Strategic Planning Analogy #395: Strategic Trajectories

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strategic Planning Analogy #357: Crawling Backwards

THE STORY
Back when my son was a baby, he learned to crawl in only one direction—backwards. This type of crawling allowed him to move a bit, but since his eyes were facing in the direction he was leaving rather than the direction he was going, he kept bumping into walls. By not being able to see where he was going, he never got to anywhere he wanted to be.

We hated to see him suffer so much, so my wife and I came up with a plan. We would hold out in front of him some of his favorite food when he was about to crawl. The appeal of the food was so great that he eventually learned how to crawl forward in order to get to the food.

THE ANALOGY
It’s hard to get where you want to go when you are moving in the direction of your butt instead of the direction of your eyes. Like my son, when you are always looking backward, you tend to run into walls.

It seems like a lot of businesses have learned to move like my son did. Their eyes are focused on where they have been rather than where they are going. The majority of their time is oriented on the past rather than the future. As a result, instead of quickly rushing to a glorious future, they end up bumping into walls. Their prospects die along with the death of dying past.

THE PRINCIPLE
All strategic initiatives eventually fail. Even the great ones.

Great strategic initiatives are ideally suited to their environment. However, the elements of the environment are in constant motion. Consumers change, technology changes, competition changes, government regulations change, and so on. Strategic initiatives that were once ideally suited for the environment will get of sync with the environment if they do not adapt to these changes. Eventually, the changes will be so large that even previously great strategic initiatives will fail.

Therefore, if you want to continue to be successful in the future, you need to anticipate the changes the future will bring. And you will not be able to anticipate the future if all you think about is the past.

You may not think you are spending too much time on the past, but consider the following:

1. Finance
The purpose of accounting is to accurately represent in numbers what has happened in the past. Although this is necessary to do for taxes and government regulations, it has almost nothing to do with preparing one for the future. Accountants use the word “closed” as in “We have closed the books on the prior quarter.” That door to the past is shut…finished…closed. Quit opening it all the time.

How much time do you fret over the preparing of those accounting financials? How focused are you on having discussions and giving presentations based on those numbers about the past? How much of your management time is devoted to criticizing or praising people based on what happened in those numbers from the past?

If you want to dwell on financials, try focusing on future cash flow opportunities rather than past accounting performance. After all, stock prices are based on what people think of your future cash flow prospects. Think like they do. Put your eyes on the future rather than the past.

2. Growth
Businesses progress through various lifecycle phases, from introduction to growth to maturity to decline. Each phase requires a different type of strategic initiative. If you do not properly transition your strategy for these changes, you may not successfully progress to the next phase (and die prematurely).

As I’ve said many times previously, managers seem to love the growth phase. There is a tendency to want to perpetuate that phase as long as possible. Rather than looking forward to maturity, they keep looking back at the glories of growth.

This can cause many problems. First, maturity tends to be the most profitable phase of the lifecycle. Why do you want to postpone the most profitable phase? Second, if you keep pushing a growth-based strategy on a business that is no longer in growth, you will cause numerous problems. You will over invest in infrastructure and capacity, wasting a lot of money. You will set goals that are unrealistic, causing perpetual disappointments.

If you want growth, the way to get it is not by overinvesting in a mature business (looking backwards). It is by looking forward to brand new opportunities to provide growth that the mature business can no longer produce. Use the profits of maturity to fund the next cycle.

3. Efficiency
A lot of what businesses focus on is based in a desire for greater efficiency. In the name of efficiency we get standardization, benchmarking, ISO certification, Six Sigma and so on. At first, all of this sounds pretty good. Unfortunately, almost all of the tools used to become more efficient have the unwanted side effect of locking your business more tightly to the past.

Benchmarking chases after imitating where others have been. You cannot move ahead of competition if you are always chasing them via benchmarking. You cannot set the new standards of the future if you are focused on benchmarking the processes and the procedures of the past.

The problem with setting standards and going after ISO certifications and Six Sigma answers is that they get very rigid. You are locking the business into one way of doing things. Tolerance for deviation and experimentation goes away in the name of efficiency. Although those standards may have been ideal at the time they were established, they will not be ideal forever. Locking into the process of the past lock you into a mental mindset of the way things need to get done. Radical new approaches and different business models are stifled, because they do not fit the mold of the rigidness put in place in the name of efficiency.

The ideal process for one type of strategic initiative may be a horrible process for a different type of strategic initiative. For example, Apple built a successful business model for digital music by ignoring virtually every standard in the entire music value chain. It could do this because it was not locked into the old standards which were caused the analog music firms to bump into walls. The analog companies had perfected the obsolete and could not psychologically abandon it the way Apple did. They were crawling backwards while Apple ran past them to the future.

If you want a glorious future, you need to embrace some experimentation and deviation. Cultures like a Google and 3M encourage lots of experimentation. This leads to new opportunities. Remember, the ultimate goal is not to perfect efficiency at what you are doing today (perfecting the obsolete), but to do the right things for tomorrow in a non-wasteful manner.

SUMMARY
There are some benefits to accurate accounting, a desire for growth, and a pursuit of efficiency. If you are not careful, however, a single-minded pre-occupation with these concepts can lock you into the past and make it more difficult to see into the future. In finance, balance the backwards look at closing the books with a forward look into future cash flow management. In seeking growth, look forward to new growth opportunities rather than trying to get unrealistic growth out of a mature concept whose growth days are past. In the pursuit of efficiency, don’t lock yourself into rigid procedures that make it impossible to adapt to the new realities of the future. Leave room for experimentation.

FINAL THOUGHTS
In the story, we got my son to quit moving backwards by providing an incentive which made moving forward a lot more desirable (tasty food). If you are having trouble getting your firm to look forward, perhaps you need to do a better job of making a future orientation look more desirable as well. You have to make pioneering into the future seem more pleasurable than nostalgia about the past.

Strategic Planning Analogy #265: Two Stores, Two Stories

THE STORY
Ritz Camera, the largest specialty camera and imaging retail chain in the US, filed for bankruptcy in February 2009. Now, it has recently said that if it does not find a buyer soon for the chain, it will liquidate its assets in an open auction.

At the beginning of 2009, Ritz Camera had more than 800 stores in operation. It is now less than half that size.

By contrast, Best Buy is doing rather well. Its balance sheet is very healthy and it is gaining market share. Although the recession has had its impact on Best Buy, the company will survive and looks poised to thrive for quite awhile.

Why such different fates for these chains? A friend of mine used to work in the photography specialty retail business many years ago. He said that when taking good photos was very difficult, many flocked to photography as a “hobby.” These photo hobbyists carried around bags of gear to make better photos—lots of lenses, filters, light meters and shades. They would have a darkroom in their basement with lots of chemicals and enlargers, so that they could develop their own film and photos and crop them to be “just right.”

All of this took skill, knowledge, dedication and lots of practice—as well as lots of money. It was not for the average “amateur.” These hobbyists could take great pride in their unique skills and abilities. Others marveled in jealousy at the “magic” of their great photographs.

Then something happened. Technology got sophisticated enough that cameras could take pretty good pictures all on their own—just point and shoot. Now everyone could take pretty good pictures without any advanced training, skills or lots of gear. Being a photo hobbyist no longer carried the same cache. It wasn’t all that special anymore once the average Joe could do just about as well.

As a result, those who looked to their hobby as their point of pride and status saw that being a photo hobbyist no longer satisfied that ego stroking. Therefore, many quit photography and found new hobbies in areas which still held status, like electronics or computers.

Now, with the digital revolution, everyone has access to cheap and easy tools to take, edit, modify and photoshop their pictures into great works of art—and place them on the internet for all to see. And you don’t even need a camera. I was recently at the zoo—a place full of young families. I looked around me and noticed that I was the only one with a camera. Everyone else around me was taking photos with their cell phone.

It is getting harder to even think of photography as a hobby. It’s just something people do, like breathing. And nobody thinks of breathing as a hobby. Without a large hobby segment, there is no reason to for a large photo hobby specialty store like Ritz. Hence the problems at Ritz: it’s camera focus fell out of touch with where pictures evolved.

By contrast, Best buy has frequently changed its product focus. I remember back in the 1980s, when their big emphasis was on microwave ovens. It was the cool new technology, and people flocked to Best Buy because they held seminars and cooking classes on how to use this cool new gizmo. Soon thereafter microwave ovens became mature and were treated like a toaster that you replace at Walmart when they break.

Of course, by then Best Buy had moved on to the next cool new gizmo—VCRs. Then when that started to get mature, they went on to follow with computers, then DVDs, then Digital TV and now Mobile Devices. The idea was to abandon categories before they matured and replace them with the next new thing. That way Best Buy was always hot and always successful.

THE ANALOGY
As a business, companies have two strategic choices. They can either define themselves primarily by specializing in the type of products they sell (like Ritz Camera) or they can define themselves primarily by the specializing in the place in the product lifecycle where they want to be.

This is a critical strategic decision which can dramatically impact how your company evolves. How you answer this question can even be one of the major reasons why you succeed (like Best Buy) or fail (like Ritz Camera).

THE PRINCIPLE
The principle here is that the decision to focus on product versus lifestage is critical. It needs to be a conscious choice, because it will drive so many of your other strategic decisions. If done well, there are opportunities to succeed with either approach. But to do so takes hard work, tough choices and significant strategic modifications. You have to be fully committed to one side or the other. A half-hearted middle approach will tend to fail.

Let’s look at either option in detail to illustrate the particular types of risks and tough choices which apply to either decision.

Focus On Product
The biggest problem on a product focus is that products evolve and go through a lifecycle. At first, they are the cool new thing, desired by leading edge hobbyists who desire the status of taking the time to become an expert when others aren’t. Second, the experts help the rest of us “get it” so that the product achieves mass demand. It is the hot thing everyone wants. Then, it becomes just another thing that everyone already has. Your sales shift from first-timers to replacement purchases and the priority shifts from expertise/service to low price. Finally, your product becomes a lowly commodity at best, and an obsolete has-been at worst, which is replaced by the next new cool thing.

Therefore, if you focus on the product, then your greatest strategic challenge is to align your business with the changing demands from managing to the life cycle. For example, if the basic product you sell doesn’t change, then you have to change, to have the most appropriate business model for the particular period in the lifecycle where that product lies. At the beginning, you need to be creative, inventive and cool, and you have fat profit margins to pull it off. At the end, you have to think like a commodities manufacturer, with razor-thin margins and a merciless emphasis on cost reduction. That’s a big cultural change. Distribution channels can change over time, too, from dealing with boutiques to dealing with Walmart.

The second strategic challenge is to slow-down the natural progress of the life cycle, to keep it as alive and cool as possible for as long as possible. Rapid obsolescence via frequent product upgrades can help to keep it cool longer. Strong image advertising can help keep some status with the product longer. Look at the mature automobile industry. Cars can last a decade, but clever strategies like leasing and restyling induce people to want to change cars every 3 to 4 years. Relentless beer image advertising has helped beer brands keep at least some preference and status rub-off in that mature business.

The third strategic challenge is to try to outlast all the competition, so that in the end-game you have a near monopoly. That is what Budweiser has done in the US beer market. Everything has pretty much consolidated into their lap, so that they still have enough volume and clout to make a killing.

The biggest risk is that your company dies when the product eventually dies. If you’re in the newspaper business and nobody wants newspapers, you’re in big trouble.

I think the problem at Ritz Camera was:

1) They picked the wrong product (cameras instead of photos)
2) They did not try aggressively enough to own all the new places where photo status was going (scrapbooking, on-line editing software, You-Tube, etc.)
3) They did not try to develop and get an exclusive on the ultimate cool photo-phone.
4) They did not change their business model enough to win when things get commoditized and margins go away (i.e., their stores could not beat Walmart when the product matured).

In other words, they did not manage the lifecycle well because they did not realize how much of a priority that was, so they lost.

Focus On Lifestage
The other option is to be more like Best Buy and focus on staying in a particular lifestage. For example, if you focus on the early stage, when products lose their cool, you switch to the next cool thing. This is also pretty much how GE has worked over the years. As industries they were in starting to get mature, they would sell off the division and add a new division still in the early cool stage. That way, the portfolio stayed hot (and profitable). The benefits here are that a) you can focus on perfecting a management style for that life stage; and b) your lifespan is not tied to the lifespan of a particular product.

With this strategy, the biggest issues are timing and transitioning. By timing, I mean knowing when to let go of old products and when to dive into new products. If you sell off too quickly, you may walk away from a lot of profit. If you stay too long, you may not find a profitable way to exit the business.

If you enter a new business too early, it may take too long to get a return (and you are more likely to guess wrong on whether it will get hot). If you enter too late, you may have to pay too much to enter and be too far behind in the race for leadership.

By transitioning, the problem is getting people to accept that your brand has a right to be in that new space. If you are too far afield, then the customers will not give you credit in that new space. Also the farther away the transition is from your core, the less likely you will have the proper skills needed to win. For example, if Best had gotten into high end designer handbags when they were hot, it would have failed because it does not line up well with the brand customer or the brand image, and they know nothing about designer fashion. That transition would not have worked.

Best Buy has succeeded because their timing was great and they always transitioned into products that were consistent with the brand and its core customer’s desires. They were also willing to be very aggressive in the transition—killing off old categories entirely and going full-out to win in the new category. This is not a game for the half-hearted.

SUMMARY
Great strategies tend to be explicit on whether the company is going to focus on a type of product or a particular lifecycle stage. Then one needs to aggressively adapt the company over time to stay true to the chosen path. Half-hearted efforts on either path can lead to failure.

FINAL THOUGHTS
You don’t have to only focus on the early stage of the life-cycle. Pinnacle Foods has done well by purchasing the cast-off mature food brands from the food companies trying to get out of mature businesses. They own brands like Duncan Hines, Hungry Man, Aunt Jemima and Swanson. Because they are experts in running brands in their late maturity, they can make them successful when their former parents found them to be a drag on profits.