THE STORY
Last fall, when Jordan Spieth won the FedEx Cup of golfing, he earned $10 million. That’s a lot of money for a golfing match. It’s not typical. The winner of a typical game during the golfing season makes only about $1.5 million. In the 2014-15 golf season, Jordan Spieth won $22 million from all his playing in golf tournaments.
By contrast, professional bowlers earn a lot less. The
winner of a major bowling event earns about $25,000 (one-sixtieth of a major
golf tournament). Top money makers on the pro bowling tour only earn about
$250,000 for the whole year. In the first 56 years of the PBA (Professional
Bowler’s Association) history—through 2013—only 40 bowlers made more than $1
million during their entire career. When you get past the
top ten bowlers, the average yearly earnings from professional bowling is only
about $6,500. And you have to pay all your own travel and living expenses. (You can read more about the plight of bowlers here and here.)
What’s going on here? Pro golfers and pro bowlers are both
athletes; they both play as individuals on a tour; they both try to get a ball
to roll to a desired target; they both have to practice thousands of hours to
master their craft; they both play games also played by millions of average Americans.
So why do golfers make so much more than bowlers?
I thought there was a movement to promote equal pay for
equal work. It seems to me that the work of professional bowlers and golfers is
roughly equal. Shouldn’t the pay be the same?
The problem is that tournaments can only pay out a percentage of what they earn, and bowling tournaments earn a lot less than golf tournaments. Golf has the advantage of appealing to affluent men, a category difficult to target by marketers. As a result, companies are willing to pay a fortune to sponsor or advertise on golf tournaments. By contrast, bowling fans are not a coveted group by marketers. In fact, the PBA was so debt-ridden that it was purchased in 2000 for only $5 million, less than the cost of a minor league baseball team.
The economics don’t favor the bowler. There isn’t enough
money available to pay them any more. As a result, poor professional golfers
can earn a lot more than the best professional bowlers.
This problem is very similar to what happens in any
business. The amount of money a company can earn is based largely on the pool
of money available in the industry in which the company operates. If you are
operating in a great place (like an athlete in golf), your chances for success
are high. If you are operating in a poor place (like an athlete in bowling),
your chances for success are practically non-existent, even if you work as hard
at bowling as a golfer does at golf.
At one time, the recorded music industry was like golf,
earning huge amounts of money. Mediocre bands could still make a decent living
off recorded music. Now, the pool of money available for recorded music has
shrunk dramatically. Only the top performers can earn a decent living off of
recorded music.
Therefore, one comes to the conclusion that it is more
important for businesses to determine where to play than to determine how
to get better at playing their game. And determining where to play is a key
role for strategic planning.
The principle here is that hard work only has a huge payout if you are working in a space that can afford to make huge payouts. The problem is that I see so many businesses focus all their effort on trying to “get better” rather than trying to be in the “right place”.
Their strategists focus on things like:
- How do I lower costs?
- How do I improve the business process to make it more efficient?
- How do I speed up my output (or get to market faster)?
- How do I use R&D to improve the features of my output?
They end up focusing on things like Lean or TQM or other
such process improvement disciplines. This is like a professional bowler spending
all his time trying to figure out how to become a better bowler.
The problem is that no matter how much a bowler improves his
ability to bowl, he will never be making the big money. He would have been
better off spending those thousands of hours of practice on golfing.
Similarly, no matter how much a company focuses on operational
improvements, the odds of getting a great reward on that effort are minimal if
you are operating in a business space that is not profitable. Doing the wrong
thing more effectively is still doing the wrong thing.
This is why Michael Porter, in his seminal article in the
Harvard Business Review called “What is Strategy?” (Nov.-Dec. 1996) said that
operational effectiveness is not a strategy.
If you really want to do strategy, you have to focus on
something else.
Ask the Right Questions
The first place to start is by asking the right questions. The
first question is this: What business should I be in? The second question is
this: How can I win in this business?
As a young athletic boy, one should first ask a similar
question: What sport should I be in? How one answers that question can have a
major impact on lifetime earnings. In fact, there may be no other decision a
young athlete can make that will have a greater impact on success. If a lot of
professional bowlers had seriously pondered this question in a rational way
when they were young, they might have decided to focus on golf rather than
bowling.
Similarly, the choice of where a business decides to play is
critical. Your answer to that question can have a greater impact on future
success than anything else you ever do.
For example, Textron and Berkshire Hathaway both started out
in the textile industry in the US. They could have just stayed in that industry
and tried to do the best that they could at operating in the US textiles
industry. Their strategy could have focused on how to be faster, cheaper,
better at playing there.
But they did not. Both companies stopped to ask that
critical question: What business should I be in? As it turns out, the US
textile industry was a relatively awful place to play. It was sort of like the “bowling”
of the business world. There just wasn’t a lot of money to be made in that
space.
As a result, Textron and Berkshire Hathaway diversified and
moved into better business areas. Their portfolios include businesses in the “golfing”
areas of the business world, far removed from textiles. Stopping to take time
to ask the critical question allowed them to become large, successful entities.
Had they not stopped to ask the question, and stayed in US textiles, neither
company would probably exist today.
In an earlier blog, I referenced a study by McKinsey which
said that the largest factor in a company’s success is determined by the nature
of the industry the company decides to play in. So companies should spend time
deciding where to play.
As critical as this question is, I find a lot of companies
don’t stop to do this. They are so focused on getting better at where they are,
they never stop to ask if they should be operating somewhere else. This error
can ruin a company more than almost anything else they do.
This is not a one-time decision. Industries change; prospects
change (as we saw in recorded music). You have to periodically reassess if it
is time to shift the business portfolio. GE has been so successful for so long
because they continually ask this question and periodically shift accordingly.
A successful choice in the past will not protect you
forever. Analog photography was great for Kodak for years, but eventually the
time came to switch businesses. By not doing so, Kodak’s doom was inevitable.
There was no amount of operational improvement that could save them in analog
photography.
Focus on the Right Efforts
This leads to the second issue—what strategists should focus
on once the right business is chosen. Although operational improvements have an
impact, strategists can make a greater impact if they focus on something else. Rather
than focusing on how to do things better, they should focus on how to
do things differently.
If you do things just like everyone else, there is no reason
for someone prefer your offering. They will see you as pretty much the same
thing, so they will pick whatever is cheaper. However, if you are doing things
differently, you can create a point of differentiation, a reason to be
preferred. If you are preferred, you can often charge a premium price.
Moving from an environment of extreme discounting to premium
pricing may do far more for the bottom line than all those operational improvements
put together. I speak more about the need for differentiation in a prior blog.
Operational improvement is not a strategy. Strategy is about finding the right place to play and about how to win in that space by doing things differently. If your strategic planning efforts overlook these two areas and only focus on operational improvements, you may end up perfecting the obsolete.
FINAL THOUGHTS
Ask yourself: Is my business space more like bowling or more
like golf? If it’s more like bowling, it may be time to change sports.