Emergent Vs. Positioning (Part 2)

 

INTRODUCTION
In the last blog, we looked at a comparison between the Emergent view of strategy and the Positioning view.  I explained why I prefer the positioning view.  In today’s blog (part 2), I will explain why I think the emergent point of view also makes some good points and how to incorporate them into a positioning framework to get the best of both worlds.

 

POINT #1: SUSTAINABLE COMPETITIVE ADVANTAGE

The Issue

The emergent position brings up two good issues.  The first has to do with sustainable competitive advantage.  The positioning school tries to find positions which provide sustainable competitive advantages.  The emergents respond that sustainable competitive advantages are becoming increasingly more difficult to create, so finding those types of positions can be a more futile undertaking.

First is the “sustainability” part of the phrase.  In a seemingly ever faster changing environment, very little appears sustainable.  So if change is constant, why seek sustainability? 

Then there is the “competitive advantage” portion of the phrase.  With rapid change comes frequent upgrades and frequent obsolescence.  It makes any advantage very temporary.  It is like a ping pong game, where the ball keeps bouncing from one side to the next—first side A has the advantage and then side B has the advantage, then side A regains the advantage, and so on.  So instead of trying to achieve lasting advantage, emergents just try to stay in the game by responding with their ping pong paddle in a way to keep the game alive.

The Solution

Is this phenomenon a concern?  Yes.  Is the problem as dire as the emergents believe?  I don’t think so.  First of all, this is not the first time rapid change has occurred in business.  We’ve gone through the industrial revolution, the widespread adoption of electricity, the movement to a knowledge-based economy, and so on.  Yes, there is some turmoil during the transition, but companies with a good strategy find a way to make it through the transition.

The solution is to change the focus of where one looks for advantage.  Even when many things are changing, many others stay the same.  In particular, when products and technologies are changing rapidly, basic human needs and desires still stay the same.   There is always a segment wanting low prices.  There is always a segment wanting status.  There is always a segment wanting convenience.  There is always a need to feel loved or appreciated.

Now the means by which these constants are achieved may change.  The core solutions do not.  So the solution is to find positions which are not tied to particular products, but to enduring solutions.  For example, Wal-Mart positioned itself around the enduring solution of offering low prices.  Now the way it has done this has changed.  It started as a discount store.  When it looked like wholesale clubs could provide lower prices, they opened up Sam’s Club.  When it looked like supercenters could provide lower prices, they aggressively replaced discount stores with supercenters.  When it appeared that building a more sustainable and eco-friendly supply chain could lower costs and prices, Walmart aggressively went in that direction. 

The point is that Walmart’s low price position gave them an anchor.  As the world was changing around them, they did not panic.  They just kept migrating to wherever that position could be best met.  And through that singular focus, they were able to reinforce that position with the customers and become continually stronger.

Bausch & Lomb was in the lens business, but they focused their position on the end solution—better sight.  As a result, they migrated in to contacts, eye surgery equipment and eye enhancing vitamins.  Yes, the product changed radically, but because of their focus, they knew what had to be done to stay relevant.  They found a place where they could differentiate and win.

Apple keeps changing their offering, but each offering is true to their position of selling cool, easy to use interfaces between people and their data.

Without these positioning anchors, the myriad of strategic choices would overwhelm a company.  You cannot do it all.  You have to focus.  You have to make trade-offs.  And these enduring positions help light a path within the confusion of change.  In fact, they can help you better anticipate where to go, due to that focus.  Without it, you are always trying to catch-up to whatever looks hot today.  And by the time you match it, the world has moved on to the next hot item.  You never get ahead that way.

Another positioning approach to take is to create a position around speed and flexibility.  The emergent view is to always be racing to keep pace with change.  If speed and flexibility are so important in a rapidly changing environment, wouldn’t building excellence around speed and flexibility be a great position?   Build your positioning trade-offs around speed and flexibility, so that you become faster and more flexible than those who do not make those trade-offs.  This position actually makes rapid change an advantage for your position.

 

POINT #2: LOSS OF CONTROL

The Issue

The second key point emergents make is that businesses are losing control of the interaction with their customers.  The power is shifting to the consumer.  Social media and web 2.0 have given the consumer more of a voice.  They are having a greater say in how products are designed and marketed. 

If consumers are gaining a greater control over the conversation, then emergents would say that consumers are gaining greater control over a company’s position.  If that is the case, then a company can no longer rely on managing its business by managing its position.  Instead, a company needs to chase where the consumer conversation is going and whatever emerges from that is the strategy.

The Solution

Well, this is true to a point.   And that point ends when you shift from incremental strategy to transformational strategy.  Consumers can be great critics of the status quo.  They can tell you what is wrong with a product and how to incrementally make it better.   However, they tend to be quite bad at voicing opinions about transformational issues which go beyond what the consumer has experienced. 

This is because a) most consumers are too busy living their current lives to spend time dreaming up all the particulars around the business model for the next big thing; and b) if they have no experience to relate to, then they have trouble getting their arms around it and give an accurate assessment.

That is why Henry Ford supposedly said, “If I’d asked my customers what they wanted they would have asked for a faster horse.”

That is why Steve Jobs supposedly said, “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.”

So if you want to remain in an approach to strategy which is only incremental, then perhaps the idea of following the customer makes sense.  But if you want to transform the world like Henry Ford or Steve Jobs, it would seem that following the customer is a poor choice.  Instead, you still need to lead the customer and be pro-active in what you do.  And if the world is moving as fast and creating as much obsolescence as the emergents proclaim, then I think the transformation approach is even more important.  And that means that significant control is still in the hands of the successful companies.

 

SUMMARY

The emergents make some good points, but not enough to get me to abandon the positioning perspective.  Instead, I just altered the positioning perspective slightly to accommodate the concerns.  You can see them in the chart nearby.  For the concern of the world changing too quickly, I suggest either shifting positions to timeless solutions or to speed & flexibility solutions.  For the concern of losing control, I suggest focusing more on transformations, where control is still strong.

 

FINAL THOUGHTS
Although there is good and bad in both points of view, that does not give an excuse to abandon all approaches to strategy.  It is still worth doing.

Strategic Planning Analogy #434: Want More, Get Zero

THE STORY
I was talking to an executive recruiter (also known as a “headhunter”) today. He says that he runs into a peculiar phenomenon when talking to many unemployed senior executives who are looking for a job.

The recruiter will ask these executives about what kind of financial compensation they want in their next position. Often, the answer goes something like this:

“At my last job, I made $250,000. I refuse to take anything less at my next job.”

Unfortunately, this unemployed executive is confronting some harsh realities. First, the great recession has changed how companies value certain skill-sets. His skill set isn’t valued as highly as it was prior to the great recession.

Second, the longer this executive remains unemployed, the larger is the perception that his skill-set is becoming outdated. By not being currently employed in this rapidly changing world, his skills may become obsolete.

Therefore, although he might see an offer of $200,000 for his skills, he will probably never see another offer of at least $250,000. So by refusing to take anything less than $250,000, he ends up with nothing. I don’t know about you, but even though $200,000 is less than $250,000, it is sure a lot more than nothing. In that situation, I’d take a $200,000 job if it were offered to me.

THE ANALOGY
It’s human nature to not want a reduction in our wages. We like to believe that our income should continue to rise each year until we retire. Unfortunately, harsh reality does not always make that possible. In fact, I read recently that it is normal in the US for a worker’s wages to peak when they are in their late 40s and plateau or decline thereafter (in real terms). If the worker refuses to take a pay cut, their only alternative may be no pay at all.

A similar situation can occur in business. The harsh reality of a new, disruptive technology can have the potential to render a company’s current business model obsolete. However, a company may stubbornly refuse to migrate to the new technology, because it provides less income than the prior technology. By refusing to accept the lower returns of the new technology, the company eventually ends up with no returns at all.

Take Kodak, for example. Back in 1975, Kodak claims to have invented the first digital camera. However, Kodak did not bring the product to market. Why? As it turns out, there is a lot less profitability in digital imaging than there is in film-based imaging. The profit loss from no longer selling film or developing equipment/services is far larger than the replacement profits from digital imaging. By refusing to accept a new business model because it was less profitable than the old one, Kodak ended up with neither and had to file for bankruptcy.

Or how about Ford? They invented the minivan, but did not bring it to market because they thought it would merely cannibalize their highly profitable station wagon business. Splitting the market between two vehicle types would be less profitable. Of course, Chrysler brought out the minivan because they did not have a large station wagon business. In the end, the station wagon business virtually disappeared, and Ford was never a major player in minivans. By refusing to accept less up front, Ford ended up with almost nothing (no station wagons and no meaningful share of minivans).

I personally experienced this problem at Best Buy. During the early days of the transformation of music from CDs to digital files, one of my jobs at Best Buy was to look for a way to exploit this transformation. I looked at the music and entertainment industry from all possible angles. I created countless scenarios and strategies. The problem was that every strategy I examined in the new music space was less profitable than what Best Buy was making in the old music CD world. This made Best Buy somewhat reluctant to make fast, bold moves into the new space.

Apple, however, was earning nothing in the old CD world. Therefore, everything in the new transformation would be additional profits for them. As a result, they were fast and bold with the iPod and iTunes. And Best Buy is becoming increasingly irrelevant in music.

The newspaper industry was hesitant to move fast and bold into digital news because it was so much less profitable than the analog newspapers. By not wanting to cannibalize the more profitable printed paper, the newspaper industry let others take the lead in the digital space. Now, most newspaper firms are struggling to stay afloat.

So businesses can fall into the same trap as that unemployed executive. By refusing to accept less, they can end up with practically nothing.

THE PRINCIPLE
So this is the strategic dilemma. What do you do if you realize that the next transformation in your industry will make your industry less profitable? How do you convince your stakeholders to make bold moves into the new space, when those bold moves appear to destroy more profits than they create? What is the right way to handle the transformation? How do you keep from being like the unemployed executive who refused to take less, which resulted in getting nothing?

Here are some principles to consider when confronted with this type of situation.

1) Make the Right Comparison
The unemployed executive in the story was making the wrong comparison. He was comparing new job offers to his prior job. Instead, he should have been comparing new job offers to his current unemployment. By comparing job offers to the old job, he was rejecting opportunities which were far better than the current unemployment.

The same is true in business. You cannot stop these business transformations. If nobody inside the industry wants to do it for fear of earning less, then someone from the outside will cause the transformation, because they have nothing from the old status quo to lose. Sony had no stake in film photography, so it rushed into digital photography. Apple had no stake in the CD business, so they rushed into iTunes. And so it goes.

Therefore, the real comparison is not today’s business model versus tomorrow’s. No, the real comparison is tomorrow’s business model versus nothing. That makes the need to adapt look more appealing.

2) Manage the Timing
Although the transformation may be unstoppable, you may be able to slow it down a bit. Kodak did not need to immediately abandon the film business back in 1975 and immediately plow every effort behind digital. They had room to wait a bit.

Delays can be good, because they help you build up a war chest of cash to use during the transformation. However, don’t wait too long. Eventually the race will get underway and if you wait too long, you will never catch up.

3) Keep Your Powder Dry
A delay is not an excuse to ignore the transformation. It is time to prepare for the transformation. Back when rifles were loaded with gunpowder, there was a saying to “keep your powder dry.” The idea was that you never knew when you would need to fire a shot, so you’d better prepare your gunpowder so that it could be used immediately (as a dry powder).

The same is true in business transformations. Eventually, you can delay no longer. Then you need to act quickly, strongly and boldly in order to remain relevant in the new world. You need your rifle to shoot immediately. Therefore, use the time of delay to “keep your powder dry” by working behind the scenes to prepare to win in the new space. Keep up the R&D. Develop prototypes. Invest in start-ups. Hire the proper talent. Do what it takes to get ready to win in the new space. That way, when it is time to move, you can move immediately, with great force.

4) Consider Creative Reorganization
To pull this off, you may find it beneficial to rethink your organizational structure. For example, you may want to place the old business model and the new business model into separate business entities. This can ease the resistance to self-cannibalism since you are different businesses with different leadership, different goals, and different compensation.

A separation also makes it easier to spin off either business. The old business can be sold while it still has some value (before it goes to zero). The new business can be spun out separately, so that all its growth is plus business rather than a decline from the past (since the past was not a part of its separate structure).

Separation also allows the new business to achieve a better (i.e., higher) valuation in the marketplace. These reasons help explain why so many businesses these days are splitting the growth part of the portfolio from the rest of the portfolio.

5) Switch
Another option is to consider switching industries. Fuji could see that the photographic film business was going away. It discovered that the chemical reactions with film are similar to the chemical reactions with skin. Therefore, Fuji redeployed its film knowledge to the cosmetic industry to create a significant new profit center to help replace some of what was being lost in film. So check to see if your core competencies provide opportunities to shift to better industries.

Firms like GE and Nokia have been successful for generations because they are willing to abandon core industries in decline and add on new initiatives in growing areas. In essence, GE made its core competency to be running business portfolios, which allows it to adapt to negative transformations by shifting the portfolio in a new direction.

6) Get Out Early
If the transformation looks bad and you can see no viable way forward, then sell out early, when others still see value in your business. The longer you wait, the worse it gets. Don’t wait so long (like Kodak) that nobody wants you anymore and the only option is bankruptcy. Those who sell out first usually get the highest price.

SUMMARY
Often times, business transformations can result in new business models which provide less profitability than the old model. If you are a leader in the old model, this reduction in profitability may create resistance to migrate to the new model. However, by resisting the lower profits, you can end up with nothing, because the old business model will cease to exist. Fight the resistance and come up with a plan for dealing with the transformation.

FINAL THOUGHTS
A lifeboat is a lot smaller and less glamorous than a large ship. However, if that large ship is sinking, the lifeboat is a better place to be. Stop clinging to the sinking ship and swim to the lifeboat.

Strategic Planning Analogy #371: Strategy by Spying

THE STORY
Back in December, I visited the Museum of Communism in Prague. It was a very interesting museum. One display talked about all of the spying that was done back around the 1950s. The Communist governments in those days did not trust the loyalty of their people, so they continually spied on their citizens in order to assess their loyalty.

The museum showed examples of some of the spying devices used back in the 1950-60s. There was a special camera mounted onto a rifle frame for taking long-range photos. There were also all kinds of tape recorders. However, the most common form of spying was by just getting people to talk to officials about their neighbors.

This was a very expensive and labor intensive program, and the results were usually not very meaningful. Therefore, the spying on citizens by the Communist governments was eventually scaled way back.

Today, it’s a lot easier to know what’s on people’s minds. All you have to do is go to their Facebook page, listen to their Tweets on Twitter, or visit their blog. People today seem willing to volunteer all sorts of intimate details about their lives and their passions—for free. Burglars know exactly when it is safe to break into people’s homes because it is so easy to track where people are.

With data so easy to obtain, it kind of takes away the fun of being a spy.

THE ANALOGY
The communist governments did not get a very good return on all the investments they made into spying on their citizens. Yet today, many businesses are following a similar tactic. They are, in essence, using internet tools to “spy” on their customers. It may be wise to ask if the returns on those investments are worth it.

In fact, customers are so willing to share a dialogue with businesses that it can hardly even be called spying anymore. This has led to a business strategy approach I call “Do Whatever The Customer Says.” The reasoning behind the approach is as follows:

1) Companies succeed by serving the needs and wants of the customers.

2) Customers know what they want.

3) Technology makes it easy to find out what they want. It’s hardly even spying anymore.

4) So use the technology to find out what the customers want and then give it to them. In other words, the strategy becomes “do whatever the customers tell you.”

Unfortunately, these premises are wrong. As a result, the conclusion is wrong. And just as the communists eventually figured out that managing a county by spying on their countrymen was not very effective, companies will eventually figure out that managing a business by spying on their customers is not very effective, either. Just because it is easier does not make it better.

THE PRINCIPLE
The principle here is that although much benefit can be gained by staying close to the consumer and listening to them, this is not an effective way to create company strategy. There are two basic flaws to the “Do Whatever the Customer Says” approach to strategy.

First, companies do not succeed merely by serving the needs and wants of the customers. Instead, they succeed by having a viable business model. As we will see in a minute, these are not the same thing. Second, customers do not always know what they want, particularly when it comes to new and transformational ideas for which they have no prior exposure.

Therefore, if serving the customer is not necessarily the core of success, and the customer is not always knowledgeable about the best way to serve them anyway, then why put them in charge of determining your strategy?

Let’s dive into this a little bit more, to explain this in more detail.

1) Your Goals and Your Customer’s Goals are not Necessarily the Same
Customers’ goals tend to center around things like solving their problems, increasing their enjoyment, or enriching their sense of self-worth (status issues). By contrast, a company’s goals tend to center around things like making a profit, providing its investors with an adequate return on investment, or providing a great income (or status) for its management, etc. As it turns out, you can focus on meeting those customer goals (and succeed wildly), yet still not achieve the company goals.

For example, look at companies like Facebook and Twitter. Both are wildly successful at meeting an aspect of consumer goals. Large sectors of society love them and use them all the time. However, neither company is providing an adequate return on investment. And unless these companies change their business models, I highly doubt they will ever achieve an adequate return on investment.

At the current time, the Facebook and Twitter business models are broken. They will not lead to the types of returns necessary to pay back their investors at an adequate rate relative to the size of their investments (particularly the latest investments in Facebook brokered by Goldman Sachs). And, for the most part, the users do not care about the fact that Facebook and Twitter have broken business models. In fact, they like many of the reasons why it is broken, because the lack of adequate monetization makes the businesses “free” and more consumer-friendly.

Many of the ideas which have been thought of to “fix” the business models of companies like Facebook and Twitter require monetization schemes which the customer does not want. And the consumers have made it clear that if the business model is tweaked too much against them, they will bolt, en masse, to an alternative which does not impose those negative constrains on them. With all the cash-rich investors out their looking for the next “Facebook” or “Twitter”, a start-up with the old broken business model will be well funded and replace them, leaving Facebook and Twitter in the dust if they monetize improperly.

The point here is that just pleasing the customer is not good enough. Pleasing the customer does not necessarily lead to a long-term successful business. Businesses need a viable business model in order to succeed. And since customers really don’t care all that much about your business model, they are the wrong people to ask to develop that business model for you. Their advice will lead to a business model which maximizes their concerns, not yours. And that will lead to financial ruin.

Yes, a successful business model depends upon having customers willing to patronize it, so you cannot ignore their needs and wants. However, if your business model is solely based on doing whatever the customer says, it most likely will not succeed over the long haul. This is because their goals are not the same as your goals.

In other words, you cannot abdicate business model development to the consumer. You must control it internally. You need to make the tough decisions—the difficult tradeoffs—which balance the needs of the customers against the needs of the company. You cannot always give the customer everything they want, because they will want it all and they will want to pay less for it than it costs you to deliver it. These are tough issues to deal with, and require sophisticated strategic planning (and serious thinking time) to resolve. The answers will not come from a quick question broadcast to your customers.

2) Customers are Poor Sources for Transformational Ideas
The second problem with abdicating strategy to your customers is that fact that they are not the best source for creating something new within the unknowns of the future. Customers, for the most part, are focused on near-term concerns. The problems of today are more than enough to occupy their mind.

If you ask a customer what you should change to be better, most of the answers will be incremental improvements to what already exists. In other words, they can tell you how to tweak the status quo. However, they rarely have the insight to create the next great paradigm shift. Consumers have almost never begged for what became the next big revolutionary thing before it occurred. Consumers didn’t beg in advance for the Apple iPod business model or the iPhone Apps Store. Consumers didn’t beg in advance for the Google search algorithm. Consumers didn’t beg in advance for Facebook. They only reacted after it was presented to them.

Why? Customers are great at telling you what bothers them about things they have experienced. However, they are not that good about discovering things for which they have no prior experience. They have not yet experienced the future, so they are not good at articulating the best way to approach the unknown.

Consumers are too busy trying to live today’s life and cope with the current crisis. Their lives are preoccupied just trying to stay afloat while swimming in the current red seas. They are too busy to imagine for you some yet-to-be discovered blue ocean. If you find it, they may follow, but they will not find it for you.

Their job is not to preoccupy their time pondering revolutionary new ways for you to make money off of them in the future. They do not have the time nor the inclination to do so. That’s YOUR job. YOU need to devote the time and energy into envisioning a better future. You can use the customer as a sounding board to evaluate your visions, but don’t use them as the primary source of your vision.

Envisioning a radical new future takes the time and effort that will only occur if you proactively devote meaningful amounts of internal resources to that effort. It will not come by merely asking a question to your customers.

SUMMARY
While it may be true that it is impossible for a company to succeed if it does not please customers, it is equally true that it is impossible to succeed if all you do is what the customer tells you. First, the company’s needs are not identical to the customers’ needs, so if all you focus on is the customers’ needs, you may not fulfill the company’s needs. Second, customers may be good at providing incremental improvements to the status quo, but they are not well equipped at inventing a radically new paradigm for you. Therefore, Strategic Planning should not be abdicated to the customer. This is your responsibility and you need to be proactive at it, devoting sufficient time and effort to the cause.

FINAL THOUGHTS
The Museum of Communism showed that even with all the power behind the communist system, it could not endure, because it was a flawed model. Similarly, all your power will not save you if you have a flawed business model. Eventually, you will fail like Communism. This task is too important to be left entirely to the consumer.

Strategic Planning Analogy #363: Star Players

THE STORY
Once upon a time, there was a basketball team which was doing very poorly. The owner of the team started yelling at the coach about how disgusted he was with the team losing all the time.

The coach responded, “The problem is the poor talent on this basketball team. We don’t have any athletic stars on this team. If you can go out and get us some star athletic talent, I can make this basketball team a winner.”

So the owner went out to hire some star athletes. A week or two later, the owner announced that he had just hired some great athletic superstars for the basketball team. These superstar athletes were among the best in their field. It took a whole lot of money to sign them to the team—more than anyone else on the team was making—but the owner was hoping that their superior skills would bring him a winner.

Yet the basketball team continued to lose. In fact, the team was worse than it was before adding the star athletic talent. Why? These star athletes were among the best jockeys the horse racing world had ever seen. Unfortunately, a jockey’s key attributes include being short and light weight—not exactly what you want on a basketball team.

THE ANALOGY
Although the story is made up, it contains a lot of truth. When times are bad, there is a tendency to want to get some superstars on your team. It happens in sports all the time. The idea is that if we can just get one or two star players on the team, we can move from being a loser to being a winner. It’s seen as the quickest way to make a big improvement.

That’s why the top players in a sport make so much money. They are seen as the difference between being a loser and being a winner. And that is worth a lot.

This phenomenon is not just limited to sports. Businesses do this all the time as well. When a business is continuously producing poor results, there is pressure on the board of directors to do something quickly. To common perception is that the quickest path to moving a company from being a loser to being a winner is the same as for a sports team—just hire some star talent.

As a result, businesses pay a fortune to hire one or two superstar leaders from outside the company. They put a business superstar (who’s been on the covers of all the business magazines) into the CEO chair. Unfortunately, the track record for bringing in outside superstars in business is not very successful. James Heskett, a professor at the Harvard Business School, was recently musing on the internet about the research showing how the superstar philosophy often does not usually work in the business world. The results are underwhelming.

Why is that so often the case? I think it is like what happened in the story. You can bring in superstars, but if they are not fit for the task at hand, all that super-ability is wasted. Those may have been the best jockeys in the world—absolute superstars in their field. But their talent is useless for playing basketball. There was not a good fit between the jockey star’s ability and the basketball team’s need.

It also works the other way. A basketball superstar would be a lousy jockey. The outstanding abilities of a leading basketball player are ill-suited to riding a racehorse.

Ignore the fit and you can end up paying too much to get something worthless at getting what you need done.

THE PRINCIPLE
The principle here is simple. Don’t hire jockeys to play basketball (or vice versa). Even the best jockeys will do poorly at basketball, because it goes against their strengths. It is the wrong fit.

I believe the hiring of outside business superstars rarely works because almost by definition it will be a poor fit. Let me explain why.

The Needs of the Business Looking For a Star
Usually, the businesses with the greatest motivation to hire a superstar are like the basketball team in the story—chronic losers. After all, there is little motivation to go outside and spend a fortune on a business superstar if your business is already highly successful. No, it is the companies with lots of problems who have the greatest temptation to go after a superstar.

Although there can be lots of reasons why a company is consistently posting poor results, it usually boils down to two key issues:

1) A Poor Position in the Marketplace. This blog has talked about the importance of positioning probably more than any other topic over the years (for the best one, look here). It is virtually impossible to win in the marketplace unless you have a winning position. You need a reason why a significant number of customers would naturally prefer you over the competition to solve a particular problem. Without a strong position, the only way to get business is by “bribing” customers with below-cost price cuts and outlandish deals. And that is not a path to being a winner.

2) Poor Resources. If you lack in resources, it is hard to win. Those resources could be a lack of knowledge, competency, infrastructure, IT capabilities, money, modern automation, manufacturing capacity, supply chain connections, or a host of other such tools. Just as you cannot build a great house without great construction tools, you cannot build a great business without the needed business tools.

Therefore, it is probably the case that the biggest need of the business looking for a superstar is a new position and/or better resources.

The Abilities of the Typical Superstar
So if that is what the company needs, what does the typical superstar offer? Well, first, we need to understand that business superstars tend to come from highly successful companies. After all, the logic goes like this: how could this person be a business superstar if his or her business is doing poorly? Almost by definition, a superstar must come from a place with consistent success.

This means that the company where the superstar is from probably already has a good position and good resources. So what sets the superstar above the rest? Usually, they are the people who excel in getting the most out of that position and those resources. In other words, they tend to be super-operators. They can leverage those core elements better than others. They can make production more efficient, selling more powerful, and make the most out of the knowledge, data and capabilities inherent in the business.

The Lack of Fit
So here is the problem. The company needs a new position and a complete overhaul of its resources. The business superstar typically knows how to leverage positions and resources, but is clueless into how to create them in a place that doesn’t have them.

This is like hiring jockeys to play basketball. The fit is all wrong. The business superstar’s brilliance is worthless to the weak company, because there is nothing for him to leverage with his leveraging skills.

Jockeys know what to do if there is already a fast horse in existence. But if there is no fast horse, the jockey doesn’t know how to win. Similarly, a business executive skilled at improving a strong business doesn’t know what to do if there is not already strength to the current business.

I had a boss who put it something like this: “We keep hiring all these great people to turn around the business, but instead of their strengths transferring to the business, the weak business transfers to the people.”

Or to quote Warren Buffett, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

In other words, when the skill-set of the star does not meet the needs of the business, the star will no longer look like a star. It’s not that they suddenly lost all their skills. They just have skills that are useless for the task at hand. Therefore, if you feel a burning need to turn around a weak company, make sure there is a good fit. Look for the rare star who is great at transformation (moving from weak to strong) rather than the more common star who is great at operation (getting more out of something already good).

SUMMARY
A company which is producing consistently poor results requires a different type of leader than the company that has been consistently strong. Therefore, it is very risky to take someone who has done well in a successful company and put them in a poor company. It is likely that the skill-set of the superstar at the strong company is a poor fit for the different needs at the weak company. Instead, if you are a weak company, look for people who are good at transformation, not good at operating in a place already transformed.

FINAL THOUGHTS
Operating a strategy well is a far different skill than creating a great strategy. Make sure you know which is the priority need before you fill the leadership position.

Strategic Planning Analogy #346: Right to Play

THE STORY
Poker chips have value…but what kind of value? Some peg their value at their exchange rate—you can cash in poker chips for money at a pre-determined rate of exchange. However, that value can only be realized if you turn in your chips. In other words, this value in the chips can only be realized if you stop possessing them.

Since very few business places allow you to spend poker chips like money, that value can only be realized when you have real money. So the real value, in that case, is in the money, not the chips. If people stop exchanging your chips into money, the value in those chips vaporizes.

To me, the more powerful value in the chips is what they allow you to do while you still possess them. The unique value of poker chips is that they allow you the opportunity (i.e., give you the right) to play poker. Before you can play poker, you need to have first made an investment in poker chips. Without the chips, you cannot play. That is the true power and value inherent in poker chips.

THE ANALOGY
Poker chips are a lot like market share. There is value in having a lot of market share…but what kind of value? One type of value would be to use your power of market share to create excessive profits. In many ways, this would be like cashing in your poker chips for money. And, like poker, if you cash in your market share “chips” you can no longer use them to play the game.

The logic works like this. To create excessive profits, you need to extract excessive value out of your marketplace transactions. The more value you take out of the transaction, the less value there is for the customer on the other side of the transaction. In a competitive marketplace, there will be alternatives to your excessive greediness—alternatives which provide greater value to the customer. Customers will start switching to these alternatives. As a result, your market share will go down. In other words, when you seek excessive profits, you are typically cashing in (or losing) your market share chips.

To me, the greater value in market share is like the second value for poker chips mentioned above—the value in being allowed to continue to play the game. In this case, the “game” is the game of business. If you want a business which endures and produces a return year after year after year, you have to leave a large percentage of your chips on the table. In other words, you need to continue to invest in providing the type of value needed to hold market share if you want to continue to play the game. Otherwise, your market share will drop until you are no longer able to play.

THE PRINCIPLE
The principle here has to do with transformation. When a company is very successful and creating high levels of market share, there is a tendency to not want to transform the business model. After all, the current model is working quite well. Why kill the goose that is laying the golden eggs? Why risk current profits for the uncertainty of what would happen if you transform the business?

The Innovator’s Dilemma
Clayton Christensen wrote about this problem in the book “The Innovator’s Dilemma.” Briefly, the premise of the book is that innovation leads to marketplace disruption which creates great success for the innovator. This success makes the innovator want to cling to the status quo that his innovation produced. Unfortunately for this innovator, marketplace innovation cannot be stopped. If this innovator will not continue to innovate, others will, creating disruptions that make the original innovation obsolete. The irony is that the only way the innovator can continue to succeed is by destroying the current model of success and replacing it with successive disruptions of new innovation.

This is very similar to the poker chip analogy. Refusing to reinvest in additional disruptive innovations is like refusing to put chips on the poker table. When you have a lot of chips, the temptation to cash in (take excessive profits) is huge. But if you do, you lose the right to continue playing.

Trying to keep the high profits of the old innovation is taking excessive profits out of the game. You are no longer investing in the new innovations that will increase value to the customer. Others, who are still investing in innovation, will create greater value and take away your market share (your chips), leaving you with nothing.

Yes, it takes money away from today’s profits when you spend it on innovation. And yes, your immediate profitability may go down during the disruptive phase. BUT, if you do not ante up with these investments, you can no longer play the game. Your long-term profit stream potential goes away because you are no longer competitive once the next disruption occurs. In search of a small pot of success today, you sacrifice your ability to earn any future pots of success.

I was reminded of this dilemma when reading of a paper published on August 4th by Kristina McElheran of the Harvard Business School. This study looked at how market leadership impacted the way a business innovates. The conclusion of the study was that market share leaders may invest more in incremental innovation, but spending on truly disruptive innovation is more likely to come from non-leaders. In other words, leaders have more at stake in the status quo, so they are less willing to invest in innovations which disrupt it. The disruptions come from those who have less at stake in the status quo.

This is just the Innovator’s Dilemma all over again. The problem has not gone away. Leaders are still cashing in their chips, rather than making the investments needed to continue to play the game.

Therefore, if you are currently in a position of market share power, you need to ask yourself this question:

Am I going to use this power in a way which allows me to continue to play the game or am I going to cash out early?

Cashing Out
Even if you still choose to cash out early, by asking the question it is at least a conscious choice that you have made based on weighing the alternatives. If you do not ask the question, you may end up cashing out by accident, and have a lot fewer chips to cash in than you had anticipated.

Selling out near the peak (before the next disruption has its impact) is a viable strategy. If you do this, you can often walk away from the game very wealthy. This is a proactive strategy with careful analysis of the environment and understanding the timing of trends and inflection points. You are putting yourself up for sale while you still have leadership benefits (i.e., still have lots of chips to cash in).

This is very different from trying to cling to the status quo as long as you can and then selling as a last resort. While clinging to the status quo, your market share is being disrupted by the next innovation. You are losing your market share chips to the next innovator. By the time you get around to selling, you have very few chips left to cash in.

Staying to Play
If you choose to stay to play, then that requires a different set of actions. You need to take some of your profits and reinvest them into the game, in order to maintain value leadership. The trick is trying to optimize the balance between the current inward cash flow from the status quo with the outward cash flow needed to create the next disruption in your favor.

At least as a leader, you have the potential to orchestrate how that transformation occurs better than others (provided you do not get too greedy in the short-term). Take advantage of the opportunity. Be proactive in guiding the transformation (rather than resisting it).

SUMMARY
Markets continue to innovate. If you resist innovation and do not transform your business, you will lose to the next round of innovators. Therefore, either cash out while still at the top or reinvest in disruptive innovation at levels necessary in order to continue to play the game for a long time.

FINAL THOUGHTS
In poker, you can sometimes get away with bluffing. In business, you may be able to fool the customers for a short while, but eventually they will figure it out and shift their business to the place where they receive the best value. Innovation leads to better value. Therefore, if you want to maintain leadership, follow the innovation to the greater value.

Analogy #166: Symbiosis

THE STORY
The relationship between the job seeker and the headhunter is an interesting one. To the headhunter, the job seeker is neither a client nor a customer. The job seeker does not hire the headhunter nor purchase anything from the headhunter.

The headhunter receives no income from the job seeker. In fact, in many ways, a jobseeker can be a major pest to a headhunter—always calling and bothering the headhunter. Yet the headhunter puts up with it and even works to help the job seeker become successful in getting a job.

Similarly, the headhunter is neither a client nor customer of the job seeker. The job seeker receives no income from the headhunter. Yet, when a headhunter pesters a job seeker to help come up with a list of contacts for potential job candidates, the job seeker typically jumps at the opportunity to supply names. The job seeker wants to help the headhunter be successful.

Why are the headhunters and job seekers working so hard to help each other become successful, even though neither profits from the other? The reason is because of a mutual self-interest in a third party—the job hirer. If the head hunter can help get the job seeker a job, they get paid by the hirer. If the job seeker can help the held hunter get them the job, they also get paid by the hirer.

Therefore, it is in the best interest for headhunters and job seekers to help each other, because they can both gain from it via the job hirer. By helping each other, they are helping themselves.

THE ANALOGY
Looking for a new job can be a daunting task. Any help you can get in the process is very welcomed. Although there are many sources to tap for assistance, some sources will work harder for you than others. Often the ones that work hardest for your success have some selfish motive, like a headhunter.

The benefit may be indirect and tangential to your success, but so long as there is a connection between your success and their eventual success, they are incented to help create your success.

For example, once when I was looking for a job, one of the biggest helpers I had was a consultant I had used in the past. He went beyond mere friendship and went the extra mile for me. Why? I suspect it had something to do with the fact that if I landed a really good job because of him, I would be more likely to use him as a consultant at that new company. In essence, I would be an opening he could use to get into the door of that company if it hired me.

The reason why I would help a headhunter find someone to fill a job for which I am not qualified is indirect. The more I help a headhunter, the more I would hope that the headhunter would remember me when a job which fits my qualifications comes up.

Similarly, if a headhunter does a good job of helping me get hired, perhaps down the road when I need to hire someone, I will use that same headhunter.

Attaining strategic success can be similar to trying to find success in getting a job. It can help if others have a vested interest in having my strategy succeed. The more others benefit from having my business strategy succeed, the more likely they will help to make that strategy succeed. This is true even if the benefit comes from another source.

Therefore, just as you would tap into other sources to help you with job hunting success, tap into others to help with getting successful strategy implementation. And the more you can tie their success into your success, the better.

THE PRINCIPLE
The principle here is symbiosis—two parties working together because each one benefits. Symbiosis can be a critical element of strategic planning. This is particularly true if one’s current position is failing and there is a need to move the company to a radically different position.

Once a company gets into the “death spiral,” it can be very difficult to move to a path of prosperity. In a death spiral, the marketplace has pretty much rejected you as a primary or viable alternative. The market has chosen someone else as a more desirable alternative. Neither customers nor suppliers see much reason to deal with you or think about you any more.

It is difficult enough to develop a new strategy to revitalize a brand that has been rejected. Then on top of that is the added burden or convincing people to give you a second chance. Succeeding on both of these tasks is extremely difficult. This is why complete turnarounds are so rare.

As a result, why successful turnarounds need “friends”—other people who will go out of their way to help make this transformation successful. As in the story of the headhunters, friends tend to be more helpful if there is something it for them if you succeed—a symbiotic relationship. Therefore, if you are dealing with a turnaround strategy, it helps if you seek out symbiotic relationships as part of that strategy.

Complete turnarounds in the retail business are rare. When I find one, I examine it carefully to see why it succeeded. Recently, the Lord & Taylor department store chain was declared a successful turnaround by the International Herald Tribune. Although many factors went into that success, a key factor was symbiosis.

Lord & Taylor has been around since 1826. In the early years it had the reputation of being a classier, higher end department store. However, in 1986 it was purchased by the May Co. Under the May leadership the classy brand was destroyed. High end goods were replaced with lesser brands. No money was put back into the stores, making them look like a dump. Service and quality were reduced or eliminated in order to lower expenses. To get customers in, they started shouting price and pushing an endless number of coupons into the market. In other words, they had to bribe people with coupons in order to get any interest.

Lord & Taylor lost its relevancy in the marketplace. There was no reason to prefer shopping there. Other department stores had won over the customers. The desirable brands stopped supplying the chain. When Macy’s purchased May Co. in 2005, they saw no reason to keep the brand and sold it. Lord & Taylor was being rejected on all fronts.

Lord & Taylor was purchased from Macy’s by Richard Baker through the fund NRDC Private Equity. He teamed up with Lord & Taylor CEO Jane Elfers to create a turnaround. The strategic goal was to restore Lord & Taylor to its former image as a classy, contemporary higher end department store. Easy to say, difficult to do.

Lord & Taylor needed symbiosis on both sides—with suppliers and with customers. Jane Elfers was a strong merchant with a long history of dealing with the branded clothing manufacturers. A key part of the turnaround required that she get these brands to actively support the turnaround by allowing Lord & Taylor to sell their better brands again.

The only way to get the brands back was by convincing the brands that it was in their best interest. The angle? Position Lord & Taylor as a way for the brands to regain a balance of power. At the time, Macy’s had consolidated the market to the point where the better brands had very few selling alternatives except to sell through Macy’s. Macy’s had all of the negotiating power. If you didn’t bow to their demands, they could cut you off and leave you with virtually nowhere else to go.

By actively supporting the drive to make Lord & Taylor succeed, the brands would create an alternative to Macy’s. This would weaken the negotiating power of Macy’s and strengthen the power of the brands. Hence, it was in the best interest of the brands to support the transformational strategy of Lord & Taylor.

A similar situation occurred on the consumer side. In its rush to create a national department store brand, Macy’s quickly severed ties with the old names and quickly (& coldly) slapped the Macy’s logo on all of the acquired department stores. This alienated many of the consumers who resented losing their favorite brands (like Marshall Fields) in such a “heartless” fashion.

Another group was alienated from Macy’s because they resented the homogenization of the department stores. Why pay the extra price to go to a Macy’s department store if it feels like a mass merchant?

Lord & Taylor was able to tap into these alienated groups who were looking for someone to succeed at providing a viable alternative so that they would not have to rely on Macy’s.

The two symbiotic relationships fed on each other. As the manufacturers supported Lord & Taylor, it became more desirable to the customers. As more customers supported Lord & Taylor, the manufacturers started shipping even more of their better brands.

Without these symbiotic relationships, the transformation may never have worked.

SUMMARY
It is difficult to transform a company when suppliers and consumers have rejected you and found other alternatives. To succeed, you must often find mutually beneficial reasons for suppliers and customers to want you to succeed.

FINAL THOUGHTS
The more people who can win from your success, the more likely you will have a success.

Postponing the Inevitable

THE STORY
I used to live in Minnesota, where it gets very cold in the winter. On one particularly cold winter day, the high temperature was only supposed to get up to around 25 degrees below zero Fahrenheit, and that’s before you add in the wind chill index.

Usually on those days, I would call in and take the day off, huddled in my warm house. Unfortunately, we had flown people into town to hear an all day lecture by me, so I couldn’t just call in to take the day off.

The meeting went all day and into the night. It was bitter cold. Most people couldn’t get their car started. I was one of the “lucky” ones who did. At least I thought I was lucky. However, it was so cold that the oil did not properly lubricate the engine, and I ended up ruining my engine that night.

I took it in to a repair shop. The mechanic told me that what I needed was a whole new engine, and that the repairs would cost about the same as buying a new car. Then he gave me an alternative. For a lot less money, he could replace a few engine parts with some reconditioned parts. He said that if I took good care of the car, I could probably get about 18 months of use from the car with these parts. The drawback would be that the car engine would get progressively noisier and less powerful, until it wouldn’t work at all.

I took the less expensive repair. The repairman was absolutely right. The engine kept getting noisier and noisier with all of its clanging and the performance kept getting worse. Eventually, it got to the point where I didn’t think I could get another day of use out of the car, so I drove it to an auto dealer and got a new car that very evening. And it was almost 18 months to the day from the repair.

THE ANALOGY
Businesses can be like automobiles. An external event (like that bitter cold weather) can suddenly make the engine of prosperity in our business stop working properly. When that happens, we usually have two choices. We can either develop a new engine of growth for our business (one that will thrive in the new environment), or we can try to make do with the old engine for as long as we can.

Often, businesses do the same thing I did with my automobile. They put in just enough of an investment to keep the old engine running. The problem with that approach is that:

1) It’s a temporary fix at best.
2) Because the strategy did not change for the new environment, it will continually become less effective.
3) The strategy is still going to die. You will still have to replace it eventually.
4) Often times, by waiting it becomes increasingly harder to catch up with competitors who made the big investment earlier.

THE PRINCIPLE
If this is true, why then do so many companies postpone the inevitable? In many cases, it is because the timeframe of the leadership is different from the timeframe of a repositioning strategy. In an earlier blog (see “The Room is Smaller than you Think”), we talked about how many leaders think that they can stretch out the current strategy to last until they retire. Then they figure that the new leader can worry about investing in a new strategy. Unfortunately, the strategies don’t always last that long, even if they baby it along like I did with my automobile.

This idea was brought home to me again while reading an article by the consultancy of Booz-Allen (Barclays’ Global Acceleration, August 30, 2007). The article was talking about the transformation of Barclays Bank. Back in 2003, the management of Barclays Bank realized that their current strategic engine was essentially broken, given the new forces in the global economy.

As a result, Barclays Bank completely rethought their vision and started to put into place all of the parts to make the new vision a reality. To quote the article, “The new vision has been easy to articulate, but difficult to accomplish.” The author went on to say that implementation was made difficult by the fact that shareholders were not exactly accepting of taking a “profit growth holiday while we invest for future growth.”

It wasn’t until 2006 that the fruits of the effort began to really take shape. Now the new strategy is proving itself to have been worth the effort. However, one had to wait three years before seeing a major improvement. How many firms have the patience these days to wait three years?

I did some research into the average CEO tenure for large corporations. Depending on who did the research and how they defined the tenure, you get different answers. However, all of the studies tended to agree that CEOs keep their jobs for a significantly shorter period than a decade ago, some estimating that the average tenure has been cut in about half. The good news is that it seems to have stabilized over the last year. The bad news is that the average CEO only keeps the job for about six years or so.

Boards of Directors seem more willing these days to dismiss a CEO who doesn’t perform. According to one article, a new CEO has only about 20 months to make a big mark on performance. Otherwise, they lose credibility with the board of directors. Is it no wonder that companies look for the quick easy fix (like I did with my automobile) rather than making the big investment with the slow payback? The Barclays story gets written up and made newsworthy because it is rare.

Target spent decades developing the classy image which gives it permission from its customers to sell some higher margin fashion goods in a discount environment. Wal-Mart tried to leapfrog all of that effort and get permission from its customers to do so in only one year. It failed, and the strategy was quickly abandoned. They didn’t have the patience to do it the right way.

So how can one successfully transform a company when the timeline is long but the patience is short? I have two suggestions:

1) Run Parallel Processes
2) Become More Inclusive

These are briefly discussed below.

1) Run Parallel Processes
There is an old saying that “If it ain’t broke, don’t fix it.” Well, when it comes to strategy, that saying doesn’t work. For strategy, a better saying would be “Build a replacement while the current strategy is still creating cash.”

All strategies eventually fail. All strategies eventually fail. Your strategy (in its current form) will eventually fail. Failure is inevitable due to changes in the environment. If failure is inevitable, then it is wise to always keep an eye out for what will eventually weaken your strategy and prepare in the background the new replacement.

It can take many years and lots of money to create the replacement strategy. If the current business still has a few years left in it, it can help fund the replacement process. In the case of Barclays Bank, they were fortunate that the business in the UK was still strong enough to help carry the business and fund the transformation until it could pay for itself. They did not wait until the business was completely broken before starting the transformation. They saw the handwriting on the wall in where trends were headed and acted quickly to transform before the cash engine completely gave out.

Hence, the principle is to run parallel operations—one that still has life in it to keep the cash coming in the door and one that will be reaching its full potential about the time that the engine in the other strategy is about to give out. If you wait until the first engine is already dead, then you will not have the time or the money to build a proper replacement strategy. You are stuck trying to squeeze a little bit more out of the first engine after its best days are already done.

2) Become More Inclusive
The days of the independent CEO are coming to a close. To be effective, leaders need to reach out more to their constituents, including customers, the board of directors, and employees who have a stake in the long-term future of the company. The more you can reach out and build bonds with these people, the more willing they will be to work with you on long-term transformations.

Boards need to feel a sense of ownership in the long-term strategy. The more they see the strategy as being their own, the more patience they will have to get it accomplished. Conversely, if the strategy is too closely tied to the CEO, any impatience with the strategy will directly lead to impatience with the CEO, leading to an early CEO departure.

SUMMARY
Since all strategies eventually fail, the only way to keep a company from eventually failing is to periodically reinvent the strategy. Unfortunately, true reinventions can take a lot of time and money. Therefore, it is better to start the transformations while the old strategy is still strong enough to carry the business through the transformation. In addition, it is important to get as much buy-in to the strategy as possible, so that people have a personal stake in making the transition work.

FINAL THOUGHTS
The studies I read showed that if a CEO was able to deliver a strong performance, he/she could beat the odds and keep their jobs longer. Parallel processing would appear to be the best tool to beat the odds.

"We Suck Less" Is Not a Strategy

THE STORY
I worked with a retail company one time that had two problems:

• It’s main product was becoming obsolete, with worldwide demand dropping at a significant rate.

• It charged more for the product than just about anyone else, without providing any meaningful differentiation to justify the higher price.

A strategic plan was developed to radically transform the retailer into a relatively new concept—one with potentially high growth, but also high risk, because the concept was unproven. The president of the company decided that the risk of transformation was too high, so he decided instead to fix the current business model.

He built a team of people who worked very hard with him to improve the company. They made the stores nicer and more inviting. They added a little bit of variety to the product offering. They added some efficiencies behind the scenes. The stores were very nice.

This plan to “fix” the chain, however, had a couple of serious problems:

• The chain was still highly dependent on a product that was becoming obsolete.

• The chain still charged more for the product than just about anyone else.

• The changes overall increased the cost of doing business without increasing demand for the product.

It didn’t take long for the employees to realize that taking an obsolete, non-competitively priced product and putting it in a nicer store would not solve the problem. In private, they referred to the president’s vision as the “we suck less” strategy. Yes, the stores were better, but the proposition to the customer still “sucked.”

Needless to say, that retail chain is no longer in existence today.

THE ANALOGY
Over the course of time, many businesses find themselves in a situation where their current business model becomes broken. Sometimes the threats to the business model come from the outside. Take, for example what the growth of the internet and digital Web 2.0 capabilities have done to destroy many traditional business models, from industries as diverse as newspapers, magazines, travel agencies, stock trading, advertising agencies, the music industry, or insurance, just to name a few.

Other times, the threat comes from the inside. Lack of controls, insufficient investment, quality control issues, not shifting with your customer’s changing needs, and poor service can also destroy a company’s business model.

Once one realizes that there is a problem, one’s first inclination is to try to fix the problem. Fixing usually involves trying to make the bad things better. Operational excellence or getting to parity with the best in the business becomes the new goal. Eventually these goals to get better are treated as the company’s strategy.

Getting better is not a real strategy. Becoming “less bad” does not make you a winner. To say you “suck less” does not give potential customers a compelling reason to prefer you over the competition. In the story above, all that getting better achieved was to raise the cost structure and speed up the chain’s demise.

THE PRINCIPLE
In my prior blog (see “Tearing Down The House”), I talked about how it can be a mistake to tear apart a good strategy and throw it away, just because it may have a few flaws in it. The tragic consequences of such a major disruption can cause more problems than the flaws that one was trying to fix. Small changes which reinforce the current strategy would tend to be a better course of action in those cases.

This principle, however, only works if a company is already on rather solid ground with respect to its market positioning and consumer acceptance. As you may recall, the companies I referred to in the prior blog were JC Penney and Kohl’s—two companies already on rather solid ground. If your company is poorly positioned, has a negative image, or is seen as an inferior alternative to someone else, then this principle does not apply.

In those cases, just “getting better” is not enough. Making a rotten apple less rotten does not make it tasty. In a prior blog (see “Rule of 1.5”) we talked about how industries tend to consolidate to a point where only one or two players in a given space are strong enough to earn a decent return on investment. If you improve your position from being 5th best in a space to being 4th best, you are still not good enough to unseat the leader.

Your financial woes will not go away with that type of effort, because you are investing in an area where the marketplace will not give you sufficient credit to justify the expense. The question in the back of their head will be, “If you are as good as you say you are, then why are you not the leader? Since you are not the leader, it must not be as good as you say.” Their conclusion will be that even if you now suck less, you must still suck.

Your only real alternative is to change yourself into something different. You need to find a different, neighboring space where you can reposition yourself as the leader. This is not about taking who you are and making better. This is about taking who you are and making it different; making it uniquely superior in some fashion, based on a different mix of attributes than those used in the prior space. Instead of being about improvement, it is about transformation.

For example, if low price is the defining attribute of the segment you are in and you have a relatively high cost structure, you can never effectively win in that segment. However, there may be a neighboring segment where there are a sufficient number of consumers looking for something similar, except that quality and service is more important to them than price. If no business currently has a solid lock on the quality/service angle, then perhaps you can transform yourself and migrate to that new position and become #1 in that neighboring space.

The idea is to change who you are compared to in the minds of the customer (and on which attributes they compare you). Rather than having people compare you to others who are better at providing lower prices, get them to compare you to others who are inferior at providing quality/service.

In the example used in the story above, just such a proposal was made. A strategy was developed to transform the retailer from being product-based (where it had a distinct disadvantage) into something that was more lifestyle based (where it had an opportunity to invent a new type of retail format in relatively uncontested space).

Unfortunately, this proposal was rejected and instead the “we suck less” alternative strategy was put in place. Why? In the near term, transformational strategies tend to require more resources (time, money, people) and have a longer payback. There also appears to be greater risk, because one is moving away from the historical foundation of the business. By contrast, an incremental improvement program can look more practical for the immediate future.

Unfortunately, you cannot indefinitely postpone the inevitable, and the “we suck less” approach never leads to long-term success. Usually, this harsh reality comes sooner than you think (see “The Room is Smaller than you Think”). In the story above, it only took two years under “we suck less” before the company was sold at a loss.

In reality, the higher risk is not in transforming the company. Instead, the higher risk is in the “we suck less” strategy, because it nearly always fails—and usually fairly rapidly. At least with a transformation strategy, you have a shot.

JC Penney was not always the successful company it is today. There were many lean years when some people thought the company might not survive. It was a mediocre performer at the low price end of the fashion continuum. However, instead of trying to become better at the Price First-Fashion Second space, it decided to transform itself into what it saw as a better space: Fashion First-Price Second. There were a few tense years in the middle of the transition, but now that it has successfully crossed over to the other side, JC Penney is showing great results and is back on an aggressive growth strategy.

Once, I was working with different company that had an inferior position in the marketplace. I was trying to convince the President of the Company to take on a transformation of the business, but his basic response was “I don’t have time for that now. I’m too busy trying to fix the company.” At that point, those words “we suck less” came back to my mind.

SUMMARY
Unless you are already a leader, getting better is not a winning strategy. Being good at what you do is merely the minimum table stakes needed to get in the game. If you want to win, you must go beyond merely being good (or even as good as the industry leader) and seek out points of differentiation and superiority.

FINAL THOUGHTS
It takes patience to transform a company. Not all stakeholders have that kind of patience. That is one of the benefits of going private, which many firms are doing. In the private environment, it is often easier to push through a transformational agenda.