THE STORY
Have you ever noticed that in many little diners there is a sign on the wall claiming that the diner sells “the world’s best coffee”? This brings to mind several questions:
1) If a lot of diners have this sign, then how can all of them be true? How many “World’s Best Coffees” can there be?
2) What could a little old diner in the middle of nowhere be doing so differently to make their coffee the world’s best? Can they afford to have someone combing the world for the world’s best coffee beans?
3) Who gets to determine what the world’s best coffee should taste like? Isn’t it true that different people like different types of coffees?
5) How could anyone taste a sample from every establishment in the world that sells coffee in order to assure me that they know which one tastes best? After that many samples, how would they even remember what each one tasted like?
4) If their coffee is so good, then why do I see more people at a Starbucks?
5) If their coffee is so good, then why is it so cheap?
THE ANALOGY
All businesses need a position in the marketplace. Positions tell people what your business stands for and why they should prefer doing business with you. If you cannot come up with a position which explains why people should prefer to patronize you, then why are you in business? Why should people care about you? Just “showing up” is not good enough. Your business needs to create a competitive advantage through proper positioning.
Not all attempts at positioning are successful. In the story above, the diners claimed to have a position: the place to get the best cup of coffee in the world. I seriously doubt that anyone takes such a statement seriously. If your position is not taken seriously, then it is not really a position.
Therefore, one not only needs a position, but one needs a successful position.
THE PRINCIPLE
Successful positions have four characteristics. I call them the 4 “ables”. To be successful, a position must be:
1) Desirable
2) Achieveable
3) Believable
4) Ownable
Each of these is explained in more detail below.
1) Desirable
It is possible to create a position you can achieve and own, but that very few people actually care about. For example, you could create a one-stop shopping environment for people who want to get just ice cream and battery acid on the same trip. The world may allow you to own that position, but very few people are looking for something like that. It’s not the sort of position that will cause people to prefer you. First of all, those two items are not usually bought together and there is little advantage to bringing them together into the same store. Second, there could be fears that the ice cream would be poisoned by coming in contact with the battery acid.
Therefore, when choosing a position, make sure that you have chosen something people want—something so desirable that it would cause a significant number of people to choose you first over the alternatives.
2) Achievable
It’s great to come up with a position which people desire. However, if you are incapable of living up to the promises of such a positioning, then you are just going to end up disappointing people. For example, around 20 to 25% of the consumer population will put up with a lot of grief to get the lowest price. Therefore, owning the low price position in your industry will make you popular with a lot of people. However, if you are a small business with a high cost structure, then it is highly unlikely you can achieve and sustain the lowest prices in the industry. Eventually, people will figure out that you really are not the lowest priced and you will lose the battle. (In today’s internet age, there are so many sites doing comparison pricing and performance ratings that it is even harder to fool people with an unachievable position.)
You need to pick a position which is suitable to your capabilities—something you can be the best at. What is achievable for someone else, may not be achievable for you (and vice versa). That’s why there is not one single position which is best for everyone. You have to find the one that is best for you.
3) Believable
People act based on what they believe. If people do not believe that you own a position, you will not get credit for it. People’s beliefs are not always rooted in reality. Therefore, achieving a position which is verified by scientific measurement may still fail if customers do not believe it to be true. Positions are held in the mind of the customer. It is in the mind where you have to measure you success.
In the story above, it is hard to believe that a small diner has the world’s best coffee (even if it does). Therefore, it is not a very persuasive reason for choosing the diner.
A few years back, I saw a Menard’s home improvement center with a large sign on the outside claiming that Menard’s was “the official home improvement center of the new millennium.” First of all, I’m not exactly sure what that means. Second of all, it is hard for me to believe that such a claim is true. Third, the only thing it got me to believe was that there are some goofy sign creators at Menard’s (and that’s not a reason to prefer them).
Sometimes, companies that have tried to own a “quality” position have had believability issues because their prices are too low. Like in the story above, customers can wonder how your quality could possibly be that good if your prices are that cheap. In many cases, companies going after a “quality” position have had greater success once they raised their prices, because it made their position more believable.
4) Ownable
Finally, a position must be ownable—something that is relatively unique to your firm and not already owned by someone else. Remember, the goal is to find a position which will cause people to prefer you over someone else. If everyone has this quality, then it will not get people to prefer you. For example, if a doctor claimed his position to be “the doctor that cures people of their illnesses” it would not be a very successful position. After all, it is assumed that all doctors are qualified to cure people of illnesses. Hence, it would not be something that this doctor could own. He couldn’t say, “Unlike most other doctors, I cure people of illnesses.”
Another ownership problem occurs when someone claims ownership to that position before you. For example, Wal-Mart has spent a great deal of time and effort to own the low price position in basic consumables. For a newcomer to try to take that position away would be very difficult. It is already owned by Wal-Mart. It is usually better to look for a position not already firmly held by someone in the industry.
Last week, Eddie Lampert, Chairman of Sears Holdings announced the new positions for Sears and K Mart. Although it is too early to make a final assessment, let’s put the new positions to the test. For Sears, the new position is to be a “one-stop shop for the home.” The slogan is “Sears. Where it Begins.” The icon is a throwback to the big Sears catalog, where stories about people and their homes come out of the book.
For K Mart, the position revolves around being a “marketplace of discoveries.” The slogan is “turn on to something new.” The icon is a throwback to the blue light special via a cartoon Mr. Bluelight.
Starting with Sears:
1) Is it desirable? It’s nice to get everything relevant for the home at one place. But do I really want a Home Depot and a Bed Bath and Beyond under one roof? Maybe.
2) Is it Achievable? Well, wasn’t Sears’ Great Indoors format everything possible for the home under one roof? So it can be done. (Of course, the lack of success of the Great Indoors does make one a little skeptical about the desirability).
3) Is it Believable? What about all the clothing in the store? What does that have to do with the home? I doubt that all the clothes are being taken out. So it is reasonably believable, but compromised by non-home items.
4) Is it Ownable? Home Depot and Lowes own the hardlines part of the home and Bed Bath & Beyond owns the softlines part of the home. By combining the two, do you compromise your image as an expert? Can people believe that you are the expert in both?
Now how abut Kmart:
1) Is it Desirable? I’m not convinced of what it is I am to desire. Is it the ability to find new and different items? If so, that is desirable.
2) Is it Achievable? It is very difficult to always be on the cutting edge of what is new and different, especially as a discount store.
3) Is it Believable? Kmart is not known as being hip or new or unique. This will be a tough sell. Having a cartoon light explaining it to me probably will not change minds. So far, I’d say no.
4) Is it Ownable? Target owns the hip, new discovery position in discount stores. If the bent is more towards one-time closeouts, that is owned by Big Lots. I don’t see a lot of ownership possibilities, here.
Final vote: Sears brand has modest potential, Kmart seems weak. Neither a home run.
SUMMARY
Successful positions must be desirable, achievable, believable and ownable.
FINAL THOUGHTS
On May 4, 2007, Eddie Lampert said, “A company without positioning is like a ship without a rudder.” I’d add that a company with a weak position is like a ship with a broken rudder which causes you to go in circles, rather than moving forward.
Tuesday, May 8, 2007
Sunday, May 6, 2007
Oh, My!
The Story
One time, I was working with an executive who had been recently promoted. In the past, she had spent her entire career in finance doing primarily treasury-related work. With her promotion, she was given the added responsibility of also being in charge of the Strategic Planning Department.
Since she had never spent any time in strategic planning, she asked me to teach her what strategic planning was all about. I was happy to help. As I was explaining the principles of strategic planning to her, I could often see in her face a blank look of confusion. In her mind, she was used to dealing with “hard” numbers and I was giving her “soft” ideas. Not only was she uncomfortable with what I was saying, but she was having difficulty seeing why it was so important.
Then, one day as I was talking with her, I saw a look of horror suddenly come over her face. I call it the “Oh, my!” look. She looked up at me and said, “You mean to tell me that everything we are doing as a company will someday be obsolete?” Panic started to set in. For the first time, she could envision a future world where the business model the company relied on for success was no longer appropriate.
At that point I knew she finally “got it.” She finally understood what I had been talking about at all those training sessions. Strategic planning may look silly when everything is going well. However, the good times do not go on forever. Planning is needed to find the next strategy for success before the current strategic initiative stops working and becomes obsolete. Planning is not optional. It is vital to a company’s survival.
The Analogy
The executive mentioned above had been trained to think about business in a certain way—from the perspective of the Treasury Department. This thinking acted as a barrier to understanding business from a different perspective—the perspective of a strategic planner. She had to unlearn some of the thinking patterns of the past in order to gain new insights for her new responsibilities.
For example, those “hard” numbers she was used to dealing with in treasury are based on the assumption that cash flows basically go on forever. Rather than worrying about the assumptions behind the business model creating the cash, she had been trained to focus on managing the use of the cash that was assumed to appear from that business model. After talking to me, she discovered that she was acting under a false assumption, since all strategic initiatives eventually fail.
Cash flow is not something that automatically appears. It can disappear…and if nothing is done to alter the strategy, it is inevitable that one day it will disappear. Hence, the “hard” treasury numbers were softer than she originally thought.
Similarly, the only real “hard” truth a businessperson can hold on to is that all strategies eventually fail. Those seemingly “soft” ideas may be more solid, and more reliable than the numbers she was used to dealing with. Unless new strategic initiatives are put into the pipeline, the pipe will eventually stop providing a cash flow. Business is more than just managing the cash in front of you. It is about creating plans to ensure that there is a business source for creating cash in the future.
The “oh, my!” look is the realization that old preconceptions can be misleading. It is the first step in the willingness to start down the path of unlearning the past, so that one can learn a better path for the future.
The Principle
Strategic planning looks at building a better position for your business in the future. One thing that is known about the future is that it will not be identical to the past. There will be changes. Technology will change, consumers will change, competition will change, and so on.
With so many changes going on, it is reasonably likely that the basic premises behind a company’s current success may not be as effective in the future as they are today. New business models will replace the old ones. Companies that stick to the old way of doing things will become out of touch with changing market conditions and cease to be profitable.
Most of the employees in a company are focused on the near term—trying to meet quarterly or annual budgets, trying to make weekly quotas, or trying to squeeze a little more productivity out of the current business model. These are important and necessary activities. However, they are not the only activities a company needs to perform.
Somewhere in the company, there need to be people thinking about the future and the ramifications that the future has to the current business model. It doesn’t need to be everyone, nor even a majority of the people in the business. However, just because it may not be top of mind with everyone, that does not mean that it is not a critical element to long term success.
At some point, every company will be faced with an “Oh, My!” epiphany—the realization that the old model no longer works. It cannot be avoided, because change cannot be avoided. One can, however, control the point at which you reach that realization.
If you never think about the ramifications of the future, the “Oh, My!” will come at the point when the current business model no longer works. In fact, your business model may have been broken for years. Unfortunately, the failure may need to be dramatic over an extended period of time in order for you to realize that the past few years weren’t just a short-term business decline, but rather a permanent change for the worse. By then, it may be too late to do anything. By the time you can react, your position may be too weak to matter.
The good news is that if you never plan, your future demise will come as a complete surprise to you. You won’t have wasted a lot of time worrying or having the “Oh, My!” expression of panic. You could smile all the way to the end, unaware of the coming doom caused by change. Of course, you are still stuck with the premature demise of your company, even if it does come with a smile.
On the other hand, if your company had dedicated resources to continually studying the future and its ramifications, the “Oh, My!” would have been predicted prior to its occurrence. This would provide enough time to prepare a new strategic direction in advance. Rather than reacting to the doom after it has occurred, these planners would be proactively taking advantage of the pending changes, and use the change to gain market share.
Rather than fearing change, planners embrace change. Change is good, because change creates turmoil. Turmoil creates opportunities for customers to reassess their habitual purchase patterns. These reassessments may cause more customers to switch to your business.
It is much more difficult to gain share in a stable environment. Habits are hard to break. In a stable environment, there is little incentive to break current purchasing habits. Therefore, if you want to significantly increase your market share, change can be your best friend.
Of course, whenever somebody gains market share, someone else loses. Therefore, change can be your worst enemy as well. The way to make change your friend, rather than your enemy, is to anticipate the change and build a strategy in which your company is best positioned to take advantage of the change. Sometimes, you can even build strategies that help direct the course of change or accelerate the rate of change.
In order to see the possibilities of change before they occur, you have to let go of preconceived notions about success and the orthodoxies behind them. Every company has orthodoxies, or sets of assumptions, about what it takes to succeed. These orthodoxies were probably correct at the time they were created. However, as times change, the orthodoxies may no longer be as relevant. They may even be wrong. It may be time to unlearn what you think is still the truth.
For example, let us assume that an orthodoxy in your business is to have your inventory in as many locations as possible, so that the local salesperson can personally drive the inventory to your customer as soon as possible. This may have been the proper strategy at one time. However, with the creation of internet ordering capability, centralized call centers with detailed computerized information on each customer, and efficient overnight shipping services, this may no longer be the best strategy. It now may be both more efficient and higher customer service to have the inventory centralized and shipped overnight based on internet or call center interaction.
The idea of efficiency and service may never go out of style, but the orthodoxies around the best way to provide it may indeed go out of style. One of the goals in a strategic planning process should be to periodically challenge your company’s orthodoxies, to make sure they are still relevant for the environment. Then, as one looks ahead, the planning process should look at what the proper orthodoxies will be in the future.
Unlearning old orthodoxies and learning new orthodoxies is a continuing process. In the story above, the unlearning had to do with assumptions around treasury issues. Unlearnings can take place around many other types of assumptions, such as service, inventory levels, where to play in the value chain, how to bundle or unbundled goods and services, pricing, and so on.
Summary
Change is inevitable—the future will be full of changes. One of the roles of strategic planning is to prepare your company for the changes in the future. This is done by understanding the future with enough advance notice that you can adapt your strategy to future changes before they occur. By getting your thinking out in front of the change, you can make change your friend. Then, as the changes in the environment cause customers to change their habits, you can have implemented a strategy that causes customers to change their habits in your favor.
Change makes many current orthodoxies obsolete. Unless you are willing to unlearn some of your orthodoxies, you will not be able to adapt to the new orthodoxies necessary for the proper strategy of the future. The strategic planning process should include opportunities to reassess your orthodoxies to see if they are still appropriate.
Final Thoughts
In the book Creative Destruction, by Richard Foster and Sarah Kaplan, there is reference to a work by Mihalyi Czikszentmihalyi, an expert in creativity, who says that the type of thinkers needed to do this type of creative out-of-the-box planning have what he calls “a sunny pessimism.” A good strategic planner needs to be pessimistic enough to realize that whatever success a company is currently experiencing will eventually go away due to change. However, at the same time, a good strategic planner needs enough sunny optimism to believe that he or she can create a better strategy to replace the old one—one that is more appropriate for the new environment.
One time, I was working with an executive who had been recently promoted. In the past, she had spent her entire career in finance doing primarily treasury-related work. With her promotion, she was given the added responsibility of also being in charge of the Strategic Planning Department.
Since she had never spent any time in strategic planning, she asked me to teach her what strategic planning was all about. I was happy to help. As I was explaining the principles of strategic planning to her, I could often see in her face a blank look of confusion. In her mind, she was used to dealing with “hard” numbers and I was giving her “soft” ideas. Not only was she uncomfortable with what I was saying, but she was having difficulty seeing why it was so important.
Then, one day as I was talking with her, I saw a look of horror suddenly come over her face. I call it the “Oh, my!” look. She looked up at me and said, “You mean to tell me that everything we are doing as a company will someday be obsolete?” Panic started to set in. For the first time, she could envision a future world where the business model the company relied on for success was no longer appropriate.
At that point I knew she finally “got it.” She finally understood what I had been talking about at all those training sessions. Strategic planning may look silly when everything is going well. However, the good times do not go on forever. Planning is needed to find the next strategy for success before the current strategic initiative stops working and becomes obsolete. Planning is not optional. It is vital to a company’s survival.
The Analogy
The executive mentioned above had been trained to think about business in a certain way—from the perspective of the Treasury Department. This thinking acted as a barrier to understanding business from a different perspective—the perspective of a strategic planner. She had to unlearn some of the thinking patterns of the past in order to gain new insights for her new responsibilities.
For example, those “hard” numbers she was used to dealing with in treasury are based on the assumption that cash flows basically go on forever. Rather than worrying about the assumptions behind the business model creating the cash, she had been trained to focus on managing the use of the cash that was assumed to appear from that business model. After talking to me, she discovered that she was acting under a false assumption, since all strategic initiatives eventually fail.
Cash flow is not something that automatically appears. It can disappear…and if nothing is done to alter the strategy, it is inevitable that one day it will disappear. Hence, the “hard” treasury numbers were softer than she originally thought.
Similarly, the only real “hard” truth a businessperson can hold on to is that all strategies eventually fail. Those seemingly “soft” ideas may be more solid, and more reliable than the numbers she was used to dealing with. Unless new strategic initiatives are put into the pipeline, the pipe will eventually stop providing a cash flow. Business is more than just managing the cash in front of you. It is about creating plans to ensure that there is a business source for creating cash in the future.
The “oh, my!” look is the realization that old preconceptions can be misleading. It is the first step in the willingness to start down the path of unlearning the past, so that one can learn a better path for the future.
The Principle
Strategic planning looks at building a better position for your business in the future. One thing that is known about the future is that it will not be identical to the past. There will be changes. Technology will change, consumers will change, competition will change, and so on.
With so many changes going on, it is reasonably likely that the basic premises behind a company’s current success may not be as effective in the future as they are today. New business models will replace the old ones. Companies that stick to the old way of doing things will become out of touch with changing market conditions and cease to be profitable.
Most of the employees in a company are focused on the near term—trying to meet quarterly or annual budgets, trying to make weekly quotas, or trying to squeeze a little more productivity out of the current business model. These are important and necessary activities. However, they are not the only activities a company needs to perform.
Somewhere in the company, there need to be people thinking about the future and the ramifications that the future has to the current business model. It doesn’t need to be everyone, nor even a majority of the people in the business. However, just because it may not be top of mind with everyone, that does not mean that it is not a critical element to long term success.
At some point, every company will be faced with an “Oh, My!” epiphany—the realization that the old model no longer works. It cannot be avoided, because change cannot be avoided. One can, however, control the point at which you reach that realization.
If you never think about the ramifications of the future, the “Oh, My!” will come at the point when the current business model no longer works. In fact, your business model may have been broken for years. Unfortunately, the failure may need to be dramatic over an extended period of time in order for you to realize that the past few years weren’t just a short-term business decline, but rather a permanent change for the worse. By then, it may be too late to do anything. By the time you can react, your position may be too weak to matter.
The good news is that if you never plan, your future demise will come as a complete surprise to you. You won’t have wasted a lot of time worrying or having the “Oh, My!” expression of panic. You could smile all the way to the end, unaware of the coming doom caused by change. Of course, you are still stuck with the premature demise of your company, even if it does come with a smile.
On the other hand, if your company had dedicated resources to continually studying the future and its ramifications, the “Oh, My!” would have been predicted prior to its occurrence. This would provide enough time to prepare a new strategic direction in advance. Rather than reacting to the doom after it has occurred, these planners would be proactively taking advantage of the pending changes, and use the change to gain market share.
Rather than fearing change, planners embrace change. Change is good, because change creates turmoil. Turmoil creates opportunities for customers to reassess their habitual purchase patterns. These reassessments may cause more customers to switch to your business.
It is much more difficult to gain share in a stable environment. Habits are hard to break. In a stable environment, there is little incentive to break current purchasing habits. Therefore, if you want to significantly increase your market share, change can be your best friend.
Of course, whenever somebody gains market share, someone else loses. Therefore, change can be your worst enemy as well. The way to make change your friend, rather than your enemy, is to anticipate the change and build a strategy in which your company is best positioned to take advantage of the change. Sometimes, you can even build strategies that help direct the course of change or accelerate the rate of change.
In order to see the possibilities of change before they occur, you have to let go of preconceived notions about success and the orthodoxies behind them. Every company has orthodoxies, or sets of assumptions, about what it takes to succeed. These orthodoxies were probably correct at the time they were created. However, as times change, the orthodoxies may no longer be as relevant. They may even be wrong. It may be time to unlearn what you think is still the truth.
For example, let us assume that an orthodoxy in your business is to have your inventory in as many locations as possible, so that the local salesperson can personally drive the inventory to your customer as soon as possible. This may have been the proper strategy at one time. However, with the creation of internet ordering capability, centralized call centers with detailed computerized information on each customer, and efficient overnight shipping services, this may no longer be the best strategy. It now may be both more efficient and higher customer service to have the inventory centralized and shipped overnight based on internet or call center interaction.
The idea of efficiency and service may never go out of style, but the orthodoxies around the best way to provide it may indeed go out of style. One of the goals in a strategic planning process should be to periodically challenge your company’s orthodoxies, to make sure they are still relevant for the environment. Then, as one looks ahead, the planning process should look at what the proper orthodoxies will be in the future.
Unlearning old orthodoxies and learning new orthodoxies is a continuing process. In the story above, the unlearning had to do with assumptions around treasury issues. Unlearnings can take place around many other types of assumptions, such as service, inventory levels, where to play in the value chain, how to bundle or unbundled goods and services, pricing, and so on.
Summary
Change is inevitable—the future will be full of changes. One of the roles of strategic planning is to prepare your company for the changes in the future. This is done by understanding the future with enough advance notice that you can adapt your strategy to future changes before they occur. By getting your thinking out in front of the change, you can make change your friend. Then, as the changes in the environment cause customers to change their habits, you can have implemented a strategy that causes customers to change their habits in your favor.
Change makes many current orthodoxies obsolete. Unless you are willing to unlearn some of your orthodoxies, you will not be able to adapt to the new orthodoxies necessary for the proper strategy of the future. The strategic planning process should include opportunities to reassess your orthodoxies to see if they are still appropriate.
Final Thoughts
In the book Creative Destruction, by Richard Foster and Sarah Kaplan, there is reference to a work by Mihalyi Czikszentmihalyi, an expert in creativity, who says that the type of thinkers needed to do this type of creative out-of-the-box planning have what he calls “a sunny pessimism.” A good strategic planner needs to be pessimistic enough to realize that whatever success a company is currently experiencing will eventually go away due to change. However, at the same time, a good strategic planner needs enough sunny optimism to believe that he or she can create a better strategy to replace the old one—one that is more appropriate for the new environment.
Thursday, May 3, 2007
Drop Anchor
THE STORY
Growing up in the city, I really did not have much opportunity to spend time around lakes that you could swim in. In fact, as a child, I could not swim. It wasn’t until I became a teen that I was able to move from being a non-swimmer to being a bad swimmer.
Not long thereafter, I had the opportunity to swim in a large lake. I wasn’t paying a lot of attention to where I was in the lake, until I suddenly noticed that I was nowhere near the shore and that the water was getting quite deep. I had no idea how I got out that far from shore, because I thought I was staying still in the same place near shore. I swam as hard as I could to get closer to shore. When I stopped, I realized that I was in the same place I was when I started that effort.
I could feel myself being pushed out further away from shore. My feet could no longer touch the bottom. If I didn’t do something soon, I figured I was a goner. So I tried again to swim with all of my might towards shore. I kept it up until I was completely exhausted and could do no more. Luckily, it got me just enough further in that my feet could touch bottom and I could walk the rest of the way to shore.
When I got to shore, I just collapsed out of complete exhaustion. I had no energy left. It was at that point when someone explained to me the concept of the undertow. Apparently, large bodies of water have undercurrents, called an undertow, which pull you out into the deep water. They are not so strong that you notice the push, but their steady pressure is enough to slowly push you out to sea. If you are not paying attention, they can cause you to drift far away from shore before you know it. Now they tell me. I wish someone had warned me of that before I had gone in the water.
THE ANALOGY
If companies are not careful in observing what is going on around them, they can find themselves drifting into dangerous waters, just like what happened to me at that lake. The drift can be very subtle, and not immediately noticeable, because the force pulling the company is not strong enough to catch one’s attention. Had it been noticeable, the company could have reacted to it. By not seeing the immediate effect, over time the undertows of business can pull a company off course, and before you know it, your company is nowhere near its strategic intent.
As a result, companies need to firmly anchor themselves at the point where their strategic position is optimally located. In addition, they must constantly monitor their position, to make sure that the undertow is not pulling them off course. Otherwise, the company will exhaust its resources just trying to gain back its position, rather than use those resources to enjoy the fruits of being in the right place the whole time.
THE PRINCIPLE
When it comes to finding a strategic position for your company, there are typically two types of choices. Either you can anchor yourself around a particular group of consumers or anchor yourself around a particular type of solution.
When you anchor yourself around a particular group of consumers, what you are doing is trying to build a strong bond between your brand and a distinctive group of people. As the needs and desires of this group evolve and change, the company evolves and changes in order to continue to meet their needs. For example, many companies have anchored themselves to the baby boomer generation. As that generation got older and its needs changed, these companies adapted in order to continue to serve the boomers. Companies that are strong into CRM (Customer Relationship Management) or Lifetime Value of Customer equations tend to be anchored around particular consumers.
The other alternative is to anchor yourself around a solution. The idea is to position yourself as the superior way to solve a particular problem. When people do not have that particular problem, you really don’t care about them. But on those occasions when the problem arises, you want them to choose you. An example would be a home improvement store like Home Depot. They are anchored on a particular solution—helping you complete a home project better than anyone else. If you are currently not doing any home improvement project, they really aren’t interested in you. If you are starting a project, then they are very interested in you, no matter what type of customer you are.
People drift in and out of various types of needs. Let’s look at grocery shopping. At the beginning of the month, just after being paid, one perhaps has the need of stocking up the house with basic groceries. Therefore, you look for the ideal stock-up store, one with a wide selection and low prices. Later on, when you need to replace the perishables, like milk and bread, you have a different need, requiring a different solution centered around convenience and freshness. If you are planning on having a fancy party at your house, you have yet another need, requiring a different solution which may have more to do with food quality and service. If, at the end of the month you start running out of money before you run out of meals to prepare, you might look for a store like Aldi, which may not have the greatest selection or quality, but will fill your tummy for least money.
The point is that a single individual can be many different types of customers, with distinctively different needs at different times—even for the same product, such as groceries. It would be extremely difficult for one store format to ideally meet all of these different problems for the same individual. If a grocery store tried to meet all of those needs, it would probably never be the best solution for any of those problems, and it would never be the ideal choice. So instead of targeting the entire individual, the store formats pick a solution. When the customer is in need of that solution, the format is the ideal best choice and will be chosen. When the customer is not in need of that solution, they will reject the format. But that’s okay, because it gets chosen enough for the set of problems it is solving.
The problem occurs when one does not anchor the firm either on a particular solution or a particular customer. The undertows of life will cause to drift into no-man’s-land so you to not stand for either, and you will fail.
Sometimes the choice of where to set your anchor can be difficult. Take MTV, for example. For many years, they have focused on a solution—being the best entertainment option for teens. MTV would build strong loyalties to groups of teens who loved the brand. As the teens got older, MTV could be tempted to stick with these now twenty-somethings with whom they have built strong loyalties. However, MTV has stuck to their anchored solution and said good buy to these customers to go after the next batch of teens. This has worked well for MTV until very recently.
The newest batch of teens have decided that many of the web 2.0 companies such as My Space or You Tube are a superior entertainment option for teens over MTV. So when MTV abandoned its latest group of twenty-somethings, the next batch of teens did not line up at MTV to take their place. MTV failed to see that the undertow was pulling them away from where the current teen entertainment solutions were. Now MTV is in some difficulty.
Because of these kinds of risks, some companies are afraid to put their anchor down solidly in one location. There is the temptation to hedge one’s bets by trying to attract multiple consumer groups and or solutions. As risky as putting down an anchor in one place is, it is far more risky to drift around trying to be too many things to too many people.
Two struggling retailers help to point this out—the Gap and the Limited. When the baby boomers were young adults, they patronized these stores often and made both brands very successful. However, as the boomers got older, these retailers were faced with the MTV dilemma: do you stick with the boomers and follow them as their clothing tastes change or do you try to be the best solution for a youthful customer?
For the Gap and the Limited, it appears that they did not firmly plant an anchor in either location, but instead tried to drift between the two. They wanted to keep the older boomers yet still be relevant to younger generations. By not choosing a single location in which to anchor, both firms drifted out to sea, much as I did in that lake. Before they knew it, they had lost their footing with either camp and were swimming as hard as they could just to keep from losing even more ground. They have exhausted all of their efforts without getting much of any benefit.
Now the Gap is trying to find new management to get them back on course and there are rumors that Limited Brands is trying to sell the Limited stores division. Choosing where to anchor can be difficult. It is not easy turning your back on those who are not interested in where you plant your anchor. Yet, if you try to get too greedy and go after too much, you can end up with much less.
SUMMARY
Strategy is about making choices about what you will stand for. This is not always an easy task, because when you choose to stand for one thing, it means you no longer stand for something else. Choosing where to anchor your position is very important, because it helps you to make the proper decisions about which trade-offs to make in order to be superior at something. An unanchored company tries to do too much and does not make enough trade-offs. As a result it drifts away from any type of successful position.
Sometimes the drifting is slow enough that you do not notice it at first. By the time you notice it, you could find yourself so far away from where you thought you were, that you might not have enough energy or resources left to reclaim your position. Therefore, one needs to constantly monitor where you stand with your customers so that you continue to be relevant.
FINAL THOUGHTS
In many ways, a strategist is like a lifeguard. Lifeguards scan the environment to see if swimmers are drifting into dangerous waters and then quickly try to bring them back to safety. Strategists, scan the environment to make sure companies do not drift dangerously away from their desired location and then try to quickly bring the drifting companies back into a safe position.
Growing up in the city, I really did not have much opportunity to spend time around lakes that you could swim in. In fact, as a child, I could not swim. It wasn’t until I became a teen that I was able to move from being a non-swimmer to being a bad swimmer.
Not long thereafter, I had the opportunity to swim in a large lake. I wasn’t paying a lot of attention to where I was in the lake, until I suddenly noticed that I was nowhere near the shore and that the water was getting quite deep. I had no idea how I got out that far from shore, because I thought I was staying still in the same place near shore. I swam as hard as I could to get closer to shore. When I stopped, I realized that I was in the same place I was when I started that effort.
I could feel myself being pushed out further away from shore. My feet could no longer touch the bottom. If I didn’t do something soon, I figured I was a goner. So I tried again to swim with all of my might towards shore. I kept it up until I was completely exhausted and could do no more. Luckily, it got me just enough further in that my feet could touch bottom and I could walk the rest of the way to shore.
When I got to shore, I just collapsed out of complete exhaustion. I had no energy left. It was at that point when someone explained to me the concept of the undertow. Apparently, large bodies of water have undercurrents, called an undertow, which pull you out into the deep water. They are not so strong that you notice the push, but their steady pressure is enough to slowly push you out to sea. If you are not paying attention, they can cause you to drift far away from shore before you know it. Now they tell me. I wish someone had warned me of that before I had gone in the water.
THE ANALOGY
If companies are not careful in observing what is going on around them, they can find themselves drifting into dangerous waters, just like what happened to me at that lake. The drift can be very subtle, and not immediately noticeable, because the force pulling the company is not strong enough to catch one’s attention. Had it been noticeable, the company could have reacted to it. By not seeing the immediate effect, over time the undertows of business can pull a company off course, and before you know it, your company is nowhere near its strategic intent.
As a result, companies need to firmly anchor themselves at the point where their strategic position is optimally located. In addition, they must constantly monitor their position, to make sure that the undertow is not pulling them off course. Otherwise, the company will exhaust its resources just trying to gain back its position, rather than use those resources to enjoy the fruits of being in the right place the whole time.
THE PRINCIPLE
When it comes to finding a strategic position for your company, there are typically two types of choices. Either you can anchor yourself around a particular group of consumers or anchor yourself around a particular type of solution.
When you anchor yourself around a particular group of consumers, what you are doing is trying to build a strong bond between your brand and a distinctive group of people. As the needs and desires of this group evolve and change, the company evolves and changes in order to continue to meet their needs. For example, many companies have anchored themselves to the baby boomer generation. As that generation got older and its needs changed, these companies adapted in order to continue to serve the boomers. Companies that are strong into CRM (Customer Relationship Management) or Lifetime Value of Customer equations tend to be anchored around particular consumers.
The other alternative is to anchor yourself around a solution. The idea is to position yourself as the superior way to solve a particular problem. When people do not have that particular problem, you really don’t care about them. But on those occasions when the problem arises, you want them to choose you. An example would be a home improvement store like Home Depot. They are anchored on a particular solution—helping you complete a home project better than anyone else. If you are currently not doing any home improvement project, they really aren’t interested in you. If you are starting a project, then they are very interested in you, no matter what type of customer you are.
People drift in and out of various types of needs. Let’s look at grocery shopping. At the beginning of the month, just after being paid, one perhaps has the need of stocking up the house with basic groceries. Therefore, you look for the ideal stock-up store, one with a wide selection and low prices. Later on, when you need to replace the perishables, like milk and bread, you have a different need, requiring a different solution centered around convenience and freshness. If you are planning on having a fancy party at your house, you have yet another need, requiring a different solution which may have more to do with food quality and service. If, at the end of the month you start running out of money before you run out of meals to prepare, you might look for a store like Aldi, which may not have the greatest selection or quality, but will fill your tummy for least money.
The point is that a single individual can be many different types of customers, with distinctively different needs at different times—even for the same product, such as groceries. It would be extremely difficult for one store format to ideally meet all of these different problems for the same individual. If a grocery store tried to meet all of those needs, it would probably never be the best solution for any of those problems, and it would never be the ideal choice. So instead of targeting the entire individual, the store formats pick a solution. When the customer is in need of that solution, the format is the ideal best choice and will be chosen. When the customer is not in need of that solution, they will reject the format. But that’s okay, because it gets chosen enough for the set of problems it is solving.
The problem occurs when one does not anchor the firm either on a particular solution or a particular customer. The undertows of life will cause to drift into no-man’s-land so you to not stand for either, and you will fail.
Sometimes the choice of where to set your anchor can be difficult. Take MTV, for example. For many years, they have focused on a solution—being the best entertainment option for teens. MTV would build strong loyalties to groups of teens who loved the brand. As the teens got older, MTV could be tempted to stick with these now twenty-somethings with whom they have built strong loyalties. However, MTV has stuck to their anchored solution and said good buy to these customers to go after the next batch of teens. This has worked well for MTV until very recently.
The newest batch of teens have decided that many of the web 2.0 companies such as My Space or You Tube are a superior entertainment option for teens over MTV. So when MTV abandoned its latest group of twenty-somethings, the next batch of teens did not line up at MTV to take their place. MTV failed to see that the undertow was pulling them away from where the current teen entertainment solutions were. Now MTV is in some difficulty.
Because of these kinds of risks, some companies are afraid to put their anchor down solidly in one location. There is the temptation to hedge one’s bets by trying to attract multiple consumer groups and or solutions. As risky as putting down an anchor in one place is, it is far more risky to drift around trying to be too many things to too many people.
Two struggling retailers help to point this out—the Gap and the Limited. When the baby boomers were young adults, they patronized these stores often and made both brands very successful. However, as the boomers got older, these retailers were faced with the MTV dilemma: do you stick with the boomers and follow them as their clothing tastes change or do you try to be the best solution for a youthful customer?
For the Gap and the Limited, it appears that they did not firmly plant an anchor in either location, but instead tried to drift between the two. They wanted to keep the older boomers yet still be relevant to younger generations. By not choosing a single location in which to anchor, both firms drifted out to sea, much as I did in that lake. Before they knew it, they had lost their footing with either camp and were swimming as hard as they could just to keep from losing even more ground. They have exhausted all of their efforts without getting much of any benefit.
Now the Gap is trying to find new management to get them back on course and there are rumors that Limited Brands is trying to sell the Limited stores division. Choosing where to anchor can be difficult. It is not easy turning your back on those who are not interested in where you plant your anchor. Yet, if you try to get too greedy and go after too much, you can end up with much less.
SUMMARY
Strategy is about making choices about what you will stand for. This is not always an easy task, because when you choose to stand for one thing, it means you no longer stand for something else. Choosing where to anchor your position is very important, because it helps you to make the proper decisions about which trade-offs to make in order to be superior at something. An unanchored company tries to do too much and does not make enough trade-offs. As a result it drifts away from any type of successful position.
Sometimes the drifting is slow enough that you do not notice it at first. By the time you notice it, you could find yourself so far away from where you thought you were, that you might not have enough energy or resources left to reclaim your position. Therefore, one needs to constantly monitor where you stand with your customers so that you continue to be relevant.
FINAL THOUGHTS
In many ways, a strategist is like a lifeguard. Lifeguards scan the environment to see if swimmers are drifting into dangerous waters and then quickly try to bring them back to safety. Strategists, scan the environment to make sure companies do not drift dangerously away from their desired location and then try to quickly bring the drifting companies back into a safe position.
Tuesday, May 1, 2007
Eat Your Children
THE STORY
Back in 1729, Jonathan Swift wrote an essay entitled, “A Modest Proposal.” In this essay, Jonathan Swift was writing about the deplorable situation that existed in Ireland at that time. In particular, he was concerned about the large number of children in Ireland living in poverty. In the words of Swift, his goal was to “find out a fair, cheap, and easy method of making these children sound, useful members of the commonwealth.”
In the essay, Swift makes “a modest proposal” for achieving this noble goal: Sell the children at the age of one for the purpose of being eaten by the wealthy. In a cold and unemotional writing style, Swift calmly points out many benefits from the proposal, including the elimination of problem children and an improvement to the economic condition of the community.
Naturally, this is just one of the many satirical pieces Swift wrote during his life. You can find the entire essay at http://art-bin.com/art/omodest.html.
THE ANALOGY
The thought of eating one’s babies is disgusting. This was anything but a “modest proposal.” Of course, this was the point of the essay, that the real disgusting thing was that society had become callous to the societal ills around them. By pointing out the absurdity of the eventual outcome of extreme callousness, Swift hoped to encourage more compassion.
The business world is full of its version of babies—all of the products and services that the company has nurtured over many years. Just as people would find it disgusting to kill and eat their children, businesses often find it disgusting to think about killing off their products and services. The emotional ties are difficult to sever.
However, sometimes the best strategic options for a business include the need to kill and/or sell off our corporate children. It may not be pleasant, but it may be necessary for the survival and prosperity of the firm. The trick is to find a way to make the move without destroying the emotional fiber of the company.
THE PRINCIPLE
The principle here is that all strategic initiatives eventually fail. If you stick it out with a product throughout its entire life cycle, when that product or service reaches the end of its life cycle, your company will die along with that product. To avoid the premature demise of a company, it must at times be willing to let go of the heritage of the past and adapt the strategy to the changing environment.
A great example of this dillema occurred at Intel. Intel’s heritage had been in memory devices. In the 1980s the memory chip was called the DRAM ( Dynamic Random Access Memory) chip. Employees thought of memory devices such as the DRAM as being a part of the heart and soul of the company. It was how they defined the company in their mind. It was what put Intel “on the map.” To abandon it would be like abandoning your parents. One middle manager, for instance, said that the idea of Intel getting out of DRAMs would be aking to “Ford deciding to get out of cars."
Emotions aside, reality was telling a different story. Intel was increasingly becoming a non-factor in DRAMs. The DRAM business was unprofitable for Intel and was putting the fate of the entire company at jeopardy. A rational person could see that microprocessors were the more logical future of Intel. Yet humans are not entirely rational people. Emotions also drive decisions. And the emotions kept Intel in the DRAM business longer than it should have.
Emotions are important to strategy, because without an emotional commitment, it is difficult to endure the difficulties which come with trying to bring a strategy to life. An emotionless strategy rarely gets the company’s rank and file motivated to go the extra mile to achieve greatness. So it is important, when taking a new strategic path, to make sure that the emotions and morale are not destroied in the process.
Intel COO at the time Andy Grove knew that the company needed to move on. The dilema as he saw it, and the way he resolved it was like this:
“Don't ask managers, What is your strategy? Look at what they do! Because people will pretend. . .The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the "self-evident truth" that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true. . .I recall going to see [President] Gordon [Moore] and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So, I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.”
The solution was to:
A) Get people to see that their version of the truth really wasn’t the truth; and
B) Point out that if they didn’t make the change themselves, new management would probably be brought in to do it without them.
In today’s era of hedge funds and activist shareholders, the risk of being replaced or having the change thrust upon you anyway is a far more frequent and real threat. Why let the outsiders come in and make all the changes and reap all the profits? If it is going to happen anyway, do it yourself and allow current management and current stakeholders reap the benefits. At least if you do it, there will probably be more compassion and understanding. The emotional aspect may be easier to take and the healing may be more rapid if the insiders do it rather than the unknown outsiders.
It can hurt to abandon one’s children, like the DRAM. It can hurt more if you do not. The company may die along with the death of the product. Another related problem is the fear of cannibalization. As discussed in an earlier blog, “This Candy Melts in Your Hand”, many companies over the years have failed to invest in the next big thing in their industry for fear that it would cannibalize the sales of the current portfolio of products. By avoiding investment in the new, these managers hope to prolong the life of the old.
Unfortunately, just because your company does not invest in the new does not mean that others will do likewise. Firms with less to lose will dive into the next big thing and ruin your business anyway. It is better that you ruin the the business yourself by killing off your baby and at least own an entry into the next big thing, than to have someone else kill your baby and leave you with nothing.
However, using only a rational justification to do so is rarely as effective as combining it with an appeal to people’s emotions and sense of heritage. Jonathan Swift’s cold and rational essay could never pursuade anyone to kill babies, because it did not address the moral outrage. Similar feelings of outrage could occur in your business if you appear as cold as Jonathan Swift.
For example, there could be emotions of fear to be dealt with—fear that by leaving the old, everyone will lose their jobs and that one’s personal stake in the company will disappear. This is a real threat to company employees. In the case of Intel, leaving the DRAM business resulted in the loss of 3000 jobs. Although not all jobs can be saved, one should point out that change can often lead to greater growth, and greater growth can lead to greater opportunity.
There could be great sense of loss in purpose. Although the paycheck is great, people are happier and more productive if they feel like their work has a greater sense of meaning and purpose. By severing the heritage with the past, the company could appear like a cold uncompassionate piece of money-grubbing capitalism. This could disrupt morale to the point that productivity drops and good people leave to find a more fulfilling position elsewhere. It is important to link the killing of the corporate baby with a shift to an even greater sense of purpose which builds on the heritage of the past.
Finally, it is important to continually manage the perception of the company by its employees. If the identity of the company is too wrapped up in a single product, or the perception is based on a false “self evident truth,” then you could have problems down the road. It is better to manage this image prior to the need to kill off a baby then to wait until the last minute.
SUMMARY
Because the world is changing, strategic initiatives become obsolete. At some time, it may become necessary to kill off the babies that made the business what it has become in order to ensure a better place for where it must go in the future. Although this sounds great on a rational level, people live and act based on emotions as well. The emotional aspect should be addressed when making this change. If it is not addressed, either powerful internal forces will keep the change from occurring or the transition will not be as smooth and successful as it could be.
FINAL THOUGHTS
Companies are only as good as the people who do the work. If you destroy the morale, you destroy a part of what makes your company great.
Back in 1729, Jonathan Swift wrote an essay entitled, “A Modest Proposal.” In this essay, Jonathan Swift was writing about the deplorable situation that existed in Ireland at that time. In particular, he was concerned about the large number of children in Ireland living in poverty. In the words of Swift, his goal was to “find out a fair, cheap, and easy method of making these children sound, useful members of the commonwealth.”
In the essay, Swift makes “a modest proposal” for achieving this noble goal: Sell the children at the age of one for the purpose of being eaten by the wealthy. In a cold and unemotional writing style, Swift calmly points out many benefits from the proposal, including the elimination of problem children and an improvement to the economic condition of the community.
Naturally, this is just one of the many satirical pieces Swift wrote during his life. You can find the entire essay at http://art-bin.com/art/omodest.html.
THE ANALOGY
The thought of eating one’s babies is disgusting. This was anything but a “modest proposal.” Of course, this was the point of the essay, that the real disgusting thing was that society had become callous to the societal ills around them. By pointing out the absurdity of the eventual outcome of extreme callousness, Swift hoped to encourage more compassion.
The business world is full of its version of babies—all of the products and services that the company has nurtured over many years. Just as people would find it disgusting to kill and eat their children, businesses often find it disgusting to think about killing off their products and services. The emotional ties are difficult to sever.
However, sometimes the best strategic options for a business include the need to kill and/or sell off our corporate children. It may not be pleasant, but it may be necessary for the survival and prosperity of the firm. The trick is to find a way to make the move without destroying the emotional fiber of the company.
THE PRINCIPLE
The principle here is that all strategic initiatives eventually fail. If you stick it out with a product throughout its entire life cycle, when that product or service reaches the end of its life cycle, your company will die along with that product. To avoid the premature demise of a company, it must at times be willing to let go of the heritage of the past and adapt the strategy to the changing environment.
A great example of this dillema occurred at Intel. Intel’s heritage had been in memory devices. In the 1980s the memory chip was called the DRAM ( Dynamic Random Access Memory) chip. Employees thought of memory devices such as the DRAM as being a part of the heart and soul of the company. It was how they defined the company in their mind. It was what put Intel “on the map.” To abandon it would be like abandoning your parents. One middle manager, for instance, said that the idea of Intel getting out of DRAMs would be aking to “Ford deciding to get out of cars."
Emotions aside, reality was telling a different story. Intel was increasingly becoming a non-factor in DRAMs. The DRAM business was unprofitable for Intel and was putting the fate of the entire company at jeopardy. A rational person could see that microprocessors were the more logical future of Intel. Yet humans are not entirely rational people. Emotions also drive decisions. And the emotions kept Intel in the DRAM business longer than it should have.
Emotions are important to strategy, because without an emotional commitment, it is difficult to endure the difficulties which come with trying to bring a strategy to life. An emotionless strategy rarely gets the company’s rank and file motivated to go the extra mile to achieve greatness. So it is important, when taking a new strategic path, to make sure that the emotions and morale are not destroied in the process.
Intel COO at the time Andy Grove knew that the company needed to move on. The dilema as he saw it, and the way he resolved it was like this:
“Don't ask managers, What is your strategy? Look at what they do! Because people will pretend. . .The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the "self-evident truth" that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true. . .I recall going to see [President] Gordon [Moore] and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So, I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.”
The solution was to:
A) Get people to see that their version of the truth really wasn’t the truth; and
B) Point out that if they didn’t make the change themselves, new management would probably be brought in to do it without them.
In today’s era of hedge funds and activist shareholders, the risk of being replaced or having the change thrust upon you anyway is a far more frequent and real threat. Why let the outsiders come in and make all the changes and reap all the profits? If it is going to happen anyway, do it yourself and allow current management and current stakeholders reap the benefits. At least if you do it, there will probably be more compassion and understanding. The emotional aspect may be easier to take and the healing may be more rapid if the insiders do it rather than the unknown outsiders.
It can hurt to abandon one’s children, like the DRAM. It can hurt more if you do not. The company may die along with the death of the product. Another related problem is the fear of cannibalization. As discussed in an earlier blog, “This Candy Melts in Your Hand”, many companies over the years have failed to invest in the next big thing in their industry for fear that it would cannibalize the sales of the current portfolio of products. By avoiding investment in the new, these managers hope to prolong the life of the old.
Unfortunately, just because your company does not invest in the new does not mean that others will do likewise. Firms with less to lose will dive into the next big thing and ruin your business anyway. It is better that you ruin the the business yourself by killing off your baby and at least own an entry into the next big thing, than to have someone else kill your baby and leave you with nothing.
However, using only a rational justification to do so is rarely as effective as combining it with an appeal to people’s emotions and sense of heritage. Jonathan Swift’s cold and rational essay could never pursuade anyone to kill babies, because it did not address the moral outrage. Similar feelings of outrage could occur in your business if you appear as cold as Jonathan Swift.
For example, there could be emotions of fear to be dealt with—fear that by leaving the old, everyone will lose their jobs and that one’s personal stake in the company will disappear. This is a real threat to company employees. In the case of Intel, leaving the DRAM business resulted in the loss of 3000 jobs. Although not all jobs can be saved, one should point out that change can often lead to greater growth, and greater growth can lead to greater opportunity.
There could be great sense of loss in purpose. Although the paycheck is great, people are happier and more productive if they feel like their work has a greater sense of meaning and purpose. By severing the heritage with the past, the company could appear like a cold uncompassionate piece of money-grubbing capitalism. This could disrupt morale to the point that productivity drops and good people leave to find a more fulfilling position elsewhere. It is important to link the killing of the corporate baby with a shift to an even greater sense of purpose which builds on the heritage of the past.
Finally, it is important to continually manage the perception of the company by its employees. If the identity of the company is too wrapped up in a single product, or the perception is based on a false “self evident truth,” then you could have problems down the road. It is better to manage this image prior to the need to kill off a baby then to wait until the last minute.
SUMMARY
Because the world is changing, strategic initiatives become obsolete. At some time, it may become necessary to kill off the babies that made the business what it has become in order to ensure a better place for where it must go in the future. Although this sounds great on a rational level, people live and act based on emotions as well. The emotional aspect should be addressed when making this change. If it is not addressed, either powerful internal forces will keep the change from occurring or the transition will not be as smooth and successful as it could be.
FINAL THOUGHTS
Companies are only as good as the people who do the work. If you destroy the morale, you destroy a part of what makes your company great.
Monday, April 30, 2007
Sometimes the Best Path is Behind You
The Story
Over the years, I have had the privilege of enjoying dinners with a good number of top level executives. The conversations can often drift to cover a great many topics. Here are two examples.
One time, I was at a dinner where there was an executive who was getting tired of the hectic business life. He was too young to retire and had not been in the executive ranks long enough to build up a sizable cash reserve to live off of. Therefore, he was considering simplifying his life down to the bare minimum, in order to afford no longer being a business executive.
He came up with an annual income figure in his mind that he felt was the absolute lowest a person could live on. The idea was that if he could figure out a way to create an income stream that low, he might consider getting out of the “rat race” of the business world.
The annual figure he came up with, in today’s dollars, would probably be in the low $100,000s. I was quickly working the numbers in my head, and the number he had chosen was about twice the average family income at that time in the United States. Approximately 75% of the people in the U.S. were living at a level below which he thought to be the absolute bare minimum a person could live on.
This executive could see the puzzled look on my face as I was contemplating these statistics in my head, so he responded, “That’s a very low number. Why, I can’t think of anybody I know who makes less than that.” Of course, virtually every one of the hundreds of people who worked for him made less than that. But I guess they don’t count. Otherwise, how could he live with the fact that he was paying people less than what he though was the bare minimum a person in the U.S. could live on?
At another dinner, about 15 year ago, I was sitting at a table with a number of top executives. During the conversation, one of them started talking about Wal-Mart. He said, “I don’t know why anyone would shop at Wal-Mart. My wife tried it once and she hated it.”
Then, all of the other executives started agreeing with him, saying that their wives also hated the store. Their consensus was that Wal-Mart wouldn’t last, because nobody likes the store. Finally, I couldn’t take it any longer, and I said, “The average family in the United States makes under $30,000 per year. They do not shop Wal-Mart because they want to; they shop it because they have to. They cannot afford to shop elsewhere like your wives.”
The top executives responded to my comment with silence and then shifted the conversation to talk about their favorite French wines. Oh, by the way, these executives were in the retail industry.
This leads me to my third story. Whenever you fly on an airplane, before you take off, the flight attendant tells you about the safety precautions. At some point in that speech, the flight attendant usually says something like this, “In case of an accident, please proceed quickly and orderly to the nearest exit. Keep in mind that the nearest exit may be located behind you.”
At this point, a few of passengers will try to turn around to see if their nearest exit is behind them. It is a very uncomfortable thing to do, because the seats were not designed for looking backwards, especially if you have your seat belt on.
The Analogy
Businesses will only survive if they satisfy the needs of their customers. Since most top executives have incomes higher than 99.5% of the developed world, it is highly likely that the customers these executives are trying to serve (or, if you are in an OEM business, the customers of your customers) make far, far less income than they do.
Unless top executives make a conscious effort to stay close to their customers, it is easy for these executives to mentally get out-of-touch with their customers. They will project upon their customers the same type of lifestyle that they themselves live. As a result, they may start designing products or services that are only appropriate for the top 5% of society, rather than their true customers.
As we saw in the first story above, the wealthy executive who was considering leaving the business world lived in a neighborhood of other wealthy people and all of his friends were equally wealthy. As a result, he had a very distorted view of what it meant to be average. He could no longer imagine how a person could live on a truly average income because he had no exposure to these types of people. That was a shame, because he was in a business that catered to average, to slightly above average, income people.
In the second story, executives were relying on their wives as their gage of what the “typical” woman would do. Of course, their wives were not typical. They had access to far more money than the average woman. They typically did not work outside the home as most women now do. Some of these executive wives had servants to help them around the house, something the typical woman does not have, either. Because their wives are not in the targeted customer segment of Wal-Mart, it is no wonder that they did not like the store. However, to assume that because executive wives do not like Wal-Mart, nobody will like Wal-Mart is to be blind to the realities of the marketplace.
This situation is like the airline story. If you are in first class, it is almost impossible to see what is happening behind you in coach class. First, the seats and seatbelts are not designed for looking back. Second, the flight attendants typically close a curtain or door between first class and the rest of the passengers.
Those in first class live in a world far better than those in coach:
If you ever counted the seats in a typical airplane, you’d find that there are probably at least ten times more seats allocated to coach than to first class. That’s because the majority of the people flying cannot afford the luxury of first class. The first class passengers may only be able to see each other, but that does not negate the fact that they are in the minority on that plane.
The flight attendants say that the best exit path for you may be behind you. Similarly, the best path for finding your business strategy may be by looking behind you at people who are not living the life of “first class.”
The Principle
Before one can create a great strategic plan, one must first understand the environment in which the plan will exist. If you make the wrong assumptions about the environment, your strategy will probably have bad assumptions as well. One of the most important goals of the environmental analysis is to deeply understand your customers:
Granted, one can get some of this information out of consumer research. But typical consumer research can tell only part of the story, especially if the reader of that research has no personal connection to that customer, and thus, no context for understanding the deeper meaning behind the numbers.
True strategic insight comes when one understands the nuances behind the thoughts and emotions of their customers. This can typically only come from spending time in direct contact with the customer.
There are many ways to help build a deeper connection to your customers:
• Get out of the office and go hang out in the neighborhoods where your customer lives. Go into their homes and watch them interact with your product or service.
• Have your company conduct focus groups with your customers and go out and watch them in person behind the two-way mirror. If you feel comfortable with it, perhaps you could do the interviewing yourself.
• Cultivate friendships with people who are less like you and more like your typical customer.
• Join clubs, associations, or organizations like churches, which have a more diverse membership than you would find in your normal business day. This does not include belonging to the local country club. The typical country club is still too exclusive to show you what “average” is all about. It’s like thinking the executive wife is an “average” housewife. Free advice from your country club friends about what the customer wants is typically worth what you paid for it and nothing more.
• Go on sales calls with your sales force to see first hand how your customers interact. Better yet, do some of the sales calls on your own.
• Spend time listening in to the complaints coming into your call center. Better yet, spend time answering some of the calls yourself.
The more contact you have with the customer, the more the consumer research will come alive, because you will have a greater context for understanding it. Your environmental analysis will be more meaningful, resulting in the ability to create strategies that are more relevant.
Summary
The best strategies are those that find a profitable way to serve a particular customer segment better than anyone else. Because top executives are so well compensated, they are typically living a lifestyle very different from most of the customers they are selling to (or the customers of their customers, if they are OEM manufacturers). As a result, it is easy for these executives to get out of touch with their customers. When that happens, these executives may make poor assumptions about their customers, leading to poor strategies which would only work if the majority of the population was as wealthy as they were.
Therefore, executives need to find ways to keep in touch with their customers though direct personal contact.
Final Thoughts
One time I was having dinner with a wealthy CEO who made more money from his job in two weeks than the average family would make in an entire year. That would put him well into the top 1% in income, not to mention the money he made from investments and serving on the boards of other companies. Yet he considered himself to be middle class. At this dinner, he was complaining about those whom he called the “rich people”—people who made even more money than he did. At one point in the conversation, he said, “Rich people are out of touch and they don’t get it.”
I looked him straight in the eye and replied, “You’re right. Rich people don’t get it.”
Over the years, I have had the privilege of enjoying dinners with a good number of top level executives. The conversations can often drift to cover a great many topics. Here are two examples.
One time, I was at a dinner where there was an executive who was getting tired of the hectic business life. He was too young to retire and had not been in the executive ranks long enough to build up a sizable cash reserve to live off of. Therefore, he was considering simplifying his life down to the bare minimum, in order to afford no longer being a business executive.
He came up with an annual income figure in his mind that he felt was the absolute lowest a person could live on. The idea was that if he could figure out a way to create an income stream that low, he might consider getting out of the “rat race” of the business world.
The annual figure he came up with, in today’s dollars, would probably be in the low $100,000s. I was quickly working the numbers in my head, and the number he had chosen was about twice the average family income at that time in the United States. Approximately 75% of the people in the U.S. were living at a level below which he thought to be the absolute bare minimum a person could live on.
This executive could see the puzzled look on my face as I was contemplating these statistics in my head, so he responded, “That’s a very low number. Why, I can’t think of anybody I know who makes less than that.” Of course, virtually every one of the hundreds of people who worked for him made less than that. But I guess they don’t count. Otherwise, how could he live with the fact that he was paying people less than what he though was the bare minimum a person in the U.S. could live on?
At another dinner, about 15 year ago, I was sitting at a table with a number of top executives. During the conversation, one of them started talking about Wal-Mart. He said, “I don’t know why anyone would shop at Wal-Mart. My wife tried it once and she hated it.”
Then, all of the other executives started agreeing with him, saying that their wives also hated the store. Their consensus was that Wal-Mart wouldn’t last, because nobody likes the store. Finally, I couldn’t take it any longer, and I said, “The average family in the United States makes under $30,000 per year. They do not shop Wal-Mart because they want to; they shop it because they have to. They cannot afford to shop elsewhere like your wives.”
The top executives responded to my comment with silence and then shifted the conversation to talk about their favorite French wines. Oh, by the way, these executives were in the retail industry.
This leads me to my third story. Whenever you fly on an airplane, before you take off, the flight attendant tells you about the safety precautions. At some point in that speech, the flight attendant usually says something like this, “In case of an accident, please proceed quickly and orderly to the nearest exit. Keep in mind that the nearest exit may be located behind you.”
At this point, a few of passengers will try to turn around to see if their nearest exit is behind them. It is a very uncomfortable thing to do, because the seats were not designed for looking backwards, especially if you have your seat belt on.
The Analogy
Businesses will only survive if they satisfy the needs of their customers. Since most top executives have incomes higher than 99.5% of the developed world, it is highly likely that the customers these executives are trying to serve (or, if you are in an OEM business, the customers of your customers) make far, far less income than they do.
Unless top executives make a conscious effort to stay close to their customers, it is easy for these executives to mentally get out-of-touch with their customers. They will project upon their customers the same type of lifestyle that they themselves live. As a result, they may start designing products or services that are only appropriate for the top 5% of society, rather than their true customers.
As we saw in the first story above, the wealthy executive who was considering leaving the business world lived in a neighborhood of other wealthy people and all of his friends were equally wealthy. As a result, he had a very distorted view of what it meant to be average. He could no longer imagine how a person could live on a truly average income because he had no exposure to these types of people. That was a shame, because he was in a business that catered to average, to slightly above average, income people.
In the second story, executives were relying on their wives as their gage of what the “typical” woman would do. Of course, their wives were not typical. They had access to far more money than the average woman. They typically did not work outside the home as most women now do. Some of these executive wives had servants to help them around the house, something the typical woman does not have, either. Because their wives are not in the targeted customer segment of Wal-Mart, it is no wonder that they did not like the store. However, to assume that because executive wives do not like Wal-Mart, nobody will like Wal-Mart is to be blind to the realities of the marketplace.
This situation is like the airline story. If you are in first class, it is almost impossible to see what is happening behind you in coach class. First, the seats and seatbelts are not designed for looking back. Second, the flight attendants typically close a curtain or door between first class and the rest of the passengers.
Those in first class live in a world far better than those in coach:
- • Wider Seats
• More Leg Room
• Better food with real dinnerware (these days, coach often does not even get a meal, even if first class does)
• Better, more personalized service
If you ever counted the seats in a typical airplane, you’d find that there are probably at least ten times more seats allocated to coach than to first class. That’s because the majority of the people flying cannot afford the luxury of first class. The first class passengers may only be able to see each other, but that does not negate the fact that they are in the minority on that plane.
The flight attendants say that the best exit path for you may be behind you. Similarly, the best path for finding your business strategy may be by looking behind you at people who are not living the life of “first class.”
The Principle
Before one can create a great strategic plan, one must first understand the environment in which the plan will exist. If you make the wrong assumptions about the environment, your strategy will probably have bad assumptions as well. One of the most important goals of the environmental analysis is to deeply understand your customers:
- • How do they live?
• How do they think?
• What are the fears and anxieties in their lives?
• What brings them joy?
• What motivates them to act?
• Why do they purchase the things they purchase, in the way they purchase?
Granted, one can get some of this information out of consumer research. But typical consumer research can tell only part of the story, especially if the reader of that research has no personal connection to that customer, and thus, no context for understanding the deeper meaning behind the numbers.
True strategic insight comes when one understands the nuances behind the thoughts and emotions of their customers. This can typically only come from spending time in direct contact with the customer.
There are many ways to help build a deeper connection to your customers:
• Get out of the office and go hang out in the neighborhoods where your customer lives. Go into their homes and watch them interact with your product or service.
• Have your company conduct focus groups with your customers and go out and watch them in person behind the two-way mirror. If you feel comfortable with it, perhaps you could do the interviewing yourself.
• Cultivate friendships with people who are less like you and more like your typical customer.
• Join clubs, associations, or organizations like churches, which have a more diverse membership than you would find in your normal business day. This does not include belonging to the local country club. The typical country club is still too exclusive to show you what “average” is all about. It’s like thinking the executive wife is an “average” housewife. Free advice from your country club friends about what the customer wants is typically worth what you paid for it and nothing more.
• Go on sales calls with your sales force to see first hand how your customers interact. Better yet, do some of the sales calls on your own.
• Spend time listening in to the complaints coming into your call center. Better yet, spend time answering some of the calls yourself.
The more contact you have with the customer, the more the consumer research will come alive, because you will have a greater context for understanding it. Your environmental analysis will be more meaningful, resulting in the ability to create strategies that are more relevant.
Summary
The best strategies are those that find a profitable way to serve a particular customer segment better than anyone else. Because top executives are so well compensated, they are typically living a lifestyle very different from most of the customers they are selling to (or the customers of their customers, if they are OEM manufacturers). As a result, it is easy for these executives to get out of touch with their customers. When that happens, these executives may make poor assumptions about their customers, leading to poor strategies which would only work if the majority of the population was as wealthy as they were.
Therefore, executives need to find ways to keep in touch with their customers though direct personal contact.
Final Thoughts
One time I was having dinner with a wealthy CEO who made more money from his job in two weeks than the average family would make in an entire year. That would put him well into the top 1% in income, not to mention the money he made from investments and serving on the boards of other companies. Yet he considered himself to be middle class. At this dinner, he was complaining about those whom he called the “rich people”—people who made even more money than he did. At one point in the conversation, he said, “Rich people are out of touch and they don’t get it.”
I looked him straight in the eye and replied, “You’re right. Rich people don’t get it.”
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