Strategic Planning Analogy #553 Part 2: Revenue Statement

BACKGROUND
In my last blog, I discussed why the traditional financial statements (income statement, balance sheet, cash flow) are inappropriate for planning. In this blog, we will look at one of the documents to use in their place—the Revenue Statement.

THE REVENUE STATEMENT
The purpose of the Revenue Statement is to provide a strategic framework for predicting sales. Yes, the income statement also has a line for sales. However, the income statement doesn’t tell you why that number was chosen and what the strategies are to reach that number. In addition, as mentioned in the last blog, the sales line in an income statement is disconnected from the other lines which directly influence it, like marketing. To remedy these weaknesses, I designed the Revenue Statement.

Since there are so many different types of business models out there, the Revenue Statement would need to be tweaked a bit to fit each type of industry. But a rough example can be seen in the figure below.

1) The Baseline

The first part of the Revenue Statement is used to determine the baseline. This is what sales would be if nothing changed and there were no new strategic initiatives.

To calculate the baseline, one needs to make two calculations. First you need to project a baseline for the overall industry. This number would be based on anticipated demand and competitive response to that demand. This number would come from insights from your industry research.

Second, you need to project what portion of that demand (market share) you will get if you stick with your current status quo approach.  In other words, if you do nothing new, what portion of the business should you expect to achieve. In the example, we see that the baseline sales is expected to decline over time. This is not unusual, since if you do nothing to the business there is a greater risk of becoming less relevant and losing share to astute competition.

That is one of the reasons why strategic planning is so important. It helps a company find initiatives that will increase sales beyond the baseline.

2) Pricing Decisions

One area where strategy can improve sales is with pricing decisions. How should you charge for your offering and how much should the charge be? Should you use a Freemium model, where most pay nothing and only the premium customers are charged (like Linkedin)? Should you have tiered pricing like the airlines? Should pricing be raised? lowered? Should pricing be bundled like fast food combo meals (or unbundled)? Who do you charge for services (in health care it can be patients, insurers, government, etc.)? Is my strategic position anchored on low prices or something else?

Remember, sales is based on how much money you get for what you offer. Pricing decisions have a huge impact on how much money comes in. This can be very strategic.

It is a good idea to review your pricing strategy when planning and this is the place to do that. So in the second section of the Revenue Statement, you would state any changes to your pricing strategy. Then you would calculate the impact on your sales.

The impact could be threefold. First, your pricing decisions could impact overall demand for the product. For example, back in the 1980s, it could cost close to $100 to buy a prerecorded video of a movie. As a result, most people rented movies rather than buy them. But in the 1990s, Warner Brothers decided to slash the price its videos to $20 or less. Suddenly, the demand for purchasing videos went up astronomically.

The second impact is what a pricing change could do to your market share. If your change makes you more or less competitive in the marketplace, it should impact your market share (although keep in mind that competition may retaliate on their own pricing and mitigate some of your impact).

Finally, your sales will change at a different rate from your units if you change prices. For example, if you used to sell something for $1 and now you sell it for $2, your sales per unit double.

All of this gets calculated in the second section.

3) Marketing Decisions

Your baseline sales assume a baseline marketing expense. Any changes to that level of marketing should have an impact on sales. After all, you probably wouldn’t increase marketing spending if you didn’t think it was going to improve sales.

So in this third section, you put in the baseline marketing expense and the anticipated change in marketing expense. Then you calculate how you expect the change in marketing expense to change sales.

4) Sales Force Decisions

Similar to marketing, changes in salesforce expenditures should have an impact on sales. Therefore, similar to section 3, this section looks at baseline sales force expenditures, changes to the baseline, and how the changes to sales force expenditures impact sales.

5) New Strategic Decisions

Almost every new strategic decision is made in order to improve the company’s long-term position. And most of the time, that improvement includes an impact on sales. So in this fifth section, one calculates the anticipated impact on sales from each strategic initiative (each covered separately in this section).

In a sense, while sections 2 and 3 looks at the changes in the QUANTITY spent to improve sales, section 4 looks at the changes in the QUALITY of what you do to improve sales.

In a simple example, if a strategic initiative is to add a new product line, the impact to sales is rather straightforward. You add in the sales of the new product and subtract out the cannibalization of the old product.

If the initiative is to improve the quality of a baseline product, then one must estimate how improved quality will impact sales.

Since strategic decisions are often made for long-term benefit, there may be a short-term decline to sales during the transition. That is why, in my example, I show a negative impact in year one from the strategic initiative (but larger improvements later).

6) Net Results

The sixth and final section looks at the net impact of the first four sections, both in terms of impact on sales and impact on sales-related expenses. Basically, you take the baseline and add to it changes from pricing, marketing, salesforce and other strategies. The end result is your estimated sales and the estimated sales-related costs to get there. When you subtract those costs from sales, you get your “Sales Contribution”: the money you have left to pay for everything else.

BENEFITS
The benefits from using a Revenue Statement are as follows:

• It proactively links all of your activities to their impact on sales. It makes sure that when you change your approach, the appropriate change to sales is also made.
• It separates all of the components of sales, so that you can critique each one for reasonableness.
• It provides the ability to look at the more indirect influencers of sales, like changes in product quality, product features, service levels, repositionings, etc.
• It makes sure that the benefits and costs of each strategic initiative are incorporated into the plan (at least the sales portion).
• It forces one to reconsider issues like pricing and the expenditures for marketing and sales forces.

SUMMARY
To more comprehensively understand the sales portion of a strategic plan, it is recommended that some form of a Revenue Statement be used. A Revenue Statement has six sections:

1. Calculation of Baseline Sales
2. Impact of Pricing Decisions
3. Impact of Marketing/Advertising Decisions
4. Impact of Sales Force Decisions
5. Impact of Other Strategic Decisions
6. Net Results

FINAL THOUGHTS
Sales is too important an element of strategy to be left as a single line on an income statement.

Strategic Planning Analogy #528: Business Without Brains

THE STORY
Imagine a game in which you are in your backyard and your goal is to shoot ping pong balls at targets in your neighbor’s back yard. The only problem is that there is a high wall between the two backyards so that you cannot see the targets…and, in addition, the targets are constantly moving. Since you cannot see anything, the only way you know you have hit a target is when you hear the ping pong ball bounce off the target.

Therefore, to win the game, you shoot as many ping pong balls in as many directions as possible. When you hear a ping pong ball hit a target, you start shooting even more in that direction until the target moves away. Then you start randomly shooting everywhere again.

THE ANALOGY
That sounds like a relatively stupid game to me. There’s no intellectual challenge. There’s no strategy. It’s just random shooting, hoping to get lucky. You could train a monkey to do that…or program a machine to do it.

Yet this is what modern marketing consists of at many companies. The company sets up its digital business on a web site. Then the company tries a constant stream of experiments with the site to see what works. Colors are randomly changed, the size and placement of boxes changes, prices and offerings randomly change. Text randomly changes. They try everything, everywhere.

With all of this “experimentation” going on, the company “listens” to see if they got any “hits” on the website. If so, they start doing more of what random thing seemed to cause the hit. Eventually the customer moves away from that approach, so the company randomly starts firing experiments in all directions again hoping for the next hit.

You can give this approach all sorts of fancy names like “big data” or “agile” or “digital marketing” or “listening to the customer.” But the reality is that it is little more than that silly game with the ping pong balls. No need to think; no need for strategy. Just program a machine to try a lot of things and listen for hits. It sounds like a rather stupid game to me.

THE PRINCIPLE
The principle here is that although the digital age has had a profound impact on marketing, most of the foundational principles of marketing have not been repealed. They are still valid. And if you ignore these principles, you are doing little more than shooting ping pong balls over the wall. Sure, with today’s technology, you can be more efficient with your randomness (and hear the hits better), but it still is little more than random luck. You may as well quit marketing and put all your money into lottery tickets. It takes about the same level of brainpower and strategy (virtually none) yet is a lot easier.

The only problem is that you can get VC money to make a business out of random experiments, but you cannot get VC money just to play the lottery. Perhaps venture capitalists would have higher success rates if they put their money into lottery tickets. Or MAYBE they should invest in people who still operate by the fundamentals or marketing.

Marketing Principle #1: Successful Companies Have a Reason for Being

Successful companies do not merely exist to make their owners wealthy. They succeed because there is a reason for them to succeed in the marketplace. They are fulfilling a consumer need better than anyone else. By fulfilling an unmet need, they have a reason to exist—a relevancy when it is time for customers to spend their money.

Before starting down the path of a new business venture, smart marketers will ask a series of relevancy questions. If the business idea is not sufficiently relevant, then they do not pursue the venture, for it is most likely destined for failure—because it does not have a reason for being.

Examples of relevancy questions include:

1.     Why would a consumer naturally prefer my product over the alternatives?

2.     What benefits do I provide better than anyone else?

3.     Do customers truly have a need for what I am offering?

4.     For what problem am I offering a superior solution?

5.     Is my solution valuable enough to the consumer to get them to pay me an amount that would provide a proper return on investment?

6.     If I didn’t exist, would I be missed in the marketplace?

Google initially succeeded because they offered a superior way to search the internet. It was different. It was better. Consumers could see the superiority. It was a better solution. In other words, it had a reason to exist—a reason to be successful—a reason to be preferred.

Compare that to a lot of other digital businesses trying to make it in the world today. Thousands upon thousands of these ideas are dreamed up in dorm rooms or on a sofa at Starbucks. They all look about the same and act about the same. There is no talk about superiority, because there is none. It’s still in beta and bull of bugs and won’t be great until version 4.0.  

There’s rarely talk of real benefits or meeting needs in a way people are willing to pay for. And there is rarely talk about why this version would be naturally preferred over the thousands of similar pitches being made in the same space.

Instead they talk about how fast they will be at adjusting and adapting. It sounds to me like they are just shooting ping pong balls over the wall and they think they will win because they can shoot more ping pong balls more often.  

Marketing Principle #2: Successful Companies Own a Position

But even if these people bothered to develop a great solution for an important problem, it is not enough. Others may have as good (or better) a solution for that same problem. In addition to having a solution for a problem, you have to OWN that solution in the mind of the customer. The solution has to belong to you. When the customer encounters the problem, your brand needs to be the one which comes to mind.

Google took its initial superiority in search engines and built a brand which “owned” search in the minds of most customers. By owning search, it became nearly impossible for anyone to take it away.

When I look at a lot of the proposed digital ideas today, I see people going after spaces already owned by someone else. They want to be the next “Facebook” or the next “Apple.” Well we already have Facebook and Apple. As long as they do their job, we won’t need another one.

Don’t attack a space already owned by someone else. That battle rarely leads to victory. Build a position that is different—one that you can own. Imitation may be the most sincere form of flattery, but it is a lousy way to try to win. Followers are never in the front.

How many different games do we need on our smartphones? They all seem to be minor variations on a small handful of themes. Your odds of being the next Angry Birds or Candy Crush are probably worse than if you put your money into lottery tickets.

If you cannot own a position, then you cannot achieve a winning position in the consumer’s mind for that space. And without a position, you have no reason to exist. Owning a position usually requires being early in the game, bringing something meaningful to the game, and out-executing the competition. A lot of companies are competing in the smartphone business, but only Apple and Samsung make any real money at it. Everyone else is a loser in that space because they do not own it.

Marketing Principle #3: Successful Companies Know Why they are Successful

Some of the literature on the “new” way of marketing say it is a waste of time to try to figure out why a particular experiment works. If a blue website sells more than a green one, just accept it and move on.

I’m okay with some of that as it relates to minor tactics. But at some point, one should understand why they are in business and why a customer should prefer them. You cannot strengthen or broaden a position if you don’t understand why it works.

If your only success is due to discovering the advantages of a blue website first, your advantage disappears as soon as everyone else makes their website blue. The advantage is not sustainable.

However, if you deeply understand the “why” of your success, you can use that knowledge to build barriers of sustainability. Apple understands why it is successful. It creates a consumer advantage through “coolness” and a competitive advantage through closed systems. It keeps replicating this over and over again to make Apple ever stronger. And if the superiority in coolness and closed systems lies outside of Apple, as in the case of Beats, they acquire it.

The new marketers praise the value of ignorance—just go with what works and don’t ask why. I beg to disagree.

SUMMARY
Much of what is proposed as “New Marketing” is really “No Marketing.” It is a brainless, strategy-less approach depending upon quickness and luck. The basic laws of marketing still exist. Sure, the execution will need to adapt to the digital age, but the fundamental principles still apply. Successful businesses today still need to worry today about:

a)     Having a reason to exist in the marketplace (superior solution);

b)     Owning their position in the marketplace (differentiation);

c)     Knowing what is the reason for their success (understanding why).

Even in the new digital economy, these are the characteristics of the sustainable winners.

FINAL THOUGHTS
In that ping pong game, the successful “real” marketer would put a door in that wall and design compelling reasons why the targets would be prefer to come into my backyard and/or let me walk into their backyard. This proactive, strategic approach is superior to shooting ping pong balls and hoping for the best.

strategic planning analogy #359: Does It Fit?

THE STORY
I’m a real sucker for a great bargain. Unfortunately, not all great prices are great deals.

Take clothing, for example. I’ve seen lots of really great clearance prices over the years on clothes. Unfortunately, the clearance assortment usually leaves a lot to be desired. They almost never seem to have my exact size left in stock. Therefore, I’ve been known to buy clothing that doesn’t quite fit me exactly, just because I couldn’t resist the low price. Sometimes, I can make the clothing work. Other times, it just sits in my closet, never worn.

I may have paid a terrifically low price for the item, but it was a lousy deal because it didn’t fit and I never wore it.

THE ANALOGY
It really doesn’t matter how little I paid for the clothes. If they don’t fit, they are worthless to me. It was wasted money.

The same can be said of certain strategic initiatives. They may appear to be excellent opportunities, but if they don’t have a strategic fit with the organization, you will never reap the full benefits of that opportunity. If fact, that great so-called “opportunity” could end up destroying value for your firm because of all the time, money and energy wasted in trying to make it fit, when in fact it does not and can not. You will always be at a competitive disadvantage versus others in that space who have a greater fit with the strategic initiative.

Just as you do not want a closet full of clothes you cannot wear, you do not want a business full of initiatives where you had no strategic advantage/fit. No matter how great the opportunity looks, it has to fit to be a great opportunity for you.

THE PRINCIPLE
The principle here is that great strategies produce great cash flows over their life.

Two Factors Impacting Cash Flows
Two factors impact how much net cash a strategy will produce over its lifetime:

1) The amount of money/time/effort needed create and execute the strategy. These are the efforts which produce the INPUT for your strategy. For example, if your strategy is to become a major player in the smartphone business, you need to expend money/time/effort to design/develop your technology (hardware and software) and find a way to get the smartphone manufactured. Once this infrastructure is developed, you need a process to ensure your technology remains up-to-date and that daily operations run smoothly and efficiently. Without these inputs (a phone, software, and operations to produce them), you cannot be in the smartphone business.

2) The amount of money/time/effort needed to get customers aware of your strategy and make it easy to purchase what you are offering. These are the efforts which produce the OUTPUT for your strategy. Using modern terms, this is the concept of “monetizing” your strategy. For example, to monetize your smartphone, you need things like arrangements with the supply chain (mobile phone carriers and retailers), marketing campaigns, distribution capabilities, and a sales force. And if your business is advertising based, not only do you need a sales/marketing arm to reach end users, but also a sales/marketing arm to reach advertisers. In the case of the iPhone, Apple also needed to develop an infrastructure for developing and selling apps in order to fully monetize the strategy.

To maximize cash flow, one typically needs to keep the costs of inputs low and the net revenues from outputs high. A key way to do this is via strategic fit. Strategic fit is critical in both the inputs and the outputs. Without strategic fit, you will both expend more effort AND get less in return on your inputs as well as your outputs. And in a competitive marketplace, it is difficult to have a winning strategy when others, using strategic fit, can spend less and get more out of the same initiative.

Strategic Fit And Inputs
On the input side, strategic fit occurs when the competencies, skill sets, and infrastructure needed to get a strategic initiative up and running are similar to the competencies, skill sets and infrastructure already possessed by the firm. For example, it is easier to develop the software and hardware needed for a smartphone if you already have the engineering and technical experience to develop things like this in-house. Having brought similar technology to market in the past will put you further down the learning curve. This will make the process more efficient, more timely and more likely to succeed.

Similarly, experience in manufacturing similar products will give you an advantage in delivering the new product you have developed. You will get down the learning curve faster for everyday operations, thereby increasing the efficiencies of your input. If you can build the product using manufacturing infrastructure you already own and experienced employees who are already in place, you not only avoid the added expense of new infrastructure and new training, but you also get to spread your current infrastructure cost over more products. This makes your entire portfolio more profitable.

There was a strong strategic fit for Apple to enter the smartphone business, because it built upon the learnings, expertise and infrastructure developed for the iPod. This allowed Apple to get a quality, innovative product to market quickly and successfully. Conversely, Microsoft has been slow and far less successful in its smartphone strategy due to a poorer fit. Microsoft’s expertise and experience is more suited to developing and producing business productivity software. It knows little about designing gadgetry and is not the most savvy in understanding the consumer market.

Strategic Fit and Outputs
Outputs have a strategic fit when the necessary requirements to distribute, sell, market and monetize the strategy are similar to (or can piggy-back on) the distribution, selling, marketing and monetizing expertise/infrastructure already in place in the firm.

For example, the Apple iPad can take advantage of all of the expertise and infrastructure already in place to distribute, sell and monetize the iPod and the iPhone. Apple already has the needed relationships with the retailers and the phone carriers. They already have the apps infrastructure in place. Apple can use the same sales force and distribution infrastructure. They already know how to successfully market cool new technology to the target audience. This cuts out a lot of time and costs, as well as improving efficiency and effectiveness.

Contrast this to the experience Dell had in adopting its strategy from selling computers to business to selling computers to consumers. At first, you would think this to be a reasonable fit. Further examination says otherwise, particularly as it relates to outputs. Selling to consumers is quite different than selling to business. You need a different type of sales force, with a different type of sales pitch. You need different channels of distribution. You need a different product mix (less desktops, more laptops). You need a different marketing appeal (based on different attributes) which uses different advertising media. There are different after sales service expectations, since consumers don’t have their own IT departments. You need to be “cool.”

By not having expertise in all of these outputs to the consumer market, Dell was at a competitive disadvantage to HP/Compaq. HP/Compaq had a greater strategic fit in the consumer space, so they won the strategy battle in computers. HP/Compaq could move faster and more efficiently in the consumer space, giving them the edge over Dell.

Remember, even if you have a superior product, your strategy can still fail if the competition has a superior way to get their product sold. Just ask anyone who has tried to win against Frito-Lay in salty snacks in the US. It is almost irrelevant how good your snack is. Frito-Lay has such a lock on the distribution channels that you cannot get adequate access to the customer at the point of sale. Even a giant like Anheuser Busch had to abandon their strategic initiative into salty snacks (Eagle Snacks) in failure because of its disadvantage to Frito-Lay in snack distribution. Anheuser Busch could not transfer its beer distribution expertise, so there ended up being little fit on outputs.

Overcoming A Lack of Strategic Fit
Given the importance of strategic fit, companies try to find ways to quickly overcome a lack of strategic fit. There are two ways to do so. First, one can seek fit via acquisitions. The logic is that if you do not have a strong strategic fit within your company, then buy a company that already has that strategic fit. That way, your firm will have the strategic fit once the acquired company is assimilated.

Although this approach can sometimes work, it has two big drawbacks. First, you typically have to pay a large premium to acquire a company with the desirable knowledge and infrastructure needed for entering a hot new opportunity. You end up paying so much for the business that nearly all of the financial benefit goes to the seller, rather than the buyer. Unless this expertise and infrastructure is very scarce, others will also have this fit. And if the others already had the fit in-house, they will have attained it at a far lower cost than your acquisition, putting you at a competitive disadvantage.

Second, the expertise and infrastructure in the acquired company is only useful if it can be integrated into the new strategy. Transfer of expertise is always difficult, but it is more difficult when done via acquisition.

The alternative to acquisition is outsourcing. The idea is that if you do not have the fit, then outsource that work to someone who already has the fit. The problem here is that you can lose any competitive advantage. If everyone can outsource to the same experts, then you cannot gain an edge on anyone else using the same source.

Sony used to be very strong in conventional tube televisions because of its proprietary expertise in manufacturing. However, with the new TV screen technology, all the manufacturers are basically outsourcing the key manufacturing to the same few third-party manufacturers. Sony is sourcing from the same place as everyone else. Now, Best Buy can go direct to the same third-party manufacturers and build a comparable TV, cutting out Sony and keeping more of the profits.

In global automobile manufacturing, a lot of the parts were outsourced to manufacturers in China. Now, the Chinese want to become world players with their own automobile brands. They can rely on the local outsourcers to provide them the same quality parts as the established brands. And because the manufacturer and outsourced firms are both Chinese, they have some added synergies unavailable to global firms.

Therefore, don’t think of acquisitions and outsourcing as magic bullets that automatically achieve strategic fit and strategic advantage. There are significant risks involved. It is better if your strategy can rely on expertise and infrastructure that you (and only you) already have in place.

SUMMARY
To win in a competitive environment, it helps to have a strategic advantage. An excellent source of advantage is strategic fit. The closer the fit between a new strategic initiative and your core expertise and infrastructure, the more likely you will have an advantage. Strategic fit not only applies to what is needed to develop/create a product/service, but also what is needed to monetize that product/service. Therefore, when choosing a strategy, look for options with a strong strategic fit in both areas. If the fit is not there, do not assume that acquisitions and outsourcing can automatically fill the gap and make you a success.

FINAL THOUGHTS
There are a lot of exciting new growth opportunities out there. But if they don’t fit, they won’t be exciting growth opportunities for you. Don’t follow the crowd and chase the latest hot idea. Look for the unique opportunity which fits who you are and is hard for others to copy because it doesn’t fit them. Wear the clothes that fit and you will always look good.

Strategic Planning Analogy #243: Buy My Goods

THE STORY
Imagine, if you will, that you are walking down a city street and encounter a street vendor selling his wares. The Vendor says, “Buy my goods.”

You respond, “Why should I buy it?” The Vendor replies, “So that I can make my sales quota.”

Confused, you ask the Vendor, “But what does your product do?” The Vendor replies, “It provides income to myself and my family when I sell it to people like you.”

A bit baffled by his answers, you ask yet another question, “Is it better than the competition?” The Vendor replies, “It is for me, because I don’t make any income off the competition.”

At this point, you are getting rather angry and perturbed by the vendor’s selfish responses, so you ask one final question, “What’s in it for me?” The Vendor replies, “The satisfaction in knowing that you helped me earn a living.”

At this point, you walk away without making a purchase.

THE ANALOGY
I doubt that a vendor like the one in the story sells many goods. There is nothing in his sales pitch oriented towards customer benefits. All he sees are his own personal benefits. Rather than sounding like a salesman, he sounds like a beggar asking for money.

Any business person would know better than to act like this, right? Not so fast. Although perhaps not as blunt as this salesman, it seems that many businesses these days are so pre-occupied with their internal issues that attention to the customer’s point of view is not getting the attention it deserves.

THE PRICIPLE
The principle here has to do with orientation. A lot of businesses claim to be consumer oriented, but if you look at their actions, it seems like the consumer was forgotten. The current bleak economic situation seems to be making the problem worse, as fear of bankruptcy crowds out thoughts of consumer orientation.

Look at the auto industry. All they seem to be talking about are internal issues—problems with the unions, problems with the dealer networks, problems with credit lenders, problems with regulations, and so on. To the consumer, this is just a lot of “blah, blah, blah.” The message consumers hear seems to be, “Buy from me so that I don’t go bankrupt.” …Sounds a lot like that street vendor.

The customers don’t want to hear about your problems. They just want a good car at a good price that meets their needs. If you cannot do that, then you must be a bad manager, and why should the consumers support that?

The focus on the compensation at financial institutions is sending a similarly poor message. They also sound like our street vendor, with all the talk about how much income and bonuses they make off our transactions, rather than what the customer gets. In fact, it was the ridiculous way in which compensation was given to mortgage firms that caused the housing crisis in the first place. The orientation was on how to get my personal reward for signing up another bad mortgage (internal orientation), rather than providing good financing for the consumer (external).

Circuit City decided that sales help was an excessive cost (an internal focus), so they eliminated their best sales people. Without that consumer-oriented selling force, sales plummeted and now Circuit City is bankrupt, never able to recover.

An internal orientation may look good for a short time. The mortgage firms had a few great years. Circuit City got rid of a lot of costs. However, the long-term ramifications were devastating.

Never take the customer for granted. Try to win over their business every day. And if you screw the customer now, they WILL screw with you later.

Consumer orientation is essential for long-term health. When putting together a consumer-oriented strategy, three factors should be kept in mind.

1) What Problem Am I Solving?
Consumers purchase things in order to solve problems. And the problem they are trying to solve is not how to get you a big fat bonus. Speak in the language (the context) of the customer, and show them how a purchase will solve a pressing problem they are trying to deal with. In these tight economic times, discretionary spending is shrinking dramatically. If you want to sell in this environment, show how your purchase addresses an essential need.

2) Why is my Solution Superior?
Being able to solve a problem is good. Being the best way to solve the problem (at least for some segment of the population) is even better. If you want to win, your strategy must create a point of superiority. I am shocked at how many times I’ve asked a top executive the question “why would a consumer prefer your brand over the competition” and gotten a blank stare in response. This is a question for which every executive should have a rapid and plausible answer.

If you cannot articulate a reason why consumers should prefer you over the competition (other than the silly answer from our street vendor), then don’t expect the consumer to be able to figure it out. Nobody has a monopoly. There are always alternatives. Put into your strategy a believable and defendable reason why you are the best alternative.

3) Why Should we Continue to do Business Together?
Questions 1 & 2 tend to be more rational. However, there is also an emotional element to choice. Are you creating an emotional bond that makes the customer want to keep coming back?

There are lots of ways to sell someone a product or service that will turn them off from ever wanting to deal with you again. Avoid these and build a strategy around emotional bonding.

SUMMARY
At the end of the day, businesses succeed by selling something to someone at a profit. As a result, the consumer is a critical target to orient your strategy around. If all you do is perfect internal procedures or maximize internal rewards, you may cruise along fine for awhile, but eventually the customer will figure out that they are not the focus and they will go somewhere else.

FINAL THOUGHTS
Have you ever noticed how quickly after it starts raining that the streets are filled with vendors selling umbrellas? Now that’s consumer orientation in action, reacting quickly to changing consumer needs.

Analogy #222: Square Pegs

THE STORY
There’s the old story of the square peg and the round hole. The problem is that the four points on the square peg stick out beyond the size of the round hole. As a result, no matter how hard and how long you hammer at that square peg, it will never go into that round hole.

Now the typically prescribed solution is to get rid of the square peg and find a round peg. The round peg easily fits into the round hole and can be hammered into place with just a few hits from the hammer.

Of course, this assumes that you only have three items at your disposal: a hammer, some pegs and a hole. But what if you had a fourth item—a saw.

With a saw, two more options are available. First, you can saw off the pointy sides of the square peg, so that it more closely resembles the shape of the hole. The second option would be to saw the round hole so that it more closely resembles the shape of the square peg.

THE ANALOGY
A good strategy creates a strong fit between what you are offering and what the environment needs. In classic strategic analysis, one starts by examining the environment. Based on what the environment looks like, you then create a strategy which fits that environment. For example, if the world is turning environmentally green, then it might make good sense to create a green strategy.

Relating this back to the story, if the environment looks like a round hole, then you should be creating a strategy which looks like a round peg. But what if your company is shaped more like a square peg?

A classic answer would be to replace your square peg with a round one. This sounds easy, but it is fraught with problems. First, “squareness” is what you are good at. It is your competitive advantage. Throwing it away and picking up a competency that is foreign to you (“roundness”) can be difficult. If you have to build the new competency from scratch, it can take a lot of precious time and there is no guarantee that you will succeed. Your “square” way of thinking may hurt you in your journey.

Second, if you try to get the round peg through acquisition, there can still be problems. As we’ve mentioned many times before, most acquisitions fail to provide a positive return on investment. One typically overpays for something which under-delivers relative to expectations. So you can still fail.

Third, there are others who already have wonderful round pegs. They will fill the round hole quickly before you are ready.

That’s where the saw comes in. Rather than accepting the environment as a given, we have the opportunity to alter the way the future evolves. Just as a master gardener can cause a bush to grow into a particular shape of his/her choosing, we can help shape the future. If you have a square peg, use your saw to create a square hole.

THE PRINCIPLE
The principle here has to do with preparation. Before planting a seed, the ground is prepared for it. The hard ground is broken down, the stones are removed, and the soil is fertilized. If you don’t prepare the soil, the seed won’t grow. Similarly, for your strategy to take root, the environment must be prepared for it in advance. Therefore, consider advance preparation as an integral part of your strategic plan. Improve your strategy’s potential for success by changing the environment.

This idea was made clear to me as I was reading a recent Business Week article about Cisco. Back in 2005, Cisco created the Emerging Markets Group, headed by Paul Mountford. The idea is for Mountford to spend time working with the leaders of emerging nations to help them envision the future. Part of that future includes the digital infrastructure.

Mountford tries to increase the importance of the digital infrastructure in the way these country leaders think about growing their nations and their economies. He tells them how building large digital hubs will help create jobs and make their cities more prosperous. Later, when the time comes for these leaders to put their visions into action, Cisco tries to win the business on those digital hubs.

Now Cisco doesn’t always win all the contracts. This preparation does, however, create more and better contracts to bid on. Better to get a smaller slice of a big, juicy pie than most of a meager crumb.

In other words, rather than waiting for the digital market to evolve on its own, Cisco pro-actively tries to redefine the market and chance the nature and the pace of the growth. It has taken its saw and cut a Cisco-sized hole into the future.

Another example years ago took place in the US soup business. Campbell’s had a near monopoly in soup and could have stayed content with that. However, Campbell’s realized that although it had most of the US soup business, it had only a small share of the US food business. If it could change the nation’s perception of soup, it could change the overall share for soup in the US diet.

As a result, Campbell’s embarked upon the “soup is good food” campaign. They changed the perception of soup to make it appear more wholesome and nutritious. This changed the demand profile for soup. And since Campbell’s sells most of the soup,
It gained most of the share of that increased demand. In other words Campbell’s took a saw to food demand and cut it into a shape that looked more like soup.

The beauty of this approach is that it not only makes the market more inviting for your strategy, it often makes it less inviting for competitors. The more you can shape the future to look like your peg’s particular shape, the harder it is for others to get their peg in the hole. In an extreme example, the battle between Blu-ray and HD DVD was a war to influence a preference for a standard technology. Once Blu-ray won, HD DVD had to disappear.

In addition, the more actively you control how a business ecosystem evolves, the less risk there is to your strategy. There’s a reason why some companies spend so much money lobbying governments. They want to help shape how the industry evolves and how it will be regulated. At times, it can be far more profitable to spend time and money on getting the world prepared for what you want to offer, than to try to offer what the world currently wants.

It takes time to proper influence a marketplace. Mountford often spends years working with government officials to dream and envision before any project comes out of it. It can take years to change one’s perception about soup. But the rewards can be great. That is why a long-term perspective can be so valuable. It gives you time to saw the hole that will reap the greatest rewards.

If all you do is react to what is in front of you, then you will never play to your strengths. Your fate will be determined by the world, which does not have your best interests at heard. However, if you take time to mold the future into what is best for you, good times are ahead.

SUMMARY
Strategy is about trying to create a fit between what the market wants and what you have to offer. In classic marketing, the emphasis is usually on creating internal adjustments in what you offer so that you are more in tune with the environment. However, it can often be more desirable to spend that effort on changing the environment to be more in tune with what you do best. How much time do you spend trying to influence the marketplace versus having the marketplace influence you?

FINAL THOUGHTS
If you don’t have a saw, make friends with someone who does. I worked with a furniture retailer that wanted to define high-end furniture shopping to be what they offered. It did not have enough influence on its own to do this. As a result, the retailer spent a lot of time wooing the local garden club. The garden club was very influential in helping define what cultured high-end people did in that market. By directly capturing the approval of the garden club, the retailer indirectly cut a hole in the high-end furniture space that was just their size.

Analogy #190: Who's Bribing Whom?

THE STORY
Back around 100 years ago, San Francisco was a pretty wild place for doing business. The city was growing rapidly and it was busy putting together its infrastructure—utilities, transportation, etc.

If your company became a part of that infrastructure, you would become extremely wealthy. Therefore, companies were highly motivated to use bribery to convince the San Francisco city aldermen to include their companies in that infrastructure.

Examples of companies who were bribing city officials at the time included PG&E (Pacific Gas & Electric), Bay Cities Water, and United Railroads. United Railroads had a $200,000 pool of money just to be used for bribery (which would be a huge amount in today’s dollars).

One of the biggest scandals was in the telephone utility. Pacific Telephone and Telegraph was currently serving customers in San Francisco. Newcomer Home Telephone Company wanted a piece of the action and allegedly paid $5,000 per official to get approval, along with $125,000 for political boss Abraham Ruef. Of course, Pacific Telephone did not want to lose its monopoly, so it bribed the officials to keep out Home Telephone. They supposedly spent about $50,000 in bribes.

Home Telephone appears to have made the bigger bribes, so on March 5, 1906, the San Francisco city supervisors awarded Home Telephone Company a 50 year franchise to operate in the city.

While the city was using bribery to build up the city, Mother Nature decided to tear down the city. On April 18, 1906, little more than a month after the Home Telephone decision, San Francisco was destroyed by a great earthquake and a fire lasing four days. Shortly after cleaning up from the earthquake, the city cleaned up its government. In March of 1907, the city officials and the businessmen who bribed them were convicted in a court of law. Abraham Ruef was charged on nearly 70 counts of accepting bribes.

THE ANALOGY
Although most businesses today do not resort to the level of bribery found in San Francisco 100 years ago, “bribery” is extremely common today. I’m not referring to the illegal type of bribery, but a legal form of bribery.

In reality, any time one must resort to added incentives to get a customer to make a purchase, you are “bribing” them. In essence, these incentives show that you cannot create sufficient sales at the original value, so you have to “bribe” people with something beyond the original value (such as a price cut), in order to get them to act as you want and buy your product/service.

Recently, I got a call for a time-share resort company who was willing to offer me all sorts of prizes and gifts in order to get me to drive to their resort to hear a sales pitch. All of their bribery in incentives was not enough to get me to go, though. It would take a much higher bribe to get me to overcome my lack of desire to hear their sales pitch.

The worse your original value proposition, the higher the bribe (in added incentives and price cuts) is needed to get customers interested in making a purchase. Ultimately, this cuts into your profits. Although this type of bribery will not get you convicted, it is not a very efficient way to earn profits.

THE PRINCIPLE
The principle here is that offerings with an inherently strong internal value are typically more profitable than offerings where bribery is needed in order to create sufficient value.

Take, for example, the automobile industry. GM and Ford are currently offering huge bribes in terms of incentives and price cuts in order to sell their slow-moving gas guzzlers. By contrast, Toyota can sell all of the Hybrid Prius automobiles they manufacture at full-price (and a premium price at that).

Because the Prius is more in tune with what customers want, Toyota does not need to add any bribes to the offering. The basic offer is strong enough on its own and can command a premium price. On the other hand, the big gas guzzlers at Ford and GM are out of tune with the marketplace. Consequently, they have to load on so many bribes to move the goods that there is very little left to create a profit. As a result, GM is in serious risk of going into default, while Toyota is doing well.

This is not an unusual example. Throughout history, one can find industries where one firm has such a superior perceived value that it can sell at a premium, whereas the competition has to resort to bribes in order to get any attention. Just compare Ipod to its competitors. Or look at Virgin Atlantic versus traditional airlines, where extensive bribery through special promotions and discounts has been a financially disastrous way of life.

Although he does not look at the issue in terms of bribes, J.C. Larreche covers similar territory in his book “The Momentum Effect.” Larreche is a marketing professor at INSEAD. Based on his studies, Larreche discovered that firms which spend a lot of marketing money to “push” goods on consumers (with what I call “bribes”) do not grow as fast, have lower stock prices, and are not nearly as profitable as companies who focus on creating the types of superior values which do not require bribes.

To paraphrase, Larreche’s advice is that rather than rushing to get a product to market, one should stop and first take the time necessary to ensure that the product you have has enough intrinsic value that it will sell without the need for bribery (what he calls achieving “compelling value” or the “power offer”).

Well, that all sounds logical and intuitive—superior offerings sell better (and more profitably) than inferior values. But how do you create these compelling power offers?

There really aren’t any shortcuts. It’s a lot of hard work. I divide the work into three buckets: Left Brain (Rational) Work, Right Brain (Emotional) Work and Whole Brain (creative) Work. The idea for the first two buckets is that you have to choose a particular customer segment and then get inside their brain. You have to understand all of their needs/wants/desires as well as what triggers satisfaction.

Some of these discoveries will be highly rational. Some will be highly emotional. You need to understand both. It is not always the technologically superior product that wins. Instead, it is the product which connects best with the customer on all levels, including emotions and psyche. Apple is very good at making the connections on all of these levels. Their products are technologically great, esthetically great, and create great emotional connections with their customers (see “Reason Vs. Rationale” for more on combining both rational and emotional appeals).

This takes time. It requires getting close to your customers…spending lots of time watching and talking to them…getting below the surface to the true human motivations. This is the data gathering phase.

But it doesn’t stop there. I know lots of companies which brag about being fact-based operations. But facts alone are not enough. It takes intuition and creativity to convert those facts into original superior value propositions. This is the third bucket of work.

Sure, it takes time and money to go through these three steps. But this is a far more productive use of your funds than using them for bribes.

And the beauty of the whole thing is that if you do this properly, the bribes will start flowing in the opposite direction. Instead of you having to bribe others, others will start bribing you.

1) Customers may start bribing you by offering to pay a premium to achieve faster access to your products. Customers can even start to act like free sales reps, singing the praises of your product to their friends.

2) So many people will want to work for your company that they will do whatever it takes to get a job there. They may even be willing to work for free as interns in order to be a part of this great value.

3) Other firms will want to do tie-ins so that they can have their products associated with your products. They will come up with all kinds of legal bribes to try to get permission from you to do this.

With all of these benefits, it should come as no surprise that I recommend that strategic planning efforts focus around trying to come up with a position which is so compelling to your customers that bribery is unnecessary. Your strategic planning process needs to incorporate some form of these three buckets (rational, emotional, and creative).

SUMMARY
It is more profitable to offer unique, compelling values than to push mediocre products. Pushing mediocrity requires an expensive form of bribery. However, if your value is compelling enough, people will start bribing you. Compelling values come from those who do the hard work of first leaning the deep-seated motivations of their customers (rational and emotional) and then finding a superior way to deeply satisfy them.

FINAL THOUGHTS
These days, whenever I look at advertising or an advertising budget, I imagine them as being distasteful bribes. It’s as if your advertising budget is like the $200,000 United Railroads had set up as their bribery budget back in San Francisco 100 years ago. Once you get into this mindset, one naturally starts to focus on ways to create extra internal value, so that you can get out of the distasteful business of supplementing your mediocre value with bribes.

This is not to say that advertising disappears. It just becomes more productive through informing and reinforcing the value, rather than trying to overcome the lack of sufficient value.

Analogy #188: Advice on Advice

THE STORY
Once there was a king who gathered his close advisors around his round table. He asked them this question: Do you think I should invade the neighboring kingdom?

The first advisor was head of the military. He thought to himself that his fighting men hadn’t been in battle for awhile, and he had an updated version of bows and arrows he wanted to try in real battle. Therefore, he answered “Yes.”

The next advisor was in charge of the King’s money. He knew such a battle would be expensive and use up much of the reserves. Later, if the King asks for spending money, he knew that he might get his head chopped off if he had to tell the King he was out of money. Therefore, he advised “No.”

The next advisor knew that if the king won the battle, there would be opportunities for promotion within the larger kingdom. Thinking he would benefit the most from this opportunity, he said “Yes, let’s invade our neighbor.”

The next advisor thought to himself that if the king wins the invasion, he will take all the credit. However, if the king loses the battle, he will blame the advisors. Therefore, seeing no personal upside to the invasion, but seeing plenty of downside, he advised, “No.”

As they continued this around the table, there were about as many people advising “yes” as advising “no.” The king was unsure of what to do. Therefore, he told his advisors “Give me your answer once again, but this time explain why your prior answer is in the best interests of the kingdom.”

The group of advisors started to panic, because none of them had answered based on what they thought was best for the kingdom.

THE ANALOGY
At some point, all leaders need to seek out advice. In the story, the king wanted advice on an invasion. Similar situations can occur in business, such as whether to invade a new sales territory, attack a particular competitor, introduce a new product, etc.

All of the king’s advisors give the king advice. Unfortunately, each advisor gave their advice based solely on what was best for their own personally-biased interests. None of them had considered the bigger picture.

When asking for strategic advice, it is important to frame the question in a manner which forces the advisor to look at the bigger picture. Otherwise, the advice is as worthless as what was given to the king.

THE PRINCIPLE
The principle here is about understanding the difference between strategic advice and implementation advice. If one is not careful, one may think they are asking for strategic advice, but get implementation advice instead. This confusion can prove to be disastrous.

Strategic advice is needed to determine what the optimal strategy should be. This is big-picture thinking. Implementation advice is used to determine the best way to achieve the already agreed upon strategy. This is more about tactical expertise. Both are important, but they require a different thinking process.

Although your advisors are probably not as selfish as the one’s in the story, they probably do have personal biases based on their area of expertise. These specialized areas of expertise are very useful at the implementation stage, but can get in the way if too narrowly applied at the strategic advice stage.

Let’s illustrate this with four types of expertise: legal, financial, marketing and operations.

Legal
Lawyers are trained in finding ways to reduce liability risks. This is an important area of knowledge, but if applied too narrowly at the strategic level, it can create bad advice. I once was working with a private school that took over a new school building. The question came up about what to do about a playground area. The legal and insurance advisors advised them to not have any playground at the school, so the school did not have one.

The legal and insurance advice was based on doing what produced the least liability. It was not based on what would produce the best school. The overall strategy—to run a great private school—was not factored into the advice. I’m sure that if you had asked these same advisors, they would have recommended that all the children stay home and never visit the school, since having children in the school would increase the liability risk significantly.

A wise person once told me that the role of a lawyer is not to tell you what to do, but rather to listen to you tell him or her what strategically correct thing you are doing and then have the lawyer advise on how to do that with the least legal liability. In other words, the specialized legal expertise is applied at the implementation level instead of the strategic level.

Financial
Pure financial discipline tends to look for ways to conserve cash and avoid risky investments. The best way to do that is to stop reinvesting in the old business and not venture into new areas. Over time, this will tend to choke off the future growth of the company. The company will starve to death because the money is horded, rather than fed to the business through investment.

As we saw in the story, the man in charge of the king’s money was reluctant to invade because that did not conserve cash, and it was risky. The financial bias always leans towards “no” when it comes to spending.

All profit streams, if not reinvested in, eventually dry up. If you take no financial risks, you will achieve no long-term financial rewards. You must continue to take risks and feed the business. Again, pure financial advice is great for finding the most prudent financial way to implement a strategy, but it may be poor approach towards finding that strategy. We talked about this in greater detail in a prior blog (see “Oh, my!”)

Marketers
Marketers are biased towards communication and selling. As much as pure financial biases tend to starve a business to death, pure marketing biases tend to spend a business into bankruptcy. Focusing only on the top line (sales) and forgetting the rest of the income statement and balance sheet can create a “growth at all costs” mentality. Rarely can you afford “all costs.” The marketing bias for “Yes” can be as deadly as the financial bias to “No.”

The dotcom bubble should have taught us that a single-minded quest only for market share can lead to poor long-term strategy. Marketing concerns need to be balanced with other priorities. Once again, a pure marketing expert can advise on the best way to market an already chosen strategy, but may give bad advice when choosing which strategy to market.

Operations
Most of the great operations people I have met are like great soldiers. If you tell them to “take that hill,” by golly they will find a way to accomplish that mission. Unfortunately, they are not always the best at deciding which hill to take.

Operations experts often have a bias towards cutting costs, since that is something they feel some control over, and something for which they have been rewarded in the past. However, if you don’t know what is the best strategy, then it is hard to know which costs are least critical to the strategy, and therefore the best things to cut.

A pure operations mindset tends to react with a bias to action—just do more of what we’ve done before, but do it a little more efficiently. However, sometimes the best strategy is to stop and do something differently.

As mentioned earlier, let these experts advise on how to take the hill (the tactics), but not necessarily listen to their advice on which hill to take.

This is not to say that people in these fields are incapable of strategic decision making. Many of them are actually very good at it. But this is only possible when they consciously take off the bias of their “departmental expertise” hat and put on their broad- thinking “corporate” hat. And this becomes easier to do if the leader makes it clear which times they are looking for the corporate hat strategic advice and which times they want the tactical expertise hat.

SUMMARY
The process of finding the best strategy requires a different type of thinking from the process of finding the best tactics. Strategy thinking requires a broad-based multi-disciplined approach. Tactical thinking requires more specific discipline expertise. Be clear about which type of advice you are looking for, or you may not get the advice you need.

FINAL THOUGHTS
Back in 2000, there was a move called Thirteen Days, which looked at the decision making that took place at the White House during the Cuban Missile Crisis of 1962. In the movie, President Kennedy kept asking all his advisors about what he should do. The military advisors were portrayed as being in a rut. Their advice on every question was to kill someone or blow up something.

President Kennedy kept telling them that his primary strategy was not the use of the military for killing or destruction. Yet, in spite of this, the military kept giving the answer formed by their military expertise bias. They were incapable of making the leap to broader strategic thinking. Make sure you surround yourself with people who can make that leap. (For more on this inability to leap outside one’s expertise, see “Henry the Hammer.”)

Analogy #171: Super Job

THE STORY
Superman is a very busy guy. First of all, he has a full-time job working as a reporter under the name of Clark Kent. Second, he has a full-time job solving crimes as a superhero.

Having two full-time jobs like that doesn’t give Superman much time to do all of the other tasks involved in everyday living. And because he isn’t married, he doesn’t have someone to share those everyday duties with. So when does he have time to do all those mundane chores like cooking, cleaning, doing taxes, laundry, and so on?

So if there was anyone who could use help outsourcing some of his tasks, it would be Superman. But there is so little he can outsource.

It would be difficult to outsource any of the tasks which require his super powers. First of all, there aren’t very many people qualified to take on that task. Second, he couldn’t afford to pay for them on a reporter’s salary. Third, all the other people with super powers are already using them to fight crime. They, too, don’t have time to take on extra duties.

Superman would have difficulty outsourcing his job as a reporter as well. That’s his cover identity. In addition, it is a good source to learn about crimes needing a superhero’s help.

So the wise move for Superman would be to outsource those mundane tasks. However, what would life be like if he outsourced the crime fighting and did the mundane tasks himself? While Superman is at home doing laundry, he hires some person from a temp agency to go out and fight the crimes for him. Not exactly the type of drama that makes for good comic books.

THE ANALOGY
Outsourcing can be a very effective part of an overall business strategy. However, as we saw in the story, it is important to make sure you outsource only certain items. In general, it is wise to keep in-house those differentiating points of expertise in which you excel and which give you your strength.

On the flip side, most experts recommend outsourcing the more mundane things which are a less critical element of your success or which do not provide much of a differentiating advantage.

Using this logic, Superman should continue to do the crime fighting, for which his super powers give him a distinct and unique advantage. However, he could easily outsource some of the mundane tasks for which super-human powers do not provide much of an advantage, like doing the laundry

Although this sounds pretty obvious when applied to Superman, it can sometimes be less obvious for businesses. To apply this principle, you first have to understand your business success model well enough to know what your distinct expertise is. In other words, you need to know what your super powers are that give you an edge.

Not all companies think this through. This applies not only to the companies thinking about what to outsource. It applies to the outsourcing specialists who are looking to get some of that outsourcing. For example, what temp agency in its right mind would try to send crime fighting temps to Superman? To be an effective outsourcing specialist, you have to understand what it is that you do so well that people will be willing to outsource tasks to you.

THE PRINCIPLE
The principle here is that if you do not understand which areas are most appropriate for outsourcing, you can get in trouble. In this blog, we will look at an industry that is suffering, in part, because of this principle. The industry will look at is the advertising industry.

The advertising industry is long past its glory days of the 1950s and 1960s. Things have been a bit tough for the industry for awhile. Now it’s true that there are a lot of factors behind this problem. However, one of the problems is that advertising agencies and the companies that use them are not following the proper principles of outsourcing.

Advertising agencies are essentially placing where companies outsource a portion of their marketing. So the question here for the brand companies is how much marketing should be outsourced to the agencies. For the ad agencies, the question is how they can out-market their clients.

Back in the 1950s and 1960s, this was a relatively easy decision. It was the era of manufacturing. The manufacturers were experts in knowing how to manufacture something. That was their super power. Although they were masters in knowing how to make something, they were less skilled at knowing how to sell something.

That is where the ad agencies came in. They were experts in knowing how to sell something. It was the era of mass marketing, and the agencies were the masters of it. They could apply that skill to all sorts of products quite well.

Hence, it was a successful outsourcing arrangement. The manufacturers stuck to their superpowers of making things and outsourced to the marketing experts the art of selling what they made.

Now, let’s fast forward to today. Manufacturing is no longer much of a source of differential advantage. It doesn’t take the same level of super powers to run a factory. Lots of people all over the world can do it. In many cases, they can do it cheaper than the owners of the brands being manufactured. Therefore, manufacturing is now what is being outsourced to places like China and Vietnam.

So if the branded companies are outsourcing the manufacturing, what becomes the new differentiating super power? In many cases, the new differentiating factor becomes the ability to out-market the other brands competing in the same space. In other words, the new super power for branded companies is marketing.

So where does this put the advertising agencies? Their specialty now is not that dis-similar from the required super powers of their clients. For an owner of branded products today, it makes about as much sense to abdicate responsibility for marketing to an outsider as it would be for Superman to outsource his crime fighting.

Since both the agency and the client claim expertise in the same field (marketing), it is no surprise that there are more frequent and more contentious arguments between the two sides. The brand owners don’t value what they get from the agencies as much as before, since they are also experts in the field. The agencies feel like they are getting less respect than they used to and are tired of the higher churn rate in clients switching agencies.

In addition, mass marketing is losing out to niche marketing. Niche marketing tends to vary more depending on the particular niche. Therefore, the generalized marketing expertise at the agency may not be as effective as the specialized marketers at the brand company.

If advertising agencies want to see the “glory years” return, they have to stop competing with their clients and instead offer something which is more appropriate for the clients to outsource.

SUMMARY
A good outsourcing arrangement is when the client keeps in house the key differentiating super powers and outsources to the agency the less critical factors. Right now, the super powers of the ad agencies and their clients are too similar. Until that changes, there will be continued problems with this arrangement.

FINAL THOUGHTS
If manufacturing can be outsourced and marketing is the key for brands, why don’t the ad agencies become owners of branded products? In other words, why don’t they become their own clients?

CMOh, No!

THE STORY
Top secret agent James Bomb was about to go out on a very important mission to try to stop the evil schemes of dastardly Dr. Whoa. Before embarking on his mission, James Bomb went to the agency’s top secret lab to find out what kind of customized sports car he was getting.

“This automobile is state-of-the-art in fighting evil,” gushed with pride the scientist who customized the sports car. “It has everything you need…a machine gun, a rocket launcher, a grenade launcher, and even a torpedo launcher, in case you end up near the water.”

“I looks ingenious,” said James Bomb. “Now show me how they work.”

“Well, therein lies the problem,” sighed the scientist. “Because the sports car is so sleek, there was no room for the bullets, the grenades, the rockets or the torpedoes. I was able to squeeze in all the launchers, but none of the things they launch.”

“What, then, am I supposed to do?” asked Mr. Bomb.

The scientist replied, “In the glove compartment, there is a small pistol which shoots little BB pellets. I’m sorry, it was all I could find at the last moment.”

“Hrrummph,” murmured the disappointed Mr. Bomb. “Well at least I can hope to find some pretty women on the mission.”

THE ANALOGY
Just as in the spy world, there are important missions in the business world. It may not be the dastardly schemes of Dr. Whoa you are fighting, but there are forces out there that can seriously damage the future of your business unless you stop them.

They can give you a fancy mission and they can give you a fancy title (like top secret agent). They can even give you what looks like a powerful platform from which to do battle (like that sports car). However, if you have no bullets or rockets or grenades, you will lose that battle. All you have to look forward to is nabbing a little beauty on the way down.

I think a similar situation is occurring for many of those placed in the Chief Marketing Officer position, known as the CMO. They have been given a fancy mission: to protect the brand long-term and to help it grow over time. They have even been given the fancy title of CMO (they get to be part of the “C”-suite). And as part of the C-suite, they have what appears to be a powerful platform from which to operate.

Unfortunately CMO’s, as a whole, appear to be failing in their task. I think a lot of it is because they do not possess all the tools to get the job done (their version of grenades and bullets). They can make some beautiful ads on the way down, but that’s about it.

THE PRINCIPLE
In last week’s issue of Advertising Age magazine (dated July 9, 2007), one of the cover stories was about a study of the effectiveness of CMOs. The study, by marketing professors Pravin Nath at the LeBow College of Business and Vijay Mahajan of the University of Texas at Austin, looked at 167 companies over a five year period.

What they concluded was the following: CMOs on top management teams don’t have any effect on a company’s financial performance. Let me repeat that: CMOs on top management teams don’t have any effect on a company’s financial performance.

This study will be published in the January 2008 edition of the Journal of Marketing. To quote Advertising Age, “Pay attention CMOs: If you’ve been fighting for more influence with top management, hide this publication—now.”

I guess then it should be no surprise that in a different article which appeared last year in Advertising Age, it said that the average tenure for someone in the CMO position continues to drop and is now less than two years. It appears that boards and CEOs are not waiting for this study. They are already frustrated and have taken to canning the CMO.

What’s going on here? What is the problem? I think the problem has a lot to do with the principle of Expectations and Capabilities. In other words, if people’s expectations exceed your capabilities to meet them, you are bound to fail. It’s like super secret agent James Bomb. He is expected to defeat the evil Dr. Whoa, but his capabilities are limited to a little BB gun.

The typical expectations for a CMO are to:

1) Increase Sales Near-Term
2) Increase the Business Even More Dramatically Long-Term
3) Protect and Strengthen the Brand over Time

In many businesses, the CMO is pretty much the only one in the C-suite with a mandate to focus primarily on the long-term interest of the company. That is quite a tall order. And to top it off, if near-term sales take a dip, all the work on the long-term becomes somewhat for naught, as the pressure builds to forget long term and get the near term fixed. And if the average tenure is less than two years, how is anyone in the CMO position going to have enough time to see the fruit of their labors?

And for all of this responsibility and all of this stress, what are the tools this person has to work with? Typically, it is little more than advertising. In the fight for the future, advertising is like a BB pistol. It has some impact, but it is not enough. The fight for the future needs more.

In a prior blog, I talked about how if someone comes from a narrow professional background, they will see all problems as requiring their narrow background for the solution (see “Henry the Hammer”). In other words, if your background is advertising, you will see nearly every problem as requiring advertising to fix it. Most CMOs tend to come out of a narrow advertising background. Hence, they tend to rely on advertising as their primary tool to get their job done.

However, much of what it takes to protect and grow a firm long-term has little to do with advertising. It is far more complex, involving finance, strategy, asset alignment, personnel choices, and so on. All of the intricacies of positioning, pursuit and productivity which I briefly outlined in a prior blog (see “Same Title, Different Jobs”) come into play. Advertising is only a small part of the puzzle.

My conclusion is that the position of CMO is failing because the design of the position is such that it is almost impossible not to fail. The capabilities do not match up to the expectations.

My solution? Bring back the chief strategist. Strategic planning as a full time job in companies is becoming obsolete. Yet there is nobody more qualified to handle the expectations of preserving and building the future than the strategist. Strategic planners tend to have broader backgrounds than CMOs and are more capable of getting their arms around the big picture. Because they are pulled less in two directions (look out for the future AND get out next week’s ad), they can do a better job of focusing on and articulating the full scope of what must be done to grow the company.

Yes, outside strategic consultants have their value. However, would you ever consider outsourcing any of your other C-suite functions to an outside consultant who only shows up on an infrequent basis? By having someone on premise all of the time worrying just about your future, you get far more than just the advice of someone out for billable hours.

Advertising and marketing are very important, but they are not the whole job. Giving a VP of Marketing the title of CMO doesn’t really change anything but their title (and, I suppose, their compensation). Adding a Chief Strategy Officer to the team, however, can give a much needed fresh broad perspective to winning the future.

SUMMARY
Protecting and growing the future of your firm is an important task. It is important enough to require having someone on senior staff, full-time, just worrying about the future. The CMO is usually not capable of doing this, regardless of expectations, because they are distracted by the “tyranny of the now” on their advertising responsibility as well as not usually having a broad enough background to cover all the aspects related to the task. Instead, the best solution to the problem is to have a senior executive schooled in the art of strategic planning.

FINAL THOUGHTS
It is interesting to note that, while the study mentioned in Advertising Age saw no positive impact from CMOs on financial performance, it also concluded that “CMOs do not have a negative impact on financial performance.” Well, there you have it. Something to call home about and to put on your tombstone: “I did not have a negative impact on financial performance.”

If you have CMO in your title, I would suggest that you always be out there networking, because the nature of your position tends to cause short career stints.

Talk it Up

THE STORY
If someone tells you that they work in marketing, they really haven’t told you much. There are too many different types of careers which fall under the title of marketing.

For example, the person may be in personal selling or in a sales department and call that marketing. Or the person could be in advertising and call that marketing. Perhaps their position is in the field of brand management. That is often called marketing as well.

There are many other distinctly different job activities which often get classified as marketing as well. It can get very confusing. Are these people apprehensive or ashamed about telling people what they do? Does “marketing” make their job sound more glamorous?

When someone tells me they are a CMO, I’m sure to them it means Chief Marketing Officer. To me, it means Chief Mystery Officer—at least until I get to know them.

THE ANALOGY
There’s something about marketing that draws people to it, like bugs to a light. Not only do many people like to describe their job in terms of marketing, an even greater number like to talk about marketing and advertising, even if their job has nothing to do with it.

I don’t think I’ve ever worked for a company where there wasn’t a majority of executives who thought of themselves as “a bit of an expert” in advertising. And even if they didn’t think of themselves as experts, they always seemed to have an opinion about the quality of the company’s advertising and were willing to tell you all about it (even if you didn’t want to hear it).

Developing and implementing strategy tends to require a lot of talking across multiple areas of the business. Unfortunately, it is common these days for people to not be nearly as eager to talk about strategy as they are to talk about marketing and advertising. So if talking is a key part of strategic planning, and people would much rather talk about marketing/advertising than talk about strategy, then perhaps one should take advantage of the willingness of people to talk marketing and use that as a hook to begin a conversation which you can eventually steer to strategic issues.

THE PRINCIPLE
This is the second in an occasional series of blogs on “Stealth Strategy” (For the first blog, see "Minutes Last Forever"). The principle here is that many firms no longer show an interest in doing a formalized strategic planning process. They would rather spend time talking about and doing other things. If you overtly try to direct their attention to strategic issues, their radars will pick up on that and they will try to shut you down. Therefore, if you want to get a strategic dialogue going, you have to come in under the radar and get the discussion going in a stealthy manner. Advertising can be a tool to get in under the radar.

Since people love to talk about marketing and advertising, one can use that interest to strike up a conversation. Then, though a series of questions, one can turn a critique of advertising into an effective critique of the company’s strategy (without ever mentioning the word “strategy”). Although these discussions might not directly lead to a formalized change in strategy, they may lead to a change in the advertising message.

If you do your job properly, you may get the advertising message changed to talk about your product or company in a way that is more strategically sound. Then, once you’ve announced to the world this strategically sound message through advertising, it pretty much commits the company to delivering on that message. Therefore the company is compelled to operate the company around the strategic promise in the advertising. The end result is that people are acting on delivering an improved strategy, even though no formalized strategic planning process was used.

This is not that far-fetched. Most of marketing involves some form of communication with the customer in order to influence behavior which results in sales. Much of strategy involves developing a position for your firm/product which is desirable, unique and differentiating, followed by:

1) Building an infrastructure to deliver that position; and

2) Getting customers to believe that you own that position.

The goals of marketing and strategy are not that dissimilar. The most effective marketing message in the long run is a message based on a solid positioning in the marketplace. Good positioning is the best way to create profitable sales. Without a strong position, marketing must resort to deep price concessions or extra “goodies” to induce sales, which significantly reduces profitability. With a strong position, one is better able to create demand for your brand without these costly concessions.

Therefore, if you want to improve marketing, one needs to develop strong market positioning. Strong positions come from doing the work of strategy, even if you call it marketing. And then, once the position is developed under the guise of marketing, it is only a short leap to turn the discussion towards building the proper internal business capacities in order to deliver on the promise of the advertising.

Let’s take an example of how this could work. Let’s assume that you are walking down the hallway and you cross paths with a top level executive. The executive says to you, “Say, did you see our new ad on TV last night? I thought it stunk. What did you think?”

You could respond in many ways, depending upon your strategic agenda. For example, if you are trying to get a better strategic focus around who your customer should be, you could respond by saying, “The problem I had with the ad was that I couldn’t figure out who we were targeting that ad towards. Who do you think is the right type of customer to be targeting?”

If your goal is to create a unique position for the company, your response could be, “The problem I had with the ad was that you could have taken our name off of the ad and put any one of our competitor’s names into the ad and it still would have made sense. The ad did not give a compelling reason to choose us over any of those competitors. I think our ad needs to explain the ways in which we are uniquely superior. In what ways do you think we are uniquely superior, so that we can come up with a stronger advertising message?”

If your goal is to get the company to think about how the external trends are changing the landscape, requiring a need for a new strategy, you could respond something like this, “What was most disturbing to me was when I compared our ad to what others are doing. Their ads seem to be more in tune with where the trends are heading. Did you see the ad from company “X”? We normally don’t think of them as a competitor, but their ad is clearly changing the way people look at all kinds of options, including what we offer. If their ad gets people to look at the world in this new way, we could be in serious trouble. Don’t you think we ought to reassess our ad message in light of this?”

By now, you should be getting the idea. If you couch your strategic comments in an advertising context, they can appear less intimidating, and people may be more willing to talk about them. The talking can lead to changes in advertising which can be used to get complementary changes in the rest of the organization. For example, if you succeed in getting the advertising message to express the proper strategy, the next time someone asks you about your thoughts on the advertising, you can say,

“I love the message in the ad, but I’m afraid that our operations are not quite living up to the promise made in the ad. If we could just tweak a few operational issues, I believe the advertising message would be even more effective.”

If advertising is the subject that gets the talking going, then take your strategic ideas and “talk them up” in the context of advertising.

SUMMARY
Because some people have had bad experiences with formalized strategic planning in the past, there can be some barriers to getting companies to discuss strategy. Since strategy is closely related to marketing, and since it is common for executives to be more willing to talk about marketing than strategy, marketing can be used as a tool to get strategy implemented. Just talk up strategy in the context of advertising (and don’t mention the “S” word).

FINAL THOUGHTS
Sometimes, the first person one should be talking to is the CMO. If you can get the marketing team as your ally in this process, you can use formal marketing meetings as a platform for holding formal stealth strategy meetings.