Strategic Planning Analogy #549: Toughest Investments to Make

THE STORY
It’s interesting to watch the debates between developers and preservationists. The developers say that if you invest a bunch of money to develop a wilderness area, you get a lot of measurable benefits:

·       Jobs

·       Economic Growth

·       New Tax Income

·       An Infrastructure that can lead to additional growth

The preservationists have a tougher sell. They say that if you spend a lot of money to preserve the wilderness, you only get what you already have—a wilderness. It’s hard to put a measurable return on an investment which returns nothing new. “What is to be gained by that?”, respond the developers. The only persuasive reply the preservationists have is that without investment in preservation, things (like trees and animals) will go away and possibly become extinct.

It can be tough for humans to mathematically compare the relative merit of using private money to create jobs and boost the economy (which both help humans) versus using public money to preserve a wilderness (which mostly benefits the animals under threat of extinction).

However, I suspect that if you asked the animals under threat of extinction, the decision wouldn’t be tough at all.

THE ANALOGY
A large part of business strategy revolves around investment decisions. The idea is to use strategy to determine where the best investment opportunities lie for a particular company.

Many times, these decisions can get framed to look like the wilderness example. The choice is between investments that:

1.     Create great new development opportunities with great new measurable sources of economic return; or

2.     Don’t really create anything new but just “sort-of” preserve the status quo.

When the decision is framed that way, the capitalist mindset will typically lean quickly towards option #1, the investments with a lot of measurable new benefits. After all, isn’t investing for a big new return better than investing just to stay about the same?

Here’s the problem. Without preservation, there is extinction. And that extinction could be your entire business. And if your core business goes bankrupt, all those other investment opportunities tend to disappear as well.

Therefore, we often need to look at these wilderness decisions from the perspective of the animal under threat of extinction, because we may, in fact, be the one that goes extinct if preservation investments are not made.

THE PRINCIPLE
The principle here is that incremental growth investments often rely on having a core foundational business for these incremental investments to leverage. It can be called synergies or scale or brand power or industry insights or distribution capabilities or funding cash flows or a host of other things. The point is that without a strong foundation to provide these benefits, there is no strategic benefit to making the incremental growth investment.

If all you bring to the investment is money, then you’d better be able to out-invest the professional investment funds which do this for a living and are competing against you for that same opportunity. Good luck with that. Your money is no better than their money, so you bring no advantage.

On the other hand, strategy is about leveraging current strengths and assets. It’s about more than just bringing money to the table. It’s also about all the skills, knowledge, power and infrastructure you have to leverage. Strategy is the process of assessing all that you have to determining where that bundle of infrastructure can create the greatest advantage. This increases your likelihood of success, because now you bring far more to the investment than just money (which is all the same). You bring all that has made your core business uniquely prepared to excel over others in the new investment.

Therefore, it is critically important to invest a portion of your money into preserving these core attributes, even if those investments do not create any additional returns. Their value is not in adding something new, but preserving something old—avoiding extinction. That’s valuable, because if your competitive advantages go extinct, you are back to having nothing but money (if you are lucky). In reality, you may be left with nothing but debt. Now, none of those investments look good.  

Example #1: Sears

I will illustrate this principle with two examples from retailing, starting with Sears. When Eddie Lampert took over control of Sears, he saw his investment opportunities as being like the wilderness example. On one side, he saw this wonderful new opportunity in bringing Sears into the forefront of internet commerce. There were lots of positive new returns on his spreadsheets by diversifying into internet commerce.

On the other side were investments in preserving the Sears retail store foundation. When he ran those investments through the spreadsheets, Lampert didn’t see any additional returns. Lampert reasoned that it was foolish to invest in a place where there were no new returns when he had other incremental opportunities where there was the potential for large new returns. Therefore, Lampert essentially stopped investing in the foundation and poured the money into internet ventures.

The problem was that by not investing in preserving the Sears core, the core was starting to go extinct. The stores became ugly and undesirable. The merchandising suffered. And worst of all, the image of the brand suffered. Customers were abandoning Sears and all that it stood for.

As the Sears brand suffered, its connection to the internet ventures created a negative influence rather than a positive influence. The connection made people less likely to embrace the internet venture. In addition, when the core deteriorated to the point that it became a major cash flow user rather than a cash flow provider, there was no longer any money to invest in the new venture.

By letting the core approach extinction, Lampert not only destroyed the core, but lost any benefits the core could bring to the success of the internet ventures. Without the synergies, his internet ventures had no advantage in the marketplace. In fact, now they had the disadvantages of being associated with a “loser” brand and being stuck in a place that no longer had any cash flow to fund it. Now, the situation is so dire that manufacturers are reluctant to ship any product to Sears. The end of the entire company may be near.

By contrast, if Lampert had diverted some of that investment money into preservation, he might not have seen a lot of new returns in the core, but the core would have been preserved to the point where it could be an asset to internet venture and given that strategy more of a competitive edge.

Example #2: Target

The technology and equipment necessary to convert from magnetic stripe credit cards to chip-embedded credit cards has been around for years. It has been up and functioning in Europe for years. But retailers and banks in the US failed to make the investments in the chip technology, even though it provided far superior security.

Why? When they ran the numbers through the spreadsheets it didn’t look good. A lot of investment money was required to make the switch, but there really weren’t a lot incremental returns. They didn’t think that converting to chip credit cards would create any meaningful additional sales. No new benefits were seen that would justify the expense. Therefore the investments weren’t made.

What they failed to take into account was that without the investment in chip credit cards, their credit operations were at high risk of being hacked by criminals. Yes, there may not have been any new benefits from the investment, but without the investment, the core was at risk.

Eventually that day of risk came. The hackers started attacking the old style credit cards. Target was probably the retailer which suffered the most from the hacking. Not only did Target immediately suffer huge financial losses, they suffered losses to the brand image. Customers were more fearful of shopping at Target. They were less likely to want to pay any extra money for the privilege of shopping there.

These losses to the strength of the core reduced Target’s longstanding competitive advantages. So now, Target has been faced with abandoning Canada (at great loss) and laying off thousands of employees and struggling to find a new position of strength in the US marketplace. Of course, Target’s current problems were caused by more than just the credit card hacking. But, by not investing in this core, they certainly made the problem worse than it would have been, both in terms of cash flow, management distraction, and image.

SUMMARY
Without strong competitive advantages, a company brings nothing to an investment except money. And most of the time, just bringing money is not enough, because others can also bring money plus their own set of competitive advantages. Therefore, it is important to continue to make investments which preserve and strengthen those core competitive advantages, even if the investments themselves create no direct additional return. For without the preservation of these advantages, the entire company is put at risk of extinction.

FINAL THOUGHTS
Investments in preservation can be the toughest investments to make. They are extremely difficult to justify on a stand-alone basis via spreadsheet analysis. Yet, without them, the entire foundation of the business may crumble. You have to continually remind yourself that these investments may not create something new, but they can keep you from extinction—and that is worth a lot.

Strategic Planning Analogy #474: Weighing Money

THE STORY
Back in the 19^th century, the US was primarily a rural nation.  In those days, if you wanted to purchase something, you didn’t have all the malls with all the stores nearby like we have today.  Instead, if you needed something, you got out your Sears or Montgomery Ward paper catalog and ordered what you needed by mail.  Then, a few weeks later, the mailman would deliver to you what you ordered.

Not only weren’t there many stores back then, there weren’t many ways to pay for the things you bought.  No credit cards or PayPal existed.  Only the very rich had checking accounts.  As a result, almost everything was paid for in advance with cash—usually with coins.

This caused a problem for Sears and Montgomery Ward.  Thousands upon thousands of orders would come to them by mail—each of them in envelopes filled with coins.  Trying to figure out if the right amount of coins were in the envelope to match the cost of the order was a logistical and financial nightmare.

Sears eventually came up with a way to simplify the process.  In fact, they eliminated the process.  Instead of counting the money, they weighed the money.  As it turns out, Sears discovered three things:

1)      The vast majority of people are honest about putting in the right amount of coins;

2)      You can get a reasonable (but not exact) estimate of the value of a pile of coins by weighing them; and

3)      Weighing coins is a lot faster, easier and cheaper than counting them.

By switching from counting to weighing, Sears could process the orders faster with a lot fewer employees.   The big shortages of money would still be caught.  And whatever little shortages that slipped through were small and infrequent.  The money saved from not counting more than made up for any losses from shortages in payment.

So everybody won.  The consumers got their orders processed faster and Sears made the process more profitable.

 

THE ANALOGY
Sears could have spent a lot of time and money to perfect the system of counting all those coins.  And I’m sure they could have made significant improvements to the money counting process.  But I’m also sure that those improvements would never have been as cost efficient as abandoning the process altogether to switch to weighing money.

At first, it seems counter-intuitive to say that profitability goes up when you stop accurately checking to see if you were properly paid.  How could a company like Sears stop counting its payments?

Well, as it turns out, the top line on the income statement is not the most important line.  The long-term prospects for the bottom line are far more important.  If a little less accuracy on the top line can create far more money on the bottom line, then we should be happy with that. (and, by the way, Sears eventually knew the exact total of all coinage coming in—even if they couldn’t tell which order the coins came from).

I bring this up because a lot of businesses are focused on increasing accuracy all over the place.  Using a host of processes like Six Sigma or Lean, a great deal of time and effort is used to gather tons of data to figure out how to do things better or faster or cheaper or with fewer defects all over the company. 

These practices may improve the individual areas being studied.  But, like Sears, perhaps even more improvement to the consolidated bottom line would have occurred if the study had not occurred and the process was entirely eliminated.

Precision and improved performance is not always the right answer for every process. Sometimes, the bigger picture is better served when some processes stay a little looser or are eliminated altogether.  The secret is in knowing when to apply these tools and when not to.

  

THE PRINCIPLE
The principle here has to do with the difference between efficiency and effectiveness.  Efficiency is about focusing on making a process operate as well as possible (speed, cost, accuracy, etc.).  Effectiveness is about focusing on doing those things most critical to long-term success (pleasing customers, gaining competitive advantage, improving long-term cash flow, etc.).

The Folly of Putting Efficiency Ahead of Effectiveness

The difference between a focus on efficiency or accuracy can be great.  For example, I could create the most efficient process for sending messages in Morse Code, but that would never be a more effective way of communication when compared to smartphones and the internet.  If the end goal is communication, I should abandon the Mosrse Code and adopt smartphones and the internet.

Focusing on perfecting Morse Code while ignoring smartphones may seem silly, but companies do things almost as silly all the time. 

Most companies never really have an adequate answer to what I call “The Most Important Question,” which is:  What is it about your business strategy which would cause customers to naturally prefer you over the alternatives?  In other words, they have never figured out what will make the company uniquely effective in the marketplace. 

Instead, they do pretty much what everyone else in the field is doing.  They offer essentially the same solution in the same way.  Then the hope is that they can eke out a small advantage by doing the whole thing just a little bit better. So, they use tools like six sigma and lean in an attempt to make everything they do a little more efficient than the competition.

The problem with this approach is that:

1)      Perfecting the status quo does you no good when the status quo becomes obsolete (like when smartphones and other communication tools made Morse Code obsolete).  Being the best obsolete alternative is not much to brag about.

2)      The competition rarely stands still.  They are also trying to become more efficient.  As a result, it is difficult to get a meaningful long term advantage in doing what everyone else does just a little better.  Think of the battle between Fuji and Kodak to become the best at producing photographic film.  They alternated having small temporary advantages until digital technology made both of them obsolete (see more here).

3)      If you don’t start first with understanding what is most critical for effectiveness, you have no way to prioritize what efficiencies to work on.  In addition, you don’t know which approach is best to improve them (is it by reducing costs, reducing defects, saving time or something else?).  As a result, you can end up working on the wrong projects (like improving money counting instead of moving to a less accurate process of money weighing).

The irony is that putting efficiency first is not the most efficient way to improve your long-term prospects.  It wastes a lot of effort on doing things that do not meaningfully improve the really important things, such as winning in the marketplace.

The Benefits of Putting Effectiveness First  

True, lasting efficiency only comes when effectiveness is given top priority.  Effectiveness focuses on finding a way to win.  That “way to win” involves understanding the underlying problem you are trying to solve (your solution) and differentiating attributes where you will excel in order to be the best at that solution.

For example, Wal-Mart’s solution is to improve the lives of lower income people by making the things of life more affordable.  The differentiating attributes they focus on are lowest cost and lowest price.  Wal-Mart doesn’t waste a lot of effort perfecting service or luxury, because that focus won’t improve their ability to win with their strategy.  Instead, they place all of that efficiency and perfection emphasis in areas which lower costs and lower prices.  And Wal-Mart didn’t stop at just trying to perfect the status quo discount store.  When they discovered that supercenters were a more effective way to solve their problem, they quickly made the switch.

The key to strategy execution is knowing which trade-offs to make.  It is virtually impossible to be the best at everything.  If you try to simultaneously be best at low prices, high quality, speed, service and innovation, you will probably end up being inferior to someone on all of these attributes.   No, if you want to be meaningfully superior, you have to focus on only a couple of attributes.  You trade off (do less) in the areas less important to your effectiveness so that you can afford to trade on (do more) in the areas critical to your effectiveness.  

Starting with effectiveness lets you know where to prioritize you efficiency efforts.  And it lets you know which aspect of efficiency (speed, price, etc.) to focus on.  And, most importantly, it lets you know where not to direct your efficiency efforts.  And, finally, it keeps an eye open for non-status quo approaches which are more effective at solving the underlying problem.  This provides an effective way to win year after year after year.

 

SUMMARY
If you focus too hard on trying to be perfectly efficient at everything you do:

1)      You can end up never winning superiority at any attribute relative to competition (because your efforts are dissipated over too many conflicting areas); and/or

2)      You end up perfecting the obsolete.

However, if the primary focus is first on being effective at owning a solution, you will know how to make the right trade-offs, so that you can become perfectly efficient in the places necessary for you to win in the marketplace.

 

FINAL THOUGHTS
Tools like Six Sigma and Lean should not be looked at as substitutes for strategy (or as being your strategy).  No, they are merely tools.  Tools in the wrong hands can be dangerous.  Tools in the right hands can produce great things.  If you want those tools to do great things, you need to first understand your effectiveness strategy.  This provides the context for knowing where and how to apply those tools.

Strategic Planning Analogy #416: Would You Build This?

THE STORY
There’s a story from decades ago about the Sears department store company. The company was going through some difficult times. A team of executives was put together to try to rescue the company.

Eventually, one of the executives on the team supposedly said something like this: “If we were starting from scratch, would we try to build something like Sears? If not, then why are we working so hard to preserve it?”

THE ANALOGY
Most strategic planning falls into one of two broad categories. Either one is trying to extend/exploit a winning business model or trying to repair a broken business model. As we can see in the story, Sears was working on the latter approach. Its business model, a middle of the road department store, was broken.

A natural reaction when one sees something broken is to try to fix it. But eventually one of the executives at Sears decided to question that assumption. His point was that the business model was broken for a reason—it was obsolete. The middle was not the right place to be anymore—success was at the extremes. Either become a low end discount store or a high end department or a specialty store. Even if you fixed the model to become the best middle of the road department store possible, it is still not the place you want to be. So why try to be there?

Often times, I think executives rush in to fix things before taking the time to ask the question “Is this worth fixing?” A lot of wasted strategic effort could be avoided if we spent more time asking ourselves if the broken business model is worth fixing in the first place.

THE PRINCIPLE
The principle here is that not all strategic pursuits are worth pursuing. Before spending a lot of time and effort running down a strategic path, make sure it is a path worth running on. Although this advice seems obvious—especially when working on new ventures—it can be overlooked when working with core legacy ventures. We want to preserve the core so badly that we forget to ask ourselves if the core is worth preserving.

Example of Intel
Consider the story of Intel. Back in the 1980s, Intel was trying to fix its core legacy business of memory chips. Nobody at Intel wanted to give up on the business, even though the legacy business was not doing well. Emotionally, people wanted to hang on and try to fix it. Andy Grove, COO at the time, finally went in to see President Gordon Moore and said something like this,

“What would a new management would do if we were replaced? [which was a real possibility if they couldn’t fix things] The answer is clear: They would get out of the memory business. So we go through the revolving door, come back in as if we were the new management, and just do it ourselves.” You can read more about this story here.

Andy Grove stopped to ask the tough question: Is the legacy core worth fixing? As a result, he stopped trying to fix it and moved on to building on Intel’s new strength in processing. And instead of being fired, Andy Grove eventually was made CEO of Intel.

When meeting resistance to abandoning the core, keep these principles in mind:

1) All Strategic Initiatives Eventually Fail
Sometimes strategies fail due to mistakes in execution. Other times they fail because the marketplace has changed to the point where the core strategy is no longer valid. For example, the digital era has made the core photographic film business of Kodak obsolete, no matter how well it is executed.

When you have a problem with your core, start by asking what the source of the problem is. Is it from poor execution or from obsolescence? If obsolescence, then don’t waste a lot of time trying to fix it. If poor execution, determine if it is too far gone to be salvageable before trying to salvage it.

Remember, all strategic initiatives eventually fail, because a changing environment changes what is most appropriate. There is no shame in admitting that the old core is no longer in sync with the most recent changes. It is inevitable. The real test is whether simple modifications can get it back in sync or if its time has passed and it can no longer be brought back in sync. And that should be the focus.

2) Most of Your Other Stakeholders Don’t Care About the Past
Lenders, shareholders and customers are probably nowhere near as attached to your legacy as the people inside the company. Lenders and Shareholders get their returns from future cash flows, not past cash flows. If abandoning the core leads to better cash flows, then they are usually quite okay with that. If you stick too long with a legacy that is no longer producing cash flows, then they are typically quite okay with changing the management (as Andy Grove feared). If the new management would abandon the core anyway, why not do it yourself?

Customers are typically not enamored with the past, either. They want to purchase what is the best thing to purchase right now, not what was the best thing to purchase in days gone by. If an iPhone is available today, why purchase an old rotary dial desk phone? Providing what customers used to want is not a formula for success, even if they used to want it a lot. And if your customers no longer want your offering, there isn’t much reason to try to preserve that offering.

Therefore, resistance from the outside to abandoning your core may not be as large as you fear. In fact, the outside world may cheer you on for abandoning the core.

3) The earlier you ask these questions, the better you can resolve them.
If you wait until a core business is fully obsolete before changing, you are working from a severe disadvantage. By that time, the core has no value, you have no cash flow to use for a transformation, and your reputation may already be tarnished.

It is better to consider abandoning the core earlier, when it may still have value to sell off, or at least provide enough cash flow to fund the transition to a replacement business. Transitions are always easier when moving at a time of strength. Customers are more likely to follow. Your best employees are still around. There is more money to fund the shift.

Therefore, start asking the questions early, even when the present looks good, because the future may not be a repeat of the present. Negative change may be just around the corner.

SUMMARY
Even though there may be a strong emotional attachment to the legacy core business, that does not mean that one should always try to preserve that business. The core may no longer be relevant today, or perhaps your execution of that strategy has drifted too far to be repairable. Therefore, before embarking on a massive program to fix a broken legacy business, ask yourself these questions: If I were starting over from scratch today, is this a business worth trying to be in? If not, why work so hard to be in it?

FINAL THOUGHTS
After Eddie Lampert’s investment company (ESL Investments) bought Sears, a lot of analysts were angry because Eddie Lampert was not pouring a lot of time, effort or money into preserving its core. They wanted him to fix the core business. However, Eddie Lampert was smart enough to ask the right questions. He knew the answer was not in fixing the core. He was merely using it as a foundation to become a major force in the on-line retail space. That was where he concentrated his efforts. This was where Eddie Lampert could see the possibility of a favorable return on investment. The analysts should have been happy that he wasn’t pouring money down the drain into the core.

Strategic Planning Analogy #284: Wheels on the Plow

THE STORY
Once upon a time, there was a successful, experienced farmer named Joe. Joe would hook his trusty horse up to his old plow and create a precision garden.

Then, one day his neighbor Bill bought one of those new-fangled motorized tractors. Bill was a less experienced farmer who had poorer soil to work with. However, that motorized tractor made Bill’s farm far more productive than Joe’s farm.

Joe didn’t like his neighbor doing so much better than himself. After all, Joe was the more experienced farmer. So Joe examined the situation. He noticed that Bill’s tractor had wheels. Therefore, Joe decided to put wheels on his horse-drawn plow.

The wheels made Joe’s horse-drawn plow a little more efficient, but still far less efficient than Bill’s motorized tractor. “What’s the problem?” Joe thought. “I’ve got wheels just like the tractor. I’ve got more experience. Why is Bill doing better than me?”

THE ANALOGY
A motorized tractor is far more efficient than a horse-drawn plow. No matter what you do to modify that horse-drawn plow, it will never catch up to the power of the tractor. Imitating part of the tractor, by putting wheels on the plow was not good enough. Even Joe’s added experience wasn’t enough to overcome the power of the motorized tractor.

To be as efficient as Bill, Joe would need to completely abandon the horse-drawn plow and get a motorized tractor.

The tractor was a disruptive technology. It made the old technology obsolete.

Disruptive technologies and processes occur in business rather frequently. When it happens, we can either react like Joe or react like Bill. Bill embraced the disruptive technology. Joe tried to modify the obsolete technology with a small part of the new (the wheels). Bill’s approach was more successful.

In general, embracing new technology is more successful than a half-hearted approach.

THE PRINCIPLE
The principle here is that sometimes you have to abandon what you know and embrace the new in order to thrive. A half-hearted approach (putting wheels on the plow) won’t do.

We can see that in the history of the retail/restaurant sector.

I was recently eating at a Big Boy’s restaurant. While sitting there, I started thinking back to my childhood, when Big Boy was one of the largest and most successful restaurants in the US. It had a strong appeal with children and made good burgers.

Then along came McDonalds. McDonalds brought a disruptive technology to the restaurant industry. It eliminated waitresses and busboys. It eliminated washing dishes. It made the food preparation far more efficient. As a result, McDonalds could offer items similar to what was on the Big Boy menu far more efficiently than the Big Boy way (and charge a lot less for them).

At first, one might think that Big Boy had the advantage. It was more experienced in the restaurant business than McDonald’s founder Ray Kroc. It had a nationwide market penetration. It invented the Big Boy hamburger (the Big Mac was just an imitation). It already had the devotion of children.

Yet today, Big Boy is barely limping along as a tiny company in a few locations, whereas McDonalds is everywhere, doing quite well.

Sure, Big Boy made some improvements along the way. They did their equivalent of “putting a wheel on the plow.” But it never embraced the transformational invention of the fast food industry. Had it quickly embraced the disruptive new industry, Big Boy could have been what McDonalds became. But it did not, and saw a declining future.

Similarly, Sears could have been what Home Depot became. Sears had all the early advantages, including the power of the Craftsman name. Yet Sears did not embrace the disruptive technology of the large Home Improvement Center. It just put a few wheels on the old way that Sears had always done things.

Even when Sears tried to build free-standing specialty stores to compete with Home Depot, it modeled them more after the old hardware store format (which Home Depot was putting out of business) than it did the new disruptive business model. The free-standing Sears Hardware Store near my home currently has a going out of business sign on its door.

By contrast, let’s look at the history of Wal-Mart. In the 1940s, Sam Walton started out as Walton’s Variety Stores. At the time, this was the most efficient way to sell basic goods in the rural south. However, in the late 1950s, Sam Walton noticed that the new discount store format was superior to the old variety store business model in terms of providing value to the customer. So Sam Walton abandoned the variety stores and fully embraced the new discount store format, opening his first Wal-Mart store in 1962.

Eventually, Sam noticed that warehouse clubs might be a disruption to the discount store model, so he fully embraced the technology and in 1983 began to build the Sam’s Club chain. Later, he noticed that the hypermarket/supercenter model could be the disruptive technology to make discount stores obsolete, so he fully embraced the supercenter concept, opening the first unit in 1988.

Today, Wal-Mart sees the internet as a disruptive technology that could significant overtake the old business model, so they are starting to fully embrace on-line retailing. According to a Reuters article dated October 17th, Walmart.com CEO Raul Vazquez told Reuters its aim is to be the biggest and most valued online retail site. According to Vazquez:

"In a few months, whenever someone thinks about buying diapers—in the same way they think about going to a Wal-Mart in the physical world—they will think about going to Walmart.com. Eventually, we'll be the biggest in sales and the biggest in mind-share and all of those other things that we've established in the offline world."
Given their track record, I would guess that Wal-Mart will be a winner here as well.

Wal-Mart wins because it was not afraid to abandon its successes of the past and embrace the new disruptive technologies. Big Boy and Sears are losing because they hung onto the past and made only minor, half-hearted improvements.

So what does this mean for the rest of us?

1) Be on the lookout for Disruptive Technologies
Wal-Mart kept spotting the disruptive technologies early because they were always on the outlook for any potential threat to their value proposition, no matter where it came from. If you are not actively looking broadly, you may miss it, because the disruption often comes from outside your industry and not from your traditional competitors.

2) Be careful in how you define yourself
Big Boy and Sears defined themselves by what they were and what they did. Big Boy saw itself as a traditional restaurant. Sears saw itself as America’s Department Store. By contrast, Wal-Mart defined itself by the benefits it provided to customers—namely lowest prices.

When Wal-Mart saw anything that could potentially offer better prices to its customers, it quickly pounced on it. They knew that if they lost their pricing edge with the customer, the game was over, so they saw any pricing advantage anywhere else as an immediate threat.

However, Big Boy and Sears did not feel as immediately threatened by McDonalds and Home Depot, because these newcomers came from different industry definitions. Since they did things differently, McDonald’s and Home Depot were not seen as direct competitors. The newcomers were seen as playing in a different industry—not their own—so not an immediate threat. Hence, their technologies were not fully embraced.

3. Be willing to abandon what used to make you successful
Wal-Mart was willing to abandon its prior means of success in order to fully embrace its next means of success. They would shut down a Wal-Mart discount store and build a Wal-Mart Supercenter across the street. Such abandonment of the past is difficult to do, but often necessary. If you are not willing to completely abandon the past, you cannot completely embrace the future.

4. Don’t Just Put Wheels on the Old Plow
Improvements to obsolete technology don’t change the fact that the technology is obsolete. A halfhearted inclusion of bits and pieces of the future glued onto the past won’t succeed against others who fully embrace the future. Rather than putting wheels on the plow, buy the motorized tractor.

SUMMARY
When disruptive change occurs, you can either embrace it or resist it. Embracing it is usually the best approach, even if it means abandoning what made you successful in the past.

FINAL THOUGHTS
Prior experience is not much of an advantage if the experience is in obsolete processes. Don’t let your obsolete experience blind you to the need to gain new experiences.

Strategic Planning Analogy #279: Trends Change, Not People

THE STORY
When I was a teen, my observations were that young people drank Coke and older people drank coffee. Now, decades later, it seems that it is the younger crowd that is patronizing the coffee shops and drinking the coffee in large quantities. If anyone is drinking a Coke, it tends to be an older person.

The same with hair color. When I was a teen, I observed that if there was a woman with bright blonde hair, she tended to be a relatively young adult. Older women had more subdued colors. Now, decades later, it seems that the bright blond colors are on the older women and the younger women use more subtle highlighting.

It’s as if all of the rules I learned as a teen no longer apply.

THE ANALOGY
The problem with the rules I came up with as a teen was that I was linking a trend to an age. In other words, I believed that when people reached a certain age, they should act a certain way.

Instead, I should have linked a trend based on date of birth. In other words, people born at a certain time have a particular characteristic they will carry on throughout adulthood. The next generation is not bound by the old trend and so they start their own, which they carry on throughout their adulthood.

It isn’t so much that people’s beverage preferences change completely as they get older. It’s that the “cool” drink in the formative years changes from generation to generation. Depending on that was “cool” to drink at that formative age, that became the beverage of choice you carried with you as you aged.

A couple of generations ago, that cool drink was Coke. Now, it’s some fancy form of coffee (or maybe an energy drink). I suppose in another generation or two, young people will find something else “cool” and it will be the old folks who drink the fancy coffees (who are those same people who picked up the coffee habit when they were young and when coffee was cool).

This concept has been particularly true with beer brands over the ages. A particular beer brand is cool when drinkers are starting out, and they tend to stick with that brand through the rest of their life. The next generation chooses another “cool” beer brand and sticks with it. And so on.

So what does this imply for strategy? Strategies try to find the ideal place for your firm in the future. To find that ideal place in the future, it is important to first have an accurate view of the future.

As you try to imagine that future world, you can fall into the trap I did as a teen and incorrectly assume that younger generations will revert back to the behavior of the prior generation when they get older. I had thought that young people would always prefer Coke and old people would always prefer coffee, no matter when you were born. That was an incorrect assumption.

A better way to predict the future is to look at how each generation forms its habits in those formative years, and use that as a guide for how each generation will adapt to the future.

THE PRINCIPLE
The principle here is that trends change faster than people change. The next revolution in behavior tends to start with the generation still forming its life-long habits. Those who already have long-ingrained habits change far more slowly. As each new generation arrives, there is the opportunity to create a new trend, even if the older folks hesitate to participate.

This principle should lead to the following concepts.

1. Don’t look to the older people of today to predict how the older people of tomorrow will be
Back in the 1980s, I remember reading predictions about shopping behavior. At that time, the older people were shopping Sears, while the younger adults preferred shopping discount stores and specialty stores. Some prognosticators at that time were predicting that when the younger customers became old, they would switch store preferences to Sears, since that seems to be what older people do.

Well, here we are at the point when those younger shoppers from the 1980s are older. And guess what…they did not automatically start switching over to shopping Sears. Sears’ customer count continues to drop.

Those prognosticators in the 1980s made the mistake I did as a teen and associated behavior with an age rather than with when you were born. Sears is losing customers because the ones who were in their formative years when Sears was cool are dying. The next generation stayed with the same basic habits they formed back in the 1980s. They didn’t say they needed to switch to Sears when they got old because “that’s what old people are supposed to do.” Instead, they said, “Sears is the store for my parents, not me.”

Buick has been trying for years to get young people to embrace their brand. Unfortunately, Buick tends to be associated with a much older generation and it is hard to dislodge that image.

For young people, Buick is not the cool brand of their generation. And when today’s young generation gets old, I doubt they will suddenly switch to driving Buicks. They won’t think that “Old people drive Buicks, so now that I am old, I should drive a Buick.” No, unless something dramatic happens, Buick’s fate appears tied to an earlier generation and its best years will die as that older generation dies.

The same is true for newspapers. For awhile, many newspaper folks were not afraid of the internet because they thought that as the young adults got older, they would become more like their parents and switch from the internet to the newspaper. You don’t hear those comments much anymore, as people realize the new generation is never switching to paper for their news as their parents have habitually done.

This is not to say that older people never change their behavior. They do. However, those changes are not because they say “I’ve gotten old now, so I have to start acting like my parents did.” Instead, the changes tend to occur because:

a) Their relative discretionary time versus discretionary money changes over their lifetime (we act differently when we are time rich and cash poor versus when we are time poor and cash rich).

b) Their physical abilities change (older people have poorer vision, weaker stomachs, and are less mobile—perhaps no longer able to drive themselves).

c) Even though they may not be trend-setters, older people will switch to the new if it is found to be vastly superior (for example, the elderly eventually saw the benefit of the internet for their lives). In this case, they are not changing to be more like their parents, but to be more like their children.

2. Don’t look to the younger people of today to predict how the younger people of tomorrow will be
Each generation has its own defining moments. Those who grew up in the depression of the 1930s had a different outlook from those who grew up in the prosperous 1950s versus those who grew up in the turbulent 1960s, versus those who grew up in the materialistic 1980s, versus those who are growing up in the current age of terrorism.

Times change; technology advances. A person who has been tapping on a computer keyboard since the age of three sees technology a lot differently from one who first typed on a computer in their 20s. The “cool” behavior of one generation becomes “the weird stuff my parent’s did” to the next generation.

“Cool” communication has morphed from email to IM to texting to tweeting. We’ve moved the core cool internet page from portals to search engines to social network sites. The cool thing of tomorrow may not even be invented yet. So don’t assume today’s definition of cool will last.

It’s difficult to stay relevant and cool for each new generation. MTV has had to reinvent itself many times over in order to have its brand still be relevant to each young generation (and it appears to be losing the battle). Perhaps a better approach is to emulate Pepsi, who adds new brands to its portfolio in order to be relevant to each new generation, from Pepsi to Mountain Dew to Gatorade to SoBe.

Therefore, when envisioning the future, assume some behavior patterns which do not yet even exist. Better yet, try to create that next cool thing.

SUMMARY
Behavior patterns tend to follow generations. Therefore, it is often a mistake to use one generation’s patterns in order to predict a different generation’s patterns.

FINAL THOUGHTS
All of this change is good, because it provides a competitive advantage to those who know how to exploit it. If things never changed, we’d all still be shopping Sears.

A Divine Right to Perpetual Success

THE STORY
Back in the 1980’s, Donald Katz wrote a book about the history of the Sears retail company. The book was titled The Big Store. In this book, Mr. Katz went into great detail about all of the successes and failures Sears has had throughout the years.

Katz tells a story in the book about one of the low points, when Sears was losing customers and having financial difficulties. A group of Sears executives got together to try to diagnose the problem and find a solution. One of the executives exclaimed that he knew what the problem was. I lost my copy of this book a long time ago, so I cannot quote it exactly, but what that executive said went something like this:

“The problem is that people have forgotten that we are Sears. If we can just remind them that we are Sears, then they will come back and shop us again. Sears represents Americana. Sears is a part of our American heritage. If people could just remember how great Sears is, they would come back.”

Apparently, to this executive, the problem with Sears was the stupidity of the customers. These customers had forgotten that Sears is a successful brand who deserved their patronage simply because it was Sears. People had forgotten that Americans are supposed to shop Sears because that is what Americans do.

Contrast this to the response to a blog called Brand Autopsy by John Moore. On March 21, 2007 John posed the question: If Sears went out of business tomorrow, would anybody care? Some of the responses were as follows:

“Miss Sears? I can't remember the last time I was in one of their stores. Sears was a regular stop for my parents while I was growing up in the 60's.”

“Going to Sears is like a trip to the museum. You get to experience the past permanently.”

“I gave up on Sears years ago.”

“Did anyone miss Roebuck all that much?”

THE ANALOGY
The Sears executive in the story assumed that for some reason Sears deserved perpetual success. It was as if there had been a decree from heaven that people were supposed to always love Sears. If people stopped loving Sears, it was because they forgot that Sears had a divine right to always be successful. If people would only remember that Sears is a successful brand, then it would be successful again.

This executive made the fatal mistake of taking success for granted. He assumed that once a brand attains success, that success cannot be taken away—once successful, always successful.

Unfortunately, brands have to win their loyalty every day. Past victories do not ensure future victories. When developing strategies, do not take success for granted. Do not take your customers for granted. Future strategies need to incorporate tactics designed to continually make the brand relevant and desirable.

The second fatal mistake this executive made was to blame any failure on the customer, rather than the business or the executives. Remember, the customer is the one with the money. If they don’t like you, they will spend the money elsewhere. It is your responsibility to get them to spend it with you. If they spend it elsewhere, you have to take the blame. If you take the approach to failure as “My strategy was perfect, it was the customer who was flawed,” then you are doomed to repeat that failure.

THE PRINCIPLE
The principle here is that reputations are perishable. Just because you have a great reputation today does not mean that you will have a great reputation tomorrow. There are several ways that one can lose a great reputation:

1) You stop doing the things which gave you the great reputation in the first place, like great service or great prices.

2) The marketplace changes and customers start valuing something different. If you do not change with the times, your prior benefits can become less desirable or even obsolete.

3) A scandal or crisis causes people to lose faith in you.

4) You are providing the same level of benefits as before, which used to be the best available. But now someone has found a way to do the same thing better than you.

Because reputations are perishable, one can never take them for granted. Every strategy needs to deal with the question of how to ensure that customers continue to love you, in spite of all the changes in the environment. If you assume that customers will love you pretty much regardless of what you do, then your strategy can fall into the trap of “customer exploitation.”

Of course, you would never refer to a strategy as being rooted in customer exploitation, but many strategies end up being that way. Here’s how the process tends to go.

If you assume customers as a given, then your focus shifts to profits. The strategic question then becomes: How can you squeeze a little bit more profitability out of those customers? The answer tends to be through a combination of small modifications: raising prices, cutting service, cutting quality, etc. The subtle thinking in the back of the mind is that customers love us, so they will put up with a small about of these reductions to the overall value of the offering. In fact, we can even come up with a fancy name for it, called “brand premium.” In other words, our brand is so strong, that we can charge a premium. Or to say it another way, if the brand is strong enough, we can exploit our customers more.

Yes, there is some truth to the power of a brand. But that power can evaporate if we exploit the customer too much. Back in the 1960s and 1970s, Schlitz was one of the top selling beers in the United States. Even as late as 1976, it was the #2 brand in the country. But the Schlitz company started taking its success and its customers for granted. Instead of worrying about its customers, it looked for ways to squeeze more profits out of what they assumed to be a guaranteed perpetual flow of business forever.

To improve profitability, Schlitz found a less expensive way to make beer. Unfortunately, this process had the negative side effect of making the beer taste less desirable. Although people had loved the Schlitz brand in the past, they did not care for the inferior taste of the new beer made with the cheaper process. The love was lost. They abandoned the beer in droves. Today, Schlitz is a minor factor in the industry, made in small quantities by Pabst.

So what do I think was the principle factor behind the decline of the Sears brand? Back at the height of the Sears success (in the 1950s and 1960s), the US had Fair Trade laws. These laws made it illegal for a retailer to sell a product below the retail price suggested by the manufacturer of the product. If you were a retailer selling name brand products, you could never really get a price advantage over the competition. By law, you were constrained to price parity.

This is where the genius of Sears came in. Sears developed its own lines of products under its own brand names, like Kenmore and Craftsman. They positioned them to be every bit as good as the brand name products. However, because Sears owned the brands, it could charge whatever price it wanted. It was not restricted by the Fair Trade laws. Therefore, it priced its brands to always be below the fair trade price on the equivalent brand named goods.

In essence, Sears was the Wal-Mart of the 1950s and 1960s. It owned the reputation for “always low prices.” The laws of the United States almost guaranteed that Sears would be lowest priced alternative.

However, the Fair Trade laws started being abolished in the late 1960s/early 1970s. Suddenly, Sears was no longer guaranteed to have the lowest prices. Department Stores and Big-box specialty stores could now underprice the Sears private label with the often more desirable brand names. In fact, the repeal of the Fair Trade laws helped spur the rapid growth of discount department stores, like K Mart and Wal-Mart.

The reason people had loved Sears (lowest prices) vaporized. Sears was no longer the “Wal-Mart” of their time. Now Wal-Mart was the Wal-Mart of their time. Because Sears did not understand why people used to love them, they had no idea why people stopped loving them when the environment changed.

When Sears lost its original reason for success, it needed to do one of two things with its strategy. Either it needed reinvent itself so that it could hold onto its lowest price reputation (in other words, morph into a discount store like Wal-Mart), or find a new position as desirable as the old one (which they have never found).

It is not the customer’s fault that Sears is not doing well. The customer did not forget what made Sears great. Sears failed to understand the impact that Fair Trade laws had on their success, and so it misread the impact when those laws were lifted. The Sears strategy never found a new reason for customers to love them, because the company was apparently not aware that it even needed a new reason for people to love them. They thought “Americana” was enough. Sadly, it was not.

SUMMARY
There is no such thing as a perpetual divine right to success. Customers love you for a reason. Things can change, causing that reason to no longer apply. Therefore, strategic processes must always have at their core a reassessment to ensure that the company continues to have a desirable and winnable position in the hearts of their customers. Otherwise, you can take the customer for granted and increase your exploitation of them until they eventually leave.

FINAL THOUGHTS
During this same time period (the 1960s/70s), Kresge could see what was going on in the environment and morphed itself from being a variety store chain (S.S. Kresge) into being the leading discount store chain (K Mart). Sears could have done the same. It is their own fault that they did not.

An “Able” Position

THE STORY
Have you ever noticed that in many little diners there is a sign on the wall claiming that the diner sells “the world’s best coffee”? This brings to mind several questions:

1) If a lot of diners have this sign, then how can all of them be true? How many “World’s Best Coffees” can there be?

2) What could a little old diner in the middle of nowhere be doing so differently to make their coffee the world’s best? Can they afford to have someone combing the world for the world’s best coffee beans?

3) Who gets to determine what the world’s best coffee should taste like? Isn’t it true that different people like different types of coffees?

5) How could anyone taste a sample from every establishment in the world that sells coffee in order to assure me that they know which one tastes best? After that many samples, how would they even remember what each one tasted like?

4) If their coffee is so good, then why do I see more people at a Starbucks?

5) If their coffee is so good, then why is it so cheap?

THE ANALOGY
All businesses need a position in the marketplace. Positions tell people what your business stands for and why they should prefer doing business with you. If you cannot come up with a position which explains why people should prefer to patronize you, then why are you in business? Why should people care about you? Just “showing up” is not good enough. Your business needs to create a competitive advantage through proper positioning.

Not all attempts at positioning are successful. In the story above, the diners claimed to have a position: the place to get the best cup of coffee in the world. I seriously doubt that anyone takes such a statement seriously. If your position is not taken seriously, then it is not really a position.

Therefore, one not only needs a position, but one needs a successful position.

THE PRINCIPLE
Successful positions have four characteristics. I call them the 4 “ables”. To be successful, a position must be:

1) Desirable
2) Achieveable
3) Believable
4) Ownable

Each of these is explained in more detail below.

1) Desirable
It is possible to create a position you can achieve and own, but that very few people actually care about. For example, you could create a one-stop shopping environment for people who want to get just ice cream and battery acid on the same trip. The world may allow you to own that position, but very few people are looking for something like that. It’s not the sort of position that will cause people to prefer you. First of all, those two items are not usually bought together and there is little advantage to bringing them together into the same store. Second, there could be fears that the ice cream would be poisoned by coming in contact with the battery acid.

Therefore, when choosing a position, make sure that you have chosen something people want—something so desirable that it would cause a significant number of people to choose you first over the alternatives.

2) Achievable
It’s great to come up with a position which people desire. However, if you are incapable of living up to the promises of such a positioning, then you are just going to end up disappointing people. For example, around 20 to 25% of the consumer population will put up with a lot of grief to get the lowest price. Therefore, owning the low price position in your industry will make you popular with a lot of people. However, if you are a small business with a high cost structure, then it is highly unlikely you can achieve and sustain the lowest prices in the industry. Eventually, people will figure out that you really are not the lowest priced and you will lose the battle. (In today’s internet age, there are so many sites doing comparison pricing and performance ratings that it is even harder to fool people with an unachievable position.)

You need to pick a position which is suitable to your capabilities—something you can be the best at. What is achievable for someone else, may not be achievable for you (and vice versa). That’s why there is not one single position which is best for everyone. You have to find the one that is best for you.

3) Believable
People act based on what they believe. If people do not believe that you own a position, you will not get credit for it. People’s beliefs are not always rooted in reality. Therefore, achieving a position which is verified by scientific measurement may still fail if customers do not believe it to be true. Positions are held in the mind of the customer. It is in the mind where you have to measure you success.

In the story above, it is hard to believe that a small diner has the world’s best coffee (even if it does). Therefore, it is not a very persuasive reason for choosing the diner.

A few years back, I saw a Menard’s home improvement center with a large sign on the outside claiming that Menard’s was “the official home improvement center of the new millennium.” First of all, I’m not exactly sure what that means. Second of all, it is hard for me to believe that such a claim is true. Third, the only thing it got me to believe was that there are some goofy sign creators at Menard’s (and that’s not a reason to prefer them).

Sometimes, companies that have tried to own a “quality” position have had believability issues because their prices are too low. Like in the story above, customers can wonder how your quality could possibly be that good if your prices are that cheap. In many cases, companies going after a “quality” position have had greater success once they raised their prices, because it made their position more believable.

4) Ownable
Finally, a position must be ownable—something that is relatively unique to your firm and not already owned by someone else. Remember, the goal is to find a position which will cause people to prefer you over someone else. If everyone has this quality, then it will not get people to prefer you. For example, if a doctor claimed his position to be “the doctor that cures people of their illnesses” it would not be a very successful position. After all, it is assumed that all doctors are qualified to cure people of illnesses. Hence, it would not be something that this doctor could own. He couldn’t say, “Unlike most other doctors, I cure people of illnesses.”

Another ownership problem occurs when someone claims ownership to that position before you. For example, Wal-Mart has spent a great deal of time and effort to own the low price position in basic consumables. For a newcomer to try to take that position away would be very difficult. It is already owned by Wal-Mart. It is usually better to look for a position not already firmly held by someone in the industry.

Last week, Eddie Lampert, Chairman of Sears Holdings announced the new positions for Sears and K Mart. Although it is too early to make a final assessment, let’s put the new positions to the test. For Sears, the new position is to be a “one-stop shop for the home.” The slogan is “Sears. Where it Begins.” The icon is a throwback to the big Sears catalog, where stories about people and their homes come out of the book.

For K Mart, the position revolves around being a “marketplace of discoveries.” The slogan is “turn on to something new.” The icon is a throwback to the blue light special via a cartoon Mr. Bluelight.

Starting with Sears:
1) Is it desirable? It’s nice to get everything relevant for the home at one place. But do I really want a Home Depot and a Bed Bath and Beyond under one roof? Maybe.

2) Is it Achievable? Well, wasn’t Sears’ Great Indoors format everything possible for the home under one roof? So it can be done. (Of course, the lack of success of the Great Indoors does make one a little skeptical about the desirability).

3) Is it Believable? What about all the clothing in the store? What does that have to do with the home? I doubt that all the clothes are being taken out. So it is reasonably believable, but compromised by non-home items.

4) Is it Ownable? Home Depot and Lowes own the hardlines part of the home and Bed Bath & Beyond owns the softlines part of the home. By combining the two, do you compromise your image as an expert? Can people believe that you are the expert in both?

Now how abut Kmart:
1) Is it Desirable? I’m not convinced of what it is I am to desire. Is it the ability to find new and different items? If so, that is desirable.

2) Is it Achievable? It is very difficult to always be on the cutting edge of what is new and different, especially as a discount store.

3) Is it Believable? Kmart is not known as being hip or new or unique. This will be a tough sell. Having a cartoon light explaining it to me probably will not change minds. So far, I’d say no.

4) Is it Ownable? Target owns the hip, new discovery position in discount stores. If the bent is more towards one-time closeouts, that is owned by Big Lots. I don’t see a lot of ownership possibilities, here.

Final vote: Sears brand has modest potential, Kmart seems weak. Neither a home run.

SUMMARY
Successful positions must be desirable, achievable, believable and ownable.

FINAL THOUGHTS
On May 4, 2007, Eddie Lampert said, “A company without positioning is like a ship without a rudder.” I’d add that a company with a weak position is like a ship with a broken rudder which causes you to go in circles, rather than moving forward.