Failures #2: Leaping the Right Distance

INTRODUCTION

In the last blog, we looked at an article in USA Today article entitled “The 18 worst product flops of all time.” These flops included:

1. Edsel by Ford Motor Co.

2. Touch of Yogurt Shampoo by Bristol-Myers Squibb

3. Apple Lisa by Apple

4. New Coke by Coca-Cola

5. Premier smokeless cigarettes by RJ Reynolds

6. Maxwell House Brewed Coffee by Philip Morris Companies

7. Harley Davidson perfume by Harley Davidson Motor Co.

8. Coors Rocky Mountain Sparkling Water by Adolph Coors Co.

9. Crystal Pepsi by Pepsico

10. The Newton MessagePad by Apple

11. Persil Power by Unilever

12. Arch Deluxe by McDonald’s

13. Breakfast Mates by the Kellogg Co.

14. WOW! Chips by Pepsico

15. Hot Wheels and Barbie computers by Mattel

16. EZ Squirt (colored) Ketchup by Heinz

17. TouchPad by HP

18. Google Glass by Google

We looked at three lessons to be learned from these flops. In this blog, we will look at another lesson to learn: The need to leap the right distance.

LEAPING THE RIGHT DISTANCE

Innovation is a lot like taking a leap into the future. But, as the USA Today article shows, not all leaps are successful. Think of it as being like leaping over a deep canyon. If you can leap from land to land, you succeed. But if you miss, you fall down into the canyon and fail.

Here’s the problem. The canyon of innovation is too wide to cross in one leap. Therefore, to successfully get across the canyon, you need to leap onto a small mesa in the middle of the canyon. Miss on either side of the mesa (too short or too long) and you fail. This is illustrated in the picture below. As we will see, many of the 18 flops failed in part by not leaping the proper distance.

1) Leap Too Short

The first reason for an innovation flop is to leap too short. This happens when your innovation improvements are incrementally too small to matter. Sure, it might be a little nicer or newer or better, but not enough to justify switching, particularly if you are charging an innovation premium price.

The Edsel (flop #1) was a nice car, but the innovations were minor compared to the hype, and the innovations were not enough to justify the premium price. The leap was too short.

Kellogg’s Breakfast Mates (#13) combined cereal, milk and a spoon into one “convenient” package. However, a test showed that the Breakfast Mate was only about a second faster to prepare than regular boxes of cereal with a normal carton of milk. In addition, convenience to the customer meant eating on the go, and you could not prepare and eat Breakfast Mate on the go. Finally, it cost a lot more per serving than the old way. In other words, Breakfast Mates leaped too short. It was not enough of a convenience innovation. The right leap would have been to go to breakfast bars—more convenient to prepare (just unwrap), more convenient to eat (on the go), and not as big a premium.

McDonald’s Arch Deluxe (#12) was a better burger than the regular one, but not enough better to justify the price or to get people to switch from better-burger restaurants. They did not leap enough and build really better burgers worth going out of your way for, like Five Guys.

Apple’s Lisa Computer (#3) was a fine computer for its time, designed for the business market. The problem was that it was not superior enough to justify a $10,000 price. Also, it was not superior enough to grab the attention of software developers to make programs for it. The switching costs for businesses was high and the leap was not big enough to justify the switch.

2) Leap Too Far

Just as bad a mistake as leaping too short is to leap too far. If you innovate beyond the ability of consumers to embrace or beyond the capabilities of technology, then you will fail as well.

The Apple Newton (#10) personal hand-held computing device came out in 1993, before the pervasiveness of the internet. Thanks to that, and the limits of technology at the time, the Newton was not a very powerful device. It tried to be the equivalent of the smartphone before technology, applications, and consumers were ready. It was a leap too far, by almost 20 years.

Premier Smokeless Cigarettes (#5), back in 1988, was also a leap too far. The market had not yet banned traditional smoking as much as today and the technology wasn’t good enough to make Premier Smokeless Cigarettes a pleasurable smoking experience. It took about 25 years before the technology and consumer sentiments caught up to make electronic smoking successful.

One might argue that Google Glass (#18) was also a leap too far. Concerns over privacy and functionality made it perhaps ahead of its time.

3) Leap Too Late

The problem when timing an innovation leap is that if you wait until the innovation is fully accepted, you are no longer imitating…you are following. True innovation has some risks, because you are trying to establish a market that doesn’t quite yet exist. If you wait for the innovation to get a firmly established by someone else, it is typically that someone else who reaps the benefit. They become the brand know for the innovation and get the first mover advantage.

This was the main problem for Hewlett Packard’s Touch Pad (#17). HP waited until Apple made tablets their own with the iPad. HP’s Touch Pad was not meaningfully enough better hardware to unseat Apple. In addition, Apple owned the apps, content business and digital store, where everything was designed to work on the iPad.

Hence, HP failed due to waiting to late.

SUMMARY

Innovation is a leap into the future. If you make your leap too short, you will not create enough differentiation for success. If you make your leap too long, you will get ahead of the customer and technology, which are not ready for success. If you make your leap too late, you become a lesser also-ran rather than a leader. Therefore, when on the path of innovation, plan you leap carefully (length and timing).

FINAL THOUGHTS

Jumping is not the same as leaping, because you end up in the same place as you started when you jump. So, just because you are furiously doing something doesn’t mean you are leaping to innovation. You may only be jumping in place.

Strategic Planning Analogy #438: Business Vs. Capability

THE STORY
One day, Bob was sitting in his garage. Suddenly, his neighbor Joe was running towards the garage. Joe quickly looked around Bob’s garage and noticed a shovel.

Panting from being out of breath, Joe said to Bob, “I’ll give you $1000 dollars for that shovel.”

Bob replied, “Are you crazy? That shovel is hardly worth $10. Why you can get a brand new one at Home Depot for less than $30.”

Joe said, “I need a shovel right now. Will you sell me yours for $1000?”

Bob answered, “Sure, Joe, you can have it for $1000.”

Before Bob could finish his sentence, Joe had tossed $1000 at Bob, grabbed the shovel and ran.

At the time, Bob thought Joe was crazy for paying so much for his shovel. But he soon forgot about it.

A week later, Bob saw Joe driving a new expensive sports car. Bob asked Joe how he could afford such an expensive automobile. Joe replied, “I used that $1000 shovel to dig up a treasure chest that was full of millions of dollars of gold and jewels. If I hadn’t had a shovel at that exact moment, I would have missed the opportunity to dig up that treasure chest.”

Suddenly, the idea of paying $1000 for that shovel didn’t seem as crazy to Bob anymore.

THE ANALOGY
The value placed on an object can vary significantly between people. Bob thought his shovel was worth about $10. Joe gave it a value of 100 times that price.

Why such a big difference? Bob looked at his shovel as a standalone object. He knew that new shovels were worth about $30 and that he had an old shovel. Therefore, Bob figured that the worth of the object was about $10.

By contrast, Joe looked at the shovel as a capability tool. If used immediately, that tool would give him the capability to get a treasure chest worth millions. It was well worth paying $1000 to get access to millions.

Successful business acquisitions depend on an accurate assessment of value. And often times, the greatest value is not in the standalone business being acquired (the “shovel”), but rather the value of the capability it gives you (access to the “Treasure Chest”).

Therefore, if you want a great return on your acquisition investment, the best path can be to first have a strategy to locate treasure chests. Then acquire whatever tools are necessary to dig up that chest.

Otherwise, you can be like Bob. Sure, he paid a lot less than Joe for that shovel, but when Bob had the shovel all it did was sit in his garage. The return on that $30 investment for Bob was worse than the return Joe got with the same shovel for which he paid $1000.

THE PRINCIPLE
The principle here has to do with capability planning. I think this is an under-emphasized part of the strategic planning process. People love to spend time talking about financial targets or market positions. These are fun topics. However, unless you have the right capabilities in place, those financial targets and market positions will never become a reality—no matter how much you talk about them.

Capabilities can cover items such as technology, patents, expertise, distribution capacity, access to raw materials, access to scarce talent, access to real estate, access to legal rights, and so on. You could have everything you need except one of these items and fail miserably—because none of the rest of it works unless you also have that missing piece. It could be something small, like a shovel, but if that missing piece keeps you from the getting the treasure, then merely knowing where the treasure is can be worthless.

The Problem With the Standalone Approach
Most acquisitions are looked at primarily as standalone business opportunities. Sure, one factors in a few synergies, like reductions in overhead and overlap, but the vast majority of the value is typically from the business itself.

But here is the problem with that approach. First, you have to pay a premium to get the business. Depending on the industry and the time in the business cycle, that premium can be on the order of 30% or more.

Second, to make that acquisition worth doing, you need a return on investment which exceeds your cost of capital. In other words, if you pay 30% more and you earn 30% more, all you have done is break even. And that is an unacceptable return. Depending on your balance sheet and the time of the business cycle, your stakeholders may require an additional 10% improvement or more.

In the end, this means that the only way that a standalone business is worth acquiring is if you can get 40% more out of it than the so-called experts who are already running the business (I spoke about this in more detail here). Remember, if it were easy to make such a large improvement, why aren’t the current owners doing so?

A few reductions in overhead or overlap rarely are enough to fill this large of a gap. And the gap may even need to be larger than 40%, because most acquisitions have some built-in dis-synergies which also need to be overcome. An example could be customers who no longer want to buy from the company after it is acquired because they don’t want to do business with you. I spoke more about these dis-synergies here and here.

The only way to assure that you can cover a 40% gap is to look outside the standalone business. You probably need to create an entirely new business to supplement the old business to cover the gap. In other words, the only way you can afford to overpay for a shovel is if you can use the shovel to obtain new treasure.

As long as you focus on positions or profits, you will look for acquisition targets that have great positions and/or produce great profits. And those are the targets which will typically have the greatest premium prices and the lowest potential for you to come in and cover the 40% (or more) gap.

The Benefit of Capability Planning
Capability planning looks at acquisitions more as a means rather than an end in themselves. The prize is not the acquired business. No, the prize is the separate hidden treasure which can only be obtained if the acquired firm is used as a tool to reach it. It is the capability value, not the operational value which makes the acquisition worth doing.

Consider the Pringles potato chip business. Proctor & Gamble has been disappointed with this piece of their portfolio for a long time. They have tried to find ways to get rid of it for literally decades. The fact that P&G could not sell it for such a long period implies that there was not enough inherent in the standalone business to ever justify paying a premium. The gap could not be covered.

But then along comes Kellogg. They see a buried treasure—international growth for their Keebler snack business. Unfortunately, Kellogg is missing a key capability—access to powerful global snack distribution. Pringles has that capability. It is the shovel that will help Kellogg get to their buried treasure. There is probably more value in Pringles as a distribution capability for Kellogg than as a snack business. Therefore, Kellogg can afford to pay for Pringles when others could not. They can cover the gap, because they have an addition treasure beyond what Pringles offers as a standalone business.

Therefore, rather than developing “Business Acquisition Strategies” focus on “Capability Acquisition Strategies.” And don’t forget that many times you can obtain access to the capability without having to buy a company (and pay the huge premium). This opens up more options, like start-ups, aggressive hiring, strategic alliances, licensing, and so on.

Acquisition is just one way to get capabilities. As long as you see acquisitions as a means, rather than an end, you can compare it to alternative means for obtaining that end. This can lead to superior strategic moves.

SUMMARY
Most acquisitions destroy shareholder value. One of the reasons is because there is not enough of an opportunity within the core business to increase the value to cover the premium and the return on capital requirements. Therefore, if you want to create value with acquisitions, start first by looking for treasure beyond the core business. Then look for acquisitions which are a tool to get to that treasure.

FINAL THOUGHTS
There’s the old story that for the lack of a nail, a shoe was lost. For the lack of a shoe, a horse was lost. For the lack of a horse, a battle was lost. For the lack of a battle, a kingdom was lost. When you look at that big picture, it makes that nail appear pretty valuable. Strategists love planning out the big battles, but if the capability to put nails in the horseshoe is missing, it can all be for naught.

Often times the great leaps in value can come from these capability issues which at first appear minor or are often overlooked. Don’t overlook capability planning in your strategy work.

Analogy #237: Take It Off

The Story
A lot of people have trouble losing weight. Well here are two sure-fire ways to lose weight.

Method #1: Get Very, Very Sick
There’s nothing like a severe case of food poisoning, flu or diarrhea to take off pounds quickly. The weight just goes down the toilet. In addition, you’ll feel so weak and nauseous that you won’t want to eat for awhile after that.

Method #2: Amputation
Now some would complain that with method #1, the weight eventually comes back. So if you really want to make sure your weight loss doesn’t come back, try amputation. Once you cut off a leg or two, that weight is never coming back. It’s quickly gone FOREVER.

THE ANALOGY
The two methods above that were recommended for weight reduction are impractical and stupid. What good does it do to lose weight if you have to spend all your time weak and sickly, either in bed or near a toilet? There’s nothing beautiful about seeing someone in such a sickly condition. In addition, there are the long-term negative health considerations from depleting your vital fluids.

Amputation may cause weight reduction, but it also eliminates key functioning parts of your body. Chopping off vitally important pieces of your body is extremely short-sited. Eventually, you’re going to want those pieces back, and by then it is too late. Not only that, you still haven’t eliminated the ugly fat in the rest of your body. You’re still fat, but without a leg.

As silly as these methods sound for human weight reduction, I have seen similar approaches taken by companies in the name of cost reduction. On the one hand, some companies cut out their “vital fluids” to the point where the company is too weak and sick to effectively function in the marketplace. They may be lean, but they are not mean. They are bedridden and on their way to oblivion.

This is often the result when companies indiscriminately announce 20% cost reductions across the board. Not every area has 20% waste, so some areas will lose vital fluids needed to be effective in the marketplace. Purging yourself of vital energy to compete makes a company sicker, not healthier.

Second, some companies will lop off entire sectors of their business. At first, they may think that they can get away without these major pieces of their business, but eventually they want them back and it is too late. For example, amputating R&D or maintenance from your company may save money today, but without R&D, you won’t have a pipeline to grow future profits, and without maintenance, your current profit machine will break down and go into disrepair, shutting you down.

During these current economic times, many strategies are focusing on cost reductions. Please don’t use either of these methods.

THE PRINCIPLE
In the end, the real goal is not absolute lowest weight, but absolute best health. If you go to a health club, the trainers will tell you that some people are so weak that they need to gain some muscle weight in order to function at their peak. Likewise, strategies should be designed to focus on health, rather than just cost reduction, since, as we have seen, not all loss is healthy.

Experts will tell you that the sensible way to lose weight is also the healthy way. The idea to do a combination of two things: Change to healthier eating habits, and increase your exercise. In other words, it’s all about managing caloric inputs and outputs: fewer, but more nutritious calories in, and burn more calories out. In today’s blog we will apply this principle to business cost reductions.

1. Cut Back on Bad Calories
The goal is not to cut out all calories. That leads to unhealthy bulimia. Instead, eliminate the empty calories that provide no nutrition. In a business sense, that means cost cutting which takes out the things that have no bearing on your positioning, things that will not be missed and do not hurt your image or competitive strengths. In fact, some cuts can actually improve your strengths (just like cutting out an excess of cabs and sweets can eliminate energy crash cycles).

My current favorite example of this is Revol Wireless. In the United States, cell phone usage is fairly mature. Just about everyone who wants a cell phone already has one. Now the typical cell phone model in the US is to sell a phone well below cost and then charge a higher phone rate over a set period of time (in a contract) in order to recover the cost of the phone.

Well, what if a cellular company were to treat the phone as empty calories? If you eliminate the phone, the usage fees no longer have to cover a phone subsidy. In addition, you do not need to lock people into a long-term contract, since you don’t need to stretch usage out until subsidy is paid for. That’s basically what Revol Wireless has done. By treating the cell phone as empty calories, it can eliminate the undesirable contract and charge much lower phone rates than the competitors who have to factor in a subsidy.

Now not everyone wants to stick with their old phone, but if that market is big enough, someone like Revol can make out.

A simpler example is Kellogg. In the past, cereal companies have tried to cut back by putting less cereal in the box. Over the long haul, that can hurt, because you have reduced the value of the box without a comparable reduction in price. This is not just eliminating fat, it is eliminating muscle. People are buying cereal, and you’ve reduced that very thing they are trying to buy.

Recently, however, Kellogg has tried a different approach. Instead of reducing the contents of the box, they have changed the shape of the box so that it takes less cardboard to house the same contents. When you multiply a small savings on cardboard times all the boxes they sell, that adds up to a large cost reduction. This reduction, however, did not reduce in any way the quality or quantity of the contents. As a side benefit, Kellogg contends that the new shape fits better on a customer’s shelf, so the value may have actually increased, even though costs decreased.

Many of the green marketing programs also work in this way. They eliminate wasteful excess packaging (empty calories), which not only reduces costs, but can increase one’s image as caring about the environment.

2. Increase Exercise
One can lose weight not only by cutting out food, but by keeping food intake constant and increasing exercise. So when one feels pressured to improve productivity, don’t blindly rush to cut. Perhaps all you need to do is improve your exercise.

In a business sense, you can see that in ratios. Most productivity measures are ratios, like Labor $ per Unit Made, Costs per Unit Sold, Overhead per Dollars Sold, and so on. The cutting reflex wants to quickly cut the numerator of these ratios—the labor, the costs, the overhead. The exerciser realizes that productivity can also be gained by keeping these inputs flat and increase the denominator outputs, like units or sales.

For example, in this current economic recession, P&G has resisted cutting inputs like advertising. If anything, they are putting added emphasis on advertising. Why? Strong advertising (flexing their advertising muscles) can increase the denominator of sales, thereby increasing productivity.

Recently P&G has announced that they are taking their Mr. Clean Car Washes out of test mode and rolling them out. This will cause an increase in expenditures, but it is a productive exercise of their money, so they will be better off. In addition, it will provide another avenue of sales so that overhead as a % of sales will go down even if overhead costs stay the same.

SUMMARY
In tough economic times, there can be a lot of pressure to cut costs. However, the best strategy is not one that cuts the most costs, but one that creates the healthiest company. So if you have to cut, look for cutting the empty calories out of your business diet—things that won’t be missed or hurt your image if they are cut (both near term and long term). Otherwise you may be cutting out something vital that you will need later (weight loss through amputation). In addition, look for ways to increase your exercise, so that you can grow the denominator (sales, units) faster than the inputs (costs). If an investment is highly productive, you can increase productivity by actually spending more.

FINAL THOUGHTS
The tough times will not last forever. More prosperous times will return. Unfortunately, if you amputate your leg, it is never coming back. Think twice before placing the saw on a piece of your corporate body.