Strategic Planning Analogy #406: Reference Points

THE STORY
Recently, I was watching an old movie from 1992 on DVD, called “The Player.” The movie is about a guy who works at a movie studio. His job is to listen to writers pitch ideas for new movies. He hears thousands of pitches each year.

Because he has to listen to so many movie ideas in such a short time, he keeps telling the writers to limit their pitch to 25 or fewer words. Well, it’s hard to describe an entire movie in only 25 words, so the writers use short-cuts. Since everybody in the movie industry knows about all the prior movie hits, the writers explain their plots by referring to the other movies it is similar to.

A common approach used in the movie (and in real life) is for the writer to pick a couple of movies the new movie is like (we’ll call them “Movie X” and “Movie Y”) and then pitch their new idea as “Movie X meets Movie Y.”

Of course, the movie exaggerated the absurdity if you try to combine too many concepts.

In the move, a studio executive is trying to summarize a crazy, convoluted movie idea he’s hearing by saying, “So it's a psychic, political, thriller comedy with a heart.”

The writer agrees, saying, “With a heart, not unlike Ghost meets Manchurian Candidate.”

Not all possible movie combinations should be combined.

THE ANALOGY
Just as movies don’t get made unless they are successfully pitched to studio executives, strategies don’t come to life unless they are successfully pitched to management. And just like the movie studios, the business executives you are trying to pitch to are very busy. If you cannot crystallize the essence of the strategy in 25 words or less, the executives may never take the time to grasp what you are talking about.

Therefore, if you want to get your strategy implemented, you need to think and act like those writers trying to get a movie made. You need to use short-cuts—reference points with which your audience is familiar. For example, you could describe your strategy as being like “Competitor X meets Competitor Y,” implying that you want an assortment strategy like company X but add to it the service levels of competitor Y. This short-cut helps management quickly understand what you’re trying to do—in a way that they can easily visualize. And if they like what they see, it is easier for them to implement the plan, because they have those reference points to fall back on.

THE PRINCIPLE
The principle here has to do with reference points. The idea is that reference points can be a strategist’s best friend AND their worst enemy. Therefore, they must be used carefully.

The Benefits of Reference Points
We’ve already talked about many of the benefits of using reference points when pitching a strategy. It speeds the process, it makes it easier for the audience to understand, and it makes it easier for the audience to implement. These benefits occur because reference point help take an abstract concept more tangible.

For example, Zapmeals had an idea to try to get quality food quickly into the hands of people who didn’t want to waste time sitting in a fancy restaurant. Their idea was to use the internet to connect local chefs (who can provide the great meals) with local people (who want the great meals). To pitch the idea, they used a reference point of a success people were aware of: “eBay for takeout orders.”

The Dangers of Reference Points
Although there are many benefits to the use of reference points, there are also many dangers. Reference points refer to what the audience knows. And what the audience knows is what already exists. It is impossible to become an innovative leader if all you are doing is copying what already exists in the industry.

As a result, reference points can keep one locked into minor variations of the status quo, if used improperly. This is particularly true if all of your reference points come from within the industry.

In the worst case scenario, competitors start clustering around the current winning strategies in the industry, because that is the common reference point for success. With all that competition fighting for the same spot, a brutal war for market share will develop. There will be a race for the bottom as everyone cuts prices to gain share. In the end, all will fail.

For example, I knew of a retailer who described his company’s strategy as being like Company X, a direct competitor. I asked him how he planned to differentiate himself that retailer. He really didn’t have an answer. He just saw a successful competitor and wanted to emulate it. The problem was that this competitor already strongly owned that position and there was no way he was going to be able to take the position away from them. Therefore, his reference point was going to make him an inferior imitation—not a formula for success.

Great strategies tend to create business in a space that in currently unoccupied. You won’t find unoccupied spaces if you look for reference points among companies that already occupy a space.

There’s a reason why one finds very few original movies. They all tend to look like other movies you’ve seen before, because the reference points when they were pitched were movies you have already seen before.

Solution: Borrow from Other Industries
To get around this problem, one needs to use reference points which come from outside the industry. That way, you get the benefits of a reference point without all the problems which come from copying what is already in the industry.

As Clayton Christensen has pointed out in the Innovator’s Dilemma, most great new innovations tend to come from people who are outsiders to the industry. They are not trapped by conventional industry reference points, so they can come up with something entirely original.

You can do the same, by searching for reference points outside your industry. For example, I was speaking to someone in the banking industry who was using retailers like convenience stores as a reference point. He liked the way mass oriented retail stores created impulse sales through effective signing and display endcaps. He liked the way they could sell a lot through minimal service by creating self-service. He liked the way customers felt comfortable in a convenience store instead of the uncomfortableness people felt in a bank. He wanted to replace those scary desks in a bank with friendly aisles full of financial packages. In other words, he wanted to be “the 7-Eleven of banking.”

So, spend some time looking beyond the walls of your industry. Think about how others do their business. Look for principles you can transfer to your industry.

The idea here is to look for successes in areas totally unrelated to your industry and envision what would happen if you applied their success formula to your industry. It may turn out that a full space in one industry is actually an open space in your industry.

It is so difficult to get management to embrace a strategy in a space that is empty (they say “if it is so good, why is the space empty?”). Therefore, if you can point to tangible examples of other industries where that position is very successful, you have a better shot of selling the idea.

SUMMARY
Great strategies need to be sold before they can be implemented. And it is easier to sell the idea if you can relate it to a concept the audience already understands (a reference point). The trick is to look for comparison insight outside your core industry. Otherwise, you will end up just copying one of your competitors and become a weak imitation.

FINAL THOUGHTS
With over 400 of these blogs, I have shown how easy it is to understand complex strategic principles by finding analogies in unrelated fields. This same approach can be used to sell your strategy. Find a great analogy and then your selling process will be a lot easier.

Spalding Water

THE STORY
Back about the time when sports beverages were just starting to take off, I had the opportunity to attend a huge food and beverage convention. In the gigantic exhibition hall, there was a company with a booth dedicated to pushing a new product called “Spalding Water.”

It sounded interesting, so I went up to talk to the salesman at the booth. He started praising the virtues of his “light, refreshing” sports drink, making sure I got the name association with Spalding, a company noted for its dedication to sports.

I asked him a simple question: “So this stuff has all of the electrolytes and the other chemicals to replenish your system like Gatorade?”

His answer was, “No, there are none of those replenishment chemicals in this beverage. We wanted to make sure this beverage was safe for children, so we did not put all of those chemicals in the water. Instead, we just wanted to keep it light and refreshing.”

Looking at the brightly colored water in the bottles, I responded, “So, then, is this stuff just an expensive version of Kool-Aid?”

“No, not really,” said the salesman. “Kool-Aid has a much stronger flavor. This Spalding water is lighter and more refreshing. In addition, it has much less sugar.”

I took a small sample of the beverage. After pondering his words for a brief moment, I think I started to get the picture, so I posed another question. “So what you’re telling me is that this is something which tastes liked watered down Kool-Aid where they forgot to put in all the sugar…and because it says Spalding on the bottle, I’m supposed to pay a premium price for the privilege. Is that about right?”

At that point, the salesman gave up on me. I could see in his eyes that he was unable to respond because, in essence, I had described what they had done. I know it sounded better when he described it as “light and refreshing,” but as part of a nation which grew up on Kool-Aid, I think most others would have describe it somewhat like I did, after tasting it.

And you know what? I never saw Spalding Water sold in any store. I don’t think it got much beyond the stage of being introduced at this convention.

THE ANALOGY
At some point, businesses succeed by selling something to someone at a profit. It can be either a good or a service or some combination of the two, but eventually money needs to change hands.

If you have a new product which you are introducing to the marketplace, potential customers are going to want to know what it is you are selling before they make a purchase. Like the example in the story above, I was confronted with a new product, called Spalding Water. I was trying to understand what exactly Spalding Water was. Because I eventually associated the product with something which made it appear bad—inferior Kool-Aid—I became uninterested in the product.

If you want to succeed, you need to be proactive in making sure that you help the customer define the product in a favorable light. This is accomplished through making sure it compares favorably to an alternative (“more refreshing than plain water”) rather than unfavorably to an alternative (“less flavorful than Kool-Aid”).

THE PRINCIPLE
The principle here is relativity, or the idea of reference points. Great positioning strategies tend to target a new space which is not already claimed by someone else. For example, Starbucks chose a great position for coffee which was pretty much untapped in the United States. Unfortunately, because it was a new position, customers did not have any experience with the position. In order to make sense out of the new position (which they did not fully understand or appreciate), people would try to compare it to something which they did understand.

The item they compare it to becomes the reference point. The customer compares the new product to their reference point to see if they think it will be better or worse. If they decide it is relatively better than the reference point, you stand a better chance of making a sale.

In Starbuck’s case, a common reference point could have been how the person was currently purchasing coffee—in five pound cans of Maxwell House at the supermarket. With that as their reference point, the relative conclusion could have been as follows: Why should I make a special trip to stand in line to get a single cup of coffee at Starbucks which costs almost as much as an entire can of Maxwell House, when I can conveniently just pick up a can at the supermarket and brew it any time I want?

With that as a reference point, Starbucks appears to be relatively worse. However, Starbucks was clever in changing the reference point. Instead of being seen as a more expensive and less convenient way to get a cup of coffee, Starbucks chose a different way to portray their offering. They positioned it as a very inexpensive way to get a high quality diversion and indulgence into your humdrum life (and oh, by the way, there is some coffee in there somewhere as an added bonus). With alternative forms of partial day diversions as the reference point, Starbucks suddenly appears more desirable.

New positions are naturally at a disadvantage in the beginning, because they are asking consumers to not only change their behavior, but to change the way they think about their world. New products succeed by making current reference points appear inferior or irrelevant. We all tend to be creatures of habit who find comfort in our current reference points. Therefore, strategic success requires not only time spent in creating wonderful new positions, but time spend in helping make sure the new position compares favorably to the current, dominant reference point. And if it doesn’t compare favorably, then we need to help customers find a different reference point.

In the case of Spalding Water, it was branded with a name associated with sports and athleticism. They also referred to it as a sports drink. Therefore, my reference point at first was the dominant sports drink of Gatorade. Since Gatorade dominated the category of “sports drinks”, my reference point for what a sports drink should be was to be what Gatorade is. Gatorade is designed to help athletes replenish the necessary chemicals lost when sweating through athletic activity. Therefore, my first reaction was that for this to be a successful sports drink, it would need to do a better job of replenishing those chemicals than Gatorade.

Spalding Water, however, made no attempt to even try to replenish these chemicals. Therefore, using my reference point for what a sports drink should be, I claimed Spalding Water to be a failure.

So then the salesman said that it was not targeted at athletes as much as it was at children. My reference point for a children’s beverage was Kool-Aid. As a comparison to my reference point of Kool-Aid, Spalding Water came off as being less flavorful and less sweet (and we all know that the sweetness is why kids love it so much). So again, the product failed against my reference point.

The problem was that Spalding Water had not convinced me that it had come up with a new position, and when I compared it to current positions it failed relative to my reference points. What the salesman should have told me was that this was a beverage targeted to concerned mothers. These are mothers concerned that their precious children are not hydrating themselves enough during the day. These mothers know that if they try to push a lot of water at their children, they will eventually balk at it, so they will remain dehydrated.

At the same time, these concerned mothers do not want to shove a lot of soda or Kool-Aid at their children because of the negative health impact of taking these products in excess. Therefore, Spalding Water is the perfect beverage for concerned mothers because it has just enough flavor and coolness to get their children to drink enough to get hydrated, but not so many additives to cause negative side effects like sodas or Kool-Aid or even adult-strength sports beverages.

Now this would have been a position for which I would have needed a different reference point. I would then have had to ask myself if I thought children would be more likely to hydrate themselves properly if a concerned mother was forcing them to drink a lot of water or drink a lot of Spalding Water. In that case, the reference point would have been tap water, and the Spalding Water would be cooler and more likely to be consumed in enough quantity to give this paranoid mother the assurance that their child was properly hydrated.

SUMMARY
New positions require proactive management of reference points, so that when the customers are confronted with the new position, they compare it to something in their mind for which the new position appears relatively superior. If reference point management is not a part of your strategic plan, consumers may choose reference points which make your product appear inferior. Don’t leave it up to chance. Be explicit in how you want your new product to compare to the current familiar reference points.

FINAL THOUGHTS
When attempting to get someone to switch from a current habit and instead purchase what you are selling, in a way you are forcing a consumer to admit that their past behavior was a mistake. Nobody likes to admit a lifetime of mistaken behavior. That is why ultimately positioning yourself as “new” can be superior to positioning yourself as just a better version of a solution already owned by someone else. This way, instead of forcing the consumer to admit they had habitually purchased the wrong solution, they only have to admit that they are solving a different problem. This will make them more receptive to switching without guilt.