Strategic Planning Analogy #420: Creating the Future

THE STORY
Back in 1989, a move came out titled “Field of Dreams.” The story is about a farmer who heard voices. One of the voices kept saying, “Build it and he will come.” Eventually the farmer figured out that he was supposed to build a baseball field on his farm. So he did.

After building the baseball field, the players from the old 1919 Chicago White Sox team miraculously come out of the corn and onto the playing field. Many exciting things happen in the movie as a result of building that baseball field.

The movie would have been pretty dull if that farmer had ignored the voice which said “Build it and he will come.” Then all you would have seen is a movie about a farmer harvesting corn.

THE ANALOGY
Exciting things happened in the movie because the farmer was pro-active in building that baseball field. He did not wait to react to the world around him. He built a new world on his farm and his life was forever changed.

This same dilemma occurs in strategic planning. We have the choice of either looking at the world as it is (and finding a way to exploit it), or of envisioning a new world and building it.

Building a new world can be difficult. Scoffers may laugh at you (like they did to the farmer in the movie). But often, the rewards of building that new world can be great.

THE PRINCIPLE
The principle here is based on an old quote by the late business guru Peter Drucker. He said, “The best way to predict the future is to create it.” In other words, the future is full of unknowns. The best way to minimize the unknowns in your future (and maximize your ability to succeed) is to proactively work to create the future of your choice. Rather than react to an uncertain world you did not create, proactively shape the world to your benefit. Be like the farmer and “build it” and the profits “will come.”

Weakness in Reaction Approach
This idea is contrary to a lot of the writing on how to do strategy. These writings will tell you to do an environmental analysis and then look for holes in the current environment to exploit.

Yes, this process of reacting to what the world offers up can often improve performance a bit. After all, exploiting what is in front of you is better than just drifting along and not trying to find a way to exploit the current environment. This process, however, rarely leads to great leaps in success.
The problem is that the current environment is designed to optimize the status quo. The rules of how the game is played are designed to perpetuate the status quo. The current leaders of the status quo tend to hold a disproportionate amount of power and influence. The supply chain is designed to their advantage. Unless you are one of those current leaders, it is hard to make an impact under their rules. Barriers to entry and exit keep the status quo in and you out. You are left to look for the small niches that the leaders ignored.

Another problem with the reactive approach is that you are always in a “following” or “chasing” mode. The world is constantly moving, and if you are merely trying to exploit what is in front of you, then by the time you get your strategy up and running, the world may have already passed you by. This is why Steve Jobs ignored the voice of the consumer. He said that by the time you got around to satisfying that voice, the consumer would have already moved on to something else. You’d never catch up by reacting.

There is a lot of truth to the idea of “first mover advantage,” where those who lead in creating a new world have inherent advantages over the companies which follow them. For example, look at all the companies trying to follow the success of Apple’s iPad. They can hardly make a dent into the industry built and lead by first-mover Apple. First movers are proactive, rather than reactive.

Strength of Proactive Approach
Look at the companies which tend to be at the top of most admired lists: Apple, Google, Southwest Airlines, Amazon, and Fed-Ex. These are companies which ignored the status quo and built an entirely new world, with new rules which gave them an advantage. They built it, and it (profits) came.

Apple totally reinvented industries such as computing, music, telecommunications, and entertainment. Google changed the way the world thinks about and uses information. Southwest Airlines threw away the rulebook on how airlines are supposed to operate and created a totally different one—one where they had the advantage. Fed-Ex created a category which did not before exist—guaranteed overnight delivery—and used the advantage of the new rules to create a great company. Amazon created shopping tools and a shopping process unheard of before. They rewrote the rules on customer service (via recommendations, customer reviews, and one-click) and created an empire.

These were not followers. They did not look for holes in the status quo. They built new worlds with new rules. By creating their own future, they had greater control over their worlds and how they evolved. They were able to predict how their industries evolved because they invented that future. They invented the rules by which the new world plays—rules which are most beneficial to themselves.

You Have To Build The Whole System
So does this mean that I just need to design the next cool thing and I’m all set? Not really. The forces of the status quo are quite strong. They will fight anyone trying to upset their situation. The best way to overcome this marketplace resistance is to build an entirely new marketplace. In other words, this is not about building new things, but entirely new systems which encompass the entire supply chain.

Consider the iPod. It was not the first attempt at reinventing digital music. Many MP3 players preceded it. They failed because they could not beat the forces of the music status quo. A music player without the cooperation of the music industry is not very useful.

The genius of the iPod was that it was a total reinvention of the entire music ecosystem. There was the cool player which the consumers loved. There was also an easy way to access music through iTunes. And Apple found a way to get cooperation from the holders of the music which nobody else had been able to do before. So this was not just a device play, but a rewriting of the whole system, including where and how music was sold and new rules on how musicians and labels were compensated.

Google wanted to reinvent the way businesses advertised. However, to do that, Google needed to also reinvent the platforms where that advertising took place. Google created the best search engine in order to be the preferred place for the new advertising to take place. They built Google Maps, Blogger, and other such sites so that they could control the way key future advertising venues evolved (and make sure Google got a huge chunk of that advertising).

In order to play in the advertising space in mobile, Google invented Android and gave it away for free. As a result, Google is controlling the leadership in smartphone platforms, giving it more control over how mobile advertising evolves (to its advantage). Google understands that if you want the new rules to benefit you, then you need to have a say in how the entire ecosystem evolves.

Amazon wants to ensure that the rules of digital commerce for ebooks and other such products work in their favor. As a result, they developed the Kindle as vehicle for these types of transactions. Some may complain that Amazon is selling the Kindle too cheaply, but consider the value it creates in helping Amazon reinvent the rules in their favor. Just as Google proved with giving away Android for free, the market penetration which comes from low prices helps one control how the future is built. And that is where the real benefit comes in.

And this is not just a digital phenomenon. In the early days of Wal-Mart, Sam Walton wanted to reinvent the rules about how rural customers purchased goods. Unfortunately, just building stores in rural areas was not enough to get the cooperation of the status quo. To win, Wal-Mart had to reinvent the entire ecosystem via building his own sophisticated distribution and data processing networks. Without that, Wal-Mart would not have been able to gain enough control to rewrite the rules of the future in their favor.

SUMMARY
Great strategic success rarely comes from reacting to the market as it is. Instead, it comes from creating an entirely new market, where the new rules are written to your advantage. The secret is about gaining as much control as possible over your destiny in a volatile world. To ensure that the new rules are written to your advantage, you need to reinvent the entire ecosystem, not just throw a new product into the old system. Build the system, and they will come.

FINAL THOUGHTS
Controlling the system does not usually require owning the whole system. Apple did not purchase the music labels. Google does not own telecommunication companies. Wal-Mart did not purchase the companies which supply its products. However, these companies created enough influence so that these other players were forced into playing by the new rules. And that is the key.

Analogy #177: Monkey Business

THE STORY
Back in 1940, Esphyr Slobodkina wrote a children’s book called “Caps for Sale: A Tale of a Peddler, Some Monkeys and Their Monkey Business.” It has become a children’s classic.

The story is about a man who earns his living by walking around selling hats. He kept his inventory on his head—a tall stack of caps of various colors.

One day, he was tired and fell asleep by a tree. When he woke up, the hats were gone. At it turns out, the tree was full of monkeys, who had each taken a hat to put on their head.

The peddler tried everything he could think of to get those monkeys to give him back his caps. But all the monkeys would do is imitate the silly antics of the peddler. Whatever the monkeys saw the peddler do, they would copy exactly.

Finally, in disgust and frustration, the peddler gave up trying to reason with the monkeys and threw his hat to the ground. Immediately, all the monkeys did the same. At last, he got back his hats.

THE ANALOGY
Monkey business is not all the different from human business. A lot of what is called strategic action is nothing more than imitating what someone else did.

There’s an old saying—“Monkey See, Monkey Do.” In other words, whatever actions a monkey sees, it will imitate. That was the basis of the story above. It is also the basis for a lot of what happens in the business world. If a competitor does something, firms frequently respond by doing the same thing.

The good news is that this behavior is rather predictable. When behavior is predictable, it is easier to build a strategy around it. The bad news is that the peddler did not proactively take advantage of that predictability. It was only by accident that he threw down his hat in disgust. Had he been more proactive, he would have realized sooner that the way to get the monkeys to throw down their hats would be to throw down his own (for more on this concept, see the blog “Mission Unpredictable”)

Of course, if he had done that, it wouldn’t have been much of a children’s story. But our goal is not to entertain children with silly antics. Our goal is to make money.

Rather than being like the peddler, who immediately got all emotional and quickly did silly things (which did not work), we need to take some time to assess the situation and then take advantage of the patterns we see.

Similarly, rather than being like the monkeys, who blindly imitated what they saw (and eventually lost their caps), we need to stop and see if there are better alternatives than just copying someone else.

THE PRINCIPLE
The principle here has to do with “Action” and “Reaction.” The idea is that before taking any action, we should consider what the competitive reaction will be. In addition, if the competitor acts first, we should consider all of our options before reacting and not just blindly copy them.

Unfortunately, it appears that businesses act more like the monkeys in our story than reasoning strategists. McKinsey & Company has just released results of an April 2008 survey of 1,825 executives. These executives were asked about what they do when faced with serious competitive threats. They categorized two kinds of competitive threats: a price cut and a new innovation.

Based on the survey results, the majority of the respondents tended to react as follows:

1) They did not find out about the competitor’s action until late in the game, such as after it was already introduced to the marketplace.

2) They reacted slowly, often missing a couple of purchase cycles.

3) They only considered 1 or 2 possible response options.
- Options often based on “What did we do last time?”

4) They did not do a sophisticated analysis of those options:
- They only looked out a year or two.
- They did not look at return on investment or NPV
- They only looked at a couple of income statement measures like sales or net profits

5) They tended to respond with a monkey-like “me too” reaction:
- Price Cuts were met with a price cut
- Innovations were met with a copycat innovation

6) The response was internally motivated (stop our losses to competition) rather than externally motivated (hurt the strategic intent of competition or cause them to be no longer relevant to your customers).

7) They were content with how they reacted and would do something similar the next time.

So then, what can we learn from these results? First, let’s look at this from the point of view of the initiator.

1) There are indeed First Mover Advantages
If it is true that competitors tend find out about your actions late and react slowly, then there is going to be a period of time in which you have a competitive advantage. Therefore, there are advantages to taking the initiative and making the first move. We discussed this in an earlier blog (see “Early Bird”).

2) Expect Imitations
Although first movers have a window of time for their competitive advantage, it will not last forever. Eventually, imitators will copy your actions. For example, if you lower prices, that price will eventually be matched. In the long run, all you have done is lower the profit margin for the entire industry. If such a price war goes on too long, all the profits will be wiped out of the industry. Unless you are the lowest-cost operator, you will probably not be better off in the long run.

The same applies to innovation. The initial differential advantage from the innovation will eventually be narrowed and eliminated via imitations. On a relative basis, you are back to where you started in the marketplace.

Therefore, when running the numbers on your potential strategic action, only assume a short period of advantage. Put into your assumptions the likelihood of being copied and having the advantage narrowed. We discussed this in more detail in an earlier blog (see “Bombs Start Wars”).

Now, let’s turn our attention to what can be learned for those reacting to competition.

1) Reacting is not a way to Get Ahead
In the McKinsey survey, respondents claimed that their reactions allowed them to suffer less financial pain than had they done nothing. However, they still suffered some pain. At the end of the day, they were worse off.

If you want to gain ground, you need to become more of an initiator, rather than a reactor. Initiating does not always mean being first to introduce the price change or innovation. Initiating means being the first to get credit for the action in the mind of the customers. For example, Coke rarely is the first to do anything, but it reacts so quickly and completely that it gets the credit in the minds of the customer for the innovation. Companies seen as laggards rarely instill much customer loyalty.

2) Consider More Options
Wal-Mart has a great price strategy which works very well for them. However, if you compete against Wal-Mart and do nothing more than just copy their prices, you will fail. The business graveyards are full of discount store chains which ceased to exist because they were nothing more than an inferior imitation of Wal-Mart. By contrast, Target has succeeded because it provides a distinctively different consumer alternative. It did not imitate Wal-Mart. Instead, Target chose its own path.

There is more than one way to build a compelling value package. Don’t take someone else’s. Build your own. Build such a unique and compelling value package that consumers will not be tempted to switch when the competitor does something new, because the competitor is no longer relevant to your customer.

Companies seen as weak imitators never instill as much loyalty as a company seen as owning leadership in a distinctively different value space. As long as American automakers are viewed as weak imitators playing catch-up with foreign brands, they will continue to lose market share in the US. Instead, these automakers need to break out of the pack and find their unique point of leadership.

SUMMARY
Business leaders often tend to act like monkeys and imitate others. If you want to get ahead, stop being a monkey and chart your own path. Move from monkey business to smart business.

FINAL THOUGHTS
Imitation may be the sincerest form of flattery, but differentiation is the surest path to sustainable profitability.