Strategic Planning Analogy #479: Playing to Win

THE STORY
Back in the very early days of personal computers (before the IBM PC), there were a lot of small upstart companies that wanted to get into the business.  Most of them said something like the following:

“We may not be big enough or strong enough to become the market leader, but we think we can get about a 15% market share.  And that should be large enough to make a good return on investment.”

The problem with this approach was that:

1)      The leaders would already have about 50% of the market share in personal computers.

2)      There were about a dozen firms who wanted to get about 15% share out of the remaining 50% of share available (that math doesn’t work).

As a result, most of these upstart companies only got about 5% share or less.  This was insufficient for profitability and they quickly went bankrupt.

Later, when IBM entered the market with the first “PC” (and the first software from Microsoft), even most of the market leaders, like Radio Shack and Commodore, had to give up the business.

 

THE ANALOGY
If you look at the strategy of most of the early entrants to personal computing, they were not playing to win.  Instead, they were playing to exist.  The idea was they did not need to aggressively pursue superiority in positioning or features.  Instead, these companies felt that all they needed to do was “show up”, and the rapidly growing market would have enough space to absorb them at about 15% market share.

That approach was a dismal failure.  By not playing to win, they ended up with nothing.  When IBM entered the market, it was aggressively playing to win—and it was the clear winner for quite awhile.

When designing a strategy, are you approaching the market more like those early entrants (just show up and hope to get sufficient share) or like IBM (go big and play to win)?

 

THE PRINCIPLE
The principle here is based on Law #12 of my 22 Laws of Strategy.  This is the Law of Winning, which says, “If you do not play to win, you will lose.”  Playing to win requires:

a)      Designing and Achieving a Winning Position (unique, desirable)

b)      Aggressively Pursuing that Position in the Marketplace

c)      Developing a business model so that you can have superiority in your position and still make money.

This is not what those early personal computer manufacturers did.  They built “me-too” products using similar business models and shipped them out to whomever would buy them.  And by not playing to win, they lost.

IBM played to win.  They developed a superior product.  They installed superior software (MS DOS).  They aggressively advertised the brand (to the point where PC became a generic name for the whole category).  They put the full force of IBM behind it.  And they became a winner.

The Rule of 1.5

If anything, the importance of playing to win is even stronger in today’s economy.  One reason why “playing to exist” no longer works well is due to the rule of 1.5.  Back in the 1980’s it was called the rule of three, which stated that most businesses had 3 strong players:  a leader, a close challenger, and a rebel/innovator.  The prime example used back then was US colas: Leader=Coke; Challenger=Pepsi; Rebel/Innovator=RC.

However, over time, this paradigm has mostly disappeared.  The reason can be found in a 1995 book called the Winner-Take-All Society, by Frank and Cook.  The book showed that in industry after industry, the advantages of leadership were getting stronger and stronger.  Challengers were at an ever greater disadvantage.  Brands were beginning to realize that it made more sense for a challenger to reposition itself as a leader in different market position than to go directly after a leader.

The net result is what I call the rule of 1.5.  Now most markets have a single strong leader with only minor challengers.  Think about US retailing.  Where it used to be Best Buy vs. Circuit City, it is now only Best Buy.  Where it used to be Bed Bath & Beyond and Linens-N-Things, it is now just Bed Bath & Beyond.  And who is the strong challenger to Walmart or Amazon?

Even in colas, Coke has increased its dominance over Pepsi to the point where its greatest challenger is now Diet Coke (which leads in a different position).  And RC cola barely exists anymore (and survives via association with Dr. Pepper, a leader in its own category of beverages).

That is why you need to play to win, because there is no guarantee that there will even be room for a profitable number 2 or 3 or 4.   Take it from me…when I was working at Best Buy and founder Dick Schulze was still running the show, there was no doubt that he was aggressively and passionately playing to win.  And win they did.

Metcalf’s Law

If anything, the digital economy with the internet and social media has accelerated this phenomenon.  It was first described as Metcalf’s law, which states that the value of a network is equal to the square of the number of connections to that network (or U=y²).

The new digital/social/mobile economy is all about building networks.  And the bigger your network, the more powerful you are.  Look at Facebook.  It did not get its high stock valuation due to current profits.  The high value was due to Metcalf’s Law and the millions upon millions upon millions of users in its network.  Linked in and others are also following this principle and building the largest networks of members in their space.

Once you build up a huge network, there are incentives for people to join your network and stay in your network.  It is referred to as “stickiness.” Hence, the networking leaders tend to become even stronger leaders and the challengers become weaker.  Who is the major challenger to Facebook?  Can a new competitor just “show up” and expect to gain a large following in Facebook’s space?

Part of the appeal of Apple is the network of partners and features it puts around its products.  The apps, the app store, the interface connections, the partnership deals and so on make the sum of the network greater than the parts, and makes it harder for any single player to challenge that network.

If you do not play to win in creating the network, you will ultimately lose in this economy.

 

SUMMARY
The disproportionate advantages to being the market leader are huge and getting even stronger.  It is getting to the point where if you are not the leader, you will be hard pressed to even make an adequate profit.  As a result, every business needs a strategy built around leadership—a winning position in desirable space.  In addition, you need to aggressively pursue gaining and maintaining that position.  Others are also out there fighting to win, so if you are not equally fighting to win, they will become the winner instead of you.

Just showing up with a me-too product and hoping that the market is large enough to get you sufficient market share is no longer a viable strategy (if it ever was in the first place).  Those “just showing up” market shares are never as large as you think they should be and rarely lead to a viable business model.  Be aggressive and play to win or don’t play at all.

 

FINAL THOUGHTS
They say that imitation is the sincerest form of flattery.  That may be true, but imitation is not a very good approach to strategy.  Following the leader positions you as a follower, not a leader.  If you do not have a business model and an aggressiveness to get to a place where you can lead (or win), then all you have is a blueprint for losing.  The world already has a Facebook, Amazon and Walmart.  It doesn’t need an imitation of them.  Instead the world needs new positions to be conquered.  Are you scaling the mountain of imitation or a mountain where you can be first to the top and win? 

 

Strategic Planning Analogy #429: Musical Chairs

THE STORY
When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

THE ANALOGY
The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

THE PRINCIPLE
The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

SUMMARY
Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

FINAL THOUGHTS
Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Strategic Planning Analogy #265: Two Stores, Two Stories

THE STORY
Ritz Camera, the largest specialty camera and imaging retail chain in the US, filed for bankruptcy in February 2009. Now, it has recently said that if it does not find a buyer soon for the chain, it will liquidate its assets in an open auction.

At the beginning of 2009, Ritz Camera had more than 800 stores in operation. It is now less than half that size.

By contrast, Best Buy is doing rather well. Its balance sheet is very healthy and it is gaining market share. Although the recession has had its impact on Best Buy, the company will survive and looks poised to thrive for quite awhile.

Why such different fates for these chains? A friend of mine used to work in the photography specialty retail business many years ago. He said that when taking good photos was very difficult, many flocked to photography as a “hobby.” These photo hobbyists carried around bags of gear to make better photos—lots of lenses, filters, light meters and shades. They would have a darkroom in their basement with lots of chemicals and enlargers, so that they could develop their own film and photos and crop them to be “just right.”

All of this took skill, knowledge, dedication and lots of practice—as well as lots of money. It was not for the average “amateur.” These hobbyists could take great pride in their unique skills and abilities. Others marveled in jealousy at the “magic” of their great photographs.

Then something happened. Technology got sophisticated enough that cameras could take pretty good pictures all on their own—just point and shoot. Now everyone could take pretty good pictures without any advanced training, skills or lots of gear. Being a photo hobbyist no longer carried the same cache. It wasn’t all that special anymore once the average Joe could do just about as well.

As a result, those who looked to their hobby as their point of pride and status saw that being a photo hobbyist no longer satisfied that ego stroking. Therefore, many quit photography and found new hobbies in areas which still held status, like electronics or computers.

Now, with the digital revolution, everyone has access to cheap and easy tools to take, edit, modify and photoshop their pictures into great works of art—and place them on the internet for all to see. And you don’t even need a camera. I was recently at the zoo—a place full of young families. I looked around me and noticed that I was the only one with a camera. Everyone else around me was taking photos with their cell phone.

It is getting harder to even think of photography as a hobby. It’s just something people do, like breathing. And nobody thinks of breathing as a hobby. Without a large hobby segment, there is no reason to for a large photo hobby specialty store like Ritz. Hence the problems at Ritz: it’s camera focus fell out of touch with where pictures evolved.

By contrast, Best buy has frequently changed its product focus. I remember back in the 1980s, when their big emphasis was on microwave ovens. It was the cool new technology, and people flocked to Best Buy because they held seminars and cooking classes on how to use this cool new gizmo. Soon thereafter microwave ovens became mature and were treated like a toaster that you replace at Walmart when they break.

Of course, by then Best Buy had moved on to the next cool new gizmo—VCRs. Then when that started to get mature, they went on to follow with computers, then DVDs, then Digital TV and now Mobile Devices. The idea was to abandon categories before they matured and replace them with the next new thing. That way Best Buy was always hot and always successful.

THE ANALOGY
As a business, companies have two strategic choices. They can either define themselves primarily by specializing in the type of products they sell (like Ritz Camera) or they can define themselves primarily by the specializing in the place in the product lifecycle where they want to be.

This is a critical strategic decision which can dramatically impact how your company evolves. How you answer this question can even be one of the major reasons why you succeed (like Best Buy) or fail (like Ritz Camera).

THE PRINCIPLE
The principle here is that the decision to focus on product versus lifestage is critical. It needs to be a conscious choice, because it will drive so many of your other strategic decisions. If done well, there are opportunities to succeed with either approach. But to do so takes hard work, tough choices and significant strategic modifications. You have to be fully committed to one side or the other. A half-hearted middle approach will tend to fail.

Let’s look at either option in detail to illustrate the particular types of risks and tough choices which apply to either decision.

Focus On Product
The biggest problem on a product focus is that products evolve and go through a lifecycle. At first, they are the cool new thing, desired by leading edge hobbyists who desire the status of taking the time to become an expert when others aren’t. Second, the experts help the rest of us “get it” so that the product achieves mass demand. It is the hot thing everyone wants. Then, it becomes just another thing that everyone already has. Your sales shift from first-timers to replacement purchases and the priority shifts from expertise/service to low price. Finally, your product becomes a lowly commodity at best, and an obsolete has-been at worst, which is replaced by the next new cool thing.

Therefore, if you focus on the product, then your greatest strategic challenge is to align your business with the changing demands from managing to the life cycle. For example, if the basic product you sell doesn’t change, then you have to change, to have the most appropriate business model for the particular period in the lifecycle where that product lies. At the beginning, you need to be creative, inventive and cool, and you have fat profit margins to pull it off. At the end, you have to think like a commodities manufacturer, with razor-thin margins and a merciless emphasis on cost reduction. That’s a big cultural change. Distribution channels can change over time, too, from dealing with boutiques to dealing with Walmart.

The second strategic challenge is to slow-down the natural progress of the life cycle, to keep it as alive and cool as possible for as long as possible. Rapid obsolescence via frequent product upgrades can help to keep it cool longer. Strong image advertising can help keep some status with the product longer. Look at the mature automobile industry. Cars can last a decade, but clever strategies like leasing and restyling induce people to want to change cars every 3 to 4 years. Relentless beer image advertising has helped beer brands keep at least some preference and status rub-off in that mature business.

The third strategic challenge is to try to outlast all the competition, so that in the end-game you have a near monopoly. That is what Budweiser has done in the US beer market. Everything has pretty much consolidated into their lap, so that they still have enough volume and clout to make a killing.

The biggest risk is that your company dies when the product eventually dies. If you’re in the newspaper business and nobody wants newspapers, you’re in big trouble.

I think the problem at Ritz Camera was:

1) They picked the wrong product (cameras instead of photos)
2) They did not try aggressively enough to own all the new places where photo status was going (scrapbooking, on-line editing software, You-Tube, etc.)
3) They did not try to develop and get an exclusive on the ultimate cool photo-phone.
4) They did not change their business model enough to win when things get commoditized and margins go away (i.e., their stores could not beat Walmart when the product matured).

In other words, they did not manage the lifecycle well because they did not realize how much of a priority that was, so they lost.

Focus On Lifestage
The other option is to be more like Best Buy and focus on staying in a particular lifestage. For example, if you focus on the early stage, when products lose their cool, you switch to the next cool thing. This is also pretty much how GE has worked over the years. As industries they were in starting to get mature, they would sell off the division and add a new division still in the early cool stage. That way, the portfolio stayed hot (and profitable). The benefits here are that a) you can focus on perfecting a management style for that life stage; and b) your lifespan is not tied to the lifespan of a particular product.

With this strategy, the biggest issues are timing and transitioning. By timing, I mean knowing when to let go of old products and when to dive into new products. If you sell off too quickly, you may walk away from a lot of profit. If you stay too long, you may not find a profitable way to exit the business.

If you enter a new business too early, it may take too long to get a return (and you are more likely to guess wrong on whether it will get hot). If you enter too late, you may have to pay too much to enter and be too far behind in the race for leadership.

By transitioning, the problem is getting people to accept that your brand has a right to be in that new space. If you are too far afield, then the customers will not give you credit in that new space. Also the farther away the transition is from your core, the less likely you will have the proper skills needed to win. For example, if Best had gotten into high end designer handbags when they were hot, it would have failed because it does not line up well with the brand customer or the brand image, and they know nothing about designer fashion. That transition would not have worked.

Best Buy has succeeded because their timing was great and they always transitioned into products that were consistent with the brand and its core customer’s desires. They were also willing to be very aggressive in the transition—killing off old categories entirely and going full-out to win in the new category. This is not a game for the half-hearted.

SUMMARY
Great strategies tend to be explicit on whether the company is going to focus on a type of product or a particular lifecycle stage. Then one needs to aggressively adapt the company over time to stay true to the chosen path. Half-hearted efforts on either path can lead to failure.

FINAL THOUGHTS
You don’t have to only focus on the early stage of the life-cycle. Pinnacle Foods has done well by purchasing the cast-off mature food brands from the food companies trying to get out of mature businesses. They own brands like Duncan Hines, Hungry Man, Aunt Jemima and Swanson. Because they are experts in running brands in their late maturity, they can make them successful when their former parents found them to be a drag on profits.