Strategy Planning Analogy #565: Not Enough Monkeys

THE STORY
There’s an old saying (originally attributed to Thomas Henry Huxley) that goes roughly like this: “If you get enough monkeys sitting at enough keyboards, one of them, by random chance will write the next Shakespearian play.” While that may be theoretically true, there’s a problem with that logic.

The problem is with the word “enough.” In order to get random tapping on a keyboards to come out as a coherent Shakespearian play, you need a lot of monkeys sitting at a lot of keyboards.

How many? I would guess at least a million times more monkeys than exist on the entire planet sitting at more chairs and with more keyboards than exist on the planet.

So, while the statement may be theoretically true, from a practical matter it is worthless.

THE ANALOGY
The big word in strategy today is “innovation.” People want strategies which make them leaders in innovation. And if that’s what people want, you can rest assured that countless numbers of consultants will come out of the woodwork saying they have a way to make you a leader in innovation.

A lot of these consultants have a theory similar to the story about the monkeys. They say that if you have enough experiments taking place, one of them will turn out to be a big hit. That’s like saying if you have enough monkeys, you can write a great play.

The problem is that many of these consultants don’t get very specific about how many experiments is “enough.” The reason they don’t get very specific is because they don’t want you to know your real odds for success. Like the story with the monkeys, the only way to guarantee that you will have a successful innovation is by doing a lot of experiments. And by a lot, I mean more experiments than you could possibly ever do over several lifetimes.

Look at the social media space. How many truly successful bone fide outstanding and hugely profitable innovations have there been in social media? 20? 50? 100? 1,000? Even if you are generous and say there have been a thousand big innovations, compare that to how many people on the planet have been experimenting around the world in this space.

There’s probably at least tens of millions of people world-wide who have tried on average dozens of experiments in the social media space. That would put us at about 1 in 500,000 being a hit. And I think that’s a very generous number. Do you think you can do 500,000 experiments in order to guarantee a winner?

So, while this type of response to innovation is theoretically possible, it is worthless on a practical level.

THE PRINCIPLE
The principle here is the difference between randomness and purposefulness. Randomness is about producing large quantities and hoping you beat the odds. Purposefulness is about focusing on ways to intentionally improve your odds in a meaningful way. Randomness is about repeating a lot of fast failures (and I do mean “a lot”). Purposefulness is about focusing on places where failure is less likely to occur.

Here are some characteristics of purposeful innovation:

#1: Purposeful innovation plays off your strengths

Even if you do beat the odds and by chance stumble upon a great innovative idea, you still don’t have a hit on your hands. You still have to develop it, bring it to market, and win versus others with similar ideas. The odds of random success at all five levels (ideation, development, operations, distribution and marketing) is really not in your favor.

As I alluded to in an earlier blog, even if you have a one in a million idea, there can be more than a million experiments in that space, so you have to fight to win against others with almost the same idea. The idea alone is not enough.

So if you want to succeed, you need to play to your strengths. Look for innovation only in places where you have competitive advantages in all of these areas. This means that you need to shut off innovation wherever your differentiating advantages do not apply.

This will narrow the innovation scope very quickly. But it will also increase your success very quickly.

Another option is to take away resources from random innovation and apply them to building competitive advantages. The more advantages you have, the better your odds of creating an innovative hit that will win.

I remember touring the area in Austin Texas where a lot of innovation start-ups were located. They all looked about the same to me. None of them were building differentiation capabilities. They were all just pulling all-nighters to get lines of code written. How do you expect to beat the odds if you are not doing anything meaningfully superior?

#2: Purposeful innovation looks for superior solutions to real problems

A lot of innovation focuses on applying the coolest new technologies in a spectacular way. These may be the types of innovations that make other engineers jealous of what you’re working on, but that doesn’t mean the rest of the world will care.

Consumers are looking for superior solutions to existing problems at reasonable prices. You need to ask yourself these questions:

1.  Once the coolness wears off (and it will, sooner than you think), is there any real substance to your innovation?
2. Is this just a short-lived fad?
3. What existing problem does my innovation solve? Does it solve the problem better than current options? It is superior enough to be worth the price you need to charge? Is it superior enough to overcome the barriers to switching from current solutions and networks?
4. Will consumers intuitively get what you’re trying to offer or will it be confusing and hard to explain? (Hint: If it takes more than a sentence or two to explain the superiority of your innovation, it probably won’t catch on.)

So the place to start is by finding where customers are complaining the loudest about the stress points in their lives. Then, you focus on looking for better ways eliminate these stress points. This means putting solution solving ahead of just looking at what the latest technology can do.

#3: Purposeful innovation avoids imitation

Facebook has been very successful. But that doesn’t mean that a copycat of Facebook will also be successful. That innovation has already been done. That market has already been captured.

Even if your innovative imitation of Facebook is a little bit better, it still won’t win. The network effect will keep people from switching for only minor improvements.

Almost by definition, true innovation is not a close copy of what already exists. It is doing something different. The blue ocean approach says it is easier to succeed in places where there is no established market/solution than one which has already been staked out by a host of competitors.

Imitation may be a sign of flattery, but it usually is not a path to success, especially when you need to get people to switch networks.

SUMMARY
Great innovations can often lead to success. Unfortunately, most experiments in innovation will be failures. The odds of randomly stumbling into innovation success are about as likely as having a monkey randomly write a play on a keyboard. Rather than rushing off to do as many experiments as possible, it is wiser to take a moment first to determine a strategic focus for your efforts. Narrow the scope to improve the odds. This is purposeful innovation. Purposeful innovation narrows the scope by: 1) Looking in places that take advantage of competitive strengths; 2) Looking in places where you can provide a superior solution to current problems consumers are complaining about; 3) Not looking to imitate what’s basically already out there.

FINAL THOUGHTS
Good fishermen know that you are more likely to catch fish if you fish in locations where there are more fish to be caught. They don’t just randomly fish anywhere. They go where the odds are better. Innovators should do the same thing.

Transcendent Strategy

THE PREMISE
There seems to be a consensus building in the business world claiming that concepts like positioning and competitive advantage are becoming obsolete. This premise is based on the assumption that the business world is moving too fast. In such a fast-paced changing world, nothing lasts—including positions and competitive advantages.

This leads to the conclusion that if competitive advantages and positions have no lasting value, then it is a waste of time to focus much effort on them.

I tend to disagree. Here is my rebuttal to this point of view.

THE REBUTTAL, PART 1
Yes, technologies come and go; products come and go. But the truly important issues endure.

Has the desire for value gone out of style? Has the desire for quality gone out of style? Have the desires for prestige and self-esteem gone out of style? No.

These eternal desires have been around or hundreds of years and will continue to be around for hundreds of years to come. Eternal values such as these do not become obsolete.

The problem is not that positioning and competitive advantages have to—by their very nature—become obsolete. No, there is nothing inherent in positioning or competitive advantages which creates obsolescence. Instead, the problem is that people are focusing on the wrong things to build a position or competitive advantage around. If you focus your position or competitive advantage on a particular “product”, “technology”, or “feature set”, then of course your position or competitive advantage will not last—because the best alternative in these areas is constantly changing.

By contrast, if you focus your position or competitive advantage around mastering and owning the enduring attributes of prestige, self-esteem, quality, value, etc., then your position and competitive advantage will endure. Advantageous strengths in areas like this transcend all of those ever-shorter life cycles in products, technology or feature-sets.

Your company lasts, survives, and thrives even if particular products come and go, because your position and competitive advantages in understanding and providing solutions to enduring desires allow you to better migrate to the next iteration of how that need is satisfied. You continue to win, because you have built your strengths around owning the solution itself (e.g., prestige) rather than merely owning the current manifestation of that solution (e.g., a smartphone).

Think of Virgin. The company is not linked to a particular product, industry, technology or feature set. Virgin is into hundreds of diverse businesses from media to transportation—even transportation into space. Instead of focusing on a particular product or technology, Virgin has built competencies and advantages in winning a position in the enduring values. Here’s how Richard Branson, founder of Virgin, describes it:

“We've become a sort of way-of-life brand. ... People think of Virgin — if they hear that Virgin's going into a new area, they know that the quality will be good, that we'll do it in a fun way, that we'll give good value for money. And so it gives us a leg up when we go into a new venture. People already [trust] us, and they'll give us a try and, generally speaking, people seem to like what they find.”

Virgin the corporation wins and endures, even when particular ventures come and go, because it is always on the prowl looking for the next evolution for its “way of life” solution. It takes its skills (competitive advantage) in imbuing these way of life values into an industry and wins.  

And think about Apple. Its popularity has transcended a wide range of obsolescence in products, technology and feature sets. People love Apple because it wins on enduring values. Status, elegance, simplicity, easy-integration, and being “cool” are all integral to everything it does. Apple built competitive advantages in pursuing these enduring traits. This allows the company to endure, because positions and competitive advantages in these areas endure.

The fact that Apple is hiring Angela Ahrendts, the CEO of the Burberry fashion house, to run its retail division shows that Apple is structuring its competency around status, elegance and “coolness” rather than particular products or technology.

So if you build your position and your competencies around the enduring values (like Virgin or Apple), you can have a competitive advantage which can last a relatively long time.

THE REBUTTAL, PART 2
Winning positions and competitive advantages win because they best fit into the context of the environment in which they operate. The battle is decided in the marketplace. To win in the marketplace, you have to be designed to win within the context of that marketplace.

If we buy into the original premise that the business world is undergoing accelerated change, then that is the context where we must design a winning strategy. Therefore, a good way to win in this marketplace is by building competitive advantages in adapting to change.

Competitive advantages in adapting to change could include superior competencies in areas like:

1. Monitoring the environment to get early detections in the direction of change.
2. Building a flexible supply chain.
3. Having an organization that can quickly reallocate resources (human, monetary, etc).
4. Building skills around enduring values rather than temporal products and technologies.
5. Speed in execution.
6. Developing a tolerance for risk.
7. Quickly building strategic partnerships in areas needed to adapt to the change.

Companies which can do things such as these better than anyone else will have an enduring competitive advantage within the context of a rapidly changing marketplace.

SUMMARY
It is a false notion to claim that positions and competitive advantages can no longer be enduring. Yes, many positions and advantages will not be enduring, because they are linked to particular products, technologies or feature sets. But that is the fault of the people who picked the wrong things to focus their positions and advantages on. If, instead, one focuses on enduring values or adapting to change, then you can build enduring positions and competitive advantages.

FINAL THOUGHTS
Don’t blame the concepts of positioning and competitive advantage when your business becomes obsolete. These tools still work well if applied properly. Think of the axe. In the hands of a skilled lumberjack, the axe is a wonderful tool. In the hands of an axe murderer, it is a horrible tool. Are you more like the lumberjack (building enduring skills) or the axe murderer (focusing on products, technology and feature sets)?

Strategic Planning Analogy #501: The Power of Control

THE STORY

In the early 1970s, there was a fellow named Robert Taylor, who owned a small soap company, called Minnetonka. Taylor came up with the idea to sell liquid soap in small dispensable pump containers. Although a great idea, there was no way to patent it. After all, liquid soap and pump dispensers already existed.

This caused a dilemma. If the Minnetonka liquid-soap-in-a-pump idea was successful, then larger, more established soap companies could legally steal his idea and use their scale and clout to put him out of business. So even if the idea was great, Minnetonka would probably not be able to benefit from it, right?

Maybe not.

Taylor got bold. He decided to corner the market on pump dispensers. By raising $12 million dollars—more than his company's net worth—Taylor ordered 100 million of the pump dispensers from the only two companies that manufactured them in the U.S. An order of this size gobbled up the entire manufacturing capacity for these two manufacturers for at least a year, and maybe two. That gave Minnetonka plenty of time to establish itself in the marketplace without any real competition.

It worked. Taylor’s product, called SoftSoap, was a huge hit and owned the category because competitors couldn’t get their hands on an adequate supply of pumps.

In Taylor’s second smart move, he sold the business to Colgate-Palmolive for $61 million around two years after introduction. This would be about the time Taylor’s control of the dispenser manufacturers’ capacity was running out and anyone could enter the market—which they did, causing SoftSoap to dramatically lose market share (which hurt Colgate-Palmolive, not Taylor).

THE ANALOGY

Companies hate it when they have no competitive advantage. Without an advantage, there is no advantage to exploit. Without an advantage, anyone who wants to can copy your business model and directly compete against you. Barriers to entry and exit fall. A price war begins and usually only the largest and best financed survive. Profits are minimal.

So to avoid this, firms try to build competitive advantages. The problem is that firms tend to focus on finding their competitive advantage within the product or service they are selling. After all, that is what people are buying—it is what the money is paying for, right? So firms try to create uniqueness into their product which cannot be easily imitated, using tools like patents and unique capabilities.

My favorite story in this regard was when General Mills introduced Frosted Cheerios cereal. In designing the product, General Mills did not just take their regular, oat-based Cheerios and put frosting on it. Instead, General Mills made the frosted Cheerio out of a secret blend of multiple grains. Was this done to make it tastier? No. Was this done because it would make it more desirable to customers? No.

The new formulation, according to General Mills, was done to make it harder for private label competitors to accurately imitate the product. It was done to create a small internal advantage, which I doubt will have much impact on the imitators.

Sometimes, the best advantages come from not from internal formulations, but from actions taken external to the product.

SoftSoap did not have any internal advantages. It had no exclusivity to the idea of putting liquid soap in pump dispensers. In fact, it was at a major disadvantage, because Minnetonka was a small player competing in a marketplace controlled by giant consumer products companies.

So instead of looking internally, Minnetonka looked externally. It decided to create its advantage in the upstream supply chain.  By locking up the supply of pump bottles, Minnetonka created an external advantage. It prevented copying by competition not by making its product unique, but by making it impossible for competitors to get their hands on a key ingredient from a third party.

So, when looking for your competitive advantage, don’t just look internally at your product or service. Be like Robert Taylor and look for external ways to create that advantage.

THE PRINCIPLE

The principle here has to do with control. If you control access to a scarce asset, you have a competitive advantage. This type of external control can create even stronger competitive advantages than internal product uniqueness. As we saw with SoftSoap, control of the external supply of pumps overcame no real internal advantage. And we also saw that Taylor was smart enough to sell the business before the effect of that external control was lost, since once that control was lost, so was SoftSoap’s value.

Upstream Control

One place to look for that external control is upstream in the supply chain. That is what SoftSoap did. It went upstream to control the supply of pumps.

Another example would be Apple. They have been accused multiple times of using a similar tactic. Sometimes, they’ve been accused of locking up the supply of key electronic components needed by their competitors (their equivalent of soap pumps). Other times, they have been accused of locking up the shipping capacity from key technology manufacturing centers in Asia to the US, thereby making it difficult for their competitors to ship their products to the US in time for Christmas. Either way, the external control by Apple gives them a competitive advantage.

Downstream Control

Another approach would be to control the downstream capacity in a supply chain. For example, I remember talking to someone at Andersen Windows shortly after they signed the deal to be the exclusive replacement window vendor for Home Depot. Although Home Depot is not the only outlet for replacement windows, it is one of the largest and most powerful distributors in the space. By being the only replacement window available at Home Depot, Andersen Windows had no direct competition inside Home Depot. That is an important downstream competitive advantage.

GE did something similar with its appliances. GE made solid connections with most of the major home builders in the US. As a result, they locked in a number of deals to be the vendor of choice for appliances which come with a new home. Other appliance manufacturers were frozen out. The ones buying these new houses could pick which GE appliance they got, but not appliances from other brands. This was a big competitive advantage.

And Apple plays in this space as well. By owning the largest distributor of digital music (the iTunes site), it controlled how the entire digital music industry evolved (to Apple’s benefit). Having only Apple products in the cool Apple stores is a similar example.

And then there is Microsoft. Microsoft would probably not exist today if it hadn’t structured the deal the way it did for selling its first product (MS-DOS) product to IBM. Normally, in these types of deals, IBM would have owned distribution rights the operating system they commissioned. But Bill Gates took a lower fee in exchange for controlling distribution rights to MS-DOS. This allowed Microsoft to sell the operating system to every other PC manufacturer, creating the de-facto standard and a lock on PC software for decades to come.

Promotional Control

Another scarce external resource can be advertising/promotional capacity. If you lock up all the key promotional capacity, you can weaken competition’s ability to get the word out about their offering. You see something similar with consumer electronics manufacturers, who try to get massive publicity just before a competitor’s new product launch, in order to minimize the competitor’s ability to create buzz in the promotional marketplace.

Now, one might think that in today’s internet culture, it is harder to create promotional control. But think about this. If you lock up all the relevant key words on Google, you can lock up the ad space on the search engine and freeze others out a key source for getting clicks to their site.

SUMMARY

Looking internally at what you offer is not the only place to seek competitive advantage. Controlling access to external factors can also create competitive advantage. In many cases, this external control can be a more powerful advantage than anything you can do internally. Therefore, consider external control when designing your competitive strategy.

FINAL THOUGHTS

In the end, who do you think got the biggest benefit from their competitive advantage efforts—SoftSoap with its external control of supply, or General Mills with its internal control of a slightly (perhaps even inperceptively) modified recipe for the Cheerios hidden under the flavor blast of frosting?

Strategic Planning Analogy #484: Adoption Curves

THE STORY

I knew someone who lived in Latin America back in the days when inflation was regularly 2,000 to 3,000% per year.  He told me that back then a popular occupation was to be a profession line-stander.  What these people did was stand in line outside of a store before it opened.  Then, once the store opened, they quickly bought a bunch of goods for the person who paid them to stand in line for them.

Why were so many people willing to pay others to shop for them?  The extremely high inflation rates made it a great economic investment.  When inflation is over 3000%, you want to convert your money into goods as soon as possible, because every moment you waited made your money far less valuable.  Even waiting a day or two to shop would significantly diminish how much you could buy with that money.

Therefore, if you were too busy to shop immediately after getting paid, it was worthwhile to pay someone to shop for you, because the cost of paying the line-stander was less than the value loss in the currency by waiting until you could get around to shopping for yourself.

So being at the front of the line was important when paying cash in that society.  However, what if you were paying credit in a hyper inflation environment?  Well, then you’d want to be last in line, because the longer you waited to pay, the less valuable was the money used to pay off the earlier debt.

THE ANALOGY

As the story illustrates, sometimes there can be great benefits to being first in line to get something.  Other times the benefits may flow to those at the back of the line.  This same idea applies to business strategy.  Under some circumstances it makes strategic sense to be a leader in adopting new ideas, new technologies, and new business models.  Under other circumstances, it makes sense to be closer to the back of the line.  And being in the middle tends not to get much of any advantage at all.

At first this may seem counter-intuitive.  After all, the normal consumer adoption curve typically looks like a bell-shaped curve.  There are a few early adopters, a few late adopters, and most people adopt somewhere in-between.

However, when it comes to strategic adoption rates for businesses, I think the preferred curve may look more like the inverted bell curve seen in the world of hyperinflation, with most of the advantages coming at either end, and little to be gained by adopting in the middle.

THE PRINCIPLE

The principle here is that the timing of when you make a strategic move may be almost as important as what the move is.  In most cases, early adoption is best.  In many cases later adoption makes sense.  Being in the middle rarely is the best strategic move.

When Early Adoption Makes Sense

There are three times when it makes strategic sense to be at the front of the line.  These are each discussed below.

1) Establishing a Strategic Position

A strategic position is the benefit where you want to win in the marketplace.  And almost without exception, there is value to being one of the first to stake out that position.  Why?  If you are the first, you are going after uncontested territory.  There is nobody there who already owns the position, so you can just claim it for yourself...unchallenged.  You can defines the rules in that space to be in your favor.  You become the first to come to mind when the position is thought of.  You are the “expert.”

Consider the opposite, where you try to win at a position which someone else has already claimed and won. The only way you can win is to unseat the current winner.  That effort can be extremely difficult, costly and time consuming…and usually still fails.  The early leader in grabbing a strategic position has so many advantages that they can enjoy success for a long time, even if they do not have the best offering.

That’s why Al Ries and Jack Trout, the experts in positioning, made their first law of marketing the Law of Leadership, which says “It’s better to be first than it is to be better.”

2) Gaining a Temporary Edge

There is a lot of imitation in business.  If someone comes up with an idea that gives them an advantage, others will copy it.  As a result, most advantages are temporary.  Therefore, you have two choices:  You can be at the front of the line on that innovation and get the temporary advantage until others catch up; OR you can wait to do the innovation later. 

If you wait, you get no advantage in the marketplace when you invest in the innovation, since the early adopters already took it.  All you are doing is erasing your market disadvantage so that you can regain parity with the early adopters. 

If it costs roughly the same to adopt an innovation early or late, then all the advantage goes to the early adopter.  This is because every firm will eventually have to make about the same investment in order to stay relevant, so the costs are the same.  But only the early investor gets the advantage in the marketplace.  The rest have a disadvantage at first and only parity later.  So be at the front of the line if it is an advantage which pretty much everyone will have to adopt eventually.

An example could be something like free on-line delivery.  The first to offer it get the advantage, become known for it, and build a loyal sales advantage.  The latecomers are eventually forced into offering free on-line delivery to stem their sales losses to the early movers.  But it does not result in huge market share gains for the latecomers, because those lured by free delivery are already satisfied by the early adopters of the policy.  There is little incentive to switch to the latecomer’s parity offering.  I speak more about this principle in an earlier blog.

3) The Guinea Pig

Sometimes the inventor of a new process or new technology has trouble achieving the critical mass of customers needed to make their product an industry standard.  In this B2B world, it is often to the inventor’s advantage to incent some companies to become their guinea pig.  In other words, if the inventing company essentially “pays” some potential customers to be test cases for their product, then they can build the critical mass that gets others to follow.

This is why brands in the fashion world give free samples to the tastemakers and celebrities which the masses like to copy.  For if the tastemakers and celebrities wear the fashion, then others will follow, making it worthwhile to give those leaders the items for free.

This can also happen for businesses which are opinion-leaders in their industry.  If you are willing to be an early adopter for these businesses desperate to create a critical mass of demand, you may get the product for free, or get other incentives to pay for training costs or costs of conversion.  Look at the great financial deal Nokia got from Microsoft to be one of the first to adopt the Microsoft smartphone software. The latecomers would not get all of those incentives.  They would have to pay full price for the item.  Hence,the early guinea pig gains an advantage over the latecomers.

When Late Adoption Makes Sense

There are also times when it is better to be nearer the end of the line.

1) Evolving Industry Standards

When there are a variety of conflicting technologies fighting to become the industry standard, it may make sense to wait until one better understands which technology will become the industry standard.  That way, you are less likely to invest in the wrong technology and then need to make a second investment in whichever technology ultimately became the standard.  This is especially important if you are a small player who does not have enough clout to influence which technology wins and not enough money to make the investment twice.

If the technology impacts your interaction with all the players in your supply chain, there may be little advantage to being first if the rest of the people you deal with in the supply chain are waiting until they see which technology wins.  The real advantage only comes when everyone is on the same page.  It may be better to wait to see what your key partners adopt before making your choice.

2) Price Deflation 

Some technologies and business systems are very expensive when they first come out and have their prices drop dramatically over time.  This would be a sort of high price deflation, the opposite of the high inflation in the Latin America story.  In the case of high deflation, there can be high incentives to wait.  If you wait long enough, you can get the same thing as the early adopters, but much cheaper.  That cost gap may be more than enough to compensate for entering the business a little later.

Not only might the later product version be cheaper to buy, but cheaper to operate.  The technology might go from difficult installation to “plug and play.”  So purchase cost, installation cost and ongoing maintenance/operating costs could benefit from waiting.

3) Avoiding Mistakes

Not all innovations turn out as originally promised.  They may bomb in the marketplace or need significant tweaking.  Sometimes, it pays to let others do all the difficult and expensive work of experimenting and testing.  Then, only once the formula for success is figured out, pounce on the marketplace with the winning formula.

This type of waiting is especially useful to market leaders who have significant influence on their supply chain.  For example, Coca Cola has rarely ever been the first with any innovations in their industry.  They were not the first to put soda in cans.  They were not the first to create a diet soda.  They were not the first with energy drinks.  What Coke likes to do is let others waste their time, money and effort on experimenting.  Then, once the right answer is known, Coke jumps in.  And because of Coke’s marketplace clout, they usually overcome the later start and overtake the innovator…and save all the innovation expense.

SUMMARY

Strategy is more than just knowing what to do…it is knowing when to do it.  Often the best strategic moves come to early adopters.  However, sometimes it makes more sense to wait.  The proper timing depends on issues like the riskiness of the innovation, expected price changes over time (up or down) and your relative market position.  There is no obvious answer for everyone in every situation.  So you have to figure it out, just like most other strategic issues.

FINAL THOUGHTS

Before getting in line, decide where in the line you want to be.

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.

Analogy #235: It’s Not Fair!

THE STORY
Usually, the first words said by a baby have something to do with their father or mother…words like “Mama” or “Dada.”

Although I can’t prove it, it seems to me that one of the first sentences a child says is “It’s not fair!” Even if it is not the first sentence, it is probably one of the most frequent sentences you will hear from a small child…and usually accompanied with some tears (and perhaps a temper tantrum).

THE ANALOGY
Even very small children seem to have a sense of justice. They feel they have rights, and when they do not get what they think they deserve, they cry out “That’s not fair!” Although you may disagree with these young children over what they truly deserve, there is no denying that these youngsters get very unhappy when they feel that they have not gotten a fair deal.

To show their displeasure, they may cry, throw a temper tantrum, or try to create their own sense of justice by stealing back what they believe was unjustly taken away from them. A good parent will eventually show the child that the world is not always fair and that we are not to create our own vigilante justice, but work within the system. In the meantime, parents will teach the child that temper tantrums are not the proper way to resolve problems.

Unfortunately, I have seen companies do the equivalent of crying “That’s not Fair!” and throw temper tantrums when a competitor has what appears to be an unfair advantage. Well, you know what? Life isn’t always fair in business and normally, throwing a temper tantrum will not solve the problem. Crying about an unfair disadvantage won’t suddenly make your “disadvantaged” strategy a rousing success. It is still a failed strategy, regardless of whatever injustice you feel.

And although you may want to use this “injustice” as an excuse for poor performance, guess what…your shareholders don’t care. They just want performance. Rather than throwing a temper tantrum, just pick yourself up and find a different strategy where you have the advantage in your favor.

THE PRINCIPLE
The principle here is that the world is not always “fair” and that a good strategist does not use unfairness as an excuse. Instead, a good strategist looks for an alternative strategy which creates “unfairness” in its favor. In other words, instead of sitting around pouting over bad performance and blaming “It’s not fair!,” redesign your strategy so that the tables are turned and the competition is now the one claiming “It’s not fair!”

I was recently talking to an executive about a business division that was performing below expectation. I suggested that the problems were primarily due to a particular competitor that was gobbling up market share at their expense. The response I got sounded a bit like a temper tantrum excuse: “But that competitor is a dotcom startup that is not required to turn a profit. Because we require our division to make money, it cannot offer as strong a consumer value.” I half expected the excuse to end with a cry “It’s not fair!”

My answer was that it didn’t matter that the competitor did not feel compelled to make as big a profit as we did. From the customer’s perspective, they don’t care about all that profit stuff. All they know is that the competitor offered a better deal.

Hiding behind that excuse won’t solve the problem. Customers will continually flock to the place where they get the best deal. Eventually, the board and shareholders will stop listening to these cries of “It’s not fair!” and demand results. To solve the problem, this division needs a new strategy which creates a different type of value that the competitor cannot match.

I was reminded of a similar situation earlier in my life. The company I was working with had a division that was doing poorly against a particular large food retailer. This food retailer was privately held. Being privately held, this competitor made financial decisions as if its cost of equity was virtually free. Our company, which was publically held, had to calculate a large cost of equity into its return on investment. As a result, the competitor could “afford” to do things which our firm thought were poor investments.

The customer didn’t care about “cost of equity” and “return on investment.” All they knew was that these so-called “poor” investments created a preferred shopping environment for our competitor. People within our company were saying the equivalent of “It’s not fair!” They hid behind this excuse rather than change the rules with a new strategy. Guess what? The competitor grew and our division shrank. And no amount of temper tantrums would fix that.

So what do we learn from this?

1) Don’t Hide Behind Excuses of “It’s not fair!”
If the situation truly is not fair and you are at a disadvantage, then you have a broken strategy. Sticking with such a broken strategy is suicide. Crying about it won’t change it. Pick yourself up and change your strategy.

2) Develop a Strategy Where you Have Your Own “Unfair” Advantage
If your strategy is broken, you need to reposition yourself relative to the competition in a manner where you can create your own advantage. For example, if the competitor has a unique cost advantage which you cannot touch, then do not use a price strategy against them. That is suicide. Instead, find a place where they are weak (like service) and build your “unfair” advantage there. Remember, the goal is not to beat the competition at their game. The goal is to find your own game where you can win.

There is almost always multiple ways to approach the marketplace, particularly with a niche strategy. Find the approach where you have the edge over the others.

In the end, you may find that your best approach is a strategy where both companies win. For example, if you let them win on price and you win on service, then both companies can succeed on their own and not resort to killing each other firm in a downward competitive spiral.

Unfair does not mean illegal. It is not illegal that taller people win more basketball games. Their height gives them an advantage in basketball, and they can legally use that advantage there. But being tall is not always an advantage. If you are short and small, perhaps you should be competing as a jockey. Riding a racehorse is a place where a huge, tall basketball center is at a disadvantage.

SUMMARY
A good strategy is one where the competition complains “It’s not fair!” about you rather than you complaining “It’s not fair!” about them. This requires looking for positions where your uniqueness gives you an edge that others find difficult to imitate. This proactive search for your own “unfair” edge is much better than just whining and complaining about the unfair edge that someone else has.

FINAL THOUGHTS
Lately the US government has been listening to a lot of whining and complaining about unfairness. The auto industry, for example, is asking for a handout because of the unfair advantage they claim to have versus the foreign auto companies. Just giving them more money won’t change the “unfairness.” Ultimately, the auto industry needs to change and find a strategy which is not broken.

Analogy #218: Fit or Fat?

THE STORY
When my Dad was a young man, he was very trim and muscular. In those early years, he did a lot of manual labor work, like digging ditches and fighting forest fires. Over time, he gradually did less physical work.

As a result, when he got older, my Dad became fairly fat and flabby. Yet, in spite of that, my Dad insisted he had to eat more food in his older age than he did when he was younger and more active. His logic?

Well, my Dad used to say, “I keep losing weight. No matter what I do, I can’t sustain the weight I had when I was young man. I’m wasting away. I have to eat more than I want to just to slow the loss of weight.”

What my Dad failed to take into consideration was that, beginning around age 45, men lose about 1% of their muscle mass each year just from aging. Add to that the fact that my Dad became far less physical in his activities and that he had added muscle mass loss due to surviving polio. In other words, he didn’t have a weight loss problem, he had a muscle mass loss problem.

Fat has less density than muscle, so when my Dad was replacing his muscle mass with fat mass, he was putting on a lot of flabby fat. He wasn’t wasting away. He was just trading useful muscle for useless fat.

THE ANALOGY
Most business strategies revolve around leveraging some competitive strength. In other words, a company finds some competency or benefit which they can deliver better, faster, or cheaper than other companies. They then use this strength to create a strategic market advantage. For example, Wal-Mart uses its strength in supply chain management to create a market advantage around low prices.

You can think of competitive strength as being like the strength your muscles give your body. When you do a lot of exercise, you build up a lot of muscle mass. This gives you even more strength than you had before. However, if you stop exercising, the muscle mass goes away and you become weaker.

In a similar sense, businesses can only maintain their competitive strength if they focus on the hard work of exercising in their area of superiority. If you stop trying to grow in your area of competitive strength, your strategic point of positive differentiation will start to atrophy, just like the idle muscles in my Dad.

And don’t lull yourself into satisfaction just because you’ve been able to keep the company large. You may have just repeated the folly of my father and traded in useful muscle for useless fat.

Look, for example, at the recent financial mess we’re in. A lot of really, really big financial institutions fell apart and no longer exist. Unfortunately, we found out too late that these companies became large on fat, rather than muscle. Rather than doing the hard work of exercising their muscles on improving excellence in traditional areas of finance, they got fat and lazy on the junk food of sub-prime mortgages, derivatives and credit default swaps.

Like my Dad—who was focused on the number of pounds he weighed rather than the quality of those pounds—these financial institutions focused on the potential size of the profits, rather than the quality of the profits. As it turns out, the quality of the profits sucked, and caused the companies to collapse. They did not have enough muscle to overcome all that fat.

THE PRINCIPLE
The strategic principle here is vigilance. There is never a good time to slack off. If you want to keep your strategic advantage, you need to watch how well you are doing every day.

Without vigilance to monitoring your strengths, you can fall into one of three traps:

1. Muscle Atrophy
Don’t assume that just because you had a competitive strength in the past, it will always be there. If you take it for granted, it can go away, just like my Dad’s muscles. It probably took a lot of hard work to create that competitive strength in the first place. Similarly, it will probably take a lot of hard work to keep that strength.

When Tater Tots came out, they were a great success. They had a unique flavor and texture, due to their ability to hold little chunks of potato together in crispy bite-size morsels. Management assumed that great taste and texture would always be there, so the owner, Heinz, started to focus on cutting costs.

As a result of stopping the vigilance on maintaining strength in taste and texture, the cost cutters changed the way the Tater Tots were made. The little potato chunks started turning into mush. The “tots” couldn’t hold the mush together. The Tater Tot bags were full of potato crumbs. Sales dropped. Eventually Heinz figured out the problem and renewed their strength in flavor and texture. Sales came back.

2. Out Muscled
Even if you keep your strength from weakening, you can still have problems. There needs to be an effort to build and improve upon that strength. If you stand still, competitors can either catch up or pass you by. Toyota used to have a large competitive advantage in quality. People put up with their bland cars to get that superior quality. Now, Ford has caught up to them in quality and has snazzier vehicles. Toyota is still in the lead, but we’re starting to see cracks in their strategy. Without renewed vigilance to regaining its strategic strength, Toyota could be in for tougher times.

So, not only does one need internally focused vigilance to make sure a strength does not slip into fat, one needs external vigilance to make sure that others don’t get stronger and pass you by.

3. Working the Wrong Muscles
The third one is the trickiest. You may be successful in keeping a competitive edge in an area only to find out that your edge has become irrelevant. Times change. Technology changes. People’s desires change. Your strength may no longer matter. You may find yourself working the wrong muscles.

Polaroid was vigilant in keeping its competitive strength in instant film technology. It fought a long, tough battle to keep Kodak from making inroads. Unfortunately, newer digital imaging was a superior way to get instant pictures over the Polaroid process. Polaroid’s technological strength, which it protected so well, was now irrelevant. Polaroid, as we know it, ceased to exist.

The US auto makers focused on their strength of trucks. However, times changed and now people wanted fuel efficient cars. Oooops! By focusing on truck profit margins instead of changing consumer tastes, those fat truck margins were suddenly just fat.

Therefore, vigilance also requires taking a broader look at all the possible events that could make your strength irrelevant. It’s not a bad idea to use trend spotters and to have a few experiments going on in areas which might replace your relevancy. For example, Wal-Mart’s strength is predicated on having low prices. If a new retail format has the potential of getting an edge in pricing, Wal-Mart’sformat can become irrelevant.

For example, when their spotters noticed the rise of the warehouse club format, Wal-Mart became concerned. Wal-Mart was afraid that warehouse clubs could be cheaper than their discount stores. As a result, they started up the Sam’s Club format as a hedge.

Later, they saw hypermarkets as a potential threat, so they experimented with Hypermart USA. That threat in the US turned out to be false, so they closed it down. However, they next started to see supercenters as a potential threat to their pricing strength, so Wal-Mart built Wal-Mart Supercenters. Who knows where Wal-Mart would be today if they were not that diligent in watching the environment for any potential threat to their strength.

SUMMARY
Without a competitive advantage, you don’t have much of a strategy. In fact, strategy gurus like Michael Porter would argue that without a competitive advantage you do not have a strategy at all. Competitive advantages are built upon strengths. If one is not vigilant in making sure that the strength is still an advantage, then that strength can go away. And maybe you will go away as well.

FINAL THOUGHTS
Virtuoso pianist Vladimir Horowitz would practice on the piano every day. He claimed that if he missed one day of practice, he could notice a difference in the quality of his performances. If he missed two days, he said his wife could notice the difference. And if he missed three days of practice, Horowitz said his audience could notice the difference. That is why he never let up on honing his strength. Do the same with your strength.