Strategic Planning Analogy #573: Aldi Adds Frills?

THE STORY

Today I went to the grand re-opening of an Aldi store. As you probably know, the reason for Aldi’s existence is to offer a limited assortment of groceries in a bare-bones, no-frills environment. By cutting all the costs of assortment and frills, they can offer their food cheaper than the competition.

Well, the newly grand-opened Aldi moved the store a little bit more up-market. The fixturing and signage looked a lot nicer. It didn’t feel as “no-frills” as it used to.

What’s this world coming to when a store whose success is based on a no-frills image decides it has to look a lot nicer?

THE ANALOGY
Aldi claims that they need to make their stores nicer because the competition is making it harder for them to provide prices low enough to get enough customers to put up with the low-frills atmosphere. Almost everybody sells groceries at low prices now, so Aldi can’t create a price gap sufficient enough to get lots of people to give up the niceties of the other stores to go to Aldi.

This is typical of a market in maturity. It gets difficult for companies in mature markets to make the old levels of profitability using the old models that made them a success in the first place. So the companies start tinkering with the formula. If they are not careful, the tinkering may end up destroying the business model.

Is there really a place for the “More Upscale No-Frills Store”? I guess we’ll see.

Why should we care about this? Well, the overwhelming majority of companies are in mature businesses. They have pressures to rebuild profitability and growth. Those pressures could lead to the kind of tinkering that—instead of fixing things—ruins things.

THE PRINCIPLE
Since most businesses are in mature businesses, they need to have strategies for maturity. Strategies in maturity aren’t as sexy as strategies for growth industries, so they tend to get less attention than they deserve. As a result, companies may be missing out on how to optimize in a mature business.

The major problems in maturity are threefold:

1) Over Capacity (Too Many Competitors)

Barriers to exit can be so high that mature industries can end up with too much capacity. I saw a statistic a while back that said that there is so much excess manufacturing capacity in the automotive industry that there is no scenario that would allow you to get enough auto sales to have all those factories running near capacity.

Not only is there too much production, but too many brands and companies fighting in the space. When you spread all that overcapacity over too many companies, you end up with a lot of companies that are teetering on the edge of bankruptcy.

2) Too Little Growth

The over-capacity and over-abundance of companies might not be so bad if the market was growing rapidly. Unfortunately, there is very little growth in mature industries. Often, the costs of doing business in the mature industry may be growing faster than sales. This is a formula for disaster.

3) Not Enough Differentiation

By the time you get to maturity, all the weak players are gone. The remaining companies have a quality offering in the marketplace. In fact, the remaining players tend to have fairly similar offerings. They are all good enough to be a viable option, but not different enough to get significant preference over the alternatives. They are almost certainly not different enough to command much of any price premium.

Two Disastrous Outcomes

Low growth, overcapacity and insufficient differentiation often lead to two disastrous outcomes. Either you get into a profit-destroying price war or you make compromising changes to your core strategy that can destroy your reason for being (like trying to be the upscale low-frills alternative). By trying to be more things to more people, you can end up being adequate for many, but best for none.

Better Alternatives

Here are some better alternative strategies when faced with maturity.

Alternative #1: Flee the Industry

Just because an industry is mature does not mean your company needs to be mature. You can shift your portfolio to areas less mature. GE has succeeded for over a century by constantly shifting its portfolio. It routinely leaves problematic mature businesses and adds businesses that are less mature. (I spoke more about this concept here and here).

The more mature an industry gets, the less valuable a company in that industry tends to become. Therefore, if you want to get out, get out early, when you can command the highest price for your business. Early exit is often the best alternative.

Alternative #2: Consolidate the Industry

If you are the market leader, the best approach may be to accelerate the consolidation of the industry. Do what you can to reduce the number of players and the amount of capacity. This often requires buying up a lot of the more marginal players. At the end, you may end up with a near-monopoly. 

Even in a very mature business, you can usually make money if you have a near-monopoly. This was the approach taken by Macy’s in the US. It essentially bought up all the major full-line department store brands, closed a bunch of them down, and converted all the rest under the single brand of Macy’s. Now it has a near-monopoly in the space.

Alternative #3: Move From Mass To Niche

The mass market may be mature, but there may still be great growth and opportunity on the fringes. Fast Food restaurants may be mature, but the upscale niche Shake Shack is growing. Traditional supermarkets may be mature, but the organic/produce/health food niche stores like Sprouts and Fresh Thyme are growing. The traditional automotive market is mature, but the niche taken by Tesla is growing like crazy. The leadership at Proctor & Gamble is trying to move their company further away from the mature mass into the growing niches.

Alternative #4: Create a Mature Infrastructure

There are a lot of costs involved in running a business operating in a growth industry. Many of these costs are no longer necessary when a market hits maturity. Places to cut can include:

·         Extensive marketing organizations, and marketing budgets

·         Extensive sales organizations

·         Large engineering and product development organizations

·         Large R&D departments

You can probably get away with lower-priced executives across the board, too. In essence, you make your headquarters as no frills as Aldi’s stores used to be. By gutting the headquarters, you can now survive on the amount of business and margins a mature market provides.

A few years back, Home Depot got a big bump up in profitability when they decided to essentially no longer build new stores. They got rid of all the costs associated with new store growth (including the cannibalization of sales from older stores). When they eliminated all those costs associated with growth, it all flowed to the bottom line.

In another example, who do you think bought up all the Fast Moving Consumer Product Group brands when the big, bloated companies divested all the marginal and most mature parts of their portfolios several years back? It was the no-frills companies who were built specifically to survive in maturity, like Pinnacle Foods.

This type of strategy has to be more than just cutting costs. It needs to include changing the corporate culture to embrace no-frills management. Otherwise, the costs will just creep back in.

SUMMARY
The conditions of a mature market tend to severely squeeze industry profitability. This can force a company into considering a change to their strategy. But not all change is good change. Bad change is to start price wars or damage your appeal by trying to be everything to everyone and end up not being preferred by anyone. Good change includes strategies like fleeing the industry, consolidating the industry, moving from mass to niche, or redesigning your infrastructure for maturity.

FINAL THOUGHTS
I had stopped writing this blog last year because I thought strategic planning had gotten too mature and did not need this blog any more. However, I got some feedback asking me to bring the blog back, so I will periodically add new blogs. Thanks for your support.

Strategic Planning Analogy #519: A Whole Foods Bag at Aldi

THE STORY
Last week, I was shopping at an Aldi supermarket. While there, I saw a shopper in the Aldi store using a reusable shopping bag from Whole Foods.

In case you are not aware, Aldi is a low end, no frills cheap store selling a limited assortment of private label products. By contrast, Whole Foods is a huge, high end store full of high quality organic and Vegan products. Whole Foods is such an expensive place to shop that it is often referred to by customers as “Whole Paycheck.” You could not find two grocery chains at more opposite ends of the spectrum.

But there it was before my eyes—a customer in Aldi who also apparently also shops at Whole Foods. She was well dressed and looked rather sophisticated—a cut above the appearance of many in the store. And she was purchasing low-end private label goods at Aldi using a Whole Foods bag.

I was thinking how strange that was until I realized that I was also shopping at Aldi. Maybe it isn’t so odd after all.

THE ANALOGY
A big part of strategy can be segmentation. Questions debated include “who should be my segment” and “how to appeal to that people segment.”

The problem is the “who.” Did that woman I saw at Aldi belong in the Aldi segment or the Whole Foods segment? It’s obvious that Aldi and Whole Foods are targeting two totally different segments of the grocery business. Yet this woman appeared to fit into both segments. Where should we put her? Which marketing message should she receive?

This is not just a problem for supermarkets. Problems like this crop up all the time in business, where individual consumers do not neatly fit into a single segment. In fact, large portions of the population usually defy simple classification into a single segment. They appear to exhibit seemingly inconsistent behavior, doing different things at different times in different ways. They seem so illogical—defying the logic of my segmentation scheme.

As we shall soon see, the problem is that we often focus on the “who” of segmentation when instead we should focus on the “when” of segmentation. Making this change will vastly improve the segmentation portion of strategy. The illogical will become logical again.

THE PRINCIPLE
The principle here is that superior segmentation is typically occasion-based, rather than individual-based. People react differently based on the situation or occasion. For example, the same individual may:

1. Buy one brand of beer when trying to impress others and a different brand when drinking alone.
2. Go to one kind of restaurant when eating with his/her kids and a different restaurant when eating with their boss.
3. Wear one type of clothing when going to work and another type when exercising at the gym.
4. Shop at a big stock-up grocery store at the beginning of the month just after getting paid, shop at a convenience store to pick up milk when running out in the middle of the week, and shop a cheap store at the end of the month when money is tight. 

Does this inconsistency in behavior mean that these individuals are illogical? Not at all. Every behavior is logical within the context of the particular occasion/situation.

1. When impressing others with beer, price is less important and image more important. Therefore, it is logical to buy a different beer than when drinking alone (when price is more important and image less).
2. A restaurant suitable and desired by children (kid-friendly food and environment) is not one suitable for business lunches with the boss (quiet and sophisticated), so one naturally chooses differently depending on who one is eating with.
3. A business suit makes no sense at the gym and gym clothes make no sense in the office.
4. The amount of money in one’s pocket, the size of the shopping list, and how much of a hurry one is in determines where one go for groceries. As these variables change, so changes the shopping destination.

Therefore, it is the wrong question to ask as to which segment I am in:

1. The image beer or cheap beer segment.
2. The child-friendly or boss-friendly restaurant segment.
3. The suit or sweats clothing segment.
4. The stock-up, convenience, or low price grocery segment.

I’m in all of these segments. It’s like the lady who is both in the high-end organic grocery segment (Whole Foods) and the cheap private label grocery segment (Aldi).

So does that mean that segmentation is worthless? Not at all. It just means we have to move from designing segments around “who” to segments around “when.”

If you look at the “when” of segmentation, then you are looking to own a situation or an occasion. You try to become the ideal solution for anyone whenever they find themselves in that chosen situation or occasion. At that point, that person becomes a part of your segment. And when that person moves on to a different situation, they fall out of your segment. You target the moment, not the person. When the moment is appropriate for your brand, you make your move.

Grocery Example

For example, I did not see that woman at Aldi purchasing any meat or fresh produce at Aldi. When she runs out of those products, that occasion probably prompts a trip to Whole Foods, because she values their extra quality, variety and emphasis on organic. And these attributes are important to her on fresh food.

But I suspect that in order to afford those expensive items at Whole Foods, she needed to save money on items where freshness, quality, variety and organic are less important. Thus, when the occasion comes up to buy basic staples, like rice or pasta or paper plates, she went to the store focused on low price—Aldi. This explains why I saw her in the pasta section at Aldi.

So the occasion/situation dictated which attributes were most important. Then the store which owned the attributes associated with that situation got the business—Whole Foods when the occasion required quality, variety and organic and Aldi when the occasion required saving money. As long as Whole Foods and Aldi continue to excel at their differentiated solution sets, they will win when a person’s occasion causes them to desire that particular solution set.

Steps to When-Based Segmentation

To succeed at when-based segmentation, you need to do the following:

1. Choose a situation or occasion where you can win (your position).
2. Build a business model that makes your brand the ideal solution for the problems most relevant to that occasion.
3. Let people know which occasion-based solution you are relevant for and why you are best qualified to solve the problems relevant to that occasion.
4. Do a good job of getting your brand inserted into the moments when the occasion is relevant.

For example, let’s say that you own a restaurant. The first step is to find an occasion to position yourself around. Let’s assume you choose to own the occasion of business lunches.

The second step is to build a business model that will give you superiority as a place for business lunches. So you start by doing research to learn what is most important when choosing a place for a business lunch. Perhaps the research says that the following qualities are most important: quiet area where you can hold conversations confidentially, close proximity to the office, ability to cater meals, food that has a sophisticated adult taste isn’t messy. Then you build your business to win on these attributes in terms of location, offerings, and skill sets.

Third, you make sure people are aware that you are “the best place for a business lunch.”

Fourth, you try to make sure you are inserted in the moments when that occasion comes up. For example, you may buy ads on search engines for terms like “business lunch.” After all, when people are looking up the term, they are probably entering that occasion. Perhaps you get in good with all the top administrative assistants in the offices nearby. After all, they may be the ones called upon to find their boss a place for a business lunch. If the admins control the choice, then you want to control them when the occasion rises.  

Finally, don’t get upset when all those business people drive home to their families in the suburbs and are not coming to you for dinner. Their situation has changed and they are no longer trying to solve the “lunch with boss” problem. They are no longer in your segment. Their meal needs have changed. And if you try to change your business model to meet these new situation needs, you can ruin your ability to win at the business lunch occasion.

Be patient. They will come back to work tomorrow. And many will need to solve the “lunch with boss” problem tomorrow. Just be ready when they drift back into your situation-based position.

SUMMARY
Segmentation is a key element of strategic planning. Usually, the best segments are those that are defined around situations rather than around individuals. The problem with individual-oriented segments is that individuals act differently based on the situation. Therefore, it is virtually impossible to create a solution that is best for all the situations a particular individual experiences. The better alternative is to choose a position revolving around a particular situation. If you own the best solution for that situation, then you will get the business whenever someone drifts into that situation. And don’t be upset when the customer drifts into a different solution and chooses someone else. Just be ready when they drift back into the situation where you can win.

FINAL THOUGHTS
Follow the solution to the situation, not the individual. If you follow the individual, you will become unfocused in what you offer as you try to be all things to all of their situations. By contrast, if you follow the solution to a situation, you will continue to get better at owning a point of focus.

Strategic Planning Analogy #515: Follow the Recipe

THE STORY
The nice thing about a “To-Do” list is that you can pretty much do anything on the list in any order you want. The individual items on the To-Do list are independent of each other. If I choose to clean the garage first and mow the lawn second, that’s okay. Or if I choose to mow the yard first and clean the garage second, that’s okay, too. Or if I can get a friend to help me and do both at the same time, that’s also okay. All that matters is getting the stuff on the list done.

A recipe doesn’t work that way. Things need to be done in a particular order. You have to measure the ingredients BEFORE you mix them together. You have to mix the ingredients BEFORE you bake them. If you bake before mixing or mix before measuring, you will have a mess on your hands. The recipe will not turn out as desired. Unlike a To-Do list, a recipe needs to be done in the proper order.

This is especially true if you expect me to eat what you make.

THE ANALOGY
There is a long list of activities associated with strategic planning, like coming up with Visions or Mission statements, analyzing the environment, formulating a budget, creating a position, designing KPIs, assigning implementation tasks, and so on. To get it all done in a timely fashion, there is the temptation to treat it all like a To-Do list. Just get every activity assigned to somebody and let them work at—all at the same time.

That may sound efficient at first. But strategic planning is more like a recipe than a To-Do list. Connections and dependencies exist between the tasks. There tends to be a need to do things in a general order. Otherwise, you end up with a mess.

Unfortunately, I see companies skipping steps or doing them in the wrong order. That’s like mixing before measuring and skipping the baking. I wouldn’t accept that in the kitchen, and I won’t accept it in the world of planning.

THE PRINCIPLE

The principle here is that before embarking on strategic planning, get a good recipe and do the tasks in the proper order. In this blog, I will offer such a recipe. Since most recipe books come with pictures of the recipe, I have one, too—as you can see in Figure 1. Click on it to see a larger version.

Learning

I have summarized everything into three major tasks—learning, deciding and doing. These are the planning equivalents of measuring, mixing and baking. The first task is learning—getting smart about understanding the current state and expected future state. This applies to the state of your internal company/brand and the state of the external marketplace where you will compete.

To learn about the external environment, you need to study the consumers, the competition, regulations and other external factors which can impact your success. To learn about your internal environment, you need to look at your strengths and weaknesses and how you get things done.

This learning is a lot like the measuring in a recipe. You are measuring four things—current state, direction, magnitude and speed. This applies to measuring customer segments, competitive positions, technological advancements and internal issues. The four measurements work like this:

1. Current State: What do things look like today (market share, number of people, size of industry, attitudes, threat of Porter’s Five Forces, internal competitive advantages, etc.)? This is a sort of good or bad measurement.
2. Direction: In the future, how will the current state measurement change in size? Will it go up or down?
3. Magnitude: In the future, how massive will those changes in direction be? Will the changes (up or down) be huge or small?
4. Speed: How fast will the future changes occur? Will it happen almost immediately or will it take some time (fast or slow)?

This is not about making precise measurements. Measuring the future is not that easy and precision takes too long (you have to wait until the future gets here before you can precisely measure it and then it is too late to be useful in planning). For planning purposes, it is usually enough to know good or bad, up or down, huge or small, and fast or slow. I talk about this in more detail here.

Deciding

Once you become smart via learning, you are ready for step two in the recipe—to make some key decisions about how you want to play the strategic game. This is where you put together your unique mix of attributes and processes that you will stand for and win with.

Without gathering the knowledge first, your decisions for this mix will be little more than guesses, hopes, or wishes. Yet, I often see organizations start with some decision activities as their first act. They want to dive in and create visions and missions from the start. They want to decisions about what they want to be begin the planning process. It’s like mixing before measuring.

The problem is that is somewhat irrelevant what we initially want our mix to be. That’s because we do not operate in a vacuum. We operate in the context of the environment and time. The idea is not to pick a place that is pretty and desirable. The idea is to pick a place where we can succeed. And the best place to succeed depends on everything else going on in the marketplace relative to our strengths. And we won’t know that unless we do the learning first.

I remember going to a franchising seminar and hearing a lecture from a successful franchisee. He said that some of the most successful franchisees ignore the glamorous businesses and enter businesses which are dirty, ugly and risky. Why? Big corporations tend to avoid the dirty, ugly and risky. This makes them more profitable for the little franchisee. The idea here is that analysis and learning may point you to away from your first choice (the glamorous option) and put you somewhere else which will make you far more successful. Remember, nearly everyone in the smartphone business is losing money. It may be glamorous, but not a place where everyone can succeed.

In making decisions for your strategy, keep in mind the context of yourself within the environment. Make sure the position you choose is seen by the marketplace as desirable, sizable, ownable, preferable, achievable, believable, understandable, and profitable. I talk more about these concepts here. And then, once you have made your choice about what you want to be, translate it into an external message (position statement) and an internal business model (how I must operate to make the position a deliverable reality).

Doing

The third step is doing—the hard work of making your decisions come to life. This is where you “bake” the strategy. This, by necessity, has to come last. Until you make your decisions, how will you know which actions are the right ones to take? Until you know your way to win, you cannot know which are the winnable actions for your business. 

For example, Aldi and Whole Foods are both grocery retailers. Yet they have decided on radically different positions. Aldi aims for the lowest possible price while Whole Foods aims at health, nutrition, and natural/organic. The right actions for success at Aldi are almost the opposite of the right actions for Whole Foods, and vice versa.

It’s not that some actions are always good and others are always bad. Good and bad is determined by the position. A good action for Aldi can be bad for Whole Foods, and vice versa. So how do you know what the right actions are prior to deciding the position?

Yet, I often see businesses rushing to do the actions first. They claim there is no time to learn (or the future is unlearnable) and that consumers make all the decisions. Therefore all we can do is act quickly and learn from our mistakes. I don’t think it’s quite that simple. I don’t want to stick random ingredients in the oven and then taste them afterwards to learn if it is good. Random actions are not as efficient as making the right action tradeoffs based on a chosen position.

The “doing” actions you choose to prioritize need to address both internal and external challenges. Externally, one needs to convince the customers and the supply chain that you own our position and that it is in their best interests to prefer us. Internally, we need to be sure we have a model capable of delivering the position.

Cycles

Those who want the “doing” to come first aren’t entirely wrong. There are some things which are best

learned via doing and experimenting. But that doesn’t mean that you skip the traditional learning and deciding steps. It means you use the “doing” actions of your current planning cycle to begin the learning of the next cycle.

You can see this in Figure 2. Planning is a continuous series of cycles. Just as you don’t just eat once and quit eating ever again, you don’t just plan once and quit. The planning process never really stops. When you get to the end of one cycle, you use what you learned to influence the next cycle.

SUMMARY
Strategic planning is more like a recipe than a To-Do list. Good planning tends to do things in a particular order, without skipping steps. First you learn by measuring what’s going on (and expected to happen) in the internal and external environments. Then you decide how you want to mix together attributes and processes in order to create a position and business model which optimizes your chances for success in that environment. Third, you “bake” your strategy by doing the implementation actions which make your mix decisions a reality. Finally, you use what you learn from those three steps to do an even better job in your next planning cycle.

FINAL THOUGHTS
This recipe for planning isn’t 100% etched in stone. There is room to experiment with this recipe. But don’t throw it away.

Strategic Planning Analogy #481: Law of Extremes

 

THE STORY
Back about 40 years ago, Wal-Mart had not yet fully cemented its image as a low cost leader.  Other retailers were still challenging Wal-Mart on price supremacy.  One of those chains was TG&Y variety stores.

TG&Y decided to get into a price war with Wal-Mart.  The item chosen to go to war over was a pair of jeans.  TG&Y would lower the price on jeans and Wal-Mart would retaliate with an even lower price.  This pattern continued for many rounds.

Eventually, Wal-Mart dropped the price of jeans to 9 cents a pair.  At that point, TG&Y gave up and stopped the price war.  Wal-Mart had won supremacy on price, and not too long thereafter, TG&Y ceased to exist.

 

THE ANALOGY
Yes, 40 years ago, you could buy a lot more for 9 cents than you can today.  But even 40 years ago, 9 cents was an unrealistically low price for a pair of blue jeans.  Every jean sold at 9 cents would be a huge loss for Wal-Mart.  But that was the sacrifice Wal-Mart had to make in order to win the image of price against TG&Y.

Times may have changed in the last 40 years, but this type of activity still goes on.  Business leaders understand the value of owning an image and will go to extremes in order to win that image.  This seems especially true on the internet. 

In order to create a large network, internet firms will go to great lengths to get people hooked into their system.  Most end up giving away their product for free.  Other go even further by “paying” people to get on-board, either with badges, coupons or some other form of promotion.  It’s hard to make a living if you have to pay people to use your product.

And it’s not just price where companies go to extremes.  Luxury automobile brands are fighting against each other to own the word “luxury.”  They keep upping the ante by adding ever more exotic features to their automobiles.  At some point, even many luxury auto buyers will balk at paying the premium so that auto makers can get an adequate return on investment for these exotic features.

For most auto dealers, the maintenance area is among its most profitable areas, even more profitable than selling cars.  But, to increase the luxury treatment experience, many luxury dealers are throwing in maintenance for free.  Now, they’ve cut off a key source of profits.

The world is very competitive.  It takes a lot to dramatically own a position in that competitive market.  Every winner has to go to extremes to own their position, be it in price, luxury, service, convenience, technological innovation or whatever.  It’s as if the whole world is becoming the equivalent of 9 cent jeans—a world where the only way you can win is to create a costly, unsustainable extreme.

How do you create a profit if the entry level cost to achieve a winning position is unsustainably high?  That requires a sophisticated strategy.

 

THE PRINCIPLE
The principle here has to do with what I call the Law of Extremes.  It is one of my 23 laws of strategy.  (I know I said in an earlier blog that it was 22 laws, but I’ve since added another law.)  The law of extremes goes like this:  “Creating performance levels needed for ownership requires trade-offs and subsidies.”

Another way of saying this is that when the core business can no longer sustain the extremes, you have to:

1)      Add secondary businesses (called subsidies) to provide cash to cover the extremes; and/or

2)      Subtract secondary activities which take away cash from the building the extreme position (a process called trade-offs).

We will look at each of these separately.

Subsidies

Subsidies are non-core activities or businesses which are principally done only to fund the core.  An example of this practice is the “Freemium” model used by many internet businesses.  The idea is that the core business is free.  Yet in order to afford to give away the business for free, a small subset (often under 3%) pay a price in order to get premium extras.  In other words, around 3% of the users of the internet site subsidize the activity of the other 97% so that the site can make money.  Many internet sites use a freemium model like this, including Linkedin and Pandora.

Another subsidy common on the internet is to use advertising.  If you cannot get the users to pay for your extreme pricing position of free, then you have to get advertisers to pay for the site.  Another subsidy example is when internet sites sell information about you to other business that would pay for that information (watch out when companies put cookies on your device—it can be their door to a subsidy business selling your behavior).   

This subsidy phenomenon also occurs in the retail space.  In consumer electronics, the pricing policies are very extreme, often selling the main items near or below cost.  To subsidize these prices, the retailers need to bundle profitable subsidy purchases to the transaction.  A familiar one is the extended warranty, which is often more profitable to the retailer than selling the item being insured.  Other examples are selling ad space on the screens of the computers being sold, selling extra ink with the printer, selling smartphone accessories, and so on.

This is also seen in fast food restaurants where the core hamburger is sold at a loss and is subsidized by the sales of more profitable french fries and beverages.  (I’ve gotten in the habit of buying a second burger instead of the fries in order to get a better extreme value for myself). 

The irony here is that in a world of extremes, the core business becomes almost like a loss-leader for the subsidy add-on businesses.  At some point, it’s hard to tell what is the real core business anymore.  IF the subsidies are where all the profits come from, does that become the new core?  The extreme image won with the traditional core could now be seen as a loss leader positioning to mask the real positioning, which is to be best at selling the subsidies.

It goes to show that business strategies are getting more complex.  If subsidies are not integral to your business model, the model may no longer work in a 9 cent jeans world.

Trade-Offs

If subsidies are about adding income to the business, then trade-offs are about subtracting costs from the business model.  The principle behind trade-offs is as follows.  If you try to be all things to all people, you will probably never obtain an extreme position on anything.  For example, if you try to be the highest quality, lowest priced and fastest in innovation, you will have to make compromises which will prevent you from being the most extreme in any of these attributes.   There will be specialists focusing on only price or only quality or only innovation which will be the most extreme and win the battle for these positions. 

Therefore, to win in one space, you may need to stop pouring money into other spaces, so that more money can be funneled to the space where you want to win.

An example would be extreme low price “hard discount” grocers, like Aldi, Save-A-Lot, and Lidl. They have prices substantially below conventional grocers—extreme enough to win the low price image.  Yet those low prices are sustainable because these firms make trade-offs.  They stop doing many things the conventional operators do which add costs.  Examples include:

1)      Smaller, Less Costly Assortments (only one brand in one size per category)

2)      Eliminating Lower Margin Branded Goods by Going Direct to the source to create their own brand.

3)      Large reductions in labor by not having service departments, not stacking products individually on shelves, etc.

4)      Lower rent by building smaller stores in less prime real estate.

By trading away variety, ambiance, convenience, selection and other such factors, they can divert cash flow from those activities into sustainable extreme prices.

Southwest Airlines is another example.  They make money when other airlines don’t because they do more trade-offs than traditional airlines.  Activities like only selling point to point tickets, refusing to sell tickets on third party travel websites, focusing on only one-sized plane, and other non-conventional approaches, they have eliminated a lot of costs borne by their competitors.  This allows them to focus on the things important to their image and still make a profit.

The idea with trade-offs is that your successes is defined as much by what you don’t do as by what you do.  Your strategy needs to delineate what activities go onto each list (the do’s and the don’ts).

SUMMARY
In a highly competitive world, it takes extreme levels of performance in order to win a position.  Gaining extreme positions is costly.  In order to afford the cost and still make a profit, firms need strategies about subsidies and trade-offs.  Subsidies are the add-on activities which provide extra cash flow beyond the core.  Trade-offs take away activities which to not reinforce the extreme position in order to provide extra cash flow to invest in the extreme.

 

FINAL THOUGHTS
The things which “delight” the customer tend to “deplete” the cash of the company.  To remedy the situation, the company needs to “destroy” unnecessary costs and “deploy” subsidy businesses. And that is “de-truth.”

Strategic Planning Analogy #468: Defeating Concrete

 
THE STORY
The previous owners of my house had put up a pole in the back yard to connect a clothesline to the house, so that one could hang wet laundry outside to dry.  I did not dry clothes outside, so one day I decided to take down that pole.

The job was a lot more difficult than I thought it would be, because the pole was secured in place with concrete.  I had no idea how much concrete was used until I tried to dig out the pole.  The previous owners had used a lot.

With a great deal of effort, I eventually got the pole out of the ground.  Then, I took a hammer to the concrete in order to break it up into smaller pieces.  I was able to discard the smaller pieces of concrete in the trash can.

 

THE ANALOGY
There is something about concrete which seems permanent.  Once it hardens, it appears like it will last forever.  But I was able to destroy that concrete in my backyard.  The pole was no longer permanent.  I threw it all away.

In the business world, market conditions can also seem quite permanent, like concrete.  This feeling is especially true in mature businesses.  The market has already consolidated; the few remaining players have staked out their positions.  It looks like nothing will change—it is as if everything is secured in place with concrete.   However, just as I was able to get rid of the concrete in my back yard, market conditions can also change, even in mature markets.  A seemingly solid position, like that pole, can be thrown away.

Therefore, we cannot sit back and relax.  We cannot rely on the markets to stay unchanging as if set in concrete.  We still need strategic planning.

 

THE PRINCIPLE
This is another blog which tackles arguments for abandoning strategic planning.  In the past, we refuted the argument that certain markets are moving so fast that strategic planning is irrelevant.  In this blog we refute the argument that certain markets are moving too slow to require strategic planning.

Let’s face it.  Although emerging nations and new industries are exciting to talk about, most companies operate the majority of their business in relatively mature sectors or markets.  Mature markets tend to have the following characteristics:

1)      The market is consolidated down to a few players (who don’t change much over time).

2)      The reputations and brand positions of the remaining players are well set (like concrete) and it is difficult to change a customer’s long held perceptions of the remaining players.

3)      Changes in market share are very small and don’t tend to occur very often (like they are set in concrete, too).

 
      4)      The rules for how everyone plays the game appear to be set in concrete as well.

In such an environment, many will reach the conclusion that sophisticated strategic planning is a waste of time and money.  If everything is set in concrete, then why bother spending a lot of effort trying to change it with strategy?  Focusing on doing things a little better and a little cheaper is all you can do.  So stop wasting effort on strategy and just work a little harder and a little cheaper.

However, as we saw in the story, concrete may not be as permanent as it appears.  Change still happens.  And we can become the unfortunate victims of change if we do nothing, or we can take advantage of change if we work to destroy the concrete as I did in my back yard.

Coke Vs. Pepsi

Think about Coke versus Pepsi.  The cola market is very mature in most places.  Coke and Pepsi have eliminated or weakened most of the serious challengers.  Growth is minimal overall and market share doesn’t change very much.  If you are a dedicated Coke drinker, you are probably not going to suddenly shift your alliance and dedication to Pepsi.  The individual brand images have been too strong for too long.

So, why should firms in mature markets like Coke & Pepsi concern themselves with sophisticated strategy?  Because it still matters.

1) The market may be set in concrete, but customers can walk away.

If all one does is focus on doing the same thing better or cheaper, one gets myopically focused on the false assumption that there are no alternatives.  Everything appears to take place in my little area of concrete.  But customers can use your concrete as a sidewalk to move to another market.

Yes, core consumer problems may last forever, but the way they satisfy the problem can change radically.  I may always have thirst, but I do not have to drink a cola.  Starbucks started a revolution to make coffee-based drinks a viable alternative to cola for an entire generation.  Trends in health, wellness and other events have created a rise in demand for fruit drinks, energy drinks, vitamin drinks, etc.  Suddenly, the mature cola industry is becoming a declining industry.

If your feet are stuck in your own industry’s concrete, you may not look up to see the customer revolution and you may not be able to move fast enough to get to where the customers are going.  Suddenly it is no longer a war between Coke and Pepsi.  You are fighting a whole host of alternatives who are not playing by the old rules.

Radical changes can come from all sorts of places.  People are buying fewer watches because they can just look at the smartphone which is always in their hand showing the time of day.  Why buy a newspaper when you can get live updates from everywhere all the time in the digital space?   Why buy meal ingredients at the supermarket and spend the time preparing them when restaurant value meals can be cheaper, easier and faster?

Strategic planning is needed to spot these radical changes before it is too late and then prepare a response.  Perhaps if you make watches, you need to reposition yourself less as a timepiece and more as a piece of jewelry.  Perhaps if you are a supermarket, you need to sell your own value meals.  If you are a newspaper, perhaps you need to radically transform your entire business model.  If you are Coke or Pepsi, you may need to diversify.  Finding and building the right response can take a lot of time and a lot of thought.  An ongoing strategic planning program gives you that time and that thought. 

If you wait until the revolution sneaks up on you, then it is too late.   At that point, all you can do is either acquire into the revolution at a price which is too high to make a decent return, or sell out of the old business at a price which is too low to make any of your stakeholders happy. 

Just working a little harder and cheaper at making Coke or Pepsi will not get someone to stay if they find that coffee or fruit juice or energy drinks are a better solution for them than cola.  And if that is all you do (the status quo a little harder and cheaper), that concrete is going to look more like a granite tombstone.

2) Rules are just words on a piece of paper.

Just because something has always been done the same way does not mean it is the only way.  Rules are just words on a piece of paper.  They do not have to be etched in stone (or concrete).  If you rewrite the rules, perhaps you can get a huge advantage—even if the market is labeled as “mature.”

Retailers like Aldi in grocery retail and Ashley in furniture retail found a way to reinvent mature businesses by re-writing the rules.  They designed their own specifications and went directly to the factories to have products manufactured just for them.  By cutting out the middle man, they were able to improve margins while cutting prices.  This gives them an edge over people playing by the old rules.  A similar event occurred when “fast fashion” retailers like H&M and Zara rewrote the rules about inventory (much less) and fashion seasons (much more) and made huge gains in an otherwise mature business.

Apple rewrote the rules about how music got distributed and became a leading player in a market where they had no prior presence.  They broke through the concrete because they saw it as merely paper—a place where they could write new rules.

Rethinking an entire business model does not come out of just doing the same old thing harder, faster, and cheaper.  Working intently on carbon paper will not create the photocopier.  Working intently on books will not make an e-reader.  No, new business models require new thinking.  And if you eliminate strategic planning, there will not be a strong advocate for encouraging out-of-the box thinking and experimentation on a regular basis.

And if you only work on executing the old rules better (rather than looking for new rules), you will be surprised when a competitor rewrites the rules and takes most of your business away.

 

SUMMARY
Labeling a business as mature does provide an excuse to eliminate or dilute the strategic planning effort.  Radical improvements can still be gained if one uses strategic planning to either find ways to move to new solutions with the customer or to find ways to rewrite the rules for offering the old solutions.  Conversely, if you stop this type of planning and your competition (current or future) do not, then others will get those radical improvements at your expense.

 

FINAL THOUGHTS
In a mature business, don’t think of strategic planning as an expense to be cut, but as a doorway to leaps in opportunity that cannot otherwise be found when the status quo is hardening.

Strategic Planning Analogy #242: Normally Speaking

THE STORY

Here in the United States, I am treated like an odd alien from another planet because I prefer to drink my soda at room temperature.  However, when I am in Europe, that behavior is considered to be normal.  I like mayonnaise on French fries as well, which makes me appear odd in the US, but normal in parts of Europe.  I also think US sweets are "too sweet," and prefer some of the less sweet treats from Europe.

 

Perhaps when I was a child…in the middle of the night…some mad scientist switched my taste buds with the taste buds of someone from Europe.  That might explain my cravings for food at odd hours—my taste buds are in the wrong time zone!  Of course, having transplanted tastebuds (a sort of Frankenstein-of-the-Tongue) would make me odd most anywhere.

 

THE ANALOGY

What is normal?  As we saw in the story, what is normal in food taste tends to depend on where you were raised.  Normal cravings in one place are seen as quite odd in other places.

 

But it doesn't end with just location.  Look at the usage of new media by age.  What a twenty-something thinks is normal usage of new media would seem abnormal to many older people, and vice versa.

 

And stand out of the way when many people of opposing political viewpoints start to argue.  Each sees their viewpoint as "normal" and reasonable.  They find the opposition to be odd at best, and insane or dangerous at worst.

 

Even things as mundane as brushing teeth can challenge the concept of normality.  Proctor and Gamble tried to determine the normal teeth brushing routing routine, so that they could design the ideal tooth paste.  They found no normal.  Some wet the toothbrush before putting on the paste, some wet the toothbrush after putting on the paste, some don't wet the toothbrush at all.  And that's just the beginning of the tooth brushing routine.  Once the toothbrush enters the mouth, even more variety in behavior occurs.

 

We live in a highly fragmented world.  There are so many different lifestyles, attitudes and ways of everyday living.   And the trend appears towards even more fragmentation.

 

At some point, even the notion of there being a "normal" seems quaint and old-fashioned.  We are told to "celebrate diversity" and see those who propose conformity to a norm as "narrow-minded."

 

As a business, this poses some strategic challenges.  How do you create a business strategy in a "post-normal" world—a place where the idea of normal ceases to exist?

 

THE PRINCIPLE

Business strategies are executed out in the marketplace.  If the marketplace is diverse enough to make normalcy obsolete, then strategic choice—how to win in that marketplace—becomes less obvious.   The good news is that in a diverse marketplace, there is not just a single best way to win.  If someone has already locked up a solid position in the market, it doesn't mean that you've lost your chance.  With all that diversity, you are more likely to find a different strategic path where you can also win.

 

The bad news is that fragmentation decreases the size of any behavior segment, so that when you win your audience, it may be too small to support your infrastructure.  Economies of scale are harder to obtain (although the digital world often tends to reach scale sooner than the physical world).

 

Listed below are five generic approaches for trying to reach a post-normal world.  As we will see, some approaches are better suited for this world than others.

 

1.  Fight for Average

In order to maximize scale, one can aim for offering a single solution targeted to satisfy the average within the diversity.   In other words, if diversity scatters behavior randomly in all directions, the single position which is closest to each individual would be the position in the middle—average features, average prices, average performance, and so on.

 

In a world without normal, this can be the most dangerous position to take.  There is no longer the large bulk at the center of a tall, bell-shaped curve.  The dispersion of people is more equalized, putting fewer people close to the center.

 

Average at everything means you are the best at nothing.  Trying to please everyone a little bit rarely works, because you are not competing against others who are also striving for average.  You are competing against hoards of specialists.  Although none of the specialists have broad appeal (and may actually be hated by more people than your average approach), for each demand group one of these specialists will be preferred over your average approach. 

 

As a result, an average approach may never come in last, but it will never come in first.  The average of black and white is gray.  If you offer gray, you appeal neither to the whites (you are too dark) nor the blacks (you are too light).  Middle of the road products and retailers have been losing out to specialists for years. We talked about this in greater detail in a prior blog.

 

2.  Do it All

If trying to cover everyone with a single go-to-market strategy targeted at average is wrong, then how about the opposite?  There are two ways to do this.  The first is to try to be the absolute best at everything in a single offering—the perfect product.  The second is to offer a near infinite assortment of offers, each targeted at a different fragment.

 

Lucky you if you can pull off the single perfect product.  It is extremely difficult to do because there are usually trade-offs which make this impossible.  Adding more features creates complexity, which fights against simplicity.  It is nearly impossible to best at all and be best at price.  In addition, there probably is no consensus anymore on what "best" really means.  Some may think the best design is contemporary while others may think traditional design is best.  For some, bigger is better…for others, smaller is better.  Best is no longer an absolute term in a post-normal world.

 

The reality is that if you are going to get a product out in the marketplace at a reasonable price, you have to make trade-offs.  You cannot afford to do it all at the level of perfection.  Customers are willing to make trade-offs to get what they want at a price they can afford.  They will migrate to firms who offer their ideal trade-off.  If you do not trade-off as well, you may be priced out of the market.

 

But then, to create a near infinite amount of trade-off offerings (one for each fragment) has its own set of problems.  First, you may not get enough scale for any one of those offerings to create a profit.  Second, you can create brand confusion.  It's hard for a brand to be known as best at everything.  If all these products come out under the same brand, it can confuse a customer as to what the brand really stands for.  In addition, customers will not believe that a single brand can be good at producing that many varieties of trade-offs.  Generalists are not usually viewed as powerful a brand as specialists.

 

So "Do it all" is difficult pull off in a post-normal world as well.

 

3.  Cluster Portfolio

If trying to please everyone with one product (as average or as best) doesn't work, and trying to please everyone with near infinite products doesn't work, how about something in between?  This would be to create a portfolio of a manageable number of offerings which are best or average for large sub-sectors (clusters) of the marketplace.  This tends to be the approach taken by people like Proctor and Gamble.  They have great technological expertise in paper/absorbency.  How do you exploit your full potential with that competency?

 

With toilet paper, the Charmin brand uses four sub-brands to cover the bigger niches: Ultra Strong, Ultra Soft, Basic (price) and Plus (with lotion).  With paper towels, there are three basic niches for the Bounty Brand: Extra Soft, Regular (thick and stylish), and basic (cost).  With diapers, Luvs stands for price and Pampers stands for good parenting.

 

The trick is to find the sweet spot between covering more fragments without diluting the brand.  If you can find that sweet spot, you may be able to get the best of both worlds—economy of scale plus specialized trade-offs.

 

4. Laser Focus

One strategic option reasonably well suited to the post-normal world is the laser focus.  Choose a relatively large niche in the marketplace and own it better than anyone else.  Specialize in understanding the niche and meeting its unique needs.  Essentially forget about all the other diversity.  Aldi isn't trying to please everybody, nor is Whole Foods.  Each has found its own niche in the grocery marketplace and is exaggerating its offering to the tradeoffs most desired by that niche.  They don't care that others may hate their offering and never patronize them.

 

Although the world may no longer have a normal, there is usually an agreed upon normal within the niche.  In fact, it is their version of normal which tends to define that niche.  Play to that normal (ignoring the rest), and you can win, provided the niche is large enough. 

 

5.  Enable Personalization

Rather than specializing in the final product for every fragment, how about providing the means so that every fragment can create their own?  A good example is Zazzle.com.  At Zazzle you can get the ideal t-shirt just for you.  They have an enormous number of customizing options.  And if you do not like any of them, you can create your own individual customized look and they will make it for you.  There are tons of firms like this who will customize clothing, food and other everyday needs to your individual tastes.

 

In this web 2.0 world it is easier to work with the customer, allowing them to customize and personalize their own unique solution.  Your solution is no longer the end product.  Your solution is to be the enabler that allows each fragment to find or build their own unique end product.

 

SUMMARY

In a post-normal world, a one-size-fits-all strategy is out of place.  It is better to either narrow your strategy to a single niche, pick a small cluster of niches, or enable the fragmented world to create their own unique solution.

 

FINAL THOUGHTS

Next time someone accuses you of being abnormal, just say thank you.  In a post-normal world, that is a complement.