Strategic Planning Analogy #514: Working the Wrong Mine

THE STORY
Let’s assume there are two miners, named Bob and Jason. Bob is a big believer in analytics and measurement. Bob has KPIs (Key Performance Indicators) for every part of his mining operation and measures them often. Bob receives spreadsheets every day, showing in precise detail exactly how everything is going in the mines. Using that data, Bob can make minor adjustments to improve productivity on an ongoing basis. Everyone in Bob’s mining business is trained in how to improve their KPIs.

Sure, all that time, money and effort into analytics leaves little left for anything else, but Bob is happy. After all, he attributes his devotion to analytics with allowing him to eke out a small profit from a poor mine. Bob believes that without that devotion, he would lose money at that low-yield mine.

Jason, on the other hand, takes a different approach to mining. Rather than fretting about having the latest mining equipment filled with gadgets to measure productivity, Jason just carries a simple pick axe to his mine.

And every day, Jason extracts trainloads of valuable ore from his mine. Jason is making a large fortune on his mining business.

And why is Jason doing so much better than Bob? Well, while Bob was focused on incremental improvements via analytics, Jason was devoting his time, money and effort on locating the best place to do mining. And, as it turns out, great productivity at a poor mine is less profitable than average productivity at a high-yield mine which is bursting with pure ore.

THE ANALOGY
It’s common sense that—all other things being equal—a mine full of high quality ore will be more profitable to operate than a mine with very little (and low quality) ore. Yet Bob was so fixated on improving operations at his current low-yield mine site that he never stopped to consider that maybe he’d be better off looking for a better place to mine. His head was down looking at spreadsheets rather than up and scanning the geography for better sites.

Jason, on the other hand, realized that the highest determination of mining profits was in the quality of the mining location. Therefore Jason spent his effort on what was the high determination factor. Jason first searched for a superior place to mine and was rewarded handsomely.

As obvious as this common sense may appear, it seems that there are a lot more people like Bob in the business world today than Jason. Look at all the current buzz in strategic planning. It’s about big data, analytics, and KPIs. Job descriptions for strategic planners today talk more about statistical analytic prowess than big picture positioning. I recently saw where a company was placing strategy in its M&E department (Measure & Evaluate).

Now I’m not against measurement or productivity efforts. But that’s not the major source of growth and profitability. As we will see later in this blog, positioning yourself in the right place is a greater determinant of success. Therefore, positioning should be of higher importance, since decisions there will have greater impact. We need to be more like Jason and less like Bob.  

THE PRINCIPLE
The principle here is that leaders need to focus their time and energy on activities which produce the highest impact. Positioning is one of those high impact areas. Therefore, positioning should be a high priority of leaders and their strategy group…higher than low impact issues such as analytics.

The facts back this up. The latest came this week in an interview on McKinsey.com.  McKinsey’s Chris Bradley and Angus Dawson were talking about the Art of Strategy and what we’ve learned over the last 15-20 years about the topic. In the interview, Chris Bradley said research shows that “80 percent of growth is explained by decisions about where to compete or by market selection.”

Based on this research, if 80% of growth is determined by position—where to compete, who to target, winning position—then that leaves only 20% for everything else, including analysis, productivity initiatives, market share wars, and KPI monitoring. Shouldn’t we be focusing on the 80% rather than the 20%? In other words, wouldn’t we be better off spending time finding the right place to mine rather than getting more productive in the wrong place to mine?

Chris Bradley went on to say that:

“Companies should be just as focused about positional improvement as they are on performance improvement. [The research] reveals the importance of strategy in that light, not as a method of how we gain market share or decide what our edge is going be in the next quarter, but as a way to fundamentally position the company against the right trends, catch the right waves, and put our bets on the right markets.”

As Chris implies, positioning is where strategy adds the most value, so all those other strategic tasks (like productivity, market share, or near-term KPI targets) should not be sucking up all of one’s focus.

Example

I can illustrate this principle using a company I worked with. This company had a portfolio of retail brands. One of the brands was doing poorly, so I helped investigate the cause of the problems and potential solutions.

One of the things we learned was that there were a lot of areas where productivity could be improved. This included areas such as labor, inventory, distribution, marketing and merchandising. We investigated what it would take to improve these areas of inefficiency (time, effort, money) and what the impact might be if efficiency was improved.

But we did not stop there. We also spent significant time looking at the big picture position of this retail brand. What we learned was that the position of this retail brand was a lot like Bob’s mine—a poor, low yield position. In particular:

1. The sites of the stores were inferior to competition.
2. Nearly every store was in an economically depressed market with declining population.
3. Past actions had so confused the customer that one would essentially have to start over in building a compelling reason for customers to prefer the brand.

Because of the enormity of these positioning negatives, the productivity initiatives would have only a limited ability to improve the business. Even a highly efficient store will struggle if it is in a bad location in a declining market with a confused customer. It would have been like Bob’s effort to improve his poor mine—much work with little benefit—because productivity focuses on the 20% factor rather than the 80% factor.

The only way to create the big leap in improvement would have been to fix the position (the 80% factor) by relocating the chain to better sites in growing markets with a dedicated effort to rebuild loyalty. The cost and risk on that was very high.

Therefore, rather than put in all the time, effort and money needed to incrementally improve the productivity of that retail brand, the company sold the brand and put all that time, effort and money into a different brand which had a much better position (more like Jason’s high-yield mine).

That was the right move, because it focused first on positioning (the 80% factor) before determining decisions on where to create incremental improvements (the 20% factor). By putting the effort behind the brand with a better position, it improved the return on that effort.

SUMMARY
Incremental improvements via analytics, statistics, KPIs, Six Sigma, Lean and other such productivity tools has its place. But it is not the place of prominence. The big rewards come from getting the overall position right. Positioning needs the place of prominence in the strategic planning process. This is because if the position is wrong, then all those other efforts are constrained by the lack of potential within the poor position. You can only get so much ore out of a bad mine, no matter how productive you are. Better to focus on getting the position right, so that subsequent efforts are focused on place where the potential rewards are high.

FINAL THOUGHTS
Now some of you may be thinking that you can afford to focus almost exclusively on productivity issues now, because you already have a great, winning position. The problem is that environments change. The great positions of today may become lousy positions tomorrow. Decades ago, that poor retail chain I talked about had a great position (before the cities went into decline and the consumer position was compromised). So one can never ignore the positioning issue. It needs to be consistently monitored to ensure that it remains in tune with the marketplace and relevant with the customer.

Emergent Vs. Positioning (Part 2)

 

INTRODUCTION
In the last blog, we looked at a comparison between the Emergent view of strategy and the Positioning view.  I explained why I prefer the positioning view.  In today’s blog (part 2), I will explain why I think the emergent point of view also makes some good points and how to incorporate them into a positioning framework to get the best of both worlds.

 

POINT #1: SUSTAINABLE COMPETITIVE ADVANTAGE

The Issue

The emergent position brings up two good issues.  The first has to do with sustainable competitive advantage.  The positioning school tries to find positions which provide sustainable competitive advantages.  The emergents respond that sustainable competitive advantages are becoming increasingly more difficult to create, so finding those types of positions can be a more futile undertaking.

First is the “sustainability” part of the phrase.  In a seemingly ever faster changing environment, very little appears sustainable.  So if change is constant, why seek sustainability? 

Then there is the “competitive advantage” portion of the phrase.  With rapid change comes frequent upgrades and frequent obsolescence.  It makes any advantage very temporary.  It is like a ping pong game, where the ball keeps bouncing from one side to the next—first side A has the advantage and then side B has the advantage, then side A regains the advantage, and so on.  So instead of trying to achieve lasting advantage, emergents just try to stay in the game by responding with their ping pong paddle in a way to keep the game alive.

The Solution

Is this phenomenon a concern?  Yes.  Is the problem as dire as the emergents believe?  I don’t think so.  First of all, this is not the first time rapid change has occurred in business.  We’ve gone through the industrial revolution, the widespread adoption of electricity, the movement to a knowledge-based economy, and so on.  Yes, there is some turmoil during the transition, but companies with a good strategy find a way to make it through the transition.

The solution is to change the focus of where one looks for advantage.  Even when many things are changing, many others stay the same.  In particular, when products and technologies are changing rapidly, basic human needs and desires still stay the same.   There is always a segment wanting low prices.  There is always a segment wanting status.  There is always a segment wanting convenience.  There is always a need to feel loved or appreciated.

Now the means by which these constants are achieved may change.  The core solutions do not.  So the solution is to find positions which are not tied to particular products, but to enduring solutions.  For example, Wal-Mart positioned itself around the enduring solution of offering low prices.  Now the way it has done this has changed.  It started as a discount store.  When it looked like wholesale clubs could provide lower prices, they opened up Sam’s Club.  When it looked like supercenters could provide lower prices, they aggressively replaced discount stores with supercenters.  When it appeared that building a more sustainable and eco-friendly supply chain could lower costs and prices, Walmart aggressively went in that direction. 

The point is that Walmart’s low price position gave them an anchor.  As the world was changing around them, they did not panic.  They just kept migrating to wherever that position could be best met.  And through that singular focus, they were able to reinforce that position with the customers and become continually stronger.

Bausch & Lomb was in the lens business, but they focused their position on the end solution—better sight.  As a result, they migrated in to contacts, eye surgery equipment and eye enhancing vitamins.  Yes, the product changed radically, but because of their focus, they knew what had to be done to stay relevant.  They found a place where they could differentiate and win.

Apple keeps changing their offering, but each offering is true to their position of selling cool, easy to use interfaces between people and their data.

Without these positioning anchors, the myriad of strategic choices would overwhelm a company.  You cannot do it all.  You have to focus.  You have to make trade-offs.  And these enduring positions help light a path within the confusion of change.  In fact, they can help you better anticipate where to go, due to that focus.  Without it, you are always trying to catch-up to whatever looks hot today.  And by the time you match it, the world has moved on to the next hot item.  You never get ahead that way.

Another positioning approach to take is to create a position around speed and flexibility.  The emergent view is to always be racing to keep pace with change.  If speed and flexibility are so important in a rapidly changing environment, wouldn’t building excellence around speed and flexibility be a great position?   Build your positioning trade-offs around speed and flexibility, so that you become faster and more flexible than those who do not make those trade-offs.  This position actually makes rapid change an advantage for your position.

 

POINT #2: LOSS OF CONTROL

The Issue

The second key point emergents make is that businesses are losing control of the interaction with their customers.  The power is shifting to the consumer.  Social media and web 2.0 have given the consumer more of a voice.  They are having a greater say in how products are designed and marketed. 

If consumers are gaining a greater control over the conversation, then emergents would say that consumers are gaining greater control over a company’s position.  If that is the case, then a company can no longer rely on managing its business by managing its position.  Instead, a company needs to chase where the consumer conversation is going and whatever emerges from that is the strategy.

The Solution

Well, this is true to a point.   And that point ends when you shift from incremental strategy to transformational strategy.  Consumers can be great critics of the status quo.  They can tell you what is wrong with a product and how to incrementally make it better.   However, they tend to be quite bad at voicing opinions about transformational issues which go beyond what the consumer has experienced. 

This is because a) most consumers are too busy living their current lives to spend time dreaming up all the particulars around the business model for the next big thing; and b) if they have no experience to relate to, then they have trouble getting their arms around it and give an accurate assessment.

That is why Henry Ford supposedly said, “If I’d asked my customers what they wanted they would have asked for a faster horse.”

That is why Steve Jobs supposedly said, “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.”

So if you want to remain in an approach to strategy which is only incremental, then perhaps the idea of following the customer makes sense.  But if you want to transform the world like Henry Ford or Steve Jobs, it would seem that following the customer is a poor choice.  Instead, you still need to lead the customer and be pro-active in what you do.  And if the world is moving as fast and creating as much obsolescence as the emergents proclaim, then I think the transformation approach is even more important.  And that means that significant control is still in the hands of the successful companies.

 

SUMMARY

The emergents make some good points, but not enough to get me to abandon the positioning perspective.  Instead, I just altered the positioning perspective slightly to accommodate the concerns.  You can see them in the chart nearby.  For the concern of the world changing too quickly, I suggest either shifting positions to timeless solutions or to speed & flexibility solutions.  For the concern of losing control, I suggest focusing more on transformations, where control is still strong.

 

FINAL THOUGHTS
Although there is good and bad in both points of view, that does not give an excuse to abandon all approaches to strategy.  It is still worth doing.

Strategic Planning Analogy #395: Strategic Trajectories

THE STORY
Back in the early 1970s, National Lampoon magazine did a parody of detective stories. In the parody, the detective was a genius mathematician.

At one point in the story, a bad person was about to shoot the detective with a gun. The detective told the bad person to put away the gun because trying to shoot him was a waste of time. The mathematical detective’s explanation went something like this:

Before the bullet could travel from the gun to the detective, it would first have to travel half that distance. And before the bullet could travel half the distance, it would have to travel one-fourth the distance. Continuing this logic, you could keep dividing in half the distance the bullet would need to travel an infinite number of times. That creates an infinite number of distances the bullet would need to travel to reach the detective. And, of course, anything having to travel an infinite distance would never reach its destination. Therefore, mathematics proves that the bullet would never reach the detective.

It sounds mighty impressive. Too bad it is not true. Just ask anyone who’s shot a gun. I’ll trust their actual experience over the mathematical theory.

THE ANALOGY
Once a bullet leaves the chamber of a gun, it travels along a trajectory. It is nearly impossible to alter the direction of the trajectory of the bullet after the gun has been shot. It’s too late. The direction is already set in place at the point when the gun is shot. The bullet will continue on that trajectory all the way to the end. It is a foregone conclusion.

If your body is at the endpoint of that trajectory, like that detective, you may wish this were not so. You may want to believe that there are mysterious forces holding back the inevitable—perhaps for an infinite amount of time. But this is a false hope. The bullet will follow the trajectory and kill the intended target.

Bullets aren’t the only thing which follows a trajectory. Businesses also tend to follow a trajectory. Based on the way a business is introduced and managed, a path is determined. Sometimes the trajectory is upwards towards great success. Other times, the trajectory for the business is headed towards rapid tragedy and destruction.

In the latter case, the operators of the business may want to deny the inevitability of the rapid destruction. They may work up all sorts of mathematical spreadsheets and analyses to show how the “inevitable” can be stopped. They will use this math to show how the trajectory can be redirected to a better conclusion.

At first, all of that mathematical logic may seem plausible, just like in the National Lampoon story. But, in most cases, the forces behind the original business trajectory are too powerful and too fast. You cannot respond quickly enough or strongly enough to change the trajectory. Despite all that effort to avoid failure, failure occurs anyway.

THE PRINCIPLE
The principle here is that strategic plans designed to significantly alter the trajectory of a business already in motion have a high rate of failure. The original forces are just too strong and the time is too short to create a successful change.

For example, if a product is introduced with a lousy positioning, the product is quickly labeled by the market as having a “loser” position. Once that label is stuck on a product, it is extremely difficult to reposition it as a “winner.” Just think of the many products introduced to compete against Apple. Apple’s position is to be the “cool” product desired by “cool” people. Almost by definition, this positions the imitating competition as “uncool” and the owners of the competition as “uncool.” No customer wants to think of themselves as uncool, so they buy the Apple product.

Even if you can find a small morsel of mathematics to “prove” how your product excels in some way over the Apple version, it is too late. The “uncool” trajectory has already been set. And that trajectory is pointed towards failure. Microsoft has tried numerous times to reposition the Zune to win against the iPod, but the original trajectory was too strong, so Zune cannot avoid the inevitable failure.

Even if you can find a viable way to reposition for success, there is usually not enough time to fully implement it. Getting consumers to abandon an old, bad impression of a product and accept a new, superior impression takes a lot of time and money. Either the time or the money runs out before the process can be completed. And so much money needs to be spent to alter the trajectory that, even if the trajectory can be altered, rarely will the return ever justify all the cost it took to alter the trajectory. Based on return on investment, a quick death is usually the least bad alternative in these circumstances.

Yet, in spite of all the evidence against trying to alter a bad trajectory, it is a very common strategic approach. Years are wasted trying to stop the inevitable. Better financial targets may be set each year for the annual reposition (supported by mathematics), but the improvements fail to occur—year after year after year.

If trying to alter the trajectory has such a high failure rate, then what are the alternatives?

1) Set a Better Initial Trajectory By Aiming Better
Many business ventures fail because they were never designed to win in the first place. Either the business model is flawed or the position desired is unattainable (often because someone else has already locked up the position). If a winning trajectory is not part of the original design, then don’t be surprised when the launch takes a lesser path.

If you have a business on a losing trajectory, ask yourself this question: if my product disappeared, would anyone really care? Could customers easily adapt and move on without me? Usually, the answer will be yes, because losing trajectories accompany products which have not been positioned to be indispensible. I spoke more about this concept in an earlier blog.

A winning trajectory comes from initial strategies specifically designed from the start to win—to make your product uniquely indispensible. If you cannot adequately answer the eight questions asked in this other prior blog, then you are probably setting yourself on a trajectory to fail.

The extra effort spent up-front to engineer success at the beginning will put you on a better trajectory and save yourself a lot of grief later.

2) Shoot Another Bullet
Once it has been determined that your business is on a bad trajectory, often the best course is to stop the attempt to alter the old trajectory through incremental change and instead turn to a radically new approach.

For example, if you shoot a bullet at a target and realize that the bullet is moving way off course, don’t try to convince the bullet to go a different direction. Instead, aim better and shoot a second bullet. The same is true in business.

Apple’s original trajectory with its personal computer business was going in a bad direction. Its market share against the Microsoft-based PC business was small and getting smaller. Although mathematics might show some areas of superiority, the Apple computer business was on a losing trajectory. Apple could have wasted a lot of time and money to change that trajectory, but it did not. Instead it used its computer knowledge to shoot another bullet—the iPod. The iPod, iPhone and iPad are essentially computing devices. But they were built on entirely different business models and business positions. It was a model where Apple could win. It made Apple such a winner that it provided the time, money and image boost to allow the computer business to recover.

SUMMARY
Although the temptation is strong to try to alter the path of a poorly performing product by incrementally tinkering with the strategy, this is usually a futile exercise. The downward trajectory is already set. A better bet is to either spend more time up-front getting the initial trajectory right, or to cut your losses and re-start with a radically new approach.

FINAL THOUGHTS
It used to be a tradition in Detroit that citizens would celebrate the coming of New Year’s Day by shooting guns straight up into the air at midnight. Unfortunately, gravity causes all those bullets that went up to eventually come down. Sometimes, the bullets would cause damage, injury or death as they came down. The city had to spend money to convince people that it was not safe to shoot up because you couldn’t control where the bullets came down.

The same is true in business. Even if you have a business with a wonderful upward trajectory, eventually its lifecycle will end and the trajectory will start to come down. It is a futile effort to try to totally prevent the end of the lifecycle. It is better to look for the next big thing that will grow to replace that which is dying.

Analogy #212: Incremental Dead-Ends

THE STORY
In case you were wondering why it has been so long since I wrote my blog, two weeks ago I was on vacation. This past week I had a medical problem with my eye.

The eye doctor diagnosed it as “Recurrent Corneal Erosion.” What happened was that the outer layer of my eye became sort of detatched from the rest of the eye. It is sort of like what happens when a popped boil creates loose outer skin on your body.

Every time my eyelid rubbed against the eye, it was irritating the loose eye layer. It was sort of like the pain of pulling a bandage off a scab. The eye doctor said that she was taught in school that this is the most painful condition one can have with an eye. I don’t know if it is the most painful, but I can vouch that it was indeed very painful.

To counter the pain and help it heal, the standard recommendation was an anti-biotic inside petroleum jelly. The jelly supposedly helps lubricate the scraping of the eye by the eyelid, while the anti-biotic fights infection.

The jelly came in a little tube, like tiny toothpaste. However, when you squeezed on the tube, the jelly all rolled up into a ball, making it almost impossible to apply to the eye. I was not very good at applying it, so it was not helping. Next, I had my wife help me apply it. That was better, but still problematic. The next day I went to the eye doctor and had her put it in. I figured that since she was a pro, she could do it better. It was only slightly better. I even asked the pharmacist if she knew any tricks to applying the jelly.

Even with the jelly in my eye, it only temporarily helped ease the pain. And it made it hard to see, because I was looking through a film of jelly. So even at its best, it wasn’t very good.

Finally, my eye doctor referred me to a specialist. It only took him a couple of minutes to solve the problem. He took something like a blank contact lens and put it in my eye. The contact lens immediately and permanently protected the cornea from the eyelid. The pain was finally gone. And I didn’t have to mess with the jelly any more. I wish we would have done that a lot sooner.

THE ANALOGY
In the business world we need strategies to solve problems and grow the business. Often times, the place where we start is with the conventional thinking of the recent past. In other words, we try to create a better future by making incremental improvements to the current way of doing things.

This was what I was trying to do with my eye problem. I was trying to find incrementally better ways to apply the jelly. The thinking was that the jelly was good and the standard cure, so if I can just apply it better, I’ll have a better cure.

The solution, however, required throwing away the jelly and trying something entirely different. Instead of looking to prescription ointments, we went in an entirely different direction and tried an artificial lens-like device.

Frequently, we need to do the same thing with our strategy. Rather than trying to improve the current business model, we need to throw it away and come at the problem from an entirely different direction that has almost nothing in common with the old approach.

THE PRINCIPLE
The principle here is the concept of discontinuous improvement. Great leaps in innovation and growth rarely come from a series of small incremental improvements. Instead, the great leaps come from completely abandoning the old business models and technologies and processes and doing something entirely different.

You cannot make incremental improvements to the radio and eventually end up with an iPod. The technology is entirely different. The way the money is made in the business model is entirely different. The players in the business model are entirely different.

Similarly, you cannot make incremental changes to the stove and eventually come up with a microwave oven. The technology is totally different. The cooking is done in such a radically different way that entirely new ways of packaging and preparing food developed.

If you want to go back even further, you cannot evolve carbon paper into photocopiers. You cannot evolve slide rules into calculators. New approaches created entirely new industries, which made the old ways obsolete.

One of my favorite recent examples is Procter & Gamble. For years, they had looked for solutions for better cleaning through better chemistry. This had about run its course. Then someone got the idea of looking for cleaning solutions through better physics. Suddenly, there were several new cleaning products for Mr. Clean, such as the Magic Eraser. Swiffer was based in part on the science of static electricity. These successful new products were relying on business principles as different from traditional chemistry as my petroleum jelly anti-biotic was from contact lenses.

Speaking of contact lenses, Bausch & Lomb for years had relied on lens technology to help improve eyesight. Eventually, they had the epiphany that you can improve eyesight with treatments that have nothing to do with creating lenses. For example, Bausch and Lomb is a leader in building machines to do laser surgery. Bausch and Lomb is also a leader in producing vitamin supplements which have been found to improve particular types of eye problems.

You cannot incrementally get from lenses to laser surgery and vitamins. These are radically new approaches with an entirely different business model. It requires taking an entirely different look at your entire approach to profitability.

The pharmaceutical industry has been hitting a slump because the traditional approach has pretty much been exhausted. New blockbuster drugs are not coming out like they used to. Perhaps the problem is that we shouldn’t be looking for blockbuster drugs anymore. The age of the pill as the solution may be coming to an end.

Perhaps the next phase will be electronic signals…or nano machines…or sound waves…or implants…or whatever. These new cures may not provide any business for the local pharmacy. A whole new industry may replace it.

Some key things to remember.

1) If the current players in an industry do not embrace and lead in these new directions, eventually an outsider will try going in the new direction. As long as the old ways will eventually be cast aside and marginalized (or made obsolete), one may as well seek out the replacements.

2) Don’t be afraid of experimenting with radically different business models. I don’t think the folks at Apple are upset with the new model they created with iPod. Of course, one may need to try many small experiments before finding the next big thing.

3) Don’t look at your changes in isolation. They may not only upset the current way you do things, but also the way others in the supply chain need to operate. In fact, it may require you to reinvent yourself into taking some of the roles.

4) Rather than focus on the process, focus on the solution. When Bausch and Lomb switched their thinking from the process (making lenses) to the solution (better eyesight) entirely new growth paths came into being. Consumers buy your solutions, not your process. If a new process gives customers a better solution, they will abandon you in a heartbeat.

SUMMARY
Big new successes and major leaps in growth typically come through radical changes to the business model. Incremental improvements to conventional wisdom won’t get you there. They eventually lead to dead-ends. Instead of thinking of how to do the current thing better, think of how to create a superior solution by doing something different.

FINAL THOUGHTS
I’ve still got a ways to go before my recurrent corneal erosion is healed, but I am so grateful that someone thought out of the box and came up with a radically better solution. Otherwise, I would be lying in bed in pain rather than writing this blog.

Stop Listening to Me

THE STORY
Auto executive Bob Lutz likes to talk about the disasters one creates when designing cars based on consumer research. Regarding the Ford Thunderbird, he said,

“Ford ruined the Thunderbird by taking [consumer survey] responses too seriously. The original Thunderbird was a sleek, zippy, tightly designed two-seater. Ford asked T-bird customers what they’d like more of: Would they like, say, a little extra room? They would. How about a back seat? You bet. So Ford introduced an “improved” four-seater (and later a four-door). The restyled car was no longer the sleek sportster that had first attracted drivers. It’s mystique paled, and what had been a unique addition to Ford’s line was now just another car.”

The larger, more boring Thunderbird sold poorly enough that it had to be retired.

When at Chrysler, Lutz saw this problem again. In the 1980s, the Chrysler sub-compacts were not selling as well as the Ford Escort. Chrysler asked the customers what the problem was. In Lutz’s words:

“By a vast majority, respondents said they would like the car much better if it were just a little bigger—say four inches longer on its wheelbase. Now, anyone even passingly familiar with the US auto market knows that most people buy subcompacts because that’s all they can afford, not because they have some warped desire to sit with their knees up around their chest. Thus, when asked what they’d like changed about their cars, it’s axiomatic that subcompact owners would like them bigger.”

According to Lutz, the Chrysler executives were so fixated on giving the customer what they wanted, that they embarked on a $170 million campaign to find a way to make their sub-compacts four inches longer and still sell them at the same low price. It never occurred to these executives that Chrysler already had popular cars that were four inches longer for which people were willing to pay a higher price. Eventually, Lutz had to put his foot down and stop the nonsense.

And then, there was the Edsel, one of the biggest design disasters in automotive history. Oh, by the way, it was also one of the most consumer-researched designs in automotive history. Consumers were given choices of many different types of designs on each part of the car. Then Ford took the winners of each part and put it all together. When all of the “consumer chosen” parts were assembled, the total design was a mess that consumers rejected.

THE ANALOGY
We live in a Web 2.0 world. Because the Web 2.0 provides unprecedented opportunities for two-way dialogue, companies are rushing to get consumer interaction—even moreso than in the heyday of Bob Lutz. It is not uncommon these days for companies to have their advertising designed by consumers or even have their products designed by consumers.

In fact, based on what companies are doing, you might conclude that the need for strategy in a Web 2.0 world is being made obsolete. Why develop strategies, when all you have to do is whatever the customer says?

Although it can be insightful to learn what customers are thinking, the examples in the auto industry above point out that if you put too much power in the hands of the customers, it can actually destroy your business.

Just because we have new web tools to better interact with customers does not mean that customers have suddenly gotten any smarter or more insightful. They still say some silly things that could get us into serious trouble. All these new tools merely do is make it easier to fall into the trap of listening too closely to our customer to our own demise.

THE PRINCIPLE
The principle here is that strategies should incorporate many issues which transcend the interests or opinions of customers. If you limit strategy to merely the level of consumer interaction, we can end up making some self-destructive decisions.

The weaknesses of relying too much on consumer input can be summarized as follows:

1) Consumers Don’t Care If Your Business Survives
2) Consumers Can Only Interact Incrementally
3) Consumers are More Interested in Being Polite than in Being Honest

Each of these will now be discussed in greater detail.

1) Consumers Don’t Care If Your Business Survives
One of the chief goals of strategy is to provide a path to long-term prosperity (or at the very least a path to cash out of the business well). Consumers do not typically care about these things. They don’t worry about whether investors (shareholders, banks, hedge funds, etc.) get a return on their investment or whether the employees have prosperous careers. They just want what’s in it for them. And if they are honest, that means they want it all, they want it now, and they don’t want to pay for it.

Very few businesses can develop a sustainable business model around those qualifications. And guess what…in most cases, the customer doesn’t care if you business is sustainable. There are usually enough options that they will just go somewhere else to make their demands.

So if you single-mindedly try to please the customer by giving them whatever they want, and ignore your other stakeholders, you will typically end up with an unsustainable business model.

2) Consumers Can Only Interact Incrementally
Even if customers did care about the long-term viability of your business, they do not have the proper perspective to make long-term decisions. They do not know what is technologically possible. They have full-time jobs and concerns of the immediate. Consumers do not spend 40 hours a week thinking about the potential for where your brand and where it could go in the future.

As a result, consumers can only react incrementally to what is in front of them today. In the case of autos, they may be able to tell you to make them a little bigger or put in more cup holders, but they cannot help invent the future of personal transportation. Nobody was clamoring for a minivan before it was invented. They only clamored for it after a business put it on the market.

Most great business ideas are transformational—upsetting current conventions by providing something completely different than what was in the marketplace. These came out of the minds of visionary business people, not consumers. Nobody asked for the transformational coffee phenomenon of Starbucks, but now they are everywhere.

At Sony, they are proud to say that nobody ever asked for any of those great transformational inventions they have given us over the years. Instead, Sony’s great inventions came out of a deep understanding of consumer behavior (perhaps knowing people better than they know themselves) and a deep understanding of technological possibilities (for which consumers are unaware).

Incrementally, a consumer can suggest a new coffee variation for Starbucks or a new feature for a Sony computer, but beyond that, they are typically not much help. And if your company stays at only the incremental level in its thinking, your company will be passed by from other firms who are thinking transformationally, and who end up taking your customers with them (even though the customers did not ask for the transformation).

3) Consumers are More Interested in Being Polite than in Being Honest
When consumers are asked their opinions, they want to be helpful, but certain biases tend to creep into their responses to cause distortions. For example, there is a bias for consumers to say they will buy your product in your survey at a given price even if they would not, because they want to please you and encourage you. People don’t want to appear to be cheapskates, so they will tell you they are more willing to part with their money for something than they would in reality.

To quote an article in the May 18, 2007 Wall Street Journal, “The moment you ask someone for their opinion I have created a bias because of the natural human instinct to please.” Bob Lutz puts it more bluntly when he says “consumers often lie—albeit for the noblest of reasons.” Lutz’s point is that we tend to give very rational answers when being surveyed, because that is the “responsible” thing to do. Unfortunately, our true behavior is more likely to be driven by emotions.

So even if the consumer has our best long-term interest at heart and thinks about transformational issues, they may still give us answers that do not reflect their true intentions.

SUMMARY
Although consumers can tell us a lot of things, they cannot tell us what our strategy should be. If we let too much consumer commentary affect our strategic decisions, we will most likely miss the mark and allow others to take our business away, because these firms give the consumers what they really want, rather than what they say they want.

FINAL THOUGHTS
Web 2.0 technology is a great tool, just as a hammer is a great tool. But to build your strategic house, you need more than a single tool; you need the entire tool belt.