cannot come up with compelling arguments, perhaps your change strategy isn’t as good as you thought it was.

But even when the argument is compelling, sometimes the resistance can be strong, particularly if particular groups feel especially threatened by the change. Just think about how strongly the unions in the US have reacted in recent year when state and local governments tried to come up with new solutions to fix the underfunded pensions for government employees. A change is clearly needed, but any change is being aggressively resisted. 

So the question becomes, what does one do when logic and reason will not sway the resisters.  The following are two options.

OPTION #1: EVOLUTION

Option #1 Story

I’m sure most of you have heard the story of the frog in the pot of water. When scientists put a frog into a pot of boiling water, the frog will immediately sense danger and jump out of the pot.  However, when scientists put the frog into a pot of room temperature water, the the frog will stay in the water. And if you head the water slowly enough, the frog will not sense the danger and will remain in the water even as it approaches boiling. The frogs end up dying in that boiling water without jumping, because the change was too gradual for them to notice.

Option #1 Analogy

Like the frog who jumps when thrust into boiling water, people resist when they sense a large imminent threat. The way to keep the frog from resisting was to slow down the change to a pace that was imperceptible. That pace of change was so gradual that the frog did not realize it was eventually being boiled to death. So it did not resist.

In a similar fashion, if you make the timing of your changes gradual enough, you may be able to implement the entire change program over time without resistance. The idea is to package each change initiative in a bundle which is too small to trigger massive resistance. The change is slow and evolutionary. And if you have the luxury of time, this can be an effective tool.

As an example, look at the packaged food industry.  There are many reasons why it could be in the interest of these companies to convert their food products to a more nutritious formulation (less salt and fat). After all, there is the threat of governments creating “fat taxes” to punish non-nutritious foods. Or the governments could ban certain food formulations. Or public interest groups could file massive class-action lawsuits against companies deemed as harming the public through “unhealthy” formulations. The past experience of the tobacco industry in the US could eventually hit the food industry, if they do not change.

Unfortunately, if these companies make massive changes to their formulations, they can turn off their customer base who preferred the old formula. Radical formulation changes like “New Coke” almost ruined the brand.

One alternative is to make a series of small formulation changes over time, making them too small to notice or create an uproar. Then, over time enough salt and fat can be removed from the formula to remove some of the long-term threats mentioned earlier.  And because the taste changed so gradually, the customers were able to adapt without much resistance.  This is the strategy used by many food companies.

Another example of this evolutionary approach is to create change via attrition.  Treat current employees different from new employees.  Over time, the new employees (and their employment relationship) will replace the old in a peaceful manner.  Or gradually fire those executives who resist change and replace them with executives who embrace the change.

OPTION #2: REVOLUTION

Option #2 Story

In 1519, when Spanish Conquistador Hernando Cortez landed in Mexico, one of the first orders he gave to his men was to burn the ships. Cortez was committed to his mission of capturing the treasure in the hands of the Aztecs. Cortez did not want to allow himself or his men the option of quickly giving up and going back to Spain. By burning the ships, he removed this option, and his men were forced to focus on how they could make the mission to capture the wealth of the New World successful.

Option #2 Analogy

If you don’t want your people to resist change by retreating to the status quo, you can stop that by eliminating that option. When Cortez burned the ships, he took away the ability to retreat. So the only option was to move forward.  You can do the same.

For example, if you sell or shut down the status quo business, then you cannot go back.  GE has a long history of selling off the businesses in industries no longer important to its strategy.  Once the business is sold, it’s very difficult to go back. 

Other companies set up the new strategy under a new legal structure.  The people transferred to the new strategy are now employees in the new legal structure and it becomes extremely difficult to get “rehired” back into the old legal structure. In essence, that pathway has been burned. You have to make the new strategy work or you are unemployed.

This second, more revolutionary approach is ideal when you do not have the luxury of time and when the transformation in front of you is rather daunting. The arguments for resisting go away, because even if the resisters could win the argument, it is a moot point. There is nothing to go back to. The option is burned. 

WARNING

These two options seem rather extreme. This may create a desire to try something half-way in-between.  The in-between approach, however, may be the worst option.  If you speed up the transformation into larger, more painful chunks AND provide a path back to the status quo, you have the worst of all worlds:

1.      Irritated Resisters; and

2.      A way for the Irritated Resisters to regain control and take the company back.

No, the extremes are better.

SUMMARY

When the normal process of change management does not appear to be an option, there are two other, more extreme alternatives.  The evolutionary approach is to slow down the change and make it evolve at a pace where each step of change is below the level that would create significant resistance.  The revolutionary approach is to abruptly eliminate the option to stay in place, so that the only option is to move forward. The worst alternative is to take a middle position, as it gives resisters both the motivation to resist and a pathway back to the status quo.

FINAL THOUGHTS

These extreme options may not be ideal, but they may need to be considered when normal approaches appear to be unworkable.

Strategic Planning Analogy #400: Don’t Eat The Whole Fish

THE STORY
There is a Japanese seafood delicacy called fugu. We call it the blowfish. Although many rave about the taste and texture of the fugu, the fish has a serious drawback—eating it can kill you.

Fugu contains tetrodotoxin, an extremely potent neurotoxin that paralyzes its victims while they are still conscious. In other words, you are fully aware as your throat closes, your lungs deflate and you drift slowly into death. Even extremely small doses of tetrodotoxin can kill. There is no known antidote.

This toxin permeates large portions of the fish. Therefore, if you want to eat the fish and survive, you must only eat the particular portions not containing the toxin. That is why only chefs who are properly trained and certified in fugu preparation are allowed to sell fugu in Japan.

Even though the chefs are certified, I think I’ll pass on fugu.

THE ANALOGY
Just because the gourmet crowd loves fugu, that doesn’t mean they devour the whole fish. These people are smart enough to know that only a portion of the fish is edible. They are careful to avoid the poison within the fish.

Unfortunately, this is often not the way businesses operate. Leaders may become enamored with a particular company or a strategy, just like the gourmet love the fugu. For example, a leader may say they admire the success of a particular company like GE or Google or Apple or Berkshire Hathaway. Then, wanting to make their company more like the company they admire, these leaders start to imitate EVERYTHING which the company they admire does. In other words, these leaders do not discriminate and decide to “eat the whole fish” of the company they admire.

And just like the poison in the bad parts of the fugu can kill, the bad parts in the admired company can kill your company.

THE PRINCIPLE
The principle here is that just because a company enjoys success, that does not mean that everything they do contributed to that success. In addition, many of the things which “work” in their company could be toxic if applied in another company. Therefore, we need to be discriminating and only borrow concepts from others which are appropriate to our situation. Instead of eating the whole fish, we need to first cut away the dangerous and inappropriate.

There are three reasons why borrowing something indiscriminately from an admired company can become poison to our own company.

1. It Wasn’t A Part of Their Success
Even great companies can do stupid things. At one time, many people thought Enron was a great company. In February 2001, Fortune magazine's ranking of America's most admired companies listed Enron as No. 1 for "innovativeness" and No. 2 for "quality of management."

And, yes, Enron did do some remarkably creative things. Unfortunately, they also did some stupid things. The stupid things eventually destroyed Enron. By the fall of 2001, Enron fell apart.

What ultimately killed Enron was its highly leveraged reward structure on a quarterly basis. It caused employees to do bad things in order to reap the outlandish quarterly rewards. This was their poison in the fish.

Had someone in early 2001 decided that Enron was a great company, they might have indiscriminately done anything that Enron did. They might have copied the compensation structure which was the poison in the fish. After all, it was a “great” company, so isn’t everything they do great?

No, great companies can do lots of things that have nothing to do with their greatness. In fact, great companies can be so successful that the success overcomes a lot of poison. A weak company cannot afford to do too many stupid things and stay alive. Strong companies can. So there can actually be more poison in a strong company than a weak company.

Therefore, when admiring a company, first try to figure out which parts of the company are most highly correlated to their success. Then focus your attention on how you may incorporate that particular concept into your own business. Don’t just try to copy anything they do. You may end up copying their poison.

2. It Won’t Work in All Environments
Another company which used to be on most admired lists (for many decades) was GE. When companies got into trouble, they often wanted to replace their leaders with executives from GE. The idea was that GE leaders were a part of what made GE great, so if I get one of their leaders, it will make my company great.

Unfortunately, when many of those GE leaders went to other companies, they were not as successful as they had been at GE. Does this mean that the leaders suddenly become less competent? Of course not.

The problem was that the leaders often found themselves in a different environment than they had at GE. The corporate culture may have been different, the competitive situation different, the place in the lifecycle different, and so on. This could make the success formula at GE inappropriate or irrelevant in the new environment.

Of all the things GE did right in their glory years, one of the most important ones was their knack of knowing how to manage portfolios. They knew when to get out of old businesses and when to get into new businesses. They knew what to fund and what not to fund. If you move that portfolio knowledge to a one-business company operating in an area GE would have exited, then that knowledge isn’t very useful.

Remember, in the environment of the fubu fish, the tetrodotoxin is not poisonous. It is only poisonous when moved into the environment of the one eating it. The same is true in business. When the environment is different, the success factors can be very different. What works in one place can be poisonous somewhere else.

Right now, companies like Apple and Google tend to be highly admired. These companies are in a particular environment where there is high obsolescence and an extreme dependence upon gifted engineers and programmers, for which there is a severe shortage. That is why these companies tend to have some unusual perks to keep their engineers and programmers happy, like free gourmet meals.

If you try to apply the lessons of Apple and Google to a mature business with low obsolescence and little dependency on scarce talent, these tactics may not provide nearly as much benefit. They may just be money pits that decrease your profits—perhaps to the point of poisoning your ability to compete.

Therefore, consider the impact of the environment (yours and theirs) before adopting ideas and strategies from other companies.

3. It Won’t Work Alone
Often times success is not due to a single factor, but to a highly integrated system. By just copying one portion of the system, you may not reap its benefits, because the benefits require the entire interrelated system.

Take Wal-Mart, for example. One of the keys to its success is its low prices. Therefore, one could try to emulate the success of Wal-Mart by also offering extremely low prices. The problem is that if all you do is try to underprice Wal-Mart, you make quickly go bankrupt. It will become your poison.

Wal-Mart can afford to offer low prices because of its integrated system to lower costs. It has world-class logistics, global sourcing, a culture of frugality and a lot of other factors in place to allow it to profitably have low prices. If you copy the prices without copying the rest of the system, you will not have success.

Usually the connection is not as obvious as in the Wal-Mart example. Therefore, it may take more effort to determine how the complete system works. Then, you can determine if you want to copy the entire interrelated system.

SUMMARY
Just because you may admire a particular company does not mean that you should indiscriminately copy anything which that company does. If you do, you may be adding poison to your company rather than success.

FINAL THOUGHTS
This principle also works in reverse. Just because you have a low regard for a company doesn’t mean that everything they do is wrong. I know of a leader who would refuse to hire anyone who came from a company with a smaller market share than his own. His reasoning was that if a company had lower market share, then everything and everyone associated with that company must be inferior. But just as there can be poison in a “great” company, there can be nuggets of gold in a “bad” company.

Strategic Planning Analogy #374: Black Bananas

THE STORY
Large grocery chains in the US purchase their bananas from the fruit companies in the unripened “green” stage. They do this because hard, green bananas are easier to transport to the US.

Then, after the green bananas get to the US, the grocers put them into their produce warehouses. These warehouses have gigantic, pressurized gas chambers in them. These gas chambers chemically “ripen” the bananas. Depending on the length of time the bananas stay in the gas chamber, you can “manufacture” whatever level of ripeness you want. After they reach the desired ripeness, the bananas are shipped by truck to the grocery stores.

One company I know wanted to increase efficiency by shipping both bananas and flowers to the stores on the same truck. Unfortunately, something unexpected happened. The flowers arrived at the stores already starting to wilt and die—something which hadn’t happened when the flowers were shipped by themselves.

Upon further investigation, it was determined that some of the ripening gas which was infused into the banana via pressure (while in the gas chamber) started to leak out of the bananas when they were in the truck. This ripening gas was absorbed by the flowers while they shared the ride in the truck. As a result, the ripening process of the flowers was accelerated, causing them to die prematurely.

As soon as the company figured this out, they stopped carrying the flowers and bananas on the same trucks.

THE ANALOGY
Bananas and flowers are called “perishables,” because they have a short life. They soon “perish,” or die. You cannot stop a banana from turning black. You cannot stop a flower from wilting. It is inevitable, and it happens rather quickly.

Although we may not want to admit it, strategies are also perishable. Every strategic initiative eventually dies, just like bananas or flowers. And like those flowers in the truck, our strategic initiatives often die faster than we had hoped.

The reason strategic initiatives die is because the environment in which the strategy operates changes. Consumer desires change, technology changes, competition changes, innovation changes, the economy changes, and so on. These forces of change act on the strategy like the gas in those gas chambers. They cause the strategy to move through a lifecycle until it is no longer relevant and dies.

Think of the travel agents, whose strategy of being an intermediary between travelers and the travel industry died when the internet allowed travelers to interact directly with the travel industry and buy their own tickets. At that point, the old travel agent strategy lost most of its relevance.

Think also of Kodak, which is struggling to find a new strategy now that its old strategy, based on analog photographic film, is no longer very relevant.

Strategies based on growth in established economies are currently being replaced by strategies focusing on emerging markets. And retailer JCPenney this week announced it was shutting down its catalog operation, a strategy made irrelevant due to the internet.

In a similar fashion, some day your strategy will also become irrelevant, if you do not adapt. It will turn black like a banana, perhaps before you are ready to move on.

THE PRINCIPLE
The principle here is that since all strategies eventually die, a good strategist should try to proactively manage this process. Just as the grocers can manage the life a banana via the gas chamber, strategists can manage the life of their strategy via various tactics.

In particular, we will look at three areas to consider.

1) Managing the Gas Pressure
There are many things businesses can do to hasten the growth of a new business. You can increase advertising, lower prices, do a public relations push, expand distribution, get celebrity endorsements, win awards, go viral on You Tube, etc. These act like those gas chambers act on bananas, because they push your business from early entry to maturity.

In many ways, this is good, because it quickly increases your market potential. However, just as all that extra gas caused the flowers to prematurely die, too much early pressure to grow can cause your strategy to die more rapidly.

Consider the high fashion industry. A lot of the appeal of high-end fashion brands has to do with their exclusivity. The more you push to expand the market into the middle class, the more you destroy that exclusivity appeal. Soon, the high end customers will abandon the brand because of that tarnished image. And once the high end abandons the brand, the middle class will soon follow. The brand dies an early death. Had less pressure been put up front, the fashion brand might have had a longer, more prosperous life.

Hence, too much pressure up front can push what could have been a lucrative long-term trend into a less profitable short-term fad. However, too little pressure may cause your strategy to never get beyond the introductory stage. Therefore, strategic planning needs to consider what is the proper amount of pressure to apply.

2) Keeping the Pipeline Full
Supermarkets do not make just one large purchase of bananas per year. If they did, they would have two major problems: a) a lot of the bananas going black before getting sold; and b) there would be no bananas to sell in the later half of the year once all the black bananas are thrown away. To avoid these problems, supermarkets buy small batches of bananas all year long. By having a continual supply of fresh bananas coming in all year, they can optimize sales and reduce waste.

The same is true for strategies. Companies need a continual pipeline of strategic innovation, experimentation and development That way, a company is ready when its current strategy begins to die and can seamlessly move on to the replacement strategy. One of the keys to the long-term success of GE has been its ability to continually modify its portfolio in order to remain relevant. It has moved through heavy industry to financial services to entertainment and is now moving to green energy. It does it seamlessly because GE built an infrastructure specifically designed for seamless transitions by focusing on:

a) Great general management (regardless of the business);
b) Mastering portfolio management techniques; and
c) Merger & Acquisition expertise (to help shift the portfolio more effectively).

It’s hard to quickly shift a strategy from a focus on mature markets to a focus on emerging markets if you have never experimented in emerging markets before. That’s why a strategy 100% focused only on the “strategy of the moment” can be so risky. It leaves you vulnerable when the strategy of the moment begins to die. Precious time is lost in transition, because you are unprepared and inexperienced in what comes next. You may not even survive the transition.

It is safer to be like the grocer who keeps the pipeline full of fresh product all the time. Otherwise, you can be like Kodak, who was so focused on photographic film that it did not build up an adequate pipeline of post-film strategies while it still had the time and the cash flow. Now, Kodak is struggling to catch up and it may not make it.

3) Exit Early
I’ve seen supermarkets try to sell black bananas. It’s not a pretty sight. They try to hide the ugliness of the bananas by putting them inside brown paper bags. They put a sign next to them saying something like, “Black Bananas; Perfect for Making Banana Bread.” Then they give it a very low price. And it still won’t sell.

You’d find it difficult to even give away black bananas for free. They just aren’t very desirable.

The same can be true for your strategy. Once a strategic initiative turns black and is dead, almost nobody wants it. You cannot sell it at any price. You may even have to pay somebody to take it off your hands.

As I’ve mentioned in prior blogs (here and here), holding onto a strategy after it turns black is a bad idea. Just as it is better for a supermarket to get rid of a banana when it’s only starting to turn brown, it’s better for a company to dispose of a dying strategy when others can still see a little life in it.

Many companies make the mistake of hanging on to a dying strategy too long. Emotional ties or historical heritage make it hard to let go. However, waiting until the strategy turns black hurts everyone. It is almost always better to error on the side of exiting a strategy a little too early than sticking with it a little too long. The value plummets too quickly at the very end.

SUMMARY
All strategic initiatives eventually die. If you don’t want your company to die along with its strategic initiative, then you need to occasionally adjust your strategy. To optimize the return over the life of a strategy, a) manage the speed at which you pursue growth, b) maintain a pipeline of strategic alternatives, and c) exit dying strategies before it is too late.

FINAL THOUGHTS
Just as it was wrong to put bananas and flowers together on the same truck, it is usually wrong to manage mature and emerging strategies in the same way. They have different needs, so you have to approach them in a different way, with different benchmarks and expectations.

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 #159: Choosing Your House

THE STORY
When it comes time to choose a house, my wife and I have a problem. She is allergic to new houses and I am allergic to old houses.

More specifically, my wife is allergic to many of the chemicals used in modern home product manufacturing, like formaldehyde (which is in a lot more products than you would first imagine). I, on the other hand, am allergic to certain molds and dust, which are common in many older homes.

Of course, the current housing crisis is making everyone a little sick to their stomach.

THE ANALOGY
Choosing the place where you live is an important decision. You don’t want to end up in a place where you are sick all of the time.

The same is true of businesses. You don’t want to position your business to be operating in places where performance will be continually sick.

Different people have different tolerances. I can tolerate the problems that come with new home construction. My wife can tolerate the problems that come with older homes.

This is similar to business lifecycles. Business problems are different depending on the age, or stage in the lifecycle. Business startups, for example, are different from mature firms. Rapid growth provides different challenges than businesses in decline.

Some business cultures, or management styles, are better suited to particular stages in the lifestyle than others. A manager, for example, may be very good at starting up new businesses, but miserable at managing through a decline phase. In a sense, that manager is “allergic” to decline-phase businesses, just as I am allergic to musty old houses.

A company is far more likely to be successful if it chooses places to live that avoid their allergies. Therefore, strategies should take these natural allergies into account when decided which businesses to live in.

THE PRINCIPLE
There are four key principles related to finding the right house for your company.

1) Understand Your Allergies
You cannot avoid your allergies if you do not know what they are. Take the time in your planning process to understand your strengths and weaknesses. And when you are discovering your weaknesses, get specific.

For example, I said earlier that my wife is allergic to new houses. More specifically, she is allergic to many of the chemicals used in new construction, like formaldehyde. An all-natural new home, like a log cabin, would be something my wife could tolerate. Similar for me, I said I was allergic to old houses, but specifically I am allergic to certain molds that can form in old houses. If a house was well maintained and the humidity controlled, then an old house wouldn’t bother me.

The more you know about the specifics of your weakness, the more you can plan around it or compensate for it.

2) Avoid Toxic Houses
In general, a company will best succeed if it goes with its strengths. Therefore, your corporate portfolio should be skewed towards businesses in the portion of the life cycle you are best at. For those portions of the life cycle you are not suited for (your allergies), avoid them in your portfolio.

For example, let’s say your strength is in knowing how to squeeze more profits out of a mature business and your allergy is in start-ups. Now there may be a great opportunity in some new start-up industry. You may see a lot of your friends investing in this new business. You may say to yourself, “This is a great new opportunity. I should invest in it.”

However, if this is not an area of your strength, such a move could be a disaster for you, even if it is a success for others. Because your natural inclination is to squeeze profits out of a company, you might destroy your start-up my asking it to be too profitable, too early, and starve it of the necessary start-up capital. And even if you can nurse it along, there will be others in this start up industry who are much better at it. In the long run, only a small percentage of the people who enter a start-up industry are truly successful. I would bet that the ultimate winners would tend to be those who have natural strengths at doing start-ups.

Just because a new house may be wonderful for me, it doesn’t mean that it is wonderful for others. It might be toxic for my wife. You have to discover which houses are toxi for you, and then avoid them.

3) Minimize the Threat
In a perfect world, you may be able to avoid all toxic houses. In reality, you may end up with a few, anyway. What to do? In the case of house allergies, I can take an anti-histamine. What is the equivalent in business? It is delegation and separation.

When IBM wanted to get into the pc business, it knew that its core business was allergic to this type of a start-up and that the normal culture would kill it. Therefore, it used delegation and separation. The team given the task of developing the PC was placed in a remote location where the rest of the business would not interfere. Power was delegated to this team so that they could do the start-up the right way, rather than the IBM way. If this had not been done, the PC would never have come out of IBM.

Different phases in the lifecycle have different needs and different challenges. If you try to treat them all identically, you will not be optimizing the performance at each phase. Therefore, if you portfolio has a mix of businesses in different stages, separate them and manage them differently. Back in July of 2007, I did a series of blogs on these differences (see “Same Title, Different Job,” “Management By Yelling,” “Management By Dreaming,” and “Management by Growing”). It would be wise to understand these differences when dealing with the different phases of the lifecycle.

4) Be Prepared to Move
In my case, I may be able to tolerate a new house, but as the house gets older, I may not be able to tolerate that house as much any more. It’s the same house. What has changed is that the house aged. With the aging came a growth of mold which I am allergic to. At some point, it may make sense for me to sell the house and move to a newer house again.

The same thing can happen in business. You may be great at running a small start-up. However, your success could end up creating a large, mature business which you are not well suited to running. Your business moved from your comfort zone into a place where you are allergic. What to do?

One thing you can do is replace management with a team better suited to the new environment. I have great respect for what Dave Thomas did at Wendy’s. When his company evolved to a certain point, he realized that it was entering a phase to which he was allergic. Therefore, he voluntarily stepped down from leadership and handed the company over to management better suited to the new environment.

The other thing you can do is sell the business. There are many people in the high tech dotcom space who are good at starting businesses, but not running them once they become big and bureaucratic. Therefore, they tend to sell the businesses and then go and try their hand at another start-up.

GE is strong with late growth/early mature businesses. When businesses look like they are going into late maturity/decline, they sell them. When they are looking to replace these businesses, they typically don’t start from scratch (where they are allergic), but instead buy established businesses entering the phase they are best at.

It is not a mark of defeat to admit that a business has moved into a phase where you are allergic. It shows that you are smart enough to know when change is the right thing to do.

The worst thing you can do is ignore the inevitable. Business will move through the lifecycle, whether you want them to or not. In today’s environment, the movement through those phases seems to be accelerating. To not include this in your plan is a travesty, because it robs you of the opportunity to properly prepare for all of the changes which come with moving to a new phase in the life cycle.

According to a survey which the Sage company did in Ireland, 53% of the businesses did not have a plan for moving their business to the next stage in the life cycle. Just as it takes time to move to a new house, it takes time to change management or get your business prepared to be sold. This should be a part of your overall plan if your company is moving into toxic territory.

SUMMARY
Business units progress through various stages of a lifecycle, from start-up to growth to maturity to decline. Each stage has different challenges. Your company may be much better at some stages than others. This should be accounted for in your planning process, so that you can take advantage of your strengths and avoid your weaknesses.

FINAL THOUGHTS
As people age, we try to fool ourselves and others through plastic surgery, makeup, hair pieces, hair dyes, etc. We can try to do the same thing with businesses and try to put on a show that we are still a growth company, even when we are no longer in the growth phase. The tricks might fool a few, but eventually living in denial of the truth will hurt you.