Analogy #220: Red + Green = Gray

THE STORY
For one year in college, I was an art major. They taught me a bit about color. There is a special progression in the order of colors, as you can see if you look at a rainbow or look at the colors cast by a prism. Red bleeds into orange into yellow into green into blue into purple and back to red. It forms a circle, known as the “Color Wheel.”

With paint, if you combine colors that are close together on the Color Wheel, you create another pretty color. For example if you mix yellow and blue, you get green. If you mix blue and red, you get purple. It you mix yellow and red, you get orange.

However, if you mix colors on the opposite sides of the Color Wheel, you make the color disappear. All you get is a dull, ugly dark gray. Red + Green = Gray. Yellow + Purple = Gray. Orange + Blue = Gray.

Therefore, you have to be careful when mixing colors. Otherwise, you may not end up with any color at all.

THE ANALOGY
As we mentioned in our last blog, one of the keys to a successful strategy is the creation of superiority at a point of competitive differentiation. In other words, strategy is about finding a place where you can be both:

a) Unique/Distinctive; and
b) Preferred by a Sizable Sector of Consumers

These unique points of differentiation can be thought of as being like colors. You need to find your own “color” position in the marketplace. If your competitor has a “yellow” strategy, don’t try to become another yellow company. Instead, stake out your own unique superiority as a “purple” company.

The good news is that, just as there are lots of colors on the color wheel, there are lots of strategic options to choose for your competitive differentiation. In automobiles, Toyota is known for “reliability.” That is their color. BMW is known as the “ultimate driving machine.” That is their color. Kia is known for offering a good value at a low price. That is their color. By owning a different color, each of these brands has a place where they can win.

I’m not sure I understand what color a Chevrolet is supposed to be, which may explain some of their marketplace woes. By trying to have a car for everyone, Chevrolet doesn’t really stand out as special to anyone. Too many colors…too much bland gray.

So rule number one is to pick a position/color which you can own in the marketplace—one that is easy to understand. Then, rule number two is focus your communication around that color, so that people associate that color with your brand. If you do these two things, then when a customer is looking for your “color,” they will gravitate towards your brand.

These unique points of differentiation tend to be built on attributes, like price, or quality, or status, or service, and so on. So, when choosing the color of your point of differentiation, what you are really doing in choosing the attribute bundle you are going to try to own.

The problem comes when a company wants to stand for too many attributes at the same time. This would be like trying to mix together a lot of colors of paint. Little tweaks may create an exciting new color. But if you combine radically different attributes together, it can be like mixing colors at opposite sides of the color wheel—all you get is a dull, dark gray. You will fade into the background and become forgotten.

THE PRINCIPLE
The principle here is that, when it comes to finding the proper position for your strategy, more is not always better. By trying to own a large, complex mixture of attributes, you may end up owning absolutely nothing. You become just a dull gray company that fades into the background. By contrast, a simple focus on one attribute usually helps you stand out like a bright color and create a profitable niche for your brand.

Professor Alexander Chernev, at the Kellogg School of Management at Northwestern University, recently proved this with an experiment. I will summarize the results here, but you can read a more detailed report in the November 2008 edition of Kellogg Insight.

Chernev asked consumers a number of questions about everyday items, like laundry detergent, toothpaste, and cold medicines. Some of the products stressed excellence in a single attribute. Others claimed to excel at multiple attributes. For example, there could be one toothpaste brand emphasizing just whitening, while another brand claims expertise at whitening, cavity prevention, and fresh breath.

What Chernev discovered was that products specializing in a single attribute were perceived by consumers to be superior in that attribute relative to a multi-attribute product making the same claim. In other words, even if I tell you that the teeth cleaning powers in my multi-attribute brand are as strong as the brand that only claims whitening, consumers won’t believe you. They’ll think the specialist is better at whitening.

Chernev refers to this principle as a “zero-sum heuristic.” In other words, people approach products as if they can have only so much beneficial quality to them. It’s sort of like a point system, where each product has 100 points of benefit. The more attributes you claim, the more you have to divide those hundred points among the attributes. So if you claim four attributes, each attribute only has the power of around 25. However, if you only claim one attribute, that one attribute can claim all 100 points. And 100 beats 25 if you are looking to whiten your teeth, so the single attribute product wins.

Things got even worse when the pricing component was added. Chernev discovered that if you price the multi-attribute product the same as the single attribute product, the perceived inferiority of the multi-attribute product is reinforced. Instead of being seen as a superior value (more attributes for the same price), the multi-attribute product is seen as having to weaken each attribute in order to sell them at the same price as the one attribute brand.

It’s as if a $4 toothpaste specializing in whitening is seen as having four dollar’s worth of whitening ingredients, where as a four-attribute toothpaste for $4 can only have one dollar’s worth of whitening ingredients. The other $3 have to go to support the other attributes.

What this tells me is that one must be very careful when building a positioning strategy. If you try to claim excellence in too many areas, customers will be reluctant to give you credit for your claims. This is especially true if you choose to own seemingly opposite claims, such as having both the highest quality AND the lowest price. Just as opposite colors cancel each other out, so do opposite attributes.

A better approach is to narrow your focus of excellence to one main attribute. When you do so, customers are more likely to believe you. They will give you a stronger ownership of your claim.

So, to return to our analogy, don’t mix together too many colors of paint into your position. Instead of brightening the power of the colors, they offset and weaken each other, turning into an ugly gray.

SUMMARY
To win in the marketplace, one must create an image of superiority at a unique point of differentiation. This is done by focusing on a unique blend of attributes. When designing this focus, there are a few points to keep in mind. First, don’t pick a focus that is already owned by someone else. Choose something else. Second, clearly communicate that focus to the customer, so that they will associate your brand with that attribute.

Third, don’t get greedy and try to make too many claims of superiority. The more attributes you claim to own, the less likely customers will believe that you own any of them. A simple, narrow focus almost always wins out over claims that “I can do it all.”

FINAL THOUGHTS
As strategy professor Michael Porter likes to say, strategy is about making choices and tradeoffs. You cannot be everything, so examine the tradeoffs and choose the right narrow positioning for your firm. In other words, pick a color.

Analogy #219: Repair Vs. Prepare

THE STORY
Yesterday, I went to the hospital to visit a friend who had broken his leg. Now, when you break a leg, you have a true emergency on your hands and you have to get the leg repaired quickly. But I started thinking, how often do people end up in hospitals and emergency rooms for other types of problems which could have been easily avoided if preventative measures had been taken?

I used to live in a smaller community that had a shortage of doctors. I could not find any doctors who were accepting new patients, so if I needed health care, I had to use the emergency room at the hospital. It was a very inefficient way to get health care. As a result, I started to spend more time on preventative care, like:

1) Joining an Exercise Club
2) Treating Early Symptoms Quickly with Over-the-Counter medications, before the problem got worse.

Studies show that a few preventative lifestyle changes, such as a proper diet, exercise, sufficient sleep, and avoidance of things like tobacco, alcohol and the like can help avoid all sorts of medical issues in the future. It won’t stop broken legs, but at least it will stop a lot of other things.

THE ANALOGY
The goal of strategic planning is to help move a company from its current situation to a better condition. At the very least, strategic planning should help a firm avoid falling into predicaments where the situation can get worse.

This is somewhat similar to the field of medicine. There, the goal is to move a person from an unhealthy situation to a healthier condition. And if you are already healthy, the goal is to help you remain healthy.

The two approaches to medical treatment are “preventative” and “curative”. The curative approach it to detect disease and then fine a way to cure the patient who has the disease. The preventative approach is to find ways to promote healthiness so that the disease never occurs in the first place.

Following this analogy, we could take two approaches to how we focus our strategic effort. We can take the curative approach—use strategic thinking to fix the problems our company already finds itself in. I call this “repair” strategy—trying to fix the mess we are in.

We can also use the preventative approach—use strategic thinking to avoid getting into the mess in the first place. I call this “prepare” strategy, since it prepares us in advance for what the future holds, so we can better withstand any threats.

Sometimes, life throws situations at us that no amount of preventative medicine can prevent, such as a broken leg. At those times, we have to resort to repair tactics. However, as we will see in this blog, one is usually better served if the bulk of the effort is placed on prevention.

THE PRINCIPLE
The principle here is that a “prepare” approach to strategy tends to be better than a “repair” approach. This is even more true in strategy than in medicine.

Here are some of the reasons why this is so.

1) Some Damages Leave a Scar
One of the biggest problems with a repair approach is that even if you can fully correct the problem and make things right, the memory of the problem lingers. It’s like a scar…you know you are healed, but the scar reminds you that you were once ill.

Take the “Made in China” brand image. Given the problems with tainted milk, tainted dog food, tainted eggs, poisonous toys, poisonous toothpaste and other such issues, China has severely damaged its brand. I am confident that China will work to minimize these problems. That may repair the process, but it won’t immediately repair the reputation and image. They have lost the trust of the consumer. They have lost the trust of Wal-Mart, one of their top purchasers. They still see the scar.

Fixing something that has gone wrong does not erase the memory of the wrong that went on before. So if you use the repair approach, not only do you have to fix the problem, but you also have to fix the reputation and image.

If you are good all the time, you will earn a good reputation. However, if you slip up, you have to become extra good just to regain a good reputation. You will not get full credit for your efforts. Thus the repair approach can be very inefficient over the long run.

2) Prepare is Simpler than Repair
If you over eat, you can increase the odds for getting all sorts of illnesses, like as high cholesterol, high blood pressure, diabetes, heart problems, and so on. Therefore, obese people have to be on the lookout for all sorts of problems which can come from many different directions. To “cure” these problems, the obese may have to take all sorts of different medications for the rest of their lives and deal with many nagging issues.

By contrast, a preventative approach is simpler. All you have to do is concentrate on one thing—weight control—and you can significantly reduce the odds of having to deal with dozens of potential problems. Weight control is one focus, which is pretty much under your control. This is much better than the alternative, which is many nagging problems that come at you in an uncontrolled manner.

The same is true with the prepare approach to strategic planning. With this approach, the first step is to know what the key attributes are at the core of your strategy. Then you simply focus on preparing to excel and stay on the leading edge with these attributes. This is one thing pretty much under your control. And if you can control it, then your strategy will be productive for a long time.

While K Mart is frantically running all over the place trying to fix all of its problems (repair approach), Wal-Mart is focusing on just doing what it takes to excel at low prices (prepare approach). As a result, Wal-Mart has a strong strategy that is working quite well. By contrast, K Mart is not really building up a strength at much of anything. Being “less bad” is not a strategy. K Mart is too busy fixing little things to have time to focus on the one big thing.

3) Prepare is More Future Oriented
As I said at the beginning, the goal of strategy is to build a way to get to a better situation in the future. Strategy is future-oriented. The prepare approach looks forward into the future and tries to prepare the company so that is optimally positioned for that future environment.

The repair approach, by contrast, is backwards looking. It looks at what you did in the past to get into your current mess. Then it tries to build a short-term strategy (or isolated tactic) to get rid of the mess. As long as your focus is on the now and the past, you will not have sufficient time to look forward. It is only by looking forward that you can get ahead of the situation and build strategies to prevent potential future messes.

So Why Don’t We Do It More?
All that being said, it would seem obvious that the prepare approach is superior to the repair approach. Yet, when I look at the business world, it seems like the primary focus is on fixing the crisis of the day, rather than preparing for the potential glory of the future. In an earlier blog, we talked about the Tyranny of the Immediate. This is the idea that we become a prisoner to the problems of the immediate, so that we do not feel free to break away and look ahead.

Yes, someone needs to deal with the problems, but it doesn’t always have to consume the time of the leaders. Delegate most of it and turn your focus forward. That way, you can prepare, so that there will be fewer problems ahead. Break the cycle!

SUMMARY
Yes, every company will have to face problems from time to time that are unavoidable. But that doesn’t mean that your strategic focus should be to just solve problems. Winners create strategies focused on building strengths around a point of strategic differentiation. They look forward to anticipate threats to that differentiation and prepare a path to eliminate the threats.

Fixing bloated expenses or some other internal problem is not a strategy. Customers typically don’t care about your internal mess. They just want to get their needs met at a good value. Problem fixing is inefficient. Problem avoidance is priceless.

So, when allocating your time, put the emphasis on prepare rather than repair.

FINAL THOUGHTS
Time spent getting repaired in a hospital is time which cannot be devoted to moving forward. Avoid the hospital by investing time in preemptive, preventative strategic efforts.

Analogy #218: Fit or Fat?

THE STORY
When my Dad was a young man, he was very trim and muscular. In those early years, he did a lot of manual labor work, like digging ditches and fighting forest fires. Over time, he gradually did less physical work.

As a result, when he got older, my Dad became fairly fat and flabby. Yet, in spite of that, my Dad insisted he had to eat more food in his older age than he did when he was younger and more active. His logic?

Well, my Dad used to say, “I keep losing weight. No matter what I do, I can’t sustain the weight I had when I was young man. I’m wasting away. I have to eat more than I want to just to slow the loss of weight.”

What my Dad failed to take into consideration was that, beginning around age 45, men lose about 1% of their muscle mass each year just from aging. Add to that the fact that my Dad became far less physical in his activities and that he had added muscle mass loss due to surviving polio. In other words, he didn’t have a weight loss problem, he had a muscle mass loss problem.

Fat has less density than muscle, so when my Dad was replacing his muscle mass with fat mass, he was putting on a lot of flabby fat. He wasn’t wasting away. He was just trading useful muscle for useless fat.

THE ANALOGY
Most business strategies revolve around leveraging some competitive strength. In other words, a company finds some competency or benefit which they can deliver better, faster, or cheaper than other companies. They then use this strength to create a strategic market advantage. For example, Wal-Mart uses its strength in supply chain management to create a market advantage around low prices.

You can think of competitive strength as being like the strength your muscles give your body. When you do a lot of exercise, you build up a lot of muscle mass. This gives you even more strength than you had before. However, if you stop exercising, the muscle mass goes away and you become weaker.

In a similar sense, businesses can only maintain their competitive strength if they focus on the hard work of exercising in their area of superiority. If you stop trying to grow in your area of competitive strength, your strategic point of positive differentiation will start to atrophy, just like the idle muscles in my Dad.

And don’t lull yourself into satisfaction just because you’ve been able to keep the company large. You may have just repeated the folly of my father and traded in useful muscle for useless fat.

Look, for example, at the recent financial mess we’re in. A lot of really, really big financial institutions fell apart and no longer exist. Unfortunately, we found out too late that these companies became large on fat, rather than muscle. Rather than doing the hard work of exercising their muscles on improving excellence in traditional areas of finance, they got fat and lazy on the junk food of sub-prime mortgages, derivatives and credit default swaps.

Like my Dad—who was focused on the number of pounds he weighed rather than the quality of those pounds—these financial institutions focused on the potential size of the profits, rather than the quality of the profits. As it turns out, the quality of the profits sucked, and caused the companies to collapse. They did not have enough muscle to overcome all that fat.

THE PRINCIPLE
The strategic principle here is vigilance. There is never a good time to slack off. If you want to keep your strategic advantage, you need to watch how well you are doing every day.

Without vigilance to monitoring your strengths, you can fall into one of three traps:

1. Muscle Atrophy
Don’t assume that just because you had a competitive strength in the past, it will always be there. If you take it for granted, it can go away, just like my Dad’s muscles. It probably took a lot of hard work to create that competitive strength in the first place. Similarly, it will probably take a lot of hard work to keep that strength.

When Tater Tots came out, they were a great success. They had a unique flavor and texture, due to their ability to hold little chunks of potato together in crispy bite-size morsels. Management assumed that great taste and texture would always be there, so the owner, Heinz, started to focus on cutting costs.

As a result of stopping the vigilance on maintaining strength in taste and texture, the cost cutters changed the way the Tater Tots were made. The little potato chunks started turning into mush. The “tots” couldn’t hold the mush together. The Tater Tot bags were full of potato crumbs. Sales dropped. Eventually Heinz figured out the problem and renewed their strength in flavor and texture. Sales came back.

2. Out Muscled
Even if you keep your strength from weakening, you can still have problems. There needs to be an effort to build and improve upon that strength. If you stand still, competitors can either catch up or pass you by. Toyota used to have a large competitive advantage in quality. People put up with their bland cars to get that superior quality. Now, Ford has caught up to them in quality and has snazzier vehicles. Toyota is still in the lead, but we’re starting to see cracks in their strategy. Without renewed vigilance to regaining its strategic strength, Toyota could be in for tougher times.

So, not only does one need internally focused vigilance to make sure a strength does not slip into fat, one needs external vigilance to make sure that others don’t get stronger and pass you by.

3. Working the Wrong Muscles
The third one is the trickiest. You may be successful in keeping a competitive edge in an area only to find out that your edge has become irrelevant. Times change. Technology changes. People’s desires change. Your strength may no longer matter. You may find yourself working the wrong muscles.

Polaroid was vigilant in keeping its competitive strength in instant film technology. It fought a long, tough battle to keep Kodak from making inroads. Unfortunately, newer digital imaging was a superior way to get instant pictures over the Polaroid process. Polaroid’s technological strength, which it protected so well, was now irrelevant. Polaroid, as we know it, ceased to exist.

The US auto makers focused on their strength of trucks. However, times changed and now people wanted fuel efficient cars. Oooops! By focusing on truck profit margins instead of changing consumer tastes, those fat truck margins were suddenly just fat.

Therefore, vigilance also requires taking a broader look at all the possible events that could make your strength irrelevant. It’s not a bad idea to use trend spotters and to have a few experiments going on in areas which might replace your relevancy. For example, Wal-Mart’s strength is predicated on having low prices. If a new retail format has the potential of getting an edge in pricing, Wal-Mart’sformat can become irrelevant.

For example, when their spotters noticed the rise of the warehouse club format, Wal-Mart became concerned. Wal-Mart was afraid that warehouse clubs could be cheaper than their discount stores. As a result, they started up the Sam’s Club format as a hedge.

Later, they saw hypermarkets as a potential threat, so they experimented with Hypermart USA. That threat in the US turned out to be false, so they closed it down. However, they next started to see supercenters as a potential threat to their pricing strength, so Wal-Mart built Wal-Mart Supercenters. Who knows where Wal-Mart would be today if they were not that diligent in watching the environment for any potential threat to their strength.

SUMMARY
Without a competitive advantage, you don’t have much of a strategy. In fact, strategy gurus like Michael Porter would argue that without a competitive advantage you do not have a strategy at all. Competitive advantages are built upon strengths. If one is not vigilant in making sure that the strength is still an advantage, then that strength can go away. And maybe you will go away as well.

FINAL THOUGHTS
Virtuoso pianist Vladimir Horowitz would practice on the piano every day. He claimed that if he missed one day of practice, he could notice a difference in the quality of his performances. If he missed two days, he said his wife could notice the difference. And if he missed three days of practice, Horowitz said his audience could notice the difference. That is why he never let up on honing his strength. Do the same with your strength.

Analogy #217: Hot Potato

THE STORY
There’s a children’s game we played when I was young called “Hot Potato.” Although there are lots of versions of the game, it goes something like this:

First children stand, facing each other, in a circle. They have a small ball, which is called the potato. The ball is tossed around as if it is a hot potato—as soon as you catch it you quickly toss it to someone else in the circle so that it won’t (theoretically) “burn” your hand.

All the while you are tossing the ball around, someone else is keeping track of the time. When the allotted time is over, the timer yells “STOP!” Whoever has the hot potato in their hand when the time stops loses and has to leave the circle.

THE ANALOGY
A lot of business strategies rely on the tactic of buying or selling companies/divisions. In these transactions, assets change hands from one owner to another. It’s sort of like the game of hot potato. Property ownership gets tossed around from firm to firm, just like that ball gets tossed around with the children.

One time when asset tossing is particularly frequent is when the growth phase of an industry is long over and an industry is well into maturity or is starting to decline. The lack of growth creates a period of consolidation. At this point, a firm typically decides to either “get out” or “double-down.”

The ones who want to get out toss their assets away, as if it is a hot potato. The ones who want to double-down collect all of potatoes that the others are tossing out.

Just as in the game of hot potato, eventually the time for consolidation stops. In the game, whoever is holding the “potato” when the time ends loses the round. My observation is that more often than not, the company holding all the assets when the consolidation phase ends also tends to be a loser.

In this blog, we will see why.

THE PRINCIPLE
The principle here is that during consolidation, the company that is doing the consolidating more often than not creates less value than the one who is exiting the business. In fact, the consolidator often ends up destroying value.

Although not directly applicable, you could see some of this principle at work in the dotcom bubble. There were a lot of young college dropouts who started up all kinds of businesses. Eventually, big companies wanted to get in on the action, so they started buying up a bunch of these dotcom startups, with the hope of creating something great out the accumulation of many dotcom assets.

After the consolidation phase ended, businesses realized those assets were purchased at bubble-sized prices. After the bubble burst, the consolidators found they were holding onto fairly worthless assets, while the ones who sold out were sitting on piles of wealth beyond belief. The ones holding the hot potato when the bubble burst lost.

Now you may argue that this was not a true consolidation phase and that bubbles are not the norm. That may be true, but the principle still holds true. It just may take a little longer to see the results.

The rationale for doubling down during the consolidation phase tends to go as follows:

1) There are economies of scale on the cost side in becoming large.
The logic is that if I buy up the assets from others and combine them with mine, I can create a ton of synergies and eliminate a boatload of duplications and waste. For example, in the recent talks to combine Chrysler and GM, there are estimates that the economies of scale could possibly cut out $10 billion in costs.

2) There are top-line sales benefits if the number of competitors are reduced.
There’s a reason why governments tend to discourage monopolies or near monopolies. They believe that if too much power is placed in the hands of too few companies, prices will go up, hurting the consumer, and putting excessive profits in the hands of the remaining firms. Although a company would not admit this is true (in order to get the deal approved by the government), there is a belief that being a large player with fewer competitors is helpful in the fight for sales and profits in a no-growth industry.

Unfortunately, reality tends to makes these two points less powerful than they at first appear. Instead, what occurs is the following:

1) The consolidator overpays for the companies it purchases.
In today’s sophisticated environment, it is highly unlikely that one can acquire a business at a lowball price (the current situation with the valuation of banks and other financial institutions notwithstanding). Everyone knows all the tricks in how to valuate companies (or can hire someone who does). Therefore, one typically has to pay a fairly high price to consolidate the market. In other words, in the purchase price, the consolidator has to pay the other company a portion of the expected synergies in order to get a deal done. So the seller gets part of the benefits of the synergies without taking any of the risk.

2) The economies of scale are less than expected.
Although people may argue about the cause, the raw fact is that business plans tend to overstate the economies of scale—both in the amount and in how soon they will occur. As a result, most of the remaining synergies are too small to cover the premium price paid. And you probably gave that amount away to the seller when you overpaid.

3) Not all of the Sales Stick
There is a reason why some customers preferred doing business with your competitor rather than with you. For some reason, a certain percentage of the market preferred not to do business with you and chose the competitor in order to avoid doing business with you. When you buy that competitor, you are buying a customer list which includes people who have been avoiding you. They may continue to want to avoid you and defect to another firm once you make the acquisition. Therefore, there are usually top-line dis-synergies in an acquisition, causing your combined sales to be less than the sum of what each firm did separately.

4) The integration of the assets is harder than one thinks.
Pride, differing cultures, different IT systems, key employee defections, and other such factors often make integration of companies slower and more costly than anticipated. All those expected synergies come up short. You save less than you think.

5) The market shrinks faster than one thinks
The reason why industries stop growing is not because people stop spending. Typically, what happens is that another industry provides a superior solution and the growth moves to the superior solution. People didn’t stop buying photographic film because they stopped taking pictures. In reality, people are taking more pictures now than ever before. They just found digital photography to be a superior solution.

The problem in declining industries is that the consolidators tend to underestimate the growth of the new industry that is providing the superior solution, in part because they do not understand the new solution. In addition, they may not see how interconnected their old solution is to the new solution and not realize how the growth of the new is at the expense of the old. Kodak terribly underestimated the digital world, because it was not their world. They could not imagine cell phones replacing cameras.

Macy’s spent a fortune to consolidate the department store industry in the US. Unfortunately, many people have found superior solutions to the department store, such as the lower priced Kohl’s chain or in high-end specialty formats, like Williams Sonoma. In addition, apparel, the core of the department store, is not as hot a category as it used to be. The greater growth has been in areas like consumer electronics, which diverts money away from apparel into stores like Best Buy.

As I’ve mentioned many times before, study after study has shown that most acquisitions end up destroying value for the acquirer. A successful consolidation strategy usually depends upon making a series of acquisitions. Just getting one right is difficult. The likelihood that all will work is slim. That’s why the seller usually does better than the buyer.

So what is the solution?

1. Consider selling out early, while you can still get top dollar for your business. For more on this, see my blog “We Can All Act Like Sports Franchise Owners.”

2. If you still want to be the consolidator, make doing good acquisitions your core competency. Cisco succeeded in consolidation because they took the time to become world class at acquisitions. That became a big part of their value-added vision.

3. Discover early what superior solution is taking the growth out of your industry and shift to that superior solution. In other words, continue to be a growth company even through your industry is may not be by moving to where the growth is. Fuji saw that photographic growth was moving to digital and they rushed into the digital void early to stake out a position and sustain growth. Dayton Hudson saw that discount stores were growing at the expense of department stores, so they sold out of many of their department store divisions early and put the money into the faster growing Target chain.

SUMMARY
Becoming a consolidator can be an alluring strategy. You get to become the big fish in the shrinking pond. It strokes the ego to buy out those hated competitors and become the last big survivor. By contrast, selling out to the consolidator can look like defeat. However, the reality is that selling out is often the strategy which creates the greatest value, while the consolidator destroys value.

FINAL THOUGHTS
Remember the moral of the hot potato—if you hold on to it too long, you will burn your hand.

Analogy #216: Stop the Labeling!

THE STORY
When I was a young boy, my parents would occasionally send me off for a week of summer camp.

In order to keep track of things, the camps would ask parents to label everything with their child’s name. Clothes were to have labels sewn onto them. Property was to have sticky labels. That way the camp could make sure that all the boys went home with the same stuff they brought.

Of course, all of the boys would ridicule the other boys when they saw one of those labels. They would call them a “mama’s boy.” Having those labels with your name on it became a badge of shame.

Therefore, one of the first things the boys would do when they got to camp would be to rip off all those labels with their names on them. All that careful work by the parents to label things was for naught.

THE ANALOGY
There’s a certain comfort level in labeling things. The camps and the parents felt assured that such labeling would make it easier to track all of those possessions. Unfortunately, the children did not like the stigma of being labeled.

Businesses also tend to like labeling people…and each person seems to only be allowed one label. For example, some people are labeled good customers and others bad customers, and the label sticks regardless of the situation. And if you are labeled a customer, then you cannot be labeled a vendor, and vice versa.

What if businesses acted more like those boys at summer camp and ripped off those labels?

THE PRINCIPLE
The principle here is that once something gets labeled, the label tends to dictate how the item is treated. For example, if you label someone as “aggressive,” you will approach them differently than if they had been labeled “passive.” The less labeling one does, the more flexible and adaptable one can be towards that object.

Businesses interact with a lot of different people/companies. Those people/companies tend to get labeled and put into a category: customer, supplier, partner, competitor, employee, and so on. Once placed in a category, the tendency is to limit interactions to just what is implied by that label. However, new strategic opportunities open up if we rip out those labels we have mentally sewn onto them.

For a recent example of this, we can look at an article in the October 2008 Harvard Business Review. The article, entitled “The Contribution Revolution: Letting Volunteers Build Your Business,” was written by Scott Cook, founder-chairman of Intuit.

The basic idea of the article is that if a company provides the right kinds of Web 2.0-type tools, all sorts of people will voluntarily make contributions that will have a significant profitability impact on your business. Cook then lists all sorts of examples.

At his own company, Intuit, they do not have a Spanish language manual, but Spanish speaking volunteers have offered all sorts of Spanish language mini-manuals and podcasts. Unilever has the “In the Motherhood” user forum and Proctor & Gamble has the BeingGirl online community for teens. Cook likes the way both provide all sorts of relevant user-generated content.

Some companies use “free volunteers” to help design and critique products. Others ask their customers to help create their advertising. Key bloggers can be used as “free advertising” as well.

My point is that if you label someone as a customer, then you will think of them in terms of how to get them to buy from you—after all, that’s what customers are supposed to do. However, if you rip off the label, you can see how they are connected to your brand in many ways and can help in many ways—often for free.

The same thing goes for suppliers. If you think of them only in terms of that label, then the tendency is to just try to use “hardball” negotiations to get the lowest price for what they supply. But if you think of them as a strategic partner in your supply chain, you may see that you can help each other create a more efficient supply chain, which could be far more profitable than what you can get only through hardball price negotiations. Toyota’s relationships with its suppliers is an example of this.

In the grocery industry, it is not uncommon for supermarket companies to outsource a lot of their shelf space management to a variety of their vendors/suppliers. The logic is that the supplier is a specialist expert who understands that particular product class better than anyone else. In other words, the supplier becomes a “free” merchandising consultant to the supermarket.

Even those labeled as “competition” may be seen as free helpers if you rip off that label. For example, maybe you can work together to lobby the government on various causes of mutual interest. Or maybe you can jointly support an effort to create a more favorable image for your industry which could expand the total industry demand.

Employees could be seen as free “brand advocates” or free “guinea pigs” for various experiments. Really loyal and engaged employees may want to freely volunteer ideas to help the company in areas that have no direct bearing to their job label.

Although these ideas work well in the digital web 2.0 world, it can go well beyond that. Face to face meetings, joint committees, call centers, and the ol’ suggestion box can be a part of the mix as well.

To get all of this free help requires several things. First, as mentioned, get out of the mode of narrowly labeling people and companies. Look as everyone as a potential partner, willing to help you for free (or at least at below market prices).

Second, create lots of ways to make it easy for people to help you. That requires both creating lots of ways for them to communicate with you as well as people on your end to willingly and graciously receive the free help.

Third, don’t be bashful. Ask a lot of questions to a lot of people. You’re more likely to get the help you want if you let them know what you’re looking for.

Finally, get out of the habit of describing some customers as always “good” or always “bad.” Even people labeled as “bad” customers can be “good” customers if you look at them differently. Perhaps they can become good customers if you design a new business model. For example, much work has been done recently to find economic ways to sell to low income third world areas, people who had traditionally been seen as too poor to be a good customer.

Or perhaps a so-called “bad” customer is merely a “future-good” customer. It may just be too early in their life-stage for them to hit their prime opportunity years. However, if you appeal a bit to them today, they may be more loyal to you once they hit their prime opportunity years. Get a young girl hooked on your luxury handbag today, and you may create a strong brand supporter for your entire luxury portfolio once they get older and wealthier.

SUMMARY
Labeling can have the unintended negative consequence of narrowing our expectations of people. We only expect of them what is implied by the label. For example, a customer is only expected to consume, a supplier is only expected to supply. However, if we take the labels off, we can see broader potential. Everyone can become a potential strategic partner, offering all sorts of assistance. And best of all, it is often nearly free.

FINAL THOUGHTS
One time when I was at camp, they did a spot inspection of the cabins and happened to luck into coming at a rare moment when my cabin was clean. This was the exception rather than the rule. But needless to say, that rare inspection paid off and I was given a badge for “cleanliness.” Later, I was running through the woods with the badge, tripped and took a terrible tumble into the dirt. The cleanliness badge got all mangled and blackened with dirt smudges.

When camp was over, I proudly gave my dirty, mangled “cleanliness” badge to my parents. They weren’t fooled by the cleanliness label. They knew better. You should know better than to be fooled by labels, too.