Strategic Planning Analogy #567: Water Between the Marbles

THE STORY

When I was in Junior High School, we did an interesting science experiment. The teacher took a beaker and filled it full of marbles. He asked the class if we thought the beaker was full. We all said "Yes."

Then the teacher poured water into the beaker over top the marbles. He poured quite a bit of water into the beaker before the water reached the top. Then he poured the water surrounding the marbles out into another beaker. The second beaker was about half full of water.

So the teacher then pointed to that original beaker with marbles up to the top and re-asked his first question: “Is this beaker full?”

This time we answered “No.”

THE ANALOGY
Things can appear full even when they are not. It doesn’t matter what the container is or what you put into it. You can fill the container to the top and it still will not be full.

The problem is that little spaces form between the objects you put in the container. Each individual space may appear tiny, but when you add them up, all those spaces take up a lot of room. That’s why so much water could be put into a beaker that was supposedly “full” of marbles.

The same is true in business. A market may appear to be full, with large competitors appearing to take up all the available space. It looks like there is no room for anyone else.

However, if you stop looking at all the marbles (the big competitors) and start looking at the spaces, you will see that there is still a lot of room in that market. If you think strategically, you may still find a successful way to fill those open spaces.

  

THE PRINCIPLE
The principle here is that even in highly mature markets there always seems to be room for niche products or niche companies. The reason is because large companies tend to be best at doing the large things (serving large customer segments, large product runs, large marketing programs, etc.). They are not well designed to go after those small spaces.

These large, mass companies are like those marbles. They take up all the space that marbles are capable of taking, but they leave gaps they cannot fill.

Because water can go into smaller spaces, they can fill in the places the marbles cannot get to. Smaller niche markets and niche companies are like that water, able to penetrate spaces difficult for the large companies to effectively reach.

McKinsey Article

I saw an example of this principle in an article put out this month by McKinsey and Co. The article was looking at the consumer packaged goods (CPG) industry. This is a very mature business. Consolidation has occurred and there are only a few large companies left trying to fill the CPG space.

To get an idea of how full the CPG space is, the article states that growth for these large CPG companies over the past four years averaged only about 0.3% per year. It looks like there is no more room for these large CPG companies to stuff any more marbles into the CPG market. They’ve already tapped pretty much all they can get, right?

So does that mean every other company should walk away? Not necessarily. In the story, we saw that even when the marbles “filled” the beaker to the top, there was still room for about a half a beaker full of water in that beaker. Similarly, the McKinsey article says that even though the big CPG companies have “filled” the CPG market, about half the CPG space is filled by niches not held by the big companies.

And here’s the more exciting news. While the big companies were averaging only 0.3% growth, the article says that midsize companies were growing at 3.8% and small CPG companies were growing at an astonishing 10.2%!  So even in so-called slow growing mature markets, you can grow and prosper if you know how to get into those small spaces.

So how do you take advantage of those small spaces? Well, simply put, you have to become less like a marble and more like water. Marbles are large and rigid. Water is fluid and flexible, able to seep into small places.

There are three ways to become more like water. They are discussed below:

1) Make your Company Successful At Being Small

Large companies tend to find it hard to do small things because their very bigness tends to get in the way. They have large overhead, lots of bureaucracy, rigid rules, and an infrastructure built to exploit big opportunities.

Smaller, more nimble companies, however, are less burdened with all this rigid structure and high cost. They can be built in such a way that they can make money on small opportunities outside the reach of the big ones.

Don’t try to gain success by imitating the big guys. Gain success by structuring your business model to do things they cannot do. Stop trying to be a rigid marble. Stay fluid and flexible.

2) Target Small Opportunities

Don’t look for the big opportunities. Big opportunities attract big competitors. The big competitors will crush you there. Instead, look for the small niches which fall below the big company’s radar.

Small niches can still be pretty profitable if you know what you’re doing and are designed to optimize in a niche environment. So don’t look at where the big marbles already exist. Look at the spaces between them. Find a small space rightly sized for you, but too small for the big guys.

3) Make Big Companies Better at Doing Small Things

If you are already a big company, the challenge is in finding a way to become better at doing small things. Technology can be helpful here. You can use technology to:

• ·       Make small production runs more feasible;
• ·       Make it easier to find and target smaller consumer segments;

You may also need to segregate your approaches to business depending on whether it is large or a niche. For example, large opportunities may get one level of service and support while niche opportunities get a different level of service and support. In other words, you may have both “marble” divisions and “water” divisions, which are run differently.

SUMMARY
Fullness is a relative term. When you try to fill a space with large objects, there will still be lots of spaces where the large objects cannot penetrate. In the business world, you can have a successful strategy by targeting those niche spaces between the large firms. The trick is to design your business to succeed at niches (small, fluid, nimble) and to choose the niches which fall below the radar of the large companies. Large companies can also do a better job of going after some of these niches if they segregate these niche opportunities within their company and treat them differently.

FINAL THOUGHTS
There is no such thing a single right strategy which makes all the other strategies wrong. The right strategy for a marble is different than the right strategy for water. Both can work. The secret is finding the strategy where you have an advantage. The question for you should not be “What is the right strategy?” but rather “What is the right strategy for me?”

Strategic Planning Analogy #541: Necessary for Whom?

THE STORY
I was in a business meeting recently where we somehow got on the topic of Southwest Airlines. I was explaining how Southwest had been so much more profitable than most other airlines for decades because of its unique business model, which in part included the avoidance of the hub and spoke model used by most of its competition.

Someone in the meeting objected to the praise of Southwest. He countered that the traveling world needs a hub and spoke business model. Since the hub and spoke model is necessary, it is not proper to praise a company which avoids this necessity.

In my mind, my reaction was “Necessary for whom?” Is it necessary for some business travelers? Yes. Is it necessary for Southwest? Absolutely not.

THE ANALOGY
Two of the key aspects of strategy are determining WHERE to compete and HOW to compete. Answer these concerns properly and success is more likely. Answer them wrong and success is nearly impossible.

One method businesses use to determine where and how to compete is by looking for necessity of demand. After all, if something is viewed as a necessity and demanded by a large sector of society, it must be a good place to be, right?

Just look at the illegal drug business. The junkies feel that getting their next fix of the drug is the most necessary thing they must do. And the suppliers of those illegal drugs make a lot of money off that perceived necessity.

The problem is that there is not a strong correlation between necessity of demand and profitability. It worked in the illegal drug business. It didn’t work so well for those satisfying the necessity of hub and spoke in the airline business.

Southwest chose its “where to compete” principally in the lower price, non-business portion of the airlines industry. Southwest chose its “how to compete” by doing a number of things differently, including the elimination of the hub and spoke model. These were very profitable choices for Southwest.

In fact, it was a more profitable choice than going after the demands of the business traveler, even though the demand for business travel is higher (and presumably more necessary) than for non-business travel.

Just because something out there in the marketplace is a necessity does not mean that you have an obligation to provide it. Like Southwest, it may be better to avoid it.

THE PRINCIPLE
The Southwest example illustrates a common situation in business. This is the principle that the highest profits are often found by avoiding the highest demand. This may seem counterintuitive at first, but there is logic behind this point of view.

Why High Demand Items Are Often Not Very Profitable to Supply

There are many factors which tend to lower the profitability of serving many high-demand segments. The first is that high demand segments tend to attract a lot of competition. Businesses like to flock to where the big sales potential lies. But when too many companies are fighting for those sales, the profitability of those sales plummet. Price wars suck the desirability out of those sales. You may be able to get a much higher return going after smaller, less competitive markets.

A second problem is that high demand necessities tend to attract a lot of government regulation. Food and health care are high demand necessities. Many governments get involved in significant regulation how those necessities are supplied. This often takes a lot of the profitability out of the system.

Just look at the results when communism gets involved in the necessity of supplying food. They impose all sorts of regulations and price controls. They often insert themselves into owing a lot of the food businesses. The net result is that businesses pull away and consumers are stuck with shortages and long lines.

A third problem is that high demand needs pull in the masses. And the masses do not always have a lot of discretionary income. They cannot afford to pay as much for their demands as other, smaller segments. You cannot charge more than they are able or willing to pay, no matter how much it costs you to serve them. Just look at the automobile industry. Those selling cars to the masses tend not to do as well as those selling cars in luxury or high performance segments. Customers in the luxury and high performance segments are willing and able to pay a lot more for their cars, making them more profitable, even if the segments are smaller than the mass segment. That's the reason why Tesla decided to start by targeting the high performance end of the electric car business.

When you try to appeal to the masses, you often end up with “average” offerings. Unfortunately, there will always be competitors who specialize in targeting the smaller niches. The specialists will offer items that are cheaper, or of higher quality, or of higher prestige, or of higher functionality. These more profitable niches will eat away at your mass market, leaving you with some of the less profitable middle ground. This is what Southwest did when it specialized in the profitable low price, non-business segment (and firms like Virgin Airlines and Net Jets at the high end), leaving the other airlines fighting over the unprofitable middle.

Fourth, high demand areas are often in fairly mature businesses. Mature and aging businesses, by their very nature, tend not to be as profitable as businesses in their younger, faster growing stage. Look at Procter & Gamble. They completely divested out of the food business (an extremely high demand business). Why? Because it did not have high prospects for future growth and profitability. It was too mature.

Instead, P&G has been pouring money into beauty care. You can say that food is a necessity and beauty care is a more discretionary luxury (less necessary). Yet, beauty care is where P&G have better prospects for growth and profitability. P&G is doing a great job of choosing where and how to compete, even if it means walking away from a lot of high demand products. 

Choose Wisely

As a business, you have choices. Strategy is about helping you make better choices. Those choices need to consider more than just the size or necessity of demand. They also need to look at the profitability within that demand. Smaller segments can often be better strategic choices.

In most businesses, there is no law that says that you have to target unprofitable segments. Even if you think that a particular function is necessary to make the world work, that doesn’t mean you have to serve it. It’s okay to walk away from some businesses and leave it to someone else.

Others may have business models better suited to those situations. Keep in mind that when P&G has been divesting all of its non-desired businesses, it has been finding buyers for those businesses. Many of those buyers are companies who do things differently from P&G and are better suited for wringing value out of mature, slow growth businesses.

Is There a Moral Obligation?

There may indeed be some moral issues here. Is it right to only serve the profitable rich and ignore the masses? Can we ignore the poor because they are unprofitable? Businesses work within a society and they have some obligations to that society. But they also have obligations to shareholders, debt holders and employees.

If businesses choose to or are forced to take on bad business models, this is bad for everyone. If they cannot make an adequate return, employees lose their jobs, and equity/debt holders don’t get a return. More importantly, the companies don’t make any profits which can be used for charity or for taxes to governments to help solve these issues.

Strong, healthy businesses are in a better position to provide jobs and provide funding for social issues. Then the question turns from business models to social accountability.

SUMMARY
Strategy is ultimately about making choices, such as where and how to compete. These few strategic choices can have a bigger impact on business success than almost any other thing you do. Choosing what not to do is usually more important than choosing what you do. And some of the things you should not be doing are perhaps serving large “high necessity” demands. It’s okay to walk away from them and go in a direction better suited to who you are.

FINAL THOUGHTS
When you look at large, mass oriented businesses, there are usually only a small handful of winners (often only one or two). The rest struggle to stay alive. If you are not the winner in that mass space, it is usually better to walk away and switch to leading in a smaller segment. And that’s okay.

Strategic Planning Analogy #471: Two Kinds of Niches

 

THE STORY
Every so often, I hear of a story about someone discovering a famous painting in amongst a pile of junk.  I remember an elderly Milwaukee couple back in 1991 finding an old Van Gogh which they sold for $1.43 million.  In 2009, a famous painting by famous Paris artist Ary Scheffer from 1851 was found in a janitor’s closet in a rural Minnesota church.  It was appraised at $53,000 and is now prominently displayed at a Minneapolis art museum. 

And just recently, in 2012, an estate was going up for sale in Switzerland.  As people were getting the estate ready for sale, they discovered a painting by Goya which nobody knew was there, called “Lot and his Daughters,” which was painted around 1770.  It was estimated to be worth about $700,000. 

There have been enough stories about people finding expensive art treasures amongst junk that there are many who spend their time going to garage sales and estate sales to buy lots of old art work in hopes of finding a hidden treasure somewhere in the pile.

That seems like a lot of work for low odds of success.

 

THE ANALOGY
Just because a work of art is old does not mean that it is valuable.  There are tons of old pieces of art that are fairly worthless.  You can collect warehouses full of old art and end up with nothing but a big pile of relatively worthless junk. What makes a work of art valuable is when it is both old AND is associated with an artist who was a leader in a particular style of art (like Van Gogh or Goya).

A similar situation exists in the business world.  There are business gurus who are advocating the advantage of the small niche.  They say that it is very difficult to make money appealing to the broad, average middle market and that the real money is made working in smaller, specialized niches.  An example would be underperforming large department stores versus overperforming small specialty niche stores.

So then, word gets out that “small” is good.  But as it turns out, that advice is about as useful as telling an art collector that “old” is good.  Yes, old is good in art, but only if attached to an artist who was a leader in an important style of art.  Similarly, having a small share in a business strategy is only a good idea if you are also a leader in meaningful type of specialty.  It isn’t being small that’s important as much as it is in being a leader in some important way.  It is more important to become the “Van Gogh” or the “Goya” of your niche than to just aim to be small. 

THE PRINCIPLE
The principle here is that there is a vast difference between owning a niche product and owning a niche category.  A niche product is merely a product or service with a small market share.  For example, you may be the 10^th largest brand of toothpaste.  By contrast, a niche category is a solution desired by a minority of the population.  For example, a niche category would be those looking for toothpaste for sensitive teeth.

The key difference here is that a niche product is merely small in volume.  There are lots of reasons why a company can have a small volume, and many of those reasons are not good.  For example, it may just be an inferior product when compared to the higher selling brands. As is often the case, small volumes occur because consumers do not care to purchase the product.   In fact, most times, small volume does not lead to success any more than being old leads to artistic treasure.

Niche categories are different.  They may be small, but they have a purpose.  They have a strong appeal to a particular segment which will prefer it over a larger segment because it better suits their needs. Just as an old painting only becomes valuable when associated with category leadership (like Van Gogh in impressionism), a small volume toothpaste only becomes valuable if it is associated with leadership in a category niche (like best for sensitive teeth).  So the goal is not to have a strategy around being small, but around owning a category—even if the category is relatively small.

The Laws of Business Work Against The Merely Small

There are many business laws which work against the small volume niche product:

1. The Law of Scale:  There are typically economies of scale in being large (production, labor, distribution, etc.) which make it more difficult for the small operator to compete.  They are at a natural cost disadvantage.
2. The Law of Consolidation:  All markets eventually consolidate into a small handful of brands.  Sometimes only 2 or 3 meaningful brands remain. The third brand is often unprofitable and unless a smaller brand owns a niche, it is almost certainly not providing an adequate return on investment.  As a result, the lesser brands tend to disappear.
3. The Law of Networking:  In the social networked economy, the importance of having the most connections is critical.  As a result, sometimes there can only be one major player (think Facebook).
4. The Law of Bribery:  If there is no natural reason for people to prefer your brand, then they will choose other brands.  The only way to counter that trend is to “bribe” people to purchase from you via heavy price promotions or gimmicks.  This is typically not sustainable over the long term. 
5. The Law of Losers:  If you get the image of being a “loser” brand, then customers will not want to associate with your product (since it will make them look like a loser for using it).  And it is easy for a small niche product to get a loser image since—if it were a winner—then you would expect it to have a high market share.

The Best Way To Fight These Laws is Via Category Ownership

If you are the leader in a category niche, you are better able to withstand those forces mentioned above, even if you are relatively small.  For example, you may still be at a cost advantage to the big brands, but you will have the cost advantage over the lesser brands within the category where you are a leader.  In addition, because you are better suited to the category because of your specialization, the category segment may be willing to pay a meaningful premium for your product (it meets their needs better than the big mass brands).

You can avoid the excessive bribery because of the natural demand which comes from being the most desired solution within that category.  In a world of consolidation, the category leader is typically immune (if the category is large enough).  And finally, if you own a category, you are not a “loser” to those who desire that category.

The Best Strategic Approach

Therefore, the first step in a good strategy is often to seek a place category leadership.  As I said in an earlier blog, there are eight questions to ask yourself when choosing where to seek category leadership:

      1)      Is the position Desirable?

      2)      Is the position Sizeable?
      3)      Is the position Ownable?
      4)      Is the position Preferable? 
      5)      Is the position Achievable?
      6)      Is the position Believable?
      7)      Is the position Understandable?
      8)      Is the position Profitable?

By answering these questions, you will find or create a category where you can win big.

The next step is to do what it takes to create, keep and strengthen that leadership position for yourself.  You need to convert the dream to a reality with an action plan.

Third, once you own the category, you can focus on growing the category.  Since you will gain the majority of the benefits of the category growth, it is worth investing in it, even if others also benefit a little bit. Think about how Campbell’s became a leader in the US soup category and shifted its emphasis to getting people to consume more soup. 

Or think about how Chaboni first worked to own the Greek yogurt niche category niche in the US.  Then it moved to make Greek yogurt an ever larger category in the US.   By contrast, Fage—the yogurt market leader in Greece—was content to be merely be a niche product in the US.  As a result, Fage ended up not only being a niche product in the overall US yogurt market but a distant niche product within the US Greek yogurt category (even though it was introduced to the US well before Chaboni).  By settling for merely being small, Fage ended up doing poorly in the US.  Chaboni, by owning a small category and then making the category big, did very well. 

Finally, once you become the category leader, you can devote more time to leveraging that leadership position.  In the digital world, this is often referred to as finding a way to “monetize” all those visitors.  For example, first Facebook tried to own its category.  Then they grew the category from college students to everyone.  Now they are focused on monetizing the category.  This has made it nearly impossible for anyone else to succeed in that space.  That is, except for firms like Linkedin, which decided to own a niche category—business and professional social networking—and is doing well because of that category ownership.

 

SUMMARY
Although there are a lot of successful companies or brands which are small, that doesn’t mean that merely being small guarantees success.  In fact, there are many laws of business which work against the smaller players.  True success comes from being a category leader, even if the category is relatively small.  That’s because category leadership creates advantages which can be leveraged into growing the category or increasing the your share of the money made within the category.

 

FINAL THOUGHTS
On the PBS TV show Antiques Roadshow, people bring in old items from their homes to be appraised for their value as an antique.  The show likes to air all the examples where the appraisals are surprisingly high.  They tend not to emphasize all the instances where the appraisers tell the people what they own has little value.  This bias can give the false impression that almost anything really old is really valuable.  Similarly, the business press likes to tell the stories of all the little businesses which beat the odds and are successful.  This bias can give the false impression of the odds of success for small companies.  Don’t fall for the deception.  Only put small into your strategic goals if it is also accompanied by category ownership. 

Strategic Planning Analogy #456: Who Do They Love?

THE STORY
When I was in college, I was a DJ on the college radio station.  Every day the radio station used to get a pile full of new albums from the record labels.  I was shocked by the huge amount of music being issued.  And pretty much all of these albums were selling at least in some quantity to the public.

I understood why most of the top selling albums sold.  It was pretty good music.  What baffled me were the less popular albums.  Who was buying them?

At first, I thought there just must be a lot of people out there with unusual tastes, who loved a different kind of music than the mainstream.  And to a small degree, this was true.

But when I did my investigation in the sales of these lesser albums, I found out that most were not sold to people who loved these bands more than normal people.  No, most of the people buying their records agreed with the majority that they were lesser albums.

The difference was that these people really, really loved music and loved buying music.  They happened to buy more music than normal people.  As a result, these people first bought all the popular music and still wanted to buy more, so they also bought the lesser albums (because that is what’s left to buy after you already have the popular ones).

So, for the most part, people weren’t buying music from these lesser bands because they loved these bands, but because they loved having as much music as possible.

I don’t think that information would have encouraged those lesser bands.  It implied that even though they sold a bit of music, they really didn’t have many avid fans.  They were just getting money from people who would spend it rather indiscriminately on almost ANY band.  So they didn’t get the money out of love, but out of convenience.   

THE ANALOGY
In the business world, a successful business needs a stream of income.  That’s why we get so happy when sales go up.

But let’s not fall into the trap of thinking that every purchase of our goods and services is an indication of their undying love for us.  As we saw in the story, lesser bands weren’t receiving a lot of love with their sales.  Their customers still loved the popular bands more.  The lesser bands were just getting some of the leftover money from heavy spenders after they had already purchased music from the bands they loved more.

In fact, people often make purchases from companies they hate.  For example, when AT&T was the only service connected to the iPhone, people who loved the iPhone purchased their mobile services from AT&T, even though many of them hated the AT&T coverage and service levels.

So, when considering the sales component of your strategic plan, don’t automatically assume a direct correlation between sales and love.  Otherwise, you may create the wrong strategy.

THE PRINCIPLE
The principle here is that just because your business has an income does not mean that people love you.  And depending upon the type of love relationship you have with your customers, you may need a different strategy.

Let’s face it.  We can’t all be the best or the most popular.  We can’t all even be above average.  And if your offering is not the best, then “best at” strategies won’t work.  For example, if you are not the lowest cost operator, it doesn’t make sense to pursue a lowest price strategy.  It won’t work for you.  Strategies designed to exploit strengths don’t work very well if you do not have a strength to exploit.

So what should you do if you find yourself in such a situation?  Listed below are four tactics to consider doing and two tactics to not do.

“To Do” Option #1: Connect to Another Love

If people don’t love you, then find ways to get yourself associated with something people really love.  As we saw earlier, in order to get sales AT&T connected itself with the iPhone, something people really loved.  AT&T hid themselves in the package.  If you wanted the much-loved iPhone, you had to take the “unloved” AT&T. 

The more and the tighter you can bundle yourself into packages with other items people love, the better you are.  Kmart is not one of the most loved retail brands, so it tries to tie itself to brands that are more loved.  It has done so over the years by creating exclusive selling arrangements with names more loved than its own, like Sesame Street, Martha Stewart, Jaclyn Smith, Selena Gomez, and Sofia Vergara.

“To Do” Option #2: Become Most Convenient

Sometimes being “good enough” is good enough.  That occurs when you exceed the minimum threshold of acceptance and are more convenient than superior offerings.  In other words, it you create barriers making it more difficult to get the superior product, people may say the extra effort isn’t worth it and then settle for your slightly inferior offering. 

For example, you can pursue a distribution strategy which makes it easier for customers to stumble upon your product than the competition.  You can try to tie up shelf space in the most popular stores to block ease of access to competitors.   You can buy up all the key words on search engines to make it more convenient for people to click to your site.

If you are not loved enough to get people to come closer to you, then go out to become closer to them.  For example, those unloved bands can sell more music and more tickets if they get closer than other bands to where the music lovers are.  They can hang out at the music festivals where you can find the people who have more desire for and are more in the mood to spend on music.  Seeking out these people will work better than waiting for them to seek you. You imposed more convenience through your efforts to get closer.

In both option #1 and #2, the idea is to make it harder for a customer to substitute a competitor’s product for your own.  Product bundling, exclusivities, and other such tactics can often serve both purposes—get you closer to where customers want to be and make it harder for competitors to do the same.  

“To Do” Option #3:  Find a Niche

Sometimes, if you narrow your focus, you can find a way to become the best alternative to a niche audience.  You won’t be the best option for everyone, but if the niche is large enough, you will be the best with enough people to make a good profit.  You can then use a “best at” strategy within that targeted niche.

To do so, you may need to change your business model a bit.  You may need to move away from more conventional approaches and make bigger trade-offs.  This could even make you less desirable to the masses.  But if it makes you more loved by a niche, then it can be worth it. 

Many retailers found they could succeed against Wal-Mart by going after the niches Wal-Mart left behind in areas such as superior quality, superior service, a higher level of fashion taste, etc.  Becoming best for a niche ignored by Wal-Mart was a better strategy than being an inferior Wal-Mart imitator. 

“To Do” Option #4: Exit the Business

One of the first questions I like to ask in a strategy session is this:  Why should anyone naturally prefer your offering over the competition?  If you cannot think of a meaningful reason for people to naturally prefer you, I have a second question:  Why, then, should you stay in business?   If you are unloved now, and the first three options aren’t viable, the best option may be to exit the business.

“Not To Do” Option #1: Get Overconfident

If you think that your sales are there mainly because people love you, then you may try to exploit that love by raising prices, cutting features, etc.  But if that love is not really there, then attempts to exploit it could backfire.  For example, if one of those lesser bands charges too much for their music, the money will go to a different lesser band.

Most of the time, customers have alternatives.  Even if you think you have a monopoly, there can still be alternatives.  For example, even if you own 100% of the rail business, people can use other forms of transportation, or maybe telecommute via Skype.  And if you haven’t been using the options mentioned above to curtail alternatives, these alternatives may be even more abundant with easier switching than you think.

Therefore, think it over carefully before trying to exploit the love you think you have. 

“Not To Do” Option #2: Assume Unwavering Loyalty

The marketplace continues to evolve; circumstances change over time.  If you are not well loved, those changes could work against you to cause massive customer defections from your offering.

For example, you may be the most convenient option now, but that does not mean it will always stay that way.  Blockbuster video rental stores used to be the most convenient way to get video.  But then Redbox put video vending machines in far more convenient locations and Netflix let you download video from the convenience of your sofa.  Suddenly, Blockbuster went from most convenient to less convenient.  And since Blockbuster did not have much of any superiority anywhere else, people switched away from Blockbuster in droves.

Similarly, AT&T lost sales opportunities when the iPhone became available on other systems.  Kmart lost business when Martha Stewart took her brand away from Kmart and put it in Macy’s. 

Since preferences are more fickle with unloved brands, one needs to be more vigilant in holding on to whatever small advantage one can maintain.  If convenience is your advantage, keep on top of any developments that can become even more convenient.  If tie-ups with others is your advantage, make sure that you are always tied up with the best deal of the moment.

Never get comfortable in thinking the loyalty is locked in forever.

SUMMARY

If your offering is not the best in the industry, then don’t try to win with a “best at” strategy.  Instead, look for ways to bundle with others more popular, become more convenient or create a niche.  

FINAL THOUGHTS
It’s human nature to think well of our own offerings.  We may love the products and services we sell.  But our opinion is not the one that matters.  In many cases, the consumers may hold a much lower opinion of them than we do.  So pay attention to their opinion and don’t get caught up in your own sense of loyalty.

Strategic Planning Analogy #242: Normally Speaking

THE STORY

Here in the United States, I am treated like an odd alien from another planet because I prefer to drink my soda at room temperature.  However, when I am in Europe, that behavior is considered to be normal.  I like mayonnaise on French fries as well, which makes me appear odd in the US, but normal in parts of Europe.  I also think US sweets are "too sweet," and prefer some of the less sweet treats from Europe.

 

Perhaps when I was a child…in the middle of the night…some mad scientist switched my taste buds with the taste buds of someone from Europe.  That might explain my cravings for food at odd hours—my taste buds are in the wrong time zone!  Of course, having transplanted tastebuds (a sort of Frankenstein-of-the-Tongue) would make me odd most anywhere.

 

THE ANALOGY

What is normal?  As we saw in the story, what is normal in food taste tends to depend on where you were raised.  Normal cravings in one place are seen as quite odd in other places.

 

But it doesn't end with just location.  Look at the usage of new media by age.  What a twenty-something thinks is normal usage of new media would seem abnormal to many older people, and vice versa.

 

And stand out of the way when many people of opposing political viewpoints start to argue.  Each sees their viewpoint as "normal" and reasonable.  They find the opposition to be odd at best, and insane or dangerous at worst.

 

Even things as mundane as brushing teeth can challenge the concept of normality.  Proctor and Gamble tried to determine the normal teeth brushing routing routine, so that they could design the ideal tooth paste.  They found no normal.  Some wet the toothbrush before putting on the paste, some wet the toothbrush after putting on the paste, some don't wet the toothbrush at all.  And that's just the beginning of the tooth brushing routine.  Once the toothbrush enters the mouth, even more variety in behavior occurs.

 

We live in a highly fragmented world.  There are so many different lifestyles, attitudes and ways of everyday living.   And the trend appears towards even more fragmentation.

 

At some point, even the notion of there being a "normal" seems quaint and old-fashioned.  We are told to "celebrate diversity" and see those who propose conformity to a norm as "narrow-minded."

 

As a business, this poses some strategic challenges.  How do you create a business strategy in a "post-normal" world—a place where the idea of normal ceases to exist?

 

THE PRINCIPLE

Business strategies are executed out in the marketplace.  If the marketplace is diverse enough to make normalcy obsolete, then strategic choice—how to win in that marketplace—becomes less obvious.   The good news is that in a diverse marketplace, there is not just a single best way to win.  If someone has already locked up a solid position in the market, it doesn't mean that you've lost your chance.  With all that diversity, you are more likely to find a different strategic path where you can also win.

 

The bad news is that fragmentation decreases the size of any behavior segment, so that when you win your audience, it may be too small to support your infrastructure.  Economies of scale are harder to obtain (although the digital world often tends to reach scale sooner than the physical world).

 

Listed below are five generic approaches for trying to reach a post-normal world.  As we will see, some approaches are better suited for this world than others.

 

1.  Fight for Average

In order to maximize scale, one can aim for offering a single solution targeted to satisfy the average within the diversity.   In other words, if diversity scatters behavior randomly in all directions, the single position which is closest to each individual would be the position in the middle—average features, average prices, average performance, and so on.

 

In a world without normal, this can be the most dangerous position to take.  There is no longer the large bulk at the center of a tall, bell-shaped curve.  The dispersion of people is more equalized, putting fewer people close to the center.

 

Average at everything means you are the best at nothing.  Trying to please everyone a little bit rarely works, because you are not competing against others who are also striving for average.  You are competing against hoards of specialists.  Although none of the specialists have broad appeal (and may actually be hated by more people than your average approach), for each demand group one of these specialists will be preferred over your average approach. 

 

As a result, an average approach may never come in last, but it will never come in first.  The average of black and white is gray.  If you offer gray, you appeal neither to the whites (you are too dark) nor the blacks (you are too light).  Middle of the road products and retailers have been losing out to specialists for years. We talked about this in greater detail in a prior blog.

 

2.  Do it All

If trying to cover everyone with a single go-to-market strategy targeted at average is wrong, then how about the opposite?  There are two ways to do this.  The first is to try to be the absolute best at everything in a single offering—the perfect product.  The second is to offer a near infinite assortment of offers, each targeted at a different fragment.

 

Lucky you if you can pull off the single perfect product.  It is extremely difficult to do because there are usually trade-offs which make this impossible.  Adding more features creates complexity, which fights against simplicity.  It is nearly impossible to best at all and be best at price.  In addition, there probably is no consensus anymore on what "best" really means.  Some may think the best design is contemporary while others may think traditional design is best.  For some, bigger is better…for others, smaller is better.  Best is no longer an absolute term in a post-normal world.

 

The reality is that if you are going to get a product out in the marketplace at a reasonable price, you have to make trade-offs.  You cannot afford to do it all at the level of perfection.  Customers are willing to make trade-offs to get what they want at a price they can afford.  They will migrate to firms who offer their ideal trade-off.  If you do not trade-off as well, you may be priced out of the market.

 

But then, to create a near infinite amount of trade-off offerings (one for each fragment) has its own set of problems.  First, you may not get enough scale for any one of those offerings to create a profit.  Second, you can create brand confusion.  It's hard for a brand to be known as best at everything.  If all these products come out under the same brand, it can confuse a customer as to what the brand really stands for.  In addition, customers will not believe that a single brand can be good at producing that many varieties of trade-offs.  Generalists are not usually viewed as powerful a brand as specialists.

 

So "Do it all" is difficult pull off in a post-normal world as well.

 

3.  Cluster Portfolio

If trying to please everyone with one product (as average or as best) doesn't work, and trying to please everyone with near infinite products doesn't work, how about something in between?  This would be to create a portfolio of a manageable number of offerings which are best or average for large sub-sectors (clusters) of the marketplace.  This tends to be the approach taken by people like Proctor and Gamble.  They have great technological expertise in paper/absorbency.  How do you exploit your full potential with that competency?

 

With toilet paper, the Charmin brand uses four sub-brands to cover the bigger niches: Ultra Strong, Ultra Soft, Basic (price) and Plus (with lotion).  With paper towels, there are three basic niches for the Bounty Brand: Extra Soft, Regular (thick and stylish), and basic (cost).  With diapers, Luvs stands for price and Pampers stands for good parenting.

 

The trick is to find the sweet spot between covering more fragments without diluting the brand.  If you can find that sweet spot, you may be able to get the best of both worlds—economy of scale plus specialized trade-offs.

 

4. Laser Focus

One strategic option reasonably well suited to the post-normal world is the laser focus.  Choose a relatively large niche in the marketplace and own it better than anyone else.  Specialize in understanding the niche and meeting its unique needs.  Essentially forget about all the other diversity.  Aldi isn't trying to please everybody, nor is Whole Foods.  Each has found its own niche in the grocery marketplace and is exaggerating its offering to the tradeoffs most desired by that niche.  They don't care that others may hate their offering and never patronize them.

 

Although the world may no longer have a normal, there is usually an agreed upon normal within the niche.  In fact, it is their version of normal which tends to define that niche.  Play to that normal (ignoring the rest), and you can win, provided the niche is large enough. 

 

5.  Enable Personalization

Rather than specializing in the final product for every fragment, how about providing the means so that every fragment can create their own?  A good example is Zazzle.com.  At Zazzle you can get the ideal t-shirt just for you.  They have an enormous number of customizing options.  And if you do not like any of them, you can create your own individual customized look and they will make it for you.  There are tons of firms like this who will customize clothing, food and other everyday needs to your individual tastes.

 

In this web 2.0 world it is easier to work with the customer, allowing them to customize and personalize their own unique solution.  Your solution is no longer the end product.  Your solution is to be the enabler that allows each fragment to find or build their own unique end product.

 

SUMMARY

In a post-normal world, a one-size-fits-all strategy is out of place.  It is better to either narrow your strategy to a single niche, pick a small cluster of niches, or enable the fragmented world to create their own unique solution.

 

FINAL THOUGHTS

Next time someone accuses you of being abnormal, just say thank you.  In a post-normal world, that is a complement.