Strategic Planning Analogy #441: Leaving Early

THE STORY
When I go to a sporting event, I like to stay until the very end. I figure that I paid for the whole game, so I may as well watch the whole game. And who knows, something exciting might happen at the very end.

Usually, however, the end is not very dramatic. And because I wait until the end, I get caught in terrible traffic jams. First, the jam of the people trying to get out, and then the jam of the cars trying to leave. It seems like forever to finally get on my way home. What a mess!!

The frustration of trying to leave gets larger than the excitement of seeing the game. At that point, I wish I would have left earlier.

THE ANALOGY
For every strategic business initiative, there is an important question to ask—When is it time to leave this initiative and move on to something else? There is a tendency for executives to act like my behavior at sporting events and stick around until the very end. And just like in sports, if you stick around until the very end of a strategic initiative, you end up in a mess.

Usually nothing very exciting happens at the end of a business initiative life cycle. Sales slowly fall away and losses begin to mount. You could leave early without missing any excitement (and avoid the losses).

And, if you leave this business sector ahead of the crowd, you can avoid the mad rush to the exits of everyone else later on. At the end of the cycle, when everyone is trying to leave, there is virtually no value in what is left behind (everyone is selling and nobody is buying).

Therefore, we should resist the temptation to stay until the end of the game and leave early. After all, there is always another game to play, and the sooner you leave the old one, the sooner you can prepare for the new one.

THE PRINCIPLE
The principle here is that a retreat or exit from a business is not necessarily a sign of failure. Often times, leaving early is the more successful alternative.

1. ALL Strategic Initiatives Eventually Die
The first thing to remember is that ALL strategic initiatives eventually die. Again, ALL strategic initiatives eventually die. Strategic initiatives follow a lifecycle of growth, maturity, decline, then death. If your company’s strategy is to ride an initiative all the way to the end, then you will die as well. If you don’t want to die along with that strategy, then you’d better leave early and move on to a replacement strategy.

Just because all strategic initiatives die is not to say that everything dies. Consumer desires for solutions to problems does not die. Consumer desires for status, comfort, performance, convenience and value do not die. The problem is that the way consumers satisfy these desires changes over time. New and better solutions (or business models) come about which are superior to the old ones. If you want consumers to continue getting their solutions from you, then you’d better keep advancing to the initiative with the superior solution.

Kodak stuck with analog film all the way to the end and died with the initiative. Had they left earlier, they would have had the opportunity to continue to thrive. After all, the consumer desire to capture memories still lives. The desire for visual imaging still lives. The desire to share experiences through pictures still lives. The only thing that died was the analog film initiative…and the companies who stuck with it until the end.

A large part of the entire social phenomenon on the internet is just a superior business model for solving the problems that Kodak used to solve—the sharing of experiences. By sticking around too long at the old game, Kodak got caught in the mess at the end and missed out on the new game of the social revolution (not to mention the whole digital imaging thing).

Don’t get caught into believing that you are the exception and that your strategic initiative will never die. At one time, Sears was by far the largest and most successful retailer on the planet. Consumers loved them. They seemed invincible. It looked like they would be successful forever. But times changed and Sears didn’t. Superior solutions appeared. Sears is now near death. Consumer purchasing did not die, but the Sears way of selling did.

2. Wanting to Win in the Worst Way Usually is the Worst Way
Failures don’t just happen at the end of the life cycle. Failures also occur during the process of innovation. Not every new idea is a good idea. In fact, most innovations fail.

In an earlier blog, we talked about some of the psychological biases which cause companies to want to stick with an innovation too long. Some of those factors include:

a) Innovation is Fun
b) Innovation Can Enhance a Career
c) All the Other Cool, Successful Companies are doing it.
d) My Ego/Reputation gets Entangled with the Reputation/Success of the Innovation.
e) The Budget/Plan is Depending on it.
f) There’s Nothing Else in the Product Development Pipeline, So it HAS to Work.

As a result, there is an inherent bias to stick with a bad innovation too long. We want so badly for the innovation to succeed that we try to create success out of our own desire when there really is no success to be found.

Wanting to succeed in the worst way is usually the worst way to try to succeed. We need to be rational and realize that and early exit from a doomed venture is often the smart move (and will save one from taking heavy losses and write-downs in the future).

3. The Last One Standing is Usually the Loser
A third place where sticking around too long can occur is when the “Roll-Up” strategy is used. The idea is to consolidate an industry by acquiring enough of your competitors to have the leading share (roll them all into one).

There is logic to using this roll-up consolidation approach. It creates economies of scale and there are benefits from reducing the number of competitors. It can also be a great way to expand geographically.

However, the roll-up strategy is best used near the beginning of the mature phase of the life cycle. After all, it does no good to be the great consolidator of a business if the business is near death. The consolidation only makes sense when there is still a demand large enough to want the large entity you are building.

During the 1970s through the early 1990s, Supervalu rolled up and consolidated the wholesale grocery industry. This strategy provided many years of success. However, the largest customer of the wholesale grocery industry is the small, independent grocer. Thanks to the rise of the Walmart Supercenter and the growth of large supermarket chains, the independent grocer was rapidly disappearing. Having the best wholesale grocery business is worthless if you no longer have independent grocery customers. The roll up strategy was starting to die.

Fortunately, Supervalu did not need to die. They changed strategies to become owners of large retail chains (primarily through the acquisition of Albertsons). Now they controlled their retail customer base. Another winner was the wholesaler Cardinal Foods. They sold out early in the consolidation and moved into the growing health care business, eventually becoming the successful Cardinal Health.

In a roll-up strategy, remember that when everyone is willing to leave (and sell you their business), you need to question why you want to buy them. Often, they are willing to sell out because either:

a) They think the business is dying; or

b) They think you are paying such a high premium to get the business that your price is far higher than the present value of future cash flows. In this case, you transferred all the value of the consolidation to the person who is leaving the business via your purchase price.

Either way, that is not a good sign for the consolidator. In the end, all strategic initiatives eventually fail, and consolidating a larger version of that initiative at the point when it fails just creates a larger failure.

Consolidating is nice at the beginning of maturity, but know when it is time to leave that strategy. Sell out early before the very end and let someone else be holding the large mess when the initiative is nearing death. After all, the last one standing when the initiative dies will die with the initiative. I spoke about this principle in more detail here.

4. Distinguishing Battles from Wars
Leaving an initiative early may look like failure, but an initiative is only one battle. The real goal should be to worry about winning the larger war, not a single battle.

The real war is to preserve and profitably grow the corporation. For a corporation to do so, it must continually shed its old initiatives and add new ones. Shedding the old is not a sign a failure, but a realization that the greater goal requires adapting to change. In fact, failure to shed is more likely to create ultimate failure.

Long-time enduring companies like Nokia and GE have had vastly different portfolios of businesses over the years. They were willing to leave industries before that game was over and move to the newer, better game. And when GE has temporarily faltered, it is usually because it stayed too long with a particular initiative.

SUMMARY
Leaving a business early may at first seem like failure, but it is usually the more profitable option. Strategic initiatives eventually die and you cannot stop that. Therefore, to prevent your company from dying, you need to move on. And the sooner you move on, the easier and more profitable your exit will be. Also, the sooner you move on, the easier it is to own the next big thing which is replacing what is dying.

FINAL THOUGHTS
When you see others starting to leave the game, consider it a warning sign that perhaps you need to consider leaving as well.

Analogy #156: Don’t Blame Me, It’s the Environment

THE STORY
I knew an old grocery wholesale executive who liked to tell the same story, year after year. After having heard it so many times, I can almost recite it by heart. Being in the grocery wholesale business, this executive spent a significant part of his time visiting grocery retailers. Whenever he would go to visit a grocery retailer whose store was not doing well, he would hear the grocer complain that it was not his fault that his store was doing poorly. He would blame his problems on the environment, saying things like:

“The economy is bad. There is too much unemployment in the area.”

“The weather is bad. Nobody shops much in this weather.”

“The population is declining. There aren’t enough people living here anymore.”

“People are eating out in restaurants more and not buying as many groceries.”

The retailer would then conclude by saying, “It’s not my fault…nobody could make money in this environment.”

At this point, the wholesale executive would leave the store, and in every case he could go down the street and find a different grocery store that was thriving in that same environment. His point was that there are ways to make money in any environment, and somebody will figure it out. It may as well be you. The environment is not the reason the store was failing. It was because the store manager did not know how to adapt to the environment.

THE ANALOGY
When things are going poorly, it is easier for executives to blame the external environment rather than blame themselves. “It’s not my fault,” they say. “No executive could have been successful in the environment I was faced with.”

However, at some point, shareholders do not care why your business is doing poorly. The shareholders will just move their money to a company that is thriving in that same environment. And trust me, there will always being a thriving company for the shareholders to invest in, that will give them a better return, regardless of the economy.

It’s true that the environment is not always favorable to a particular business model. But where is it written that a company has to stick to a particular business model that is no longer appropriate for the environment?

One of the most important reasons for doing strategic planning is to discover (with enough advance notice) those trends that will destroy your strategy so that a better strategy for that coming environment can be found and put in its place. If a company starts its transition soon enough, it will never find itself in a position where its strategy is out of tune with the environment.

If you wait until disaster surrounds you before taking action, your options are rather limited. However, if you do strategic planning in advance, you can anticipate future problems and prepare a plan to thrive in whatever the future has to offer.

THE PRINCIPLE
Back at the end of the 20th century, an industry whose entire livelihood was threatened by changes in the environment would have been the US grocery wholesale industry. These food wholesalers were suffering from two major environmental problems:

1) The primary customer of the food wholesaler, the independent grocery store, was disappearing.
During the 1980s and 1990s, the growth and consolidation of the large supermarket chains, combined with the rapid growth of the Wal-Mart Supercenter put the weaker independents out of business and was threatening the viability of even the stronger independent grocers. Between their economies of scale and the ability to use general merchandise to subsidize grocery prices, these chains were putting independents at a major disadvantage. Many independents gave up and sold their stores to these self-distributing chains. I don’t care how great you are at wholesaling food for independent grocers. If your customers are going away, then you are in trouble.

2) Even at its most efficient, the food wholesale business model was less efficient at distribution than a large, self-distributing chain.
Food wholesalers are at an efficiency disadvantage, because they service a wide variety of independent stores over which they have limited influence. Because all of the needs of their independent customers are different, they cannot design a warehouse and distribution network that is optimal for any one of them in particular. By contrast, a large supermarket chain can run all of its stores the same way. As a result, they can create their own warehouse and distribution network that optimizes for that type of store. This makes self-distribution for large chains more efficient than food wholesaling for independents.

Therefore, in many ways it does not matter how well run and efficient a food wholesaling business is managed. If your industry is running out of customers and the business model your industry uses is less efficient than the alternative, even the best executive will have difficulties. Consequently, a food wholesaling executive might say that their problems are not their fault. It is an environment where no executive could succeed.

That type of response, however, is unacceptable. The environment cannot be blamed for any company’s failure. This trend did not happen overnight. It gradually happened over many years. There was plenty of time for a food wholesaler to detect this trend and adapt by altering its strategy.

Executives in such a situation have two choices. Either:

a) Use strategic planning to change the business model to better adapt to the changing environment; or
b) Stay with the current business model let the environment dictate a more dire future for the business.

Let’s take a look at how three companies reacted to this situation: Fleming Companies, Supervalu, and Cardinal Foods.

Entering the 1980s, Fleming Companies was one of the largest and most successful food wholesalers in the US. Given its past success, it saw no reason to radically change its strategy. It decided to continue to concentrate primarily on wholesaling groceries, primarily to independents. Yes, the trends were working against them, but they thought they could beat the odds due to their size.

As Fleming continued to stick to its original strategy, the ever more hostile strategy took its toll. Its customer base of independents began to whither away. In desperation, it took on ever more risky business, including a very risky deal with K Mart. In further desperation, Fleming lied about its financial health by getting its vendors to help it use deceptive accounting practices.

Eventually K Mart declared bankruptcy and the SEC began an investigation into its accounting practices. As a result, in April 2003 Fleming declared bankruptcy. The Fleming Companies, as it was known, ceased to exist.

Fleming could claim to be a victim of a bad environment, a firm with few options. It could claim that bankruptcy was inevitable, given the harsh conditions of a declining client base. However, Supervalu and Cardinal Foods had a different outcome.

Going into the 1980s, Supervalu was about as large and as strong as Fleming. However, Supervalu could see the trends on the horizon and was willing to do something about it. Rather than depend solely on the fate of the independent grocer for its future, Supervalu decided to become its own customer. In other words, it changed its strategy. Supervalue started moving from being a wholesaler to becoming more of a retailer. It started slowly, in order to keep the independent customers from getting upset and fleeing.

Then it started looking for the big deal to get into grocery retailing in a big way. After several attempts, it bought the Albertsons chain, making it one of the top 5 grocery retailers in the United States. Now Supervalu is doing fine.

By contrast, Cardinal Foods was a small player in grocery retailing. In looking at the trends, it could see that there was no long term hope for a small grocery wholesaler. Such a strategy was doomed. Therefore, in the late 1970s, it decided to change its strategic direction. Cardinal Foods decided to take its wholesale distribution expertise to an area where the environment was more favorable—pharmaceutical distribution. Starting in 1979 Cardinal began to acquire a number of pharmacy distribution companies. By 1997, it had acquired 15 such firms, making it a major national player in pharmacy wholesaling. In fact, the pharmaceutical business was doing so well for Cardinal, that it changed its name to Cardinal Health and exited the food wholesale business in 1988.

Starting in the mid 1990s, Cardinal Health expanded further into the medical business, while continuing to strengthen its pharmacy distribution core. Now, Cardinal Health has sales of over $80 billion and is one of the largest companies in the US based on sales.

So, was sticking to a strategy of primarily being a wholesaler to independent grocers a failing strategy? Yes. Does that mean that companies in that industry were destined to fail? No. By using the tools of strategic planning, Supervalu and Cardinal Foods had the time and the initiative to modify their strategy so that they could survive in the new environment. Fleming has no excuse. It cannot blame the environment. It can only blame itself for not preparing in advance through effective strategic planning as Supervalu and Cardinal Health did.

SUMMARY
Although environmental trends may cause a particular business model to fail, it does not mean that the company using that business model has to fail. Good strategic planning includes understanding the impact of environmental trends on business models and proactively finding new models more appropriate for the changing environment. Over the long haul, management cannot use the environment as an excuse for poor performance. Good management anticipates the environmental changes and plans a new strategy that will thrive in the new environment.

FINAL THOUGHTS
In general, shareholders do not care if a management is operating an inappropriate business model as well as humanly possible. Perfecting the obsolete is not their goal. Their goal is financial success, which comes from excellent performance with the appropriate business model for the environment. Your goal should be the same. Don’t be afraid to adapt like Cardinal Health did.