Strategic Planning Analogy #271: Nuance is Needed

THE STORY
You may remember Hugh O’Brian as the star of the TV show “Life and Legend of Wyatt Earp.” This was a top rated show during its run on ABC from 1955 to 1961. Hugh O’Brian is also known for something else, called HOBY, which stands for Hugh O’Brian Youth Leadership. O’Brian started the organization back in 1958, after being inspired by an encounter with Albert Schweitzer. HOBY is still active today.

The goal of HOBY is to help prepare High School youth to become effective future leaders in society. Every year, HOBY brings together some of the best and brightest high schoolers in the US to central locations for seminars and interactions with some of the leaders in the world. It is a great organization.

Back in the 1990s, I was invited one year to be a leader at HOBY representing the food distribution system. I thought it would be fun to interact with the youth and “impart my wisdom.” Little did I know that I would soon be ambushed.

I got to the location where the meeting was being held and was immediately bombarded with questions from the youth about food distribution in the US. At least they were worded like questions. In reality, they were manifestos, presented in the form of a question. They had already decided that we needed a radical overhaul of food distribution, had concluded what that revolutionary change should be, and were berating me for why the industry had not already made all these changes.

After the initial shock of being ambushed, I pulled myself together and tried to explain a few things. I tried to explain to them that the world is not purely black and white. The current system was not 100% evil and their proposals were not 100% good. There are implications from every decision that ripple out and affect many areas. There can be lots of negative unintended consequences which fall out of what originally appears to be good, and vice versa. You have to look at all the trade-offs of good and bad in your decisions and find the best blend.

For example, many of their proposals were very expensive to implement. I told them that these proposals in total would radically increase the cost of food, putting it out of the reach of poorer people. As a result, instead of giving people better food, their proposals could have the unintended consequence of increasing starvation and malnutrition. Did they really want that?

I told them that some of their ideas about food purity could lead to increased spoilage, food wastage, and increased disease and sickness. Did they really want those unintended consequences?

As a result, I told them that one needs to take a balanced and nuanced approach, trying to create the most good while minimizing the unintended negative consequences.

I could see that I was getting nowhere with this line of reasoning. Their minds were already made up. It was more important for them to act now than to act right. Nuance is not a part of the average High School thought process.

THE ANALOGY
These HOBY leaders-to-be aren’t all that different from some of the leaders of today. They have notions of what look like good ideas, but haven’t thought through all of the long-term consequences.

Leaders today have lots of pressures on them. Every day is full of crises and fires which need to be put out right away. There are pressures to act quickly and decisively. There doesn’t appear to be any room for nuance or for thinking out all of the long-term consequences of a decision (good and bad).

Unfortunately, if this type of thinking is ignored, leaders eventually may come to regret their decisions. For example, Enron came up with what at first looked to be a great incentive system for encouraging near-term profits. It was praised by many management gurus. However, it also had the unfortunate negative consequence of encouraging falsification, deception, and corruption. The unintended negative consequences of this incentive system caused the implosion of Enron.

How can this be avoided? This is where strategic planners can provide one of their most valuable services. Because strategists tend to be a little more removed from the tyranny of the immediate crisis of the day, they have the luxury of being able to focus more on thinking through all the consequences of a decision. They can then present that thinking to top leaders, so that they can make more informed decisions.

Just as I was trying to help the HOBY youth see the bigger picture and all of the consequences and ramifications of a decision, strategists need to the same for their companies.

THE PRINCIPLE
The principle here is that although it is desirable for leaders to look for the unintended consequences and the subtle nuances/ramifications in their decisions, it is essential for strategic planners to do so. No one else is in a better position for this task. (Note: I talked in greater detail on the importance of considering unintended consequences in an earlier blog.)

As mentioned above, leaders are often pulled in many directions and have difficulty sitting back to ponder all the ramifications. This makes it difficult for them to be the key practitioners of this task.

Many of their other top confidants have large empires of power. This can bias their ability to think objectively through all the ramifications, since it could impact their power base, or the power bases of their rivals. Even if they can be objective, that power base can make it hard for them to appear objective to others. Their questionings can appear to be personal attacks. So they are not the best candidates, either.

Outside consultants are useful, but this is typically not an area where they excel. They are often not intimately knowledgeable about your industry in a way that helps them understand the nuances of a particular decision. Also, they are not planning to stick around long enough for the unpleasant ripple effects to appear. Finally, their specialty is usually to bring in hoards of young people to gather data, not to have someone sit back and ponder implications.

No, it would seem that the strategists are in the best position for this important task. They have the most freedom from the daily fires that detract from long-term thinking. Strategists also tend to have fewer ties and biases to the status quo power bases, giving them more freedom to look to look at things objectively. Finally, because they are insiders with a stake in the long-term prospects of the business, strategists can see the nuances and are motivated to make them known.

In medieval times, the court jester was the only one who could openly criticize the king without fear of getting his head chopped off. They could get away with it because it was part of their role, and because it was packaged inside humor.

In many ways, strategists are like the court jester. Strategists are uniquely suited to get away with critical assessment about unintended long-term ramifications, because long-term concerns are a key part of their role, and they can package it inside of strategic assessment rather than personal attack. A friend of mine succeeded well as a strategist because he mastered the role of the court jester, which allowed him the ability to point out these negative ramifications in a way that no one else could.

Most job descriptions for strategists do not include the specific task of being the key point person for pointing out negative unintentional consequences and showing the difficult trade-offs hidden behind many decisions. Even so, it is probably one of the most important things they can do for their organization. Take the time to develop this skill. Then use the skill. Your company’s future depends on it.

SUMMARY
Many decisions which look great upon first glance can actually be terrible strategic decisions after pondering all the hidden long-term ramifications. To make sure a company reaches the right decision, someone in the organization needs to be pro-actively searching for the unintended ramifications before the final decision is made. This involves taking the time to ponder the nuances and interconnectivities of the business and how the decision will impact them. And guess what…usually the person best suited for this role is the strategist.

FINAL THOUGHTS
Earlier, I said I was ambushed at the HOBY convention. Actually, I was ambushed twice. Hugh O’Brian cornered me and wanted as much insight as possible into how he could get a huge donation for his organization from the company I worked for. I pointed him in the right direction.

Strategic Planning Analogy #270: Tool Time

THE STORY
A man walks into a home improvement store to purchase a ladder. He goes up to the salesman and asks for a recommendation on which ladder to buy.

The salesman replies, “That depends on what you plan on using the ladder for. We have tall ones, short ones, durable ones, inexpensive ones, and flexible ones. Tell me how you plan on using the ladder and I’ll recommend the right one.”

The man says, “I don’t know how it will be used. Heck, just get me a blue ladder. I like the color blue.”

THE ANALOGY
It’s hard to buy the right tool when you do not have a clue as to how it will be used. The same is true with financial models. You can design all sorts of different computer models for your strategic scenarios—simple ones, complex ones, flexible ones, and so on. Like the ladders in the story, each type of model has its place—and each type can be inappropriate under certain circumstances.

Models are like ladders; they are both tools to get a job done. The better you understand the job, the better choice of tool you will make. Choosing a ladder because you like its color makes as much sense as choosing a modeling technique because it is your favorite. Instead, get the tool based on the job to be done.

THE PRINCIPLE
The principle here is that the best type of model is the one that best answers the question at hand. Simple models have their place. They are quick and easy to build and easy to understand. However, they may not be adaptable to a wide variety of scenarios and they may not be sophisticated enough to provide a meaningful answer.

By contrast, a sophisticated and complex model can allow you to understand a situation more deeply. They can also be adaptable to more alternatives. Unfortunately, they can also be a time-consuming nightmare to build, debug, and input data. In addition, you may not have enough information to know how all the pieces in the model should interact.

Remember, a computer model is just a tool, not the end result. The end result is a strategic decision. Depending on what that decision is, different models may be more or less appropriate.

Keeping that in mind, here are my rules for designing models.

1) Start With the End
The first thing you need to do is ask what decision will be made based on the modeling. Knowing that (the end) will let you know where to start. I’ve seen cases where someone rushes off to build a model before fully understanding how the model will be used. They come back with something inappropriate. That is a waste of time for the modeler and the ones for whom the model was made.

If you are trying to decide between two different ways to operate your business (quality vs. low price; in-house vs. outsourced; mass vs. niche; automated vs. flexible; etc.) perhaps the best model is just a single look at each option in its mature state. There would be more complexity around the factors that are different in the scenarios and less complexity in the areas where they are the same.

If you are trying to decide whether to do an acquisition, then you probably want a model which spans several years—long enough to capture the value of the deal. You need enough detail to compute cash flow. Since a lot of the value of an acquisition is gained or lost during the transition process, you would want to model that as well.

If you are trying to choose between short-term tactics (like a pricing plan or an advertising plan), the model can probably be simplified to only looking at the areas of the business impacted by the tactic.

If you are in a crisis mode where a decision has to be made immediately, stick to the key issues and crank something out quickly.

2) Never Asssume You Will Get it Right In One Take
I worked with a guy who had an interesting take on model building. Once he got all the formulas right, he would run the model once and then freeze the results. In other words, he would erase all the formulas and links from the model and replace them with the actual numbers which came out of the first running of the model.

Then, he would present his results. Invariably, someone would want to adjust some of the assumptions in the model or try another scenario. This guy would then throw a fit because he had erased all of the formulas. He couldn’t run the model again because he had frozen each cell in the spreadsheet with the number from the prior scenario.

This is an extreme case, but the principle applies broadly. Assume that there will be future adjustments to the model. Build it with enough flexibility so that it can be adapted to the future changes.

3) The Questions You Ask Are More Important than the Model You Build
Models are built to provide more clarity around a business decision. Fuzzy notions are hard to quantify and even harder to properly evaluate. In the process of building a model, one has an opportunity to help your audience become less fuzzy by asking a lot of questions.

A computer spreadsheet model has a lot of cells which need to be filled. By working with your audience and asking the right questions, you can force them to become clearer about how each of those cells inter-relate. They may not have thought it all through. By asking the right questions, you can make them think about things that need to be thought through in order to fill in all the cells.

The value of getting them to think these things through may be a lot more valuable than the actual number which comes out of the model. For example, they may be looking at changing the price of a particular product/service. To make sure they fully understand the ramifications of the price change, you can ask questions like:

- How would that price change impact the price perception (and cannibalization) on the rest of the product portfolio?
- How will it impact your quality image?
- What happens if competition matches your price?
- How much price elasticity is there in the marketplace?
- If a lower price raises demand, what items are fixed and what items are variable in meeting that demand?

Just by asking those penetrating questions, you can create better decision-making, regardless of the model. I remember someone from McDonalds telling me about their test of a new product called McShrimp Cocktail. The original model looked pretty good until someone asked the question, “How much shrimp would it take to roll this thing out chain-wide?” Once it was determined that 100% of the known shrimp in the world would not be enough to cover annual sales projections, the project was scrapped. Simple questions can be very powerful. Use the tool of the model as an excuse to get in front of people to ask these questions.

4) Once You Have Enough Information to Make the Right Decision, Stop
The goal here is not the perfect model, but the right decision. Sometimes the choice is so obvious that it doesn’t take much of a model to show it. The gap between option A and option B at times can be so large that you don’t need to waste a lot of time fine-tuning the model. If no amount of fine-tuning could ever make option B better than A, then stop the fine tuning.

As you build and refine the model and the assumptions, continually ask yourself this question, “What is the likelihood that further refinement would lead me to a different conclusion?” At the point where you see little to no chance that further refinement would change your decision, then make the decision now and stop wasting time refining the model.

Sometimes the difference between option A and option B can be very slight. In those cases, it can be well worth the time to further refine your modeling in order to better understand which is the right decision. Focus on the key areas which are the least certain and the most influential.

SUMMARY
Financial modeling is just a tool. Its value comes from its ability to help you make better decisions. Depending on the decision, you made need a different model. So start by understanding exactly what that decision needs to be. Then bring clarity around that decision by asking the right questions. Finally, once you have enough clarity, stop fine-tuning the model.

FINAL THOUGHTS
Some strategic implications of a decision are hard to quantify, like the impact on corporate culture or the value of strategic flexibility. Just because they are hard to quantify does not mean they should be ignored. Often, the soft issues make or break a decision. A financial model is just one tool in the toolkit. Combine it with softer tools which take these other aspects into account.

Strategic Planning Analogy #269: Culture is Offensive (and Defensive)

THE STORY
Back in the days of the dot-com boom, I was working on a new e-commerce opportunity. In an attempt to get this idea off the ground, I was trying to form a joint venture between three types of companies: a high-tech e-commerce software company, a large telecommunications company, and a traditional store-based retailer.

Unfortunately, this project never got off the ground. The reason? All three companies had vastly different cultures. The software company had a silicon valley corporate culture. The telecommunications company still thought like it was part of the old-school monopolistic practices prior to the breakup of the original AT&T. The bricks and mortar retailer fell somewhere in-between.

It’s hard enough trying to get three companies to work together who have similar cultural styles. But when they cultures are so different that they appear as unintelligible foreign languages to the other firms, your chances for success are doomed.

THE ANALOGY
In the world of strategy, a lot of one’s future success often depends on cooperation with other firms. If the firms do not work together as planned, the strategy falls apart. You can put a lot of reason on paper why a cooperative strategy should work:

1) Complementary Skill-Sets/Resources
2) Mutual Self-Interest
3) Speed-to-Market
4) Building a Network Powerful Enough to Win (stronger than going alone)
5) The numbers (financial analysis) show great profit potential.

This was the case in the story above. There were many reasons why the participants should have been ticklee to death to do the deal. The logic was solid; the numbers were solid.

Unfortunately, the cultures were so different, that the companies did not trust each other. As a result, the logic and the numbers were not enough to hold the deal together.

THE PRINCIPLE
The principle here is that a strategic plan which ignores corporate culture is an incomplete strategy. Now you may be saying, “Sure, that’s true when you are trying to acquire a business or do a joint venture, but after that, corporate culture is a minor factor.” I beg to differ.
I think corporate culture can be used as both a strong offensive and defensive strategic move. By pro-actively putting corporate culture into your strategic plan, you can change the rules to your favor.

Offensive Cultural Tactic #1: Getting to the Future Faster
Most strategies are an attempt to create a better future position for your business. That usually requires changing the rules of how the game is played and getting out ahead of the competition.

New rules often require new ways of running your business. Your old corporate culture was designed for the old rules. To get to the future faster and more effectively often requires becoming aggressive at pro-actively altering your corporate culture to be more in tune with the new rules.

Those old telecommunications giants like the one in the story have a lot of legacy culture from the old days of the simple telephone monopolies. This slow, bureaucratic culture is not well suited for the modern telecommunications age. Nimbler firms like Apple are finding the new ways to mine gold from that space. They can think outside the box, because the box was not their cultural home.

Similarly, the cultural heritage of the Detroit automakers was designed for different times. GM has stuck with that old, outdated culture and paid the price. Ford has proactively tried to break that culture by bringing in an outsider to lead the firm. Caterpillar used to have a corporate culture like the auto industry, but it early on aggressively changed that culture and has become a world leader.

John Chambers, CEO of Cisco, loves to talk about how he saw the future evolving to one where innovation is more important, so he changed the corporate culture to better embrace that new reality. As these examples show, if you want to take the offensive on moving ahead, it helps if pro-active adapting your culture early in the game is part of that strategy.

Offensive Cultural Tactic #2: Getting the Right People
It’s said so often that it’s become a cliché, but success has a lot to do with getting the right people. You win with people, as the saying goes. Therefore, getting the right people can be a key factor in strategic success.

The exciting new people of the next generation are wired a bit differently from past generations. To become the employer of choice for these top prospects may require adapting your culture to make it more appealing to them. If your culture only attracts people with yesterday’s mindset, it will be hard to even see, let alone win, tomorrow’s game.

Therefore, a pro-active approach to adapting your culture can be a key offensive tactic to draw in the talent one needs to make your strategy work.

Defensive Cultural Tactic #1: Postponing Obsolescence
Corporate culture is a lot like the culture in yogurt. At first, the active culture reacts with the milk to make tasty yogurt. But if that same active culture works too long on the milk, the yogurt goes bad and spoils.

If you leave the same culture in your company too long, your company, like the yogurt, can go bad and spoil as well. You need to change it up a bit to stay current with the changing marketplace. Otherwise, your outdated culture will keep you stuck in the past. It will make your company irrelevant and obsolete.

There’s a reason why disruptive innovation often comes from outside an industry. Those on the outside bring a fresh culture and a fresh perspective. They don’t get trapped in the past by saying, “But we’ve never done it that way before.” Outsiders are more willing to try a new way, with a new culture, because they are not wedded to the old.

Therefore, if you want to defend your industry position, it is often desirable to do so by pro-actively working to keep your culture relevant to the changing industry you are in.

Defensive Cultural Tactic #2: Blocking Openings
Often times, the future industry leader gets its start by exploiting a little hole in the current leader’s strategy. The future leader takes that little hole as a beachhead to eventually topple the current leader.

This is similar to what Google is trying to do to Microsoft. Microsoft had a hole in its strategy when it came to search engines. Google exploited that weakness and became a strong leader in search. Google is now using that leadership in search to build positions across nearly all of Microsoft’s businesses. If it weren’t for that hole in Microsoft’s strategy, Google would not have had the entry way to now challenge Microsoft and put them on the defensive.

Corporate culture tends to make us look at the world in a particular way. This creates “blind spots” that others can exploit and use as a beachhead. However, if we proactively develop a culture which embraces more diversity of thought, we are more likely to have people in the organization who see that “blind spot” and help us defend it from attack.

SUMMARY
Corporate culture can be far more than just a nice little afterthought for your strategy. In fact, it can be one of your most significant strategic tactics, both as an offensive move and a defensive move. By taking a more pro-active approach to managing cultural change, one can increase the likelihood of success.

FINAL THOUGHTS
I’m not saying that you should abandon your culture every year and take up the latest management fad. Culture should have some lasting qualities. Some aspects, such as a culture of integrity or a culture of pursuing low costs may last forever. Other aspects, however, should be reexamined on a periodic basis to ensure they are still relevant.

Strategic Planning Analogy #268: We're All in the Fashion Business

THE STORY
A few years back I was working on a project with a number of people in the recorded music industry. I noticed that most of the people who worked in that industry tended to wear black clothing—from top to bottom—nearly every day.

I finally couldn’t take it any longer, so I asked one of them why he (and the others) wore black every day.

He paused for quite awhile, with a puzzled look on his face. Finally, he said, “I don’t know. I guess it makes it easer to get dressed in the morning.”

THE ANALOGY
It’s easier to get dressed when the element of fashion is taken out of the equation. If everything in your closet is black, you can grab just about anything and look okay.

For most people, however, clothing is not so simple. Fashion is a concern. Clothes need to be in fashion and coordinate together. If your clothes are out of fashion or not well coordinated, it will reflect poorly on your image. When clothes go out of fashion, they need to be replaced with the newest and latest. Wearing the right labels is also a concern.

As a result, when the element of fashion is added, getting dressed in the morning suddenly becomes a more complex affair. It takes some effort to stay on top of the fashion cycles, so that you are not looked down upon. There are even TV shows to help us understand fashionable dressing.

Most of us are aware that clothing is driven by fashion. However, as we will see in this blog, virtually all businesses have a significant element of fashion to them. Just as being out of fashion in clothing can hurt your image, being out of fashion in your business can hurt your company’s profitability. Businesses need to get in tune with the fashion complexities of their industry.

THE PRINCIPLE
The principle here is that everyone is in the fashion business. You ignore the fashion element at your own peril.

Everyone? We’re all in the fashion business? Sure…things go in and out of fashion in business all the time. Take finance. Sometimes private equity is in fashion, sometimes stock is in fashion. We tend to be somewhat faddish over the latest new wrinkle in debt structuring. Sometimes entrepreneurs are in fashion, sometimes big business.

In the automotive industry, sometimes big ol’ trucks are in fashion, sometimes tiny little cars are in fashion. Even the fashion allure of some brands come and go out of fashion. When it comes to Japanese imports, first it was Datsun that was the fashionable one to have. Later, it was Honda. Then Toyota. And now the Toyota brand may be starting to lose its fashion appeal as the hot import brand.

Governments go in and out of fashion. Sometimes it’s more fashionable to be liberal; sometimes it is more fashionable to be conservative. Fringe political groups go in and out of fashion, too.

Food is fashionable. Sometimes Thai food is in. Other times, it’s Indian or Italian. Organic is now fashionable. Carbs were totally out. Now they are back.

In computing, netbooks are in, desktops are out. And mobile phones are extremely fashionable—an older phone really looks out of date and makes you look unfashionable.

The point is that nothing lasts forever and no purchase is 100% rational. Emotional/Fashion elements suddenly make things far more desirable than what makes rational sense. Just as suddenly, they become passé and out of favor. Look at those crazy foam-like Croc shoes. At first they were in such high demand that Crocs could not manufacture them fast enough. Now, sales have plummeted and Crocs is on the verge of bankruptcy. The shoes didn’t change. Demand changed due to a change in fashion.

This phenomenon affects more than just apparel. Consumer markets, business markets, industrial markets, governmental markets, and so on, go through fashion cycles. And as we all know, business management practices are among the trendiest of them all.

So if everything has an element of fashion to it, what can we learn from the fashion apparel industry? I think there are three important principles.

1. The First Markdown is the Best Markdown
When things start going out of fashion, it is usually not a long, slow drawn-out affair. The transition is rather quick. Just ask Hummer how fast they went from cool to embarrassing. When the mortgage market went sour, it killed the fashion for fancy new housing construction almost instantly. In the fashion apparel world, they understand how fast the latest hot thing can go cold. As a result, as soon as there is a small hint that things may be turning bad they go into action. Production is halted; huge sale signs go up; inventory is pushed out the door as fast as possible, regardless of cost. This is not a time to be tentative. Soon the value of that inventory will be nearly worthless, so get whatever you can right now.

Think of bananas. Once you start seeing a few black spots, you know that soon the whole banana will be rotten. You can’t sell a totally rotten banana at any price (you can’t even give it away), but you can sell one with a few black spots if the price is low enough. So mark it down quickly, when there is still a chance of making a sale.

This applies to all businesses. Don’t assume your offering will always be in high demand. Eventually, it will become obsolete, either through new innovation, changes in demand, or competitive moves. And when that time comes, the desirability of that offering will fall far faster than you think. Therefore, when things start to turn bad, be ready to liquidate quickly, even if it means severe markdowns. Don’t procrastinate. Ford got out of Range Rover quickly, selling at a reasonable discount. GM procrastinated with Hummer and will sell it for next to nothing. The first markdown is the best markdown. Take advantage of it by pushing to sell while there is still a bit of fashion in your favor.

2. Don’t Put All Your Eggs in One Basket
If all you sell are Crocs, and Crocs go out of favor, you are doomed. The US auto makers were moving closer and closer to being just manufacturers of big trucks and SUVs. Now that those are out of fashion, they are scrambling to become serious in cars again.

The smart fashion houses don’t put all their eggs in one basket. First, they diversify by holding a portfolio of brands/styles. Second, they keep the product development pipeline full. They are always trying and testing new things. They always have one eye looking towards the next fashion season.

You should do the same. Have a portfolio of products or offerings, so that you can easily shift your mix to the changing whims of fashion. Make product development a priority—keep the development pipeline full. Keep an eye out for the next big thing and pounce on it when the time is right.

3. Seasons Come and Go
People in apparel fashion know that their world operates in seasons. What is hot in the Spring Season will be gone by the Fall Season. Something new will be hot in the fall, which will be obsolete by the following spring. Even what is hot for fall changes from year to year.

Therefore, smart apparel people never rest on their laurels. They know that just because they succeeded in the spring, they have no guarantee that they will succeed in the fall. Each season is a new battle to be won all over again. Reputation only goes so far. You have to win each season by adapting to the new seasonal whims better than anyone else.

The same is true for your business. Although the seasonality may not be as predictable as it is in apparel, there are cycles and rhythms to your business. These cycles and rhythms will significantly alter the landscape, making the successes of the past fairly meaningless. When photography fashion moved from film to digital, the reputation of Kodak only went so far…not enough to keep them successful. It was a new digital season and they were still pushing the last season’s (film-based) products.

One needs to fight hard to win each season by reinventing your offering to meet the mood of the new season. Again, it is not a gradual thing. The seasonal shift is fairly swift. You need to proactively try to predict the next season—just like apparel fashion houses do—so that you are ready when the new season comes.

SUMMARY
Every industry has an element of fashion to it, so apply some of the principles of the apparel fashion industry to your own industry. First, be prepared to make the most of the first markdown. Second, don’t put all your eggs in one basket. Third, realize that every season is a new battle.

FINAL THOUGHTS
Fashion people also realize that just because you blew it for the current season, all is not lost. There is always next season to regain the top. So cheer up. There is always the opportunity to win when the next fashion shift comes—if you are prepared.

Strategic Planning Analogy #267: It Must Be Better

THE STORY
Many years ago, there was a comedian who specialized in doing impersonations. Now, it used to be that a lot of comedians did impersonations. This comedian, however, put a unique spin on the genre. He specialized in doing impersonations of people who died long before the invention of recorded sound.

For example, he would do impersonations of people like Abraham Lincoln or Aristotle. It was interesting to watch, but was it accurate? I have no idea what Aristotle sounded like or what his mannerisms were. For all I know, this comedian could have it all wrong and not even be close.

But in the end, I guess it doesn’t matter. Since nobody else knows what Aristotle sounded like or acted like, nobody could challenge the accuracy of the impersonations. As long as the comedian was funny, the audience would accept his impersonations. It was those other comedians, who did impressions of people we knew, who were more sharply critiqued (“Hey that’s not what John Wayne sounds like”).

THE ANALOGY
When nobody knows what truth is (and nobody is able to discern the truth), then nobody can effectively challenge your position. This was the situation the comedian was in. Nobody knew what those ancient people sounded like or acted like, so the audience could not challenge the comedian’s impression of these old people. They just sat back and enjoyed the show.

However, if someone is doing an impression or imitation of something you are very familiar with, then the criticisms come flying. You know what “truth” is because you have experienced the real thing. Any variation from the real thing will be noticed as a flaw or defect. Rather than just sitting back to enjoy the show, you compare the imitation/impression to the reality (as you remember it) and get upset if the imitation does not live up to your expectations of what truth is. You’ll shout something like, “I know what John Wayne sounds like and acts like, and that was not it!”

This situation is similar to what happens in business. In product development, you have one of two strategic choices: either create something totally new, unlike anything else in the market OR create a “me, too” product that is a variation of something which already exists.

The first choice would be like our comedian, who did impressions that were totally new to you (you had never heard the voice of these people before—you have no reference point). Similarly, totally new products have no reference point—what you invent defines the category. It is accepted as authentic and people enjoy it for what it is.

The second choice (offering a “me too” product) is like comedians who do impressions of people we are very familiar with (you have a reference point). You are more critical, because you have a benchmark to compare it to. Any variance from the original reference point makes your product less “authentic.”

THE PRINCIPLE
The principle here is that the less the familiarity, the greater the acceptance. Therefore, if you blaze new trails in product development towards areas unfamiliar to your customers, your development efforts have greater potential for acceptance.

We could see this principle at work in the comedian story. We are more forgiving of the comedian going where we’d never been than ones covering familiar impressions with a slight imperfection. I also experienced this principle recently in a restaurant. This was no ordinary restaurant. It was an exotic restaurant specializing in exotic foods which I had never eaten before. Heck, I couldn’t even pronounce the words on the menu, let alone understand it.

When the food came out, I had no preconceived notion as to how it was supposed to taste. I had never eaten anything like this before. Some of it tasted fine. Some of it tasted very odd to me. But since this was a nice restaurant with a good image, I assumed they were all supposed to taste like that. It never occurred to me that the dishes might be prepared wrong. They supposedly had excellent chefs, so I just took it for granted that these concoctions were supposed to taste that way—even if I didn’t like it.

But what if I was wrong and the food really was prepared poorly? What if this really was bad tasting food? I wouldn’t know. So I was satisfied, whether it was right or wrong, because I didn’t have a pre-conceived notion of what “good” would taste like. I just sat back and enjoyed the dinner.

Now if this fancy restaurant had served me a hamburger, I would have had a reference point. I could have complained if their gourmet burger drifted too far away from my concept of what a hamburger is supposed to look like and taste like. But they did not offer a “me too” burger. They offered me a taste of the unknown. A taste of the unknown is always yummier than an off-beat version of the familiar.

You can also do this at the low end of the restaurant spectrum. Quiznos has had great success with their $4 Torpedo. The beauty of the Torpedo is that it is so unlike anything else out there that there is no reference point to tell if it is a good torpedo or a bad one—so you accept that it is a good one, and worth the $4.

Quiznos knew that having a $4 item on their menu would be a key to success in this recession. They could have lowered the price of their familiar regular sub sandwich to $4, but that would have caused problems. First, once you lower the sub to $4, there is an expectation that $4 is now the right price for that sub. It would be difficult to raise the price back up later without ruining the new perceived value. Second, the regular sub is not designed to work in the business model at $4. Either you have to cheapen the sub (which would be noticed, since people were familiar with it) or you have to lose money on the deal.

By contrast, the Torpedo was designed to work in the business model at $4. It wasn’t a “cheapened” anything, since it was brand new. Sure, it had less meat than a regular sub, but the Torpedo never was a regular sub and was not expected to be one. It was a Torpedo, and this is how Torpedos are supposed to be. They had never been anything else. A strategic piece of genius!

So what does this mean for your strategy?

1. It is almost always better to create something brand new, where you can define the parameters of success, than to copy someone else, who has already defined success (as being them). When you control how a product is defined, then you can define the perfect product as the one you are offering. Apple has been very good at this.

When Toyota invented the Prius, they made a brand new car which defined what a hybrid is supposed to be. After that, anyone else who tried to make a hybrid brand had to be compared to the definition of the perfect hybrid—the Prius. And of course the Prius is the superior Prius, so it wins. Worse yet were automakers who tried to make a hybrid version of a non-hybrid car people were already familiar with. That didn’t work, because their familiarity with the gas hog version biased them against the hybrid version (familiarity made them more critical).

2. When positioning your product, don’t spend too much time comparing it to the status quo product. If you make too big a deal out of the status quo, you are acknowledging its leadership, which makes you an also-ran. People will say, “If you are so good, then why does the status quo have higher sales?” Instead, position yourself as an entirely new way to solve an old problem. There’s just something about saying that “my revolutionary new way is better” which sounds more believable than saying “I’m making basically the same thing as what is already out there and successful, but I’m better.”

3. Sometimes you can get around cost pressures by replacing the familiar with a cheaper unknown which is positioned as a wholly new product. Cheese was getting very expensive, which is a problem for companies like Taco Bell, who use a lot of cheese and want to keep their prices low. But Taco Bell has never been afraid of inventing new menu items nobody has ever heard of. So the new items substituted cheaper cheese sauce for cheese. However, since these were brand new items that never had real cheese in them, it didn’t look like a cheap substitution. It was just how the new item was supposed to be. This is far more successful than if they had taken familiar items and did the substitution. Then, Taco Bell took this cheap sauce and put hot spices in it and invented “Hot Lava Sauce.” So now the cheaper substitute was a unique, premium item in brand new menu items.

SUMMARY
Winning strategies tend to blaze new trails rather than rework the familiar. The revolutionaries get to define the category in their favor and tend to receive less criticism. Because they define the category, they must be right.

FINAL THOUGHTS
Even if your product is not all that revolutionary, that doesn’t mean that you cannot package it in a revolutionary manner. Chrysler was making fairly ordinary trucks, but they were packaged as revolutionary because they had the magic Hemi engine.