Strategic Planning Analogy #485: Unconventionality

THE STORY 
Sometimes when my wife and I are on a road trip together, I’ll have fun by telling her that I want to race her to the destination.  Of course, that’s a silly suggestion, because we’re both in the same car.  As a result, we will both get to the destination at the same time.

I think that the very silliness of the suggestion is hilarious.  My wife thinks the very silliness of the suggestion is quite stupid.  So I laugh and she frowns.  But every once in awhile, I still bring up the suggestion when on a road trip.   

THE ANALOGY

If everyone is in the same car, they will arrive at the destination at the same time.  It kind of takes the fun out of being in the race, because there is no way to get a lead over everyone else.  It makes the whole idea of racing kind of silly.

Yet, I see businesses doing this all the time.  The company will set up all kinds of goals to win and to exceed the performance of everyone else in their industry.  The goals are quite impressive.

But when you ask them how they are going to win and achieve those goals, the game plan is to operate by the traditional rules of their industry.  My response is, “How do you plan on beating everyone else if you are doing the same exact conventional activities as everyone else in the industry.”

To me, that makes as much sense as trying to win a road race by piling all the drivers into the same car.  For if everyone in the industry is playing by the same conventional rules of operation, you are in the same car—the car of conventionality.   You are running the race the same way, with the same tools, same business models, the same processes, the same strategies. 

How can you expect to pull away and win a decisive victory under those circumstances?  I don’t care how impressive your goals are.  You haven’t shown me a way to pull ahead and win.

THE PRINCIPLE

The principle here deals with another one of my 23 laws of strategy, the Law of Unconventionality.  This law states that: “You do not achieve unconventional profitability with conventional business models.”  In other words, you do not meaningfully beat your competition if you are doing the same thing they are.  If you want unconventionally high levels of profits, you have to do unconventional things.  You have to get out of the same car of conventionality that everyone else is in and get a car of your own—a car that runs a better race.

Why Conventionality Won’t Win the Race

The problem with conventional methods is that they provide little room for differentiation.  If everyone is going after essentially the same customer in mostly the same way with basically the same offering, all the competitors will look about the same to the consumer base.  There is no natural reason for a customer to prefer one competitor over the other.

Without any meaningful natural differentiation, the only way to get an edge is by “bribing” customers with lower prices or added freebies.  Of course, the other competitors will follow, causing a downward price and profit spiral.

That is why the profitability of industries tend to drop over time and mature industries have returns which are about the same as the industry cost of capital. 

The Need to Differentiate

If there is an outlier in an industry who is beating these odds and making high levels of profits, I’ll bet you it is because they are not following the conventional rules of the industry.  They are doing something very different—playing by different rules.

Southwest Airlines has superior profits over conventional airlines because it doesn’t play by conventional airline rules.  It runs a point to point system with different rules on seating, ticketing (won’t use other ticketing sites online), baggage, fuel purchasing, employee relations and host of different things.  By playing by different rules, it has a lower cost structure and an offering which is superior to a significant sector of the population.

Geico made a splash in the insurance industry by running against the conventional approach of selling insurance personally through a huge network of insurance agents.  Instead, they put the money into advertising and call centers and cut out the agent fee, putting that money into other benefits.

Ashley Furniture gets higher than average returns for furniture retailers by direct sourcing much of its furniture from low cost countries and bypassing the branded furniture manufacturers which the conventional furniture retailers use.

Amancio Ortega became the third richest person in the world by re-writing the rules of the fashion industry.  Instead of running the business around a handful of fashion seasons each year, he built a system based on continuous replenishment.  This system supports his Zara stores in a new way, called “fast fashion,” which is very profitable, because it is a much more productive use of capital and inventory than the conventional fashion operators.

Apple became one of the highest valued companies by avoiding the conventional approach of specializing in either hardware, software or distribution and build an integrated, closed system.  It also changed the rules by focusing on elegance rather than just functionality.

Differentiation Breaks the Bribery Trap

When you do things differently, you give yourself a natural edge.  Either you create cost savings the competition cannot copy so that you can profitably underprice them, or you create superior preference so that customers are willing to pay more for your offering.  Either way, you get to zoom past the conventional operators in the race to profits.

Apple has had long lines of people waiting to full price for their integrated offerings, because many consumers thought their different approach made it worth the effort to get one. 

Because Zara sells through its offerings so quickly and replaces them with something different, people learn that it is useless to wait for items to go on sale.  You have to buy it at full price right away.  And because of their different cost structure, Zara’s full price is still a good deal relative to conventional operators.

The Limitations of Bechmarking

This is why benchmarking is only of limited value.  It helps you to understand how others do things, but it doesn’t tell you how to do things differently from everyone else.

If you are falling behind in the race, benchmarking can help you find a way to get into the car of conventionality.  At least then you are no worse than average and can ride with the rest of the conventional operators.

Or, if you see someone breaking away from the pack, benchmarking can help you figure out how to get inside their car.  For example, others like H&M and Forever 21 have copied much of Zara’s business model, which is starting to make that the “new conventional” model.

But benchmarking won’t tell you how to become the next Southwest, Geico, Apple or Zara.

Sources of Differentiation

There are lots of ways to become unconventional.  It can be done by going after a different customer base, offering a different bundle of benefits, offering a radically different way to solve an old problem, changing how a solution is delivered, changing how an offering is paid for, and so on.  There is not enough room in this blog for all the creative ways to break the mold.  Look for your creative way and you’ll be pleased with the results.

SUMMARY

If you run your business the same way as everyone else in the industry, you will never break away from the pack.  You will be stuck in a world lacking differentiation—and the added profits which come from differentiation.  Only unconventional approaches lead to unconventional returns.

FINAL THOUGHTS

A popular old circus act was to have dozens and dozens of clowns pile out of a tiny car.  If you stick to doing things the conventional way, you are like one of those clowns stuffed into the car of conventionality.  And those clowns get laughed at.  Do you want to be laughed at?  If not, get a car of your own.

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.