Strategic Planning Analogy #537: Three Questions (Part 2)

THE STORY
For as long as anyone can remember, there had been the ice brigade at the US Congress building. The 29 employees with this job had the responsibility of making sure every congressional office had a bucket of ice by its door before 9AM every morning.

Nobody remembers when it started, but the tradition pre-dates air conditioning and mini-refrigerators. The idea was that Washington, DC can get very hot. Ice could be used in a number of ways to help counter the heat, either externally or internally.

Of course, now that congress has air conditioning, mini-fridges and other ways to conquer the heat, those ice cubes were less necessary. Yet they still came, every day, like clockwork. Many of the ice buckets were just thrown away each day by congress people who did not want it.

Finally, in 1994, Republicans took over control of Congress and started a program to eliminate waste. They saw the ice delivery program as an unnecessary waste and the practice stopped May 1, 1995.

Another waste looked at during this time was the fact that even though every elevator in the building had self-service buttons which anyone was capable of pushing, each elevator had a paid employee to operate those buttons.

THE ANALOGY
Time changes things. Something which may have made perfect sense in the past may be foolish today. Yes, there was a time long, long ago when ice deliveries to congressional offices made sense. But times changed, making that no longer necessary or even particularly desired. Yet the practice continued for decades.

Similarly, when elevators were first invented, it made sense to have elevator operators. But the elevator technology advanced over time to the point where elevator operators had become unnecessary and obsolete. Yet they were still there, working away in congressional elevators.

We may see these as silly and obvious examples of being out of touch with the changing times. Surely, our business would not get that out of touch with the changes in the world around us, would it?

Well, there are business bankruptcies every day, and many of those bankruptcies are due to the fact that a company did not adequately adapt to the changing times. The digital revolution made a lot of analog businesses look rather silly and out of touch—leading to many bankruptcies. For example, Kodak was an expert at analog film. But in a world of digital imaging, they seemed as necessary as elevator operators or ice deliverers in congress. The social revolution is having a similar impact.

Therefore, we must always be on guard to ensure that the times are not passing us by and making us silly relics of the past. Even congress eventually figured this out and did something about the relics around them. I assure you that the marketplace will act quicker than congress. 

THE PRINCIPLE
This is the second of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

1. What problem are you trying to solve?
2. Why should the customer naturally prefer your solution over the alternatives?
3. What are you doing differently to prove your superiority?

In the first blog, we looked at the first question. We saw that successful companies focus on solutions rather than products. Multiple products can be focused on the same solution, and multiple solutions can be had for the same product. Therefore, if you want to win in the marketplace, you need a strategy concerning which problem you want your product to solve.

Now we will turn our attention to the second question. Once one comes to understand that consumers choose based on which product is best at solving their problem, one realizes that the goal of their company must be to supply the best solution to their customer segment. In other words, you need to get a consumer segment to prefer your solution over all of the alternatives.

Understanding the Alternatives

If you want to be the preferred alternative, then you had better understand who the alternatives are. As we saw in the last blog, alternatives can come from products quite unlike your own. For example, many luxury brands can solve the problem of providing prestige or status. This could be anything from fashion clothing to automobiles to the latest technology to trophy wives to the liquor you drink to exotic vacations to yachts to whatever.

The point is that being the best at your particular product may not make you preferred if other products are better at solving the underlying problem.

For example, there is a big difference between the way high school students act today versus when I was in high school. The underlying problem for most high schoolers has not changed over the years. They are still looking for ways to achieve status and fit in with the cool group. The preferred solution, however, has changed.

In my day, clothing was a key way of solving this problem. If you wore the right status clothes, you got an edge in achieving status and fitting in with the cool group. Today, however, clothing is not the preferred solution. Just look at firms like Abercrombie & Fitch who built their entire strategy around being the best status clothing for high schoolers. These firms are doing poorly in the marketplace because students are looking for status somewhere other than in clothing.

Instead, students have found that having the coolest technology is the preferred solution over coolest clothes. In order to afford the coolest technology, students have shifted their clothing purchases to value brands like H&M or Forever 21. In fact, I just read where thrift stores are a hot place for teens and young adults. So now, clothing is looked at as a place to solve the problem of saving money in order to afford cool technology rather than as a solution for cool.

This leaves Abercrombie & Fitch out in the cold. Even if they are the coolest clothing retailer, it is irrelevant if the preferred cool solution is from technology, not clothes.

So understand the full spectrum of options for your customer. If your offering is not preferred over these alternatives, either change your offering or change your solution. Even Abercrombie & Fitch is starting to figure this out and is repositioning its Hollister brand to be less of a cool solution to more of a stretching your money solution.

Staying Relevant

Since times change, technology changes, competition changes and consumers change, one has to continually monitor the marketplace to ensure that your solution remains the preferred alternative.

For example, think of all the ways the smartphone and all its apps have changed people’s expectations and behaviors. Much of this new behavior is because the smartphone and its apps are being seen as preferred solutions over the older ways of doing things. If mobile is not a part of your solution, you may becoming as relevant as ice men at congress or Kodak in imaging.

Alternative If You Are Not Naturally Preferred

Let’s say you have not created a clear preference for your solution. Perhaps you have parity with the leaders or near-parity. You may think that’s pretty good.

But here’s the problem: if you cannot win them over with natural superiority, then you have to win them over with artificial superiority, which I call bribery. I don’t mean the illegal type of bribery. I just mean you have to sweeten the value by offering large discounts or added goodies. In other words, you are essentially paying them to pick you, because the natural offering alone is not enough to create preference.

And we all know what those discounts and added goodies do to our profitability formula. They transfer the benefit from us to the customer. There had better be an awful lot of price elasticity in order to cover the loss of profits per item. Unfortunately, in a highly competitive marketplace, the competition will tend to match your bribery, so no advantage is had anyway. You just lowered the profitability for the entire industry.

Segmentation

The goal here is not to be preferred by EVERYBODY. That is unrealistic since people are seeking value in different ways. You cannot be the best at pleasing everyone with the same offering. Trying to please everyone usually means you are preferred by no one.

Therefore, the goal is to choose a consumer segment for whom you can create the preferred solution. The chosen segment should be large enough to satisfy your requirements.

SUMMARY
Of the three important questions, the second one is “Why should the customer naturally prefer your solution over the alternatives?” Preference is important because without natural preference, you have to lower profits through bribery in order to lure business. Worse yet, your solution may be so irrelevant that even bribery will not be enough to create preference.

Since times change, you have to be constantly on the lookout to ensure that your solution remains preferable through time. Otherwise, you may need to change your offering or change your solution.

FINAL THOUGHTS
Superiority is determined in the mind of the customer, not in your laboratory. When determining whether you are the preferred alternative, ask your customer segment, not your employees.

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 #473: Multiple Choice

THE STORY
When I was a child in school, I preferred multiple choice tests over true or false tests.  With multiple choice tests, I found it relatively easy to guess when I did not know the answer.  In nearly all cases, the correct answer would be the option that had the most words in it.  So when I didn’t know the right answer, I’d pick the wordiest option.

True or False answers were harder to guess.   You either wrote a “T” for true or an “F” for false.  One was not wordier than the other.  For awhile, I tried to perfect the writing of an answer that looked half-way between a T or an F.  It sort of looked like it could be either a T or an F.   My hope was that the teacher would be biased towards correct answers when grading and that my half-way letter would be interpreted as the correct answer due to that bias.  But that method was not as reliable as the multiple choice guessing method.

 

THE ANALOGY
In the business world, it often seems as if executives look at sales as being like a true or false test.  The question goes something like this:  “Did you get the sale? (T or F).”  And from the point of view of the executive answering the question, this seems logical.

The problem with this approach is that it does not provide any insight into the selling process.  It doesn’t help us answer a variety of essay questions, like:

1. Why did we get (or not get) the sale?
2. What would cause us to get more sales?
3. What is causing us to lose sales?
4. What approach should I use to get the next sale?
5. How can we make our sales more profitable?

Worse yet, I think the true or false approach wrongly distorts the way we look at the selling process.  Yes, from the company’s perspective, getting the sale is a true or false event.  However, from the point of view of the potential customer, the event is much more like a multiple choice question. 

The consumer has lots of choices for how to spend their time and their money.  To them, the choice is rarely binary—it is not “Do I buy your product? (yes or no).”  Instead, the question to them is “Which of my many options is the best choice for how I spend my time and money?” 

The alternatives to the consumer are many.  It can be between very similar products such as “Brand X” soup versus “Brand Y” soup.  It can be a choice between related products, like eating soup at home versus going out to eat at a restaurant.  It can also be between vastly different products.  An extreme example could be a young woman’s choice between going back to college or having a baby.

Choices between extremely different options happen all the time.  For example, a teenager may want to be popular at school.  To get there, the teen may consider a number of different options, like spending their money on the latest clothing fashions, or buying the latest technology gadget, or buying drugs. 

The multiple choice answers are quite varied.  And unless you frame the question properly to understand the real problem being solved (“What will make me popular with my peers?”), you will not understand what is going on in the mind of that person when they are making that choice.    For example, if you sell teen clothing, your biggest problem may be in convincing that teen that your clothes will make them cooler with the in-crowd than the latest smartphone. 

That is why it is so important for executives to look at sales as a multiple choice exercise for the consumer.   It helps orient executives towards understanding:

1.      What problems the customer is trying to solve;

2.      What is the vast array of options that can solve that problem; and

3.      How can I make my product become the best answer for that multiple choice question.

And, as I found out as a child, the best multiple choice answer usually has the most words. Or in this case, the customer chooses the answer with the most attributes related to solving the problem.  And you won’t know which attributes are relevant unless you understand which multiple choice question is being asked.

  

THE PRINCIPLE
The principle here is that if you want to increase sales, and do it profitably, you need to have a strategy which makes you the best option to a multiple choice question asked by a large segment of the population.  There are only two ways to create that superiority—natural advantages or bribes.

Natural Advantages

A rational natural advantage occurs when your product or service inherently has features making it meaningfully superior to the alternatives in solving a customer’s problem.  For example, if a consumer has a need for durability in their bicycle, the manufacturer making the most durable bicycle has a natural advantage over others trying to sell to that segment.  It is the natural preferred choice because the durability is a key part of the nature of that bicycle.

Natural advantages come in two varieties:  rational and emotional.  A rational natural advantage would be like that durability in the bicycle.  Durability is a rational excuse for preference.  It can also be rationally shown that the parts of a particular bicycle are stronger and longer lasting and more reliable.

By contrast, an emotional natural advantage occurs when your product or service provides makes consumers feel better about themselves. Usually, that means that your offering provides a superior feeling of self worth over the alternatives.  For example, a status-seeking woman would choose a Louis Vuitton handbag over others because that brand image provides a superior sense of self worth to her.  It’s really not about the durability of the handbag.  It’s the image and reputation of Louis Vuitton which transfers to the owner of the brand, making her feel better about herself.

Sometimes rational and emotional advantages can become intertwined. For example, if you have a movie star known for playing rugged, durable movie roles endorse the bicycle, some of the emotional connection with the actor will transfer to the bicycle, reinforcing the durability advantage.

WARNING: A natural advantage is not the same as a strength.  For example, you may be strong in “quality,” but that is not an advantage if:

a)      There is insufficient demand for quality as a solution with your market; or

b)      Others have a similar level of strength in quality (your quality is not meaningfully superior in the mind of the customer).

Therefore, the goal is not to become strong, but to become different and meaningful.  In other words, a strength must also make your solution superior to alternatives AND relevant in solving the particular problem faced by the customer.

Any efforts in areas which do not lead to difference or relevance are a waste of time.  Therefore, you strategy should emphasize trade-offs in the direction of difference and relevance.

Bribes

If you do not have a natural advantage over the alternatives (or cannot create one), then the only way to sell your product is to layer on incentives, like deep reductions in price or gifts with purchase.  I refer to these added incentives as “bribes.”  In other words, if you cannot find a way to be “better” than the alternatives, then you need to bribe people to choose you by being cheaper or more convenient than the alternatives.

Bribery is the more difficult path to sales, because it is costly and easily neutralized by price-matching.  Look at Apple.  It has created strong natural advantages.  It has created rational superiority in ease of use and features.  It has created emotional superiority with the “Cool Factor” and the pride and self worth which comes from owning the Apple brand (big emotional attachment).  As a result, Apple can sell millions upon millions of units at a premium price.

By contrast, the competition has had difficulties creating natural advantages over Apple.  As a result, the competitors have to sell their products at a significantly lower price than Apple.  In essence, the competitors are bribing people to forgo the natural advantage of Apple because the price differential is big enough to shift the value equation.

Of course, that price reduction is a high price to pay to get sales.  It makes the competition far less profitable than Apple.  Less profitability makes it harder to keep up in innovation.  And if the competition ever starts getting closer to narrowing Apple’s advantage, all Apple has to do is lower its price a little to get the advantage back.

Therefore, the best sales strategy usually revolves around natural advantages rather than bribery.

Relevancy

So how do you create the natural advantages which lead to a rise in profitable sales? Two actions must take place.  First, you need to fully understand which problems people are trying to solve and all the factors going into how they choose amongst the wide variety of alternatives.  In other words, if you want to be the superior option for the multiple choice question, you need to know what the question is and how the person thinks about the solution (e.g., are my teenage clothes creating superior acceptance over smartphones with the peer group?).  Only after taking these steps will you know which strengths are worth pursuing.

Second, the only way to typically become superior in these strengths is to focus on them more than anyone else.  Given limited time, money and manpower, gaining superiority in one area means forgoing superiority in other areas.  It is a matter of trade-offs—do less in a non-relevant area in order to do more in a relevant area. 

The first step tells you what is relevant and the second step makes you relevant.

 
SUMMARY
To the customer, purchase decisions are the result of answering a multiple choice question:  Which alternative best solves my problem or makes me feel better about myself?  If you want the customer to answer that question by purchasing your offering, then you need to provide superiority on the factors most relevant to the problem being considered.  That is best accomplished by determining the natural attributes which contribute to relevancy and then making the proper trade-offs needed to achieve superiority on those attributes.  Otherwise, you are stuck with the weaker option of bribery.

 

FINAL THOUGHTS
Relevant superiority in natural attributes does not happen by chance.  It requires forethought and a focused approach to trade-offs.  That only comes by having a strategy.  So if you want strong, profitable sales, start with a great strategy.

Emergent Vs. Positioning (Part 1)

INTRODUCTION
With today’s blog, we will begin a two-part look at a comparison between the Emergent view of strategy and the Positioning view.  In this first part, I will explain why I prefer the positioning view.  In the next blog (part 2), I will explain why I think the emergent point of view also makes some good points and how to incorporate them into a positioning framework to get the best of both worlds.

 

EXPLAINING THE TWO POINTS OF VIEW
In strategic planning, there are two dominant philosophies, commonly referred to as the Emergent and the Positioning philosophies.  They are based on different assumptions and result in different strategic activity.

The Emergent view is that the world is in constant change, so if you want your company to be relevant, you have to keep changing to find your place of relevance within that changing world. In the emergent point of view, building a strategy is not a goal but an outcome from your series of actions taken in order to fit into the marketplace of the moment.  Over time, if you focus on the right series of moves on a near-term basis, you will end up with long-term relevancy (and that result becomes your strategy).  In other words, the strategy emerges out of the focus on actions.

With the emergent point of view, the key role of a strategist is to understand how the market is shifting and to identify the evolving “sweet spot” within it.  Then the strategic path is to try to get to the sweet spot faster and better than the competition.

The Positioning view is that winning long term comes from superior differentiation.  The only way to achieve superior differentiation is by making tough choices about trade-offs.  In other words, the only way to get a sustainable edge is by freeing up resources due to minimizing the factors one trades away in order to double-down with the higher level of resources needed to create superiority at point of differentiation.  And the only way to know which trade-offs are the right ones to make is by predetermining the position one wants to own—where the superior differentiation is to occur.

With the positioning point of view, the key role of the strategist is to help determine which position provides the best chance for success for your particular company/brand and then help the company make the right trade-offs on a near-term basis in order to achieve and reinforce that position.

 

WHY I PREFER THE POSITIONING VIEW
I lean more towards the positioning point of view, and here is why:

1) Getting the Customer’s Attention is Tough

The world is cluttered with information and distractions.  It is hard to compete with all of that to get the customer’s attention.  By emphasizing a position over the long-run, I believe you not only have a better shot at getting the customer’s attention, but getting the customer’s business. 

When you own a position, a consumer knows where to slot you in their mind.  They associate your brand with a word, like “energetic”, “trendy”, “durable”, “easy-to-use”, “long-lasting”, etc.  This makes your brand easier to remember and easier to understand.  There’s too much clutter and demand on people’s time to expect them to figure it all out if it isn’t easy.  They have more important concerns.

Positions can also give your brand a personality.  And this is important, because people tend to purchase the brands which have a personality most similar to their own (or the one they aspire to). 

If you ignore positioning and just move around from sweet spot to sweet spot, you confuse the customer.  They are not sure what you stand for or why they should prefer you over the alternatives.  And when customers get confused, they tend to forget you.  That is not the way to build a strong and loyal following.

2) It’s Easier to Win in Uncontested Space

If you are are chasing after the sweet spot in the marketplace, there is a good chance that a great many others will also be chasing after that same sweet spot.  It becomes quite a competitive battleground.  And as we all know, markets eventually consolidate to only a small handful of winners.  Most of the challengers become short-lived failures.  Why pursue an approach where the odds of success are so small?

By contrast, positioning looks for ways to differentiate.    Rather than chasing the same spot as everyone else, it sets itself apart.  As I say in my book Eight Questions, a good position is desirable, sizeable, ownable, preferable, achievable, believable, understandable, and profitable.  One of the keys is ownability—a position which nobody else owns.  It belongs to you.  It is your word or personality.

When you own a unique position, it is like competing in uncontested space.  Everything is easier.  You can focus on making money instead of fighting hoards of competitors.  Long-term ownership of a position requires that focus on trade-offs that comes from a positioning perspective.

Why battle everyone else for the same sweet spot when there is the uncontested alternative?

3) It’s Difficult to Win a Battle When You Bring No Advantage

Because the emergent view downplays creating unique advantages via focused trade-offs, it doesn’t bring much to the battle.  All you can hope for is to be a little faster and a little better than all the others trying to do the same thing.  And even if you can attain this, it tends to be a very fleeting and short-lived phenomenon.  Someone else will likely be a little faster or a little better with the next iteration.   As a result, the emergent approach tends to put you in one of the most competitive places while providing very little reason for why you should have an advantage over any of those competitors.  Just trying to work harder than everyone else is not a very bankable strategy for the long haul.

By contrast, positioning tends to put you in a less competitive spot with more tools for winning the battle.  Trade-offs create business models with inherent advantages at the point of differentiation.  This makes it harder for others (without that same model) to match you at that point of differentiation.  This increases your chances of winning.

4) Profits Come From Efficiency, Not Bribery

If you have no inherent advantages to bring to the battle, then you have to resort to what I refer to as “bribery.”  My definition of bribery is creating inducements to get customers to prefer you when you have no natural advantage.  This would be things like significant price cuts or adding extra goodies to sweeten the deal.

There are two main problems with this type of bribery.  First, it is easily copied.  The advantage is fleeting because the copiers negate the advantage.  You end up in a price war.  This leads to the second problem—bribery significantly reduces profitability.  It transfers the advantage to the buyer rather than the seller.

By contrast, positioning gets a company focused on perfecting numerous trade-offs moving in a similar direction within a business model.  This consistency improves the efficiency of the business model.  And as the model becomes more efficient, two things happen.  First, you get even stronger at your point of differentiation, so you have a greater natural advantage.  Hence, there is less need to resort to bribery.  Second, the efficiency and the trade-offs provide more cash to apply to any price war.  However, if your position is strong enough, you can probably get way with having a small price premium (people will pay more is the preference is strong enough).

Example:  Microsoft Vs. Apple

Although you can find good and bad examples for each approach, I am going to use Microsoft and Apple to illustrate why I prefer the positioning approach.

Microsoft has used more of an emergent approach over the years.  When they see a particular space get “hot,” they jump to try to become a part of it.  Examples:  When AOL and Netscape were hot, Microsoft jumped in with MSN.  When game players were hot, they jumped in with the X Box.  When iPod-like devices were hot, they jumped in with Zune.  They’ve dabbled in all sorts of other non-computer computing devices over the years.  When search got hot, they invented Bing.  And now that the cloud is hot, they are putting their effort there.

In the process, Microsoft hasn’t built up any strong position.  They haven’t created much of any natural advantages.  They haven’t made consistent trade-offs.  And for the most part, they haven’t created many winners.  About the only advantage they brought to the game was deeper pockets, due to their cash flow from Windows and their business-oriented software.

The sad part is that while they were chasing sweet spots, Microsoft did not meaningfully enhance their original strengths in business software.  With the cloud, that business could be at serious risk, as people stop buying software and use competing cloud services. 

 
By contrast, Apple stayed on a narrower path, thanks to positioning.  They knew what position they wanted to hold—cool, elegent devices combined with proprietary software and services which were easy to use and worked seamlessly.  Apple made the necessary trade-offs in their culture and investments and business model to accentuate this position.   This gave Apple a natural advantage and customer loyalty strong enough to allow them to charge premium prices and still win.

Microsoft has lost market value while Apple has soared to become the highest valued public company.

 

SUMMARY
The strategic planning discipline has developed two different schools of thought on what strategy should be.  These are the positioning school and the emergent school.  I prefer the positioning school, because:

1)      Getting the Customer’s Attention is Tough Without A Position

2)      It’s Easier to Win in Uncontested Space (Which is more likely to occur with a good position).

3)      It’s Difficult to Win a Battle When You Bring No Meaningful Advantage (Which often happens with an emergent approach).

4)      Profits Come From Efficiency, Not Bribery (Positions tend to lead to efficiency, emergent tends to lead to bribes).

 

FINAL THOUGHTS
Although I prefer the positioning point of view, the emergent perspective is not without some merit.  It makes many good points.  In the next blog, I will talk about how to incorporate some of the emergent contributions into a positioning framework.

Strategic Planning Analogy #431: More Efficient "Bribery"

THE STORY
Moneyball is the story of Billy Beane, the general manager of the Oakland Athletics baseball team in the early 2000s. Billy’s problem was that he managed a team in a small market. As a result, he did not have as much money to spend on baseball talent as teams from larger markets. For example, his total athlete salary budget was about a third the size of teams from large markets like New York.

Since Billy Beane could not outspend the other teams to attract talent, he needed to be smarter about how he spent his money. To become smarter, he turned to detailed statistics and analytics. Billy learned that certain athlete statistics were better correlated to baseball success than others. Then he went after signing up players who were great on those statistics but would otherwise be overlooked by the big-market teams (because the players appeared weak on subjective issues not well correlated to success).

As a result of becoming smarter on talent, Billy Beane was able to put a competitive team on the field while spending a lot less money than the big-market teams. The story is so remarkable that in 2011, it was made into a movie.

THE ANALOGY
Most athletes are not very loyal to their team. They will go play for whoever is willing to pay them the most money. The money is like a bribe. Whichever team bribes them with the most money gets the player.

This is a lot like the retail business marketplace. Consumers are not very loyal when it comes to where they shop. Instead, they shop at whichever store gives them the best deal. That is the bribe which gets them to the store.

This was pointed out in an article in the January 9, 2012 edition of Marketing Daily. The article talked about a study of 6,000 shoppers by Pricewaterhouse Coopers. The study found that consumers really don’t care much about retail loyalty programs. Loyalty programs were ranked last in a list of reasons for choosing a store. Only 1% of the shoppers cited loyalty programs as a reason for their store choice.

What was the #1 reason for store choice? It was price, mentioned by 55% of the shoppers. In other words, shoppers are like those athletes—not very loyal and can be bribed by being offered a better deal.

Yet about 92% of retailers have a loyalty program and many spend huge sums of money on their program. My keychain has three keys on it, but seven loyalty cards. I should probably call it a “loyalty chain” instead of a keychain. My wife is even worse. She carries two wallets—one is for credit cards and money and the other just holds loyalty cards.

Now, smart phones are making it even easier. They allow you to store all that information digitally, so you can, in essence, conveniently carry an infinite number of loyalty cards. If you are carrying a card for every store, then those cards are not making you very loyal to any particular store.

So what should retailers do? They should take a tip from Moneyball. Instead of offering ever larger “bribes” (deals) in the futile attempt to create loyalty, they need to get smarter. They need to use statistical analytics to make their spending more efficient.

THE PRINCIPLE
The principle here is that many marketing expenditures have more in common with bribery than they do with loyalty. This is particularly true in retailing. Therefore, when creating marketing strategies, we should be more focused on increasing the “efficiency of the bribe” than the “effectiveness of the loyalty.”

Principle #1: Just Because it Looks Like Loyalty Does Not Mean it is Loyalty
At first, great bribery can look like great loyalty. Great bribery allows you to lure people back to the store, time after time after time (each time caused by a great bribe). Great loyalty means that customers voluntarily come back to the store, time after time after time. Since the behaviors appear similar (repeat purchasing), one may look at the behavior and mistakenly think that they are witnessing great loyalty when in fact they are witnessing great, sequential bribery.

Why is this distinction important? If the motivation is bribery, then the favorable behavior will stop when you stop the bribe, or a competitor offers a better bribe. If the motivation is loyalty, then you are better insulated from competitive attacks and less reliant on bribes for success.

If you get these two motivations confused, then you may create the wrong marketing strategy. For example, if you think you are building loyalty, then you may create a strategy with unaffordable discounts in the beginning, which you justify by saying that those discounts create long-term loyalty. Once loyal, you can then cut way back on the deals later and still keep the customer.

Terms like “lifetime value” are used to justify this approach. They say you can lose a lot of money up front if it creates a lifetime of loyalty. Then you make up for the losses in the beginning during the later years of the lifetime by cutting back on the size of the deals.

Of course, if your tactics are only creating a series of bribes, then you can never stop the bribery. If lifetime loyalty is a fallacy, then you will not only lose a lot of money up front under such a program, but you will lose it forever if you want return visits.

Therefore, if behavior is more bribe-induced than loyalty-induced, you need a way to bribe over the long term which is profitable. That requires a focus on bribe efficiency rather than lifetime loyalty value.

Principle #2: Loyalty Programs Aren’t Bad, They Are Just Misnamed
So, if loyalty is virtually non-existent, does that mean that loyalty programs should be abandoned? In general, I’d say no. They can still have great value as a bribery tool. It isn’t that the tool is bad; it is just misnamed. They should be thought of as “bribery programs” rather than loyalty programs.

Think back to Moneyball. Billy Beane could afford to pay less for quality baseball players because he was smarter about how he pursued players. He studied the statistics related to success and used that knowledge to find valuable players who could be lured with a lower bribe.

You can do the same. Those loyalty cards can provide a lot of data. They can help you get smarter about your customers. You can learn from their behavior. Analytics around this data can provide knowledge about which bribes are most effective with that customer. Using this knowledge, you can offer bribes more appropriate and more luring to that individual. And, in most cases, because the bribe is more specifically targeted to that individual, it will be more effective at a lower cost.

For example, you may find that a particular customer is easily lured by a small discount on cat food. Therefore, instead of offering huge bribes on lots of things, you can narrow your expense to a small bribe on cat food to get pretty much the same end result.

In other words, by using the data from loyalty programs, you may not make the customer more loyal, but you can make your bribery more cost efficient and more profitably effective. And that makes the program worthwhile.

Now, if you are NOT using the data from a loyalty program to get smarter, then you may be wasting a lot of money on that program. You’d probably be better off shutting down the program and using all that money to pay a bigger bribe to people at the cash register when they check out.

Principle #3: Metrics Are Valuable Only if You Use the Right Ones
In Moneyball, Billy Beane was successful because he focused on the right metrics. He looked at the statistics which really lead to wins and ignored the rest. By contrast, the big market teams were often evaluating the wrong metrics, things like how a player looked or their demeanor. By looking at the wrong metrics, the big market teams were paying too much for the wrong players.

The same problem applies to marketing. If you are looking at loyalty metrics instead of bribery metrics, you may end up rewarding the wrong behavior. Set up metrics to measure and reward efficient bribery rather than nearly non-existent loyalty.

SUMMARY
Although businesses want loyalty from their customers, usually the primary customer motivation is not loyalty, but bribery. As a result, we should convert our loyalty programs into bribery programs. That requires using data and analytics to discover the most efficient ways to bribe, and then keep using the bribes forever in order have superiority over the competition.

FINAL THOUGHTS
Just because bribes may be the most effective motivator, that does not mean that you can ignore all the other operational variables. Bribes are more efficient when the other operating factors are working well, because then you have less negativity to have to overcome with a bribe (so the bribe can be smaller).

Analogy #190: Who's Bribing Whom?

THE STORY
Back around 100 years ago, San Francisco was a pretty wild place for doing business. The city was growing rapidly and it was busy putting together its infrastructure—utilities, transportation, etc.

If your company became a part of that infrastructure, you would become extremely wealthy. Therefore, companies were highly motivated to use bribery to convince the San Francisco city aldermen to include their companies in that infrastructure.

Examples of companies who were bribing city officials at the time included PG&E (Pacific Gas & Electric), Bay Cities Water, and United Railroads. United Railroads had a $200,000 pool of money just to be used for bribery (which would be a huge amount in today’s dollars).

One of the biggest scandals was in the telephone utility. Pacific Telephone and Telegraph was currently serving customers in San Francisco. Newcomer Home Telephone Company wanted a piece of the action and allegedly paid $5,000 per official to get approval, along with $125,000 for political boss Abraham Ruef. Of course, Pacific Telephone did not want to lose its monopoly, so it bribed the officials to keep out Home Telephone. They supposedly spent about $50,000 in bribes.

Home Telephone appears to have made the bigger bribes, so on March 5, 1906, the San Francisco city supervisors awarded Home Telephone Company a 50 year franchise to operate in the city.

While the city was using bribery to build up the city, Mother Nature decided to tear down the city. On April 18, 1906, little more than a month after the Home Telephone decision, San Francisco was destroyed by a great earthquake and a fire lasing four days. Shortly after cleaning up from the earthquake, the city cleaned up its government. In March of 1907, the city officials and the businessmen who bribed them were convicted in a court of law. Abraham Ruef was charged on nearly 70 counts of accepting bribes.

THE ANALOGY
Although most businesses today do not resort to the level of bribery found in San Francisco 100 years ago, “bribery” is extremely common today. I’m not referring to the illegal type of bribery, but a legal form of bribery.

In reality, any time one must resort to added incentives to get a customer to make a purchase, you are “bribing” them. In essence, these incentives show that you cannot create sufficient sales at the original value, so you have to “bribe” people with something beyond the original value (such as a price cut), in order to get them to act as you want and buy your product/service.

Recently, I got a call for a time-share resort company who was willing to offer me all sorts of prizes and gifts in order to get me to drive to their resort to hear a sales pitch. All of their bribery in incentives was not enough to get me to go, though. It would take a much higher bribe to get me to overcome my lack of desire to hear their sales pitch.

The worse your original value proposition, the higher the bribe (in added incentives and price cuts) is needed to get customers interested in making a purchase. Ultimately, this cuts into your profits. Although this type of bribery will not get you convicted, it is not a very efficient way to earn profits.

THE PRINCIPLE
The principle here is that offerings with an inherently strong internal value are typically more profitable than offerings where bribery is needed in order to create sufficient value.

Take, for example, the automobile industry. GM and Ford are currently offering huge bribes in terms of incentives and price cuts in order to sell their slow-moving gas guzzlers. By contrast, Toyota can sell all of the Hybrid Prius automobiles they manufacture at full-price (and a premium price at that).

Because the Prius is more in tune with what customers want, Toyota does not need to add any bribes to the offering. The basic offer is strong enough on its own and can command a premium price. On the other hand, the big gas guzzlers at Ford and GM are out of tune with the marketplace. Consequently, they have to load on so many bribes to move the goods that there is very little left to create a profit. As a result, GM is in serious risk of going into default, while Toyota is doing well.

This is not an unusual example. Throughout history, one can find industries where one firm has such a superior perceived value that it can sell at a premium, whereas the competition has to resort to bribes in order to get any attention. Just compare Ipod to its competitors. Or look at Virgin Atlantic versus traditional airlines, where extensive bribery through special promotions and discounts has been a financially disastrous way of life.

Although he does not look at the issue in terms of bribes, J.C. Larreche covers similar territory in his book “The Momentum Effect.” Larreche is a marketing professor at INSEAD. Based on his studies, Larreche discovered that firms which spend a lot of marketing money to “push” goods on consumers (with what I call “bribes”) do not grow as fast, have lower stock prices, and are not nearly as profitable as companies who focus on creating the types of superior values which do not require bribes.

To paraphrase, Larreche’s advice is that rather than rushing to get a product to market, one should stop and first take the time necessary to ensure that the product you have has enough intrinsic value that it will sell without the need for bribery (what he calls achieving “compelling value” or the “power offer”).

Well, that all sounds logical and intuitive—superior offerings sell better (and more profitably) than inferior values. But how do you create these compelling power offers?

There really aren’t any shortcuts. It’s a lot of hard work. I divide the work into three buckets: Left Brain (Rational) Work, Right Brain (Emotional) Work and Whole Brain (creative) Work. The idea for the first two buckets is that you have to choose a particular customer segment and then get inside their brain. You have to understand all of their needs/wants/desires as well as what triggers satisfaction.

Some of these discoveries will be highly rational. Some will be highly emotional. You need to understand both. It is not always the technologically superior product that wins. Instead, it is the product which connects best with the customer on all levels, including emotions and psyche. Apple is very good at making the connections on all of these levels. Their products are technologically great, esthetically great, and create great emotional connections with their customers (see “Reason Vs. Rationale” for more on combining both rational and emotional appeals).

This takes time. It requires getting close to your customers…spending lots of time watching and talking to them…getting below the surface to the true human motivations. This is the data gathering phase.

But it doesn’t stop there. I know lots of companies which brag about being fact-based operations. But facts alone are not enough. It takes intuition and creativity to convert those facts into original superior value propositions. This is the third bucket of work.

Sure, it takes time and money to go through these three steps. But this is a far more productive use of your funds than using them for bribes.

And the beauty of the whole thing is that if you do this properly, the bribes will start flowing in the opposite direction. Instead of you having to bribe others, others will start bribing you.

1) Customers may start bribing you by offering to pay a premium to achieve faster access to your products. Customers can even start to act like free sales reps, singing the praises of your product to their friends.

2) So many people will want to work for your company that they will do whatever it takes to get a job there. They may even be willing to work for free as interns in order to be a part of this great value.

3) Other firms will want to do tie-ins so that they can have their products associated with your products. They will come up with all kinds of legal bribes to try to get permission from you to do this.

With all of these benefits, it should come as no surprise that I recommend that strategic planning efforts focus around trying to come up with a position which is so compelling to your customers that bribery is unnecessary. Your strategic planning process needs to incorporate some form of these three buckets (rational, emotional, and creative).

SUMMARY
It is more profitable to offer unique, compelling values than to push mediocre products. Pushing mediocrity requires an expensive form of bribery. However, if your value is compelling enough, people will start bribing you. Compelling values come from those who do the hard work of first leaning the deep-seated motivations of their customers (rational and emotional) and then finding a superior way to deeply satisfy them.

FINAL THOUGHTS
These days, whenever I look at advertising or an advertising budget, I imagine them as being distasteful bribes. It’s as if your advertising budget is like the $200,000 United Railroads had set up as their bribery budget back in San Francisco 100 years ago. Once you get into this mindset, one naturally starts to focus on ways to create extra internal value, so that you can get out of the distasteful business of supplementing your mediocre value with bribes.

This is not to say that advertising disappears. It just becomes more productive through informing and reinforcing the value, rather than trying to overcome the lack of sufficient value.