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?

Analogy #211: Killing With Good Intentions

THE STORY
When I was a very little boy, I got sick. The doctor prescribed medicine to help me get better.

After taking the medicine, I continued to be sick, so my father told the doctor the medicine wasn’t working. The doctor responded by increasing the dosage. After taking the increased dosage, not only did I not get better, I got worse.

So we went through a few more rounds of upping the dosage until I was very, very ill, coughing up lots of blood and all. There was some concern about whether or not I would survive. Then my dad decided that perhaps it was the medicine which made me ill, so he stopped giving it to me. Not too long thereafter, I became healthy again.

Nowadays, when a doctor or nurse asks me if I have any allergies they should know of, I am quick to tell them not to give me any of that medicine I had as a child.

THE ANALOGY
One of the core foundations to success in medicine is an accurate diagnosis of the problem. If you diagnose the problem incorrectly, you will take the wrong course of action. In my case, the doctor had incorrectly diagnosed my symptoms as being related to the disease rather than a reaction to the medicine. His prescribed solution—increasing the dosage of the medicine—almost killed me.

The symptoms of sickness in a business are usually easy to see—financial losses, large decreases in sales, loss of market share, inability to pay the interest on the debt, and so on. However, just because one can see the symptoms of sickness in the business does not automatically mean that you know how to cure it. You may guess wrong, like my doctor did, and actually do more damage than good.

Any fool could have seen that I was very sick…you didn’t need a medical degree for that. But the one with the medical degree did not know how to cure me, which put my long-term survival at risk.

Victory comes not from identifying the symptoms, but rather from knowing how to remedy the underlying cause of the symptoms. Identify the right cause and then you can prescribe the proper strategy.

THE PRINCIPLE
The principle here is to focus on curing the underlying cause, rather than the symptoms. For example, a symptom of a problem may be poor sales. If you only focus on eliminating the symptom (poor sales), you may conclude this is a marketing problem and pump up the advertising. Unfortunately, this may be exactly the wrong thing to do.

In a prior blog, we looked at what happened when Wendy’s had the “Where’s the Beef” advertising campaign. It was one of the most successful advertising campaigns ever, if measured by recognition. And in the near-term, it brought a lot of traffic back to Wendy’s. But for Wendy’s, that prescription of using those ads almost killed the patient.

You see, the real disease was that in-store operational discipline had deteriorated to the point that the in-store dining experience was awful. All the advertising succeeded in doing was get more people in to have a bad experience sooner, so that the image got worse more quickly. Those ads were as helpful in fixing the problem as that medicine was for me as a child. It was making things worse.

Eventually Wendy’s figured out what the real disease was and improved the in-store dining experience. It was only after fixing the underlying problem that the company was able to improve. Therefore, when designing strategies, build them around underlying issues instead of just surface symptoms.

In general, there are only three main underlying issues to focus on. If the surface symptoms look sickly, they can usually be cured by repairing one of these three issues.

Issue #1: A Reason For Being
Winning strategies start with a winning position—a reason why someone should prefer you over all other alternatives. You need to own a uniquely desirable solution in the marketplace. If you cannot quickly and easily describe why you are the obvious choice in particular area, then don’t be surprised if customers fail to choose you.

I’ve seen many companies try to avoid this positioning issue. Usually, their argument goes something like this: “Sure, I won’t have the leading market share, but if I can just get about a 5 to 10% share, I should be able to do okay. And to get a 5% share, all I need to do is be a credible alternative.”

The problem is that usually there are a dozen or so firms looking to get that 5 to 10% share, and once the market leaders are done getting their 50 to 60% share, there aren’t enough 5 to 10% wedges in the market share pie to satisfy all of those dozens of firms. Just being credible is not enough. You need to have a winning position of leadership with a niche group in order to get even a small share.

K Mart has a lot of bad symptoms and one can use a lot of tactics to try to eliminate those symptoms. However, K Mart’s real problem is that they no longer have a great position—a reason for being. Until that root problem is fixed, the rest is wasted effort. That’s why just putting some Sears brands into K Mart or putting a talking light bulb on TV won’t get the job done. The bad symptoms will remain at K Mart until a strategy is put in place to repair the POSITION.

On the right of this blog, there is a listing of blog topics I have covered. If you click on “Positioning,” you can learn about ways to cure this problem.

Issue #2: Not Delivering on the Promise
A great position is only great if consumers are satisfied that you are superior in delivering on the promises inherent in that position. Home Depot’s early success was based on an encirclement position: Best Assortment, Best Prices, and a High Level of Personal Service.

Over time, Lowe’s tended to neutralize the assortment and price superiority Home Depot once held. In addition, Home Depot lowered its standard for service in order to save money. As a result, Home Depot was no longer winning on the promises behind its position. Therefore, all sorts of bad symptoms started to appear.

It took awhile (and a change in CEO’s), but eventually Home Depot figured out that to fix the symptoms, they had to return to delivering on the promises behind the position. Superior service is once again a priority. The symptoms are starting to get better.

Make sure your position is more than just hollow words. Have your strategy look for ways to increase your ability to “own” your position by pushing the envelope. Increase the distance between your level of delivery and the rest of the market. In addition, before tweaking with your business model, think about the long-term implications it may have on your ability to hold your position. Skimping a little bit on service may have helped a tiny bit in the near term, but created a long-term sickness for Home Depot.

Issue #3: Inefficiency/Complacency
I’ve seen companies who got the first two issues right, but still had some bad symptoms creep in. What was wrong? They got lazy, sloppy, greedy and fat. The headquarters became lavish and bloated. Bureaucratic gridlock made it impossible to get anything done. Inefficiencies and wastefulness sucked up all of the cash.

The world is too competitive to allow for gross inefficiency. A leaner firm can come in and use its superior efficiency to fund a successful attack on your position.

We live in a world of constant change. Lean and nimble companies who have a war chest of money at their disposal are best able to adapt to the change and stay ahead of the game. There is never a good time to rest and stop fighting, because the battle never stops.

SUMMARY
If your company is showing signs of problems, don’t focus on the symptoms. Instead, build your strategy around the root causes of the problem. Typically, those root causes revolve around three issues: poor positioning, poor delivery on the position, or inefficiency/complacency. Get those root issues right, and the bad performance symptoms will tend to go away.

FINAL THOUGHTS
When I make an appointment on the phone to see a doctor, the receptionist will usually ask “what seems to be the problem?” Apparently, they want me to make a self-diagnosis before seeing the doctor. I’m not sure I’m always the most qualified one to do that. That’s why I’m trying to get an appointment with the doctor.

Similarly, if one of your business divisions is having problems, don’t just rely on their own abilities at self-diagnosis. Take the time to get an objective and accurate diagnosis. Remember, if they are so smart, then how come their division is so sick?

Management by Growing

THE STORY
Once upon a time, the there was a small little boy who hated being so small. “Nobody pays any attention to me or gives me any respect because I am so small,” he lamented to himself.

One day, a fairy godmother came to visit the little boy and offered to grant him any one wish. Well, that was an easy choice for this boy. “I want to grow and grow and become BIG!” he replied.

The next day, the boy woke up and was big and tall, like an adult. The boy was ecstatic! People, finally paid attention to him and gave him respect. It felt great.

Unfortunately, his growth did not stop there. Every day he grew a little bigger. At first, it wasn’t such a big deal. But eventually he was so big that he was taller than large buildings. Everywhere he stepped, he ended up crushing something with his gigantic feet. The respect he used to get from others turned to fear, as people were afraid to be near him for fear of being crushed. It made him feel like the monster Godzilla.

“I guess it’s possible to grow a little too much,” the boy finally admitted.

THE ANALOGY
One of the most popular phases in a business life cycle is the growth phase. It can be a lot of fun. Your position is relatively well set and desired by a lot of consumers. Your only problem is growing the company fast enough to take advantage of all the great potential you have. It feels like you can do no wrong.

Shareholders seem to love growth companies as well. They give the stocks high multiples. Suddenly, the company is worth a whole lot of money, and everyone is smiling.

It’s like the boy in the story. When he was small, he was ignored and not given any respect. However, once he started growing, everything started to change for the better. He started receiving the love and respect of others.

It feels so good that you want it to continue forever. However, as we saw in the story, sometimes too much emphasis on growth for too long can backfire on you. Continuing the push for growth long after you’ve reached your optimal size can cause all of your friends to turn on you.

In the business world, maturity will eventually come, causing additional rapid growth to no longer be appropriate. Too much growth for too long can result in investments which are no longer needed in the marketplace, causing returns below your cost of capital. You may be merely spreading your relatively constant sales over a larger, more costly infrastructure, which reduces overall profitability.

Growth is good, but other factors also need to be considered in your strategic planning, so that your company does not turn into a hideous monster like Godzilla.

THE PRINCIPLE
In the last three blogs, we talked about how different companies require a different approach to strategic planning depending on where they are in their lifecycle and how many barriers there are to entry/exit in their industry. In the blog “Same Title, Different Jobs”, we said that there are three major steps in strategic planning:

1) Positioning: Determining what you will stand for (own) in the marketplace—the solution you are providing, the place where you can win.

2. Pursuit: Determining the path to achieve (or improve) your desired position. This usually involves acts which allow you to gobble up market share so that you can build a strong claim to your position.

3. Productivity: Discovering ways to leverage your position so that you can optimize the return on your investment.

During the rapid growth phase of an industry, most of the attention is on growing the business (I guess that’s why it’s called the growth phase). The key area of strategic focus in this period is on pursuit. The idea is to grab as much of the market potential as fast as you can, so that nobody else can gain a stronger foothold at that position.

The success of your position is what is making the growth possible, so there is not much need to reassess the position. Regarding productivity, you greatest contribution at this point is the productivity which is a natural outcome of rapid growth—economies of scale. Hence, if you focus on the growth, productivity will be a natural byproduct at this stage of the lifecycle.

That being said, one still needs some balance. Positioning and productivity cannot be ignored. Success usually causes imitators to crop up. These imitators may create a need to tweak your positioning strategy in order to stay one step ahead of them.

In addition, the growth phase usually leads eventually to a consolidation of the industry, as a greater percentage of a company’s growth comes from acquiring competitors. If you are not an efficient, productive operator, it is likely that you will be the one being acquired rather than being the one doing the acquiring. Efficiency helps give you the edge when the intra-industry warfare begins, to see who will survive and make it to the mature stage. When the sporting goods retail industry recently went though its consolidation phase, it was the blander, but more efficient Dick’s Sporting Goods which acquired the flashier, but less productive Galyan’s.

Thus, although pursuit is the most important concern at this stage, the other factors should not be ignored.

The pleasure which comes in the growth phase causes pressure to want to continue the growth phase, long after that phase in the industry is over. It seems like everyone wants to be a growth stock forever.

If you want to be a growth stock forever, one probably needs to abandon industries as they mature and move on to new evolving industries. This is pretty much what GE has done over the decades. The growth comes from shifting one’s position, rather than continuing growth in an industry that no longer requires it. At that point, it is an emphasis on positioning, rather than pursuit which continues the growth (We’ll talk more about that in a blog at a later date).

Last month, Wal-Mart finally started coming around to seeing this conclusion. They announced that they were cutting back on new store growth, because it was no longer as productive as in the past. The sales for the new stores were coming largely from other Wal-Marts, so the net increases were shrinking.

Here is what the Wall Street Journal had to say about it on June 2nd:

“Wal-Mart Stores Inc. plans to sharply curtail future U.S. store openings, amid disappointing results for the world's largest retailer and growing investor pressure to curb its aggressive domestic expansion. Friday, it promised to cut more than a third of this year's planned store additions, delay some openings and restrict future U.S. store expansion.

“The move will cut the retailer's capital expenditures by $1.5 billion in 2007 to $15.5 billion for the year and help fund a large share buyback that investors also have been urging the company to pursue. Wal-Mart has been under pressure on Wall Street to slow its U.S. expansion and use the savings to prop up its stock price.

“Wal-Mart, based in Bentonville, Ark., isn't the only retailer to retreat on its store-building boom. AutoZone Inc., Home Depot Inc. and McDonald's Corp. have pulled back on expansion in recent years to improve store operations and boost shareholder returns. 'This is what everyone's been clamoring for,' said Goldman Sachs retailing analyst Adrianne Shapira.

“News of the capital-spending cutback and share repurchase cheered investors, who sent Wal-Mart shares up 3.9%, or $1.87, to $49.47 in 4 p.m. composite trading on the New York Stock Exchange Friday.”

So as you can see, sometimes it is wise get out of a single-minded approach to planning focused only on growth and move to a balance which includes productivity (such as stock buybacks or reinvestments in making current assets more productive, as McDonald’s has done).

SUMMARY
Growth is good, but too much of the same kind of growth for too long is often not one’s wisest move. One needs to have a balanced approach which also looks at potential repositionings or focuses on productivity in order to keep the profit wheels moving.

FINAL THOUGHTS
For some people, the thought of no longer being a growth stock is like a fate worse than death. Trust me, there is life after rapid growth. By no longer pumping all that money into pursuit, those years can be some of your most profitable. Yes, the stock might initially fall when growth-minded shareholders leave, but keep this in mind. Those same people will also leave if they see your rapid growth as no longer productive. And in that case you have nothing.

At least if you stop the unnecessary investments and start doing things like buying back stock or raising dividends or improving efficiencies, you can attract other shareholders who will still reward you. All of the retailers mentioned in that Wall Street Journal article saw their stock rebound when then quit the unnecessary growth. And finally, keep in mind that Warren Buffett did pretty well refraining from the lure of rapid growth, and instead focusing his investments in a lot of more stable businesses.

Bumpy Roads are Better

THE STORY
Yesterday, I spent most of the day in a car driving to Chicago for my daughter’s wedding. Fortunately, the roads had been recently repaved, so the ride was nice and smooth. However, I started thinking about what would happen if the road had been really bumpy.

Let’s assume for a moment that we were driving a truck full of items and we had to take these items a long distance on a very bumpy road. Before leaving on the journey, we had loaded the truck in a certain way, with boxes of cereal on the bottom and boxes of basketballs on the top. Once we get on the bumpy road, we can feel the truck bouncing up and down and shaking the entire trip.

At the end of that long and bumpy journey, we open up the back of the truck—and to our horror—we see a jumbled up mess. Some of the boxes of basketballs have shifted to the bottom and some of the boxes of cereal had bounced to the top.

Then, we say to ourselves, “If only we had been able to drive on a smooth road. Then nothing would have changed—everything in the back of the truck would be exactly where we put it at the beginning of the journey.”

THE ANALOGY
Often times, companies can hold an opinion similar to that truck driver. We long for a smooth ride for our journey into the future. We view stability in a marketplace as a good thing. Stability tends to be more predictable. It is easier to do strategic planning in a stable environment. We feel like we have greater control of what is going on.

In reality, however, a smooth and stable ride can be a business person’s worst enemy. Usually, the key objective of strategic planning is to find a way to improve one’s position in the marketplace. This typically requires finding ways to gain market share.

It is extremely difficult to change one’s position and gain share in a very stable environment. To quote our truck driver, on a smooth road everything is in the same place at the end of the journey as it was when we started. Nothing moves. In business, this implies that in a stable environment, it is very difficult to attain a better position, because everyone in the marketplace tends to stay in the same position—nobody moves.

Instead, it is the bumpy and unstable ride which provides the greater opportunities to shift one’s position. In our story, the bumpy ride allowed boxes of basketballs, which had been on the top of the heap, to fall to the bottom while some boxes of cereal were able to make their way to the top. The same is true in business. Instability and change in the marketplace make it easier to shift one’s position from the bottom of the heap to the top.

As business people, it may be in our best interest to steer our business to the bumpy roads

THE PRINCIPLE
The principle here is that changing environments can work to our favor, it we manage it well. Unstable environments have many advantages.

First, in unstable environments, customers are more willing to reconsider their purchasing behavior. We all tend to be creatures of habit. If nothing has changed in the marketplace, then there is little reason to even consider changing one’s habits. People will continue behaving as in the past (without even thinking about it). We just sort of go into autopilot and don’t alter our behavioral course.

However, if there is a lot of change going on, consumers can get jarred out of their habits. In turbulent air, we turn off the autopilot and put our hands back on the steering wheel. We pay more attention to what is going on and may alter our behavioral choices.

A simple example can be seen in the housing market. With the slowdown in people changing their residence, there is less reason to be concerned about home-related purchases. With this type of this stability in living arrangements, consumers just sort of drift through life without paying much attention to their home environment. Instead, other, more pressing issues of the day fill our mind. As a result, sales at retailers selling things related to the home, like Home Depot and Lowes, suffer.

However, when people have a major change in their lifestyle by moving into a new home, they take the time to reassess what they own and what they need. New needs arise, and sales at places like Home Depot go up. The change in residence increased one’s awareness of home needs and increased purchasing in that area.

Grocery shopping can be very habitual. People tend to shop the same store at the same time each week. These habits will rarely change from week to week, especially if there is stability in the marketplace. It is only when our environment changes that we get jarred out of that habitual pattern.

Perhaps a Wal-Mart supercenter opens up in the neighborhood, offering a new alternative to the conventional supermarket. Perhaps we get a huge promotion which changes our financial position. Maybe we are entertaining the boss for dinner at our house tonight. Any of these changes could get us out of our weekly rut and cause us to change where we shop or what we buy for groceries.

Therefore, change and instability can be our friend, particularly if we do not like our current position. Change causes people to stop their sleepwalking through life and pay attention—to rethink their habits. This is when people will be most receptive to paying attention to your marketing message. This is when they are most likely to switch their loyalty from someone else to you.

A second benefit from change is that it provides an opportunity to redefine the marketplace in your favor. In the grocery world, choices were often ruled by price. If you had the lowest prices, you tended to win. However, we are now entering a changing environment. There are scares of tainted food coming out of China (if it can kill our prized pets, what might it eventually do to us?). People are starting to worry more about the impact companies have on the environment. As baby boomers age, they are worrying more about health concerns. All of these changes can provide an opportunity to redefine how people think about food. Rather than stressing price, one can change the value priority to include more concern over health and safety.

Firms like Whole Foods are finding many converts who are changing their values regarding food and are willing to pay a little bit more to people who are selling food more in tune with these new values.

The benefit here is that if you are not the best at providing what consumers are looking for today, change may provide the opportunity to convince people to reconsider their values so that they prize more of what you are the best at providing.

Therefore, we should embrace change in the marketplace. It can be our friend in terms of increasing demand, increasing receptivity to our marketing, increasing shifting of share to our brand, and getting people to change their value priorities to more closely match our strengths.

If the market is stable, it can be in our best interest to take the initiative to create the instability on our own. Maybe we need to do something shocking, to wake people out of their autopilot and rethink their habits.

There’s a reason why the word “new” is so powerful. It makes what we currently do seem “old.” If we say we are “new”, it is more likely to break a habit than if we say we are “just like before.” And if we aren’t new, then maybe we can help convince people that their situation has changed, which should cause them to reassess their behavior—hopefully in your direction.

SUMMARY
Although stability may appear to be a nice thing, it tends to freeze a marketplace and inhibit change. Strategy is about changing one’s situation for the better. That is easier when a market is in turmoil. Therefore, if there is change in the marketplace, use it to your advantage. Anticipate which direction the change will take the marketplace and then position yourself to be best suited for the change. If change is not occurring, try to create change on your own.

Bumpy rides can often lead to better end points, where your boxes shift to the top of the heap.

FINAL THOUGHTS
If you are a market leader, you may not like change, because you may have nowhere to go but down if things change. However, given enough time, change will occur, whether you like it or not. So you may as well prepare for it.

Drop Anchor

THE STORY
Growing up in the city, I really did not have much opportunity to spend time around lakes that you could swim in. In fact, as a child, I could not swim. It wasn’t until I became a teen that I was able to move from being a non-swimmer to being a bad swimmer.

Not long thereafter, I had the opportunity to swim in a large lake. I wasn’t paying a lot of attention to where I was in the lake, until I suddenly noticed that I was nowhere near the shore and that the water was getting quite deep. I had no idea how I got out that far from shore, because I thought I was staying still in the same place near shore. I swam as hard as I could to get closer to shore. When I stopped, I realized that I was in the same place I was when I started that effort.

I could feel myself being pushed out further away from shore. My feet could no longer touch the bottom. If I didn’t do something soon, I figured I was a goner. So I tried again to swim with all of my might towards shore. I kept it up until I was completely exhausted and could do no more. Luckily, it got me just enough further in that my feet could touch bottom and I could walk the rest of the way to shore.

When I got to shore, I just collapsed out of complete exhaustion. I had no energy left. It was at that point when someone explained to me the concept of the undertow. Apparently, large bodies of water have undercurrents, called an undertow, which pull you out into the deep water. They are not so strong that you notice the push, but their steady pressure is enough to slowly push you out to sea. If you are not paying attention, they can cause you to drift far away from shore before you know it. Now they tell me. I wish someone had warned me of that before I had gone in the water.

THE ANALOGY
If companies are not careful in observing what is going on around them, they can find themselves drifting into dangerous waters, just like what happened to me at that lake. The drift can be very subtle, and not immediately noticeable, because the force pulling the company is not strong enough to catch one’s attention. Had it been noticeable, the company could have reacted to it. By not seeing the immediate effect, over time the undertows of business can pull a company off course, and before you know it, your company is nowhere near its strategic intent.

As a result, companies need to firmly anchor themselves at the point where their strategic position is optimally located. In addition, they must constantly monitor their position, to make sure that the undertow is not pulling them off course. Otherwise, the company will exhaust its resources just trying to gain back its position, rather than use those resources to enjoy the fruits of being in the right place the whole time.

THE PRINCIPLE
When it comes to finding a strategic position for your company, there are typically two types of choices. Either you can anchor yourself around a particular group of consumers or anchor yourself around a particular type of solution.

When you anchor yourself around a particular group of consumers, what you are doing is trying to build a strong bond between your brand and a distinctive group of people. As the needs and desires of this group evolve and change, the company evolves and changes in order to continue to meet their needs. For example, many companies have anchored themselves to the baby boomer generation. As that generation got older and its needs changed, these companies adapted in order to continue to serve the boomers. Companies that are strong into CRM (Customer Relationship Management) or Lifetime Value of Customer equations tend to be anchored around particular consumers.

The other alternative is to anchor yourself around a solution. The idea is to position yourself as the superior way to solve a particular problem. When people do not have that particular problem, you really don’t care about them. But on those occasions when the problem arises, you want them to choose you. An example would be a home improvement store like Home Depot. They are anchored on a particular solution—helping you complete a home project better than anyone else. If you are currently not doing any home improvement project, they really aren’t interested in you. If you are starting a project, then they are very interested in you, no matter what type of customer you are.

People drift in and out of various types of needs. Let’s look at grocery shopping. At the beginning of the month, just after being paid, one perhaps has the need of stocking up the house with basic groceries. Therefore, you look for the ideal stock-up store, one with a wide selection and low prices. Later on, when you need to replace the perishables, like milk and bread, you have a different need, requiring a different solution centered around convenience and freshness. If you are planning on having a fancy party at your house, you have yet another need, requiring a different solution which may have more to do with food quality and service. If, at the end of the month you start running out of money before you run out of meals to prepare, you might look for a store like Aldi, which may not have the greatest selection or quality, but will fill your tummy for least money.

The point is that a single individual can be many different types of customers, with distinctively different needs at different times—even for the same product, such as groceries. It would be extremely difficult for one store format to ideally meet all of these different problems for the same individual. If a grocery store tried to meet all of those needs, it would probably never be the best solution for any of those problems, and it would never be the ideal choice. So instead of targeting the entire individual, the store formats pick a solution. When the customer is in need of that solution, the format is the ideal best choice and will be chosen. When the customer is not in need of that solution, they will reject the format. But that’s okay, because it gets chosen enough for the set of problems it is solving.

The problem occurs when one does not anchor the firm either on a particular solution or a particular customer. The undertows of life will cause to drift into no-man’s-land so you to not stand for either, and you will fail.

Sometimes the choice of where to set your anchor can be difficult. Take MTV, for example. For many years, they have focused on a solution—being the best entertainment option for teens. MTV would build strong loyalties to groups of teens who loved the brand. As the teens got older, MTV could be tempted to stick with these now twenty-somethings with whom they have built strong loyalties. However, MTV has stuck to their anchored solution and said good buy to these customers to go after the next batch of teens. This has worked well for MTV until very recently.

The newest batch of teens have decided that many of the web 2.0 companies such as My Space or You Tube are a superior entertainment option for teens over MTV. So when MTV abandoned its latest group of twenty-somethings, the next batch of teens did not line up at MTV to take their place. MTV failed to see that the undertow was pulling them away from where the current teen entertainment solutions were. Now MTV is in some difficulty.

Because of these kinds of risks, some companies are afraid to put their anchor down solidly in one location. There is the temptation to hedge one’s bets by trying to attract multiple consumer groups and or solutions. As risky as putting down an anchor in one place is, it is far more risky to drift around trying to be too many things to too many people.

Two struggling retailers help to point this out—the Gap and the Limited. When the baby boomers were young adults, they patronized these stores often and made both brands very successful. However, as the boomers got older, these retailers were faced with the MTV dilemma: do you stick with the boomers and follow them as their clothing tastes change or do you try to be the best solution for a youthful customer?

For the Gap and the Limited, it appears that they did not firmly plant an anchor in either location, but instead tried to drift between the two. They wanted to keep the older boomers yet still be relevant to younger generations. By not choosing a single location in which to anchor, both firms drifted out to sea, much as I did in that lake. Before they knew it, they had lost their footing with either camp and were swimming as hard as they could just to keep from losing even more ground. They have exhausted all of their efforts without getting much of any benefit.

Now the Gap is trying to find new management to get them back on course and there are rumors that Limited Brands is trying to sell the Limited stores division. Choosing where to anchor can be difficult. It is not easy turning your back on those who are not interested in where you plant your anchor. Yet, if you try to get too greedy and go after too much, you can end up with much less.

SUMMARY
Strategy is about making choices about what you will stand for. This is not always an easy task, because when you choose to stand for one thing, it means you no longer stand for something else. Choosing where to anchor your position is very important, because it helps you to make the proper decisions about which trade-offs to make in order to be superior at something. An unanchored company tries to do too much and does not make enough trade-offs. As a result it drifts away from any type of successful position.

Sometimes the drifting is slow enough that you do not notice it at first. By the time you notice it, you could find yourself so far away from where you thought you were, that you might not have enough energy or resources left to reclaim your position. Therefore, one needs to constantly monitor where you stand with your customers so that you continue to be relevant.

FINAL THOUGHTS
In many ways, a strategist is like a lifeguard. Lifeguards scan the environment to see if swimmers are drifting into dangerous waters and then quickly try to bring them back to safety. Strategists, scan the environment to make sure companies do not drift dangerously away from their desired location and then try to quickly bring the drifting companies back into a safe position.

Mission: Unpredictable

THE STORY
Back when I was younger, I loved to watch the old TV show “Mission: Impossible”. Even though the plot was pretty much the same from week to week, I guess I liked that plot, because I kept tuning in.

Essentially, the plot every week went something like this: There would be a really evil person. This evil person would have very predictable patterns of behavior. Because the behavior was predictable, the Impossible Mission Force could devise a plan to use that predictability against the evil person. The evil person would naturally fall into the trap set up by the Impossible Mission Force, because the person’s predictable behavior would automatically lead them into it.

Every week, I would yell at the evil guy in the TV to stop and do something different for a change. I would try to tell him to quit being predictable and to break out of his routine. Yelling at the TV didn’t do much good. The evil person would remain predictable and the Impossible Mission Force would accomplish their mission.

THE ANALOGY
The problem with being too predictable is that—-just like in Mission: Impossible-—people can use that against you. For example, I one time had a job developing the advertising strategy for a retailer. I soon discovered that most retailers are very predictable in their advertising. They tend to advertise the same items in the same way during the same exact weeks of each year.

Therefore, I mocked up an annual calendar which predicted what I thought each major competitor would do in their advertising on each week. Then I called together the top merchandising management and said, “Assuming that this is what the competition is going to do next year, what is the best counter-strategy for us?” It led to some lively discussions and some big changes to our own advertising calendar.

For example, most of the competitors had their biggest Christmas toy sale on a particular week. We decided to go out one week before that in order to capture the demand first, as well as to avoid the risk of them having lower advertised prices on the same items we advertised on the same week. Similarly, there were other times when everyone else was moving in one direction, and we moved in a different direction, to avoid dilution of demand among too many stores at the same time and to avoid the risk of pricing the same item too high in the same week.

At the end of the process we had a program that optimized our position relative to the competition—all because they were too predictable. I could not have been as successful had the competition been less predictable.

Strategies are developed to help you find the proper direction for your business. The goal is to consistently move your business in the direction of your strategy. However, there is a difference between being consistent and being predictable. Being consistent means that you are not wasting effort, because all of your actions are efficiently moving your firm in the same general direction.

Being predictable, however, means that the enemy will know exactly which path you are on, so that they can ambush you. The evil people on Mission: Impossible would always get caught, because they did not deviate from their predictability. The same can happen to your business if you become too predictable. This is not to imply that your actions should be random. Consistency is still important.

You don’t want to mix it up so much that people are confused about what you stand for, either. It is hard enough trying to develop a strong position in the minds of the customer even when your message is clear and consistent.

However, without a little variety in your actions, you can become dull and uninteresting to your customers. Worse yet, you can lose your edge and become vulnerable to effective attack from your competition.

THE PRINCIPLE
In the Art of War, by Sun Tzu, he refers to this principle using the terms Cheng and Ch’i. Cheng activities tend to be orthodox, expected and predictable. Ch’i activities tend to be unorthodox, unexpected and unpredictable. Sun Tzu believed that to be effective in war, one must continually alternate between the Cheng (orthodox) and the Ch’i (unorthodox).

If all you do is the predictable (the Cheng), then the enemy can prepare and counteract it. If all you do in the unpredictable (the Ch’i), then your unpredictability in fact becomes predictable and the enemy can prepare for it and counteract it. Therefore you need random alternating approaches between the two—enough Cheng so that you get people thinking about you in a particular way and enough Ch’i so that you can take advantage of hitting them in area where they are not prepared.

According to Sun Tzu, you engage with Cheng, but win with Ch’i.

How does this apply to business? Think of Cheng as activities which reinforce your core strategic principle. For example, if your strategy is based on superior quality, then actions to promote quality are your predictable Cheng. Similarly, if your strategy centers around price or service, then price or service activities become your Cheng. You cannot abandon Cheng without abandoning the core position upon which your strategy rests.

Think of Ch’i as an action which provides an unexpected benefit to your offering which is in addition to your core benefits. For example, if you are known for price, yet can occasionally throw into your mix some great quality and service and still keep the low price, then you have upset the mental picture of your firm to be much more than mere price, taking people by surprise.

It is a mental game, where you try to build up enough expectations in one area so that your unexpected actions can have the maximum impact. With your enemy the goal is to unexpectedly gain market share at their expense while they are looking the other way.

With your customer the goal is to pleasantly exceed their expectations. If you always try to exceed expectations in the same direction, then the customer will just increase their level of expectations on that attribute, making it ever more difficult to just meet their ever increasing expectation levels. However, if your excesses come from an unexpected direction, then they cannot be overanticipated by the customer, so they remain true pleasant excesses over expectations.

When Home Depot started out, everyone expected them to have a large selection and low prices, because they were a big box retailer. And in fact, they did have a large selection and low prices. However, when customers entered the store, they were surprised to find out that Home Depot had hired experts in the field of home improvement who could give as much useful advice as that great (but expensive) local hardware store (in fact, many of the original Home Depot employees used to own or operate some of those local hardware stores). This was the unexpected surprise which created success. To paraphrase Sun Tzu, engage with big box tactics (price, selection) but win with surprising hardware store service.

It wasn’t until Home Depot started taking away the surprise that they started to slip. In the name of cost cutting (an expected big box attribute) they replaced these expert full-timers with part-timers who had less expertise. Now, Home Depot was just a boring big box store—good on expected attributes, but nothing more. Suddenly Lowes had more of the pleasant surprises. And guess where the buzz went…to Lowes.

In home improvement centers, being good at the core big box attributes (price, selection) was expected by the customer. Having them did not cause you to win (although not having them could cause you to fail). Winning came from the surprises—unexpected benefits not typically associated with a big-box retailer. To Frank Blake’s credit, as new CEO of Home Depot, he is trying to bring back the pleasant surprises.

I used to know a grocer who operated huge, high volume stores known for their low prices. Unfortunately, they also were sometimes known for having long checkout lines. If the lines got too long, the owner would sometimes break open some packages of cookies and make sure that the people in line had the opportunity to receive a free treat. He did it often enough to make a pleasant situation out of an unpleasant one, but not all the time, which would have made it merely expected, rather than pleasantly unexpected. He would engage on a regular basis with low prices, but win with the occasional surprise of treats.

If a customer knows that a store is doing exactly the same thing all the time, there is little reason for making an extra trip to the store. However, if the store is always doing some little thing a little bit different, people may be inclined to come to the store more frequently just to see what they are up to.

If a business finds a winning tactic and then repeats it all of the time, competition can just copy it and negate the benefit. However, if the business continually changes the surprise, competition cannot negate them, because by the time they find out what the other business is up to and begin to copy it, the other firm is on to something else.

SUMMARY
Although a strategy needs to consistently reinforce the core attribute behind the strategic position, this is not enough. It is just the table stakes to be able to play the game. To truly win, this consistent reinforcement of the expected must be enhanced with a variety of pleasant surprises from unexpected directions.

Becoming too predictable allows competition to negate your benefits (as I did with the advertising strategy) and allows your customers to become bored with you. Don’t be like those evil people on Mission: Impossible or maybe I’ll have to yell at you like I used to yell at the TV set.

FINAL THOUGHTS
To save you time, I will unexpectedly not have a final thought today.