Strategic Planning Analogy #554: Organizing the Closet

THE STORY
Jessica and Amanda both owned a huge amount of clothes—so many that it became hard to find the right thing to wear. Therefore, Jessica and Amanda decided to get more scientific about how they organized their walk-in clothes closets.

Because having a color-coordinated outfit was so important, Jessica organized her closet by colors. All the reds were put together, all the blues were put together, and so on. Jessica was proud of her decision. “Now, putting together a coordinated outfit should be a snap,” said Jessica.

Amanda took a different approach. First, she separated her clothes by season. Then within each season, she separated dressy clothes from casual clothes. “This should make it easy to find an appropriate outfit for the season and occasion,” thought Amanda.

So who do you think had the easier time finding an outfit?

As it turns out, Jessica had the more difficult time. Sure, all the reds were together, but there were so many of them to wade through. There were summer wear in reds, winter wear in reds, dressy clothes in reds, casual clothes in reds and so on, all mixed up together. Most of what she had to sort through in reds was inappropriate at any particular time or occasion. It was difficult to find the appropriate red items at any particular point in time.

By contrast, Amanda’s approach to sorting made finding an outfit much easier. She knew what season and occasion she needed an outfit for before entering the closet. Then, she went to the appropriate area where those types of clothes were located. It was easy to make the right choice.

THE ANALOGY

Just because you organize your closet does not mean that it will help make your life simpler and more organized. Some organizational methodologies are just more helpful than others. Amanda, who organized by end use, had a superior system of clothes segregation than Jessica’s, which sorted by color.

The same is true in business. Businesses are told that things will be better if they segregate and specialize. However, not all segregation approaches are equally effective. Some are far more efficient than others. If a business chooses the wrong segmentation approach, it may deceive itself into thinking it is better off, merely because it went through the act of segmenting.

However, it may find itself in a situation like Jessica, with a segmentation scheme that provides no benefit, because it organized around the wrong factor (like color).

Therefore, before running your business through a complicated segregation and specialization program, make sure you are segregating and specializing on the most effective factors.

THE PRINCIPLE
The principle here is that a segmentation system based on end use and occasion (like Amanda) is almost always better than a segmentation system based on people/customers. At first, this may sound like heresy. After all, the majority of publications on targeted business segmentation will focus on how to target particular customer segments. But, as we will see below, that is not the best system for these times.

Push Vs. Pull

The targeted customer approach was developed a long time ago, before the advent of social media and consumer empowerment. The idea was that you would choose a particular customer segment and then pitch your product to that segment. It assumed that the business controlled the conversation, both in terms of who was involved and what the message was. It was called “push” marketing, because the manufacturer was pushing the conversation to its intended target. It was a controlled, one-way discourse. In such a controlled environment, segmenting by customer made sense.

However, that world has pretty much disappeared. Customers now want a dialogue, which includes not only a two-way conversation with the manufacturer, but also adding in other voices, like blogs, independent reviews, consumer ratings, and the opinions of their friends. The manufacturer no longer controls the conversation. It is merely one voice among many.

Now, we are in a “pull” environment, where the customers decide whether they want to get involved or not. If they decide to opt-in, then they pull the product towards them. If the customers don’t want to opt-in, the manufacturer is left out. Because the company has pretty much lost the ability to control who wants to be in the conversation, it seems a little silly to think they can control the segmentation of customers.    

Customers Have Multiple Occasions

But even if you could still segregate customers, it’s not the best choice. This is because people do not act the same in all situations. Take food, for example. Your choice for the most appropriate place to get food can change based on the situation/occasion:

• At the beginning of the month, when flushed with cash: A stock-up store.
• When out of a couple of perishable items, like bread or milk: A convenience store.
• When trying to impress a date or a boss: Higher-quality, more expensive food.
• When trying to stretch your money at the end of the month: a hard-discount cheap store.
• When needing a quick snack at work during a break: a vending machine.
• When in a hurry: a fast food restaurant.

As you can see, the person stayed the same, but the best option did not. The best option for the same individual varied by occasion. So if you target a particular consumer segment, what are you supposed to offer, since it varies by occasion? Am I to be a combination large stock-up, small convenience, high price, low price store inside of a vending machine that is also a restaurant? There really is no way to capture a consumer segment, because the consumer segment is not consistent across occasions. It really isn’t a meaningful segment.

Occasion Segmentation

This is why occasion-based segmentation is a much better choice. It was a better choice for Amanda’s closet and will be a better choice for your business. There are three reasons for this.

First, it allows a company to specialize and become “best at” offering the solution to a particular occasion. Rather than trying to be that combination food mess mentioned earlier, you can focus on just one of those occasions and truly become the best. That way, when someone is looking for a solution to the problem associated with that solution, you will stand out as the best option and get the business.

And this leads directly into the second reason to segregate and specialize based on a solution. In a pull environment, the customer is the one making the choices, and they make their choice at the time of the occasion. They will go out into the social media space to figure out what is the best option for that occasion and then pull in the best option. The only way they will choose you is if you have specialized in such a way as to be the best at that particular time and occasion. So to win in the new environment, you need to own the occasion.

The beauty is that you are now open to all modern customers, not just a segment. Whenever anyone falls into the occasion you are specializing in, they can be yours. And given the modern digital tools, they will find you. Isn’t that better than proactively telling people you don’t want their business because they are not in your “customer segment”?

Take the Kia Soul. It was originally targeted to a young “first car” consumer segment. However, one of the largest segments buying the car is retirees. As it turns out, retirees drive less, need to save money (on fixed incomes), and don’t haul around a lot of stuff or people. The Kia Soul is a great solution to the majority of the occasions retirees fall into. Why write off retirees and all of their business because of a push marketing segmentation directed to youth?

Finally, a specialization based on occasion typically leads to operational efficiencies. By not trying to be all things to a consumer segment, you can save all the expenses associated with that. Hence, the occasion-based focus can be a more profitable approach.

SUMMARY
In general, specialization and focus are good things. However, the benefits of specialization and focus vary depending on what you choose to focus on. In most cases, focusing on owning an occasion segment is more powerful than trying to own a consumer segment. Occasion-based segmentation is more in tune with pull marketing and the way consumers behave today. In addition, consumers vary their choices based on the occasion at hand, which implies that there really is no single way to please a consumer segment. Therefore, instead of focusing your business based on consumer demographics, focus on solutions for particular situation.

FINAL THOUGHTS
Every time you pick out your clothes to wear, remember that your choice is made based on the occasion for which you are wearing them. That way, you will never forget to run your business the same way—designed to be the best at providing a solution to a particular occasion.

Strategic Planning Analogy #544: Competitor or Co-Conspirator

THE STORY
For decades—in fact for most of the 20^th Century—baseball was America’s sport. It captivated the minds of the people and was their sporting passion. Nothing else came close.

There was all sorts of competition in baseball, with the players battling it out over the summer to see which team would come out on top and win the World Series Championship. The fans were captivated by every nuance in every game.

But gradually, over the latter part of the century, American Football started winning over the hearts of the sports enthusiasts. Today, football has become America’s sport. Sports enthusiasts are captivated by every nuance in every football game. Outside of New York City and Boston, most sports fans really only get a bit interested in baseball in the post-season. Television viewership of baseball during the season is miniscule compared to the ratings for football.

It makes you wonder…where did the real competitive battle in baseball take place? Was it on the field between baseball teams or was it in the hearts and minds of the sports fan at home? They may still be winning baseball games, but they lost the battle in the mind.

THE ANALOGY
An important aspect of business strategy is competitive strategy. The idea is to develop a plan to win share versus the competition. Why? Winners tend to reap the majority of the financial rewards, so the goal is to find a way to beat the competition and win. The result is a strategy with a focus on the competition.

The problem is that the competition are not the ones purchasing products. The consumer is. The consumer is the one who ultimately determines your success, not the competition.

If you are not careful, you could end up in the situation like baseball. You could become so focused with beating the competition (the other baseball teams), that you fail to see that the consumer (the sports fan) is abandoning baseball and consuming football. You may win the baseball game, but lose the fan, which is the greater loss.

In business, Kodak was so focused on beating Fuji that it failed to act sufficiently on the customer abandoning both and moving to digital imaging. Target and Walmart were so busy battling each other that they let Amazon grab a huge chunk of the market. Pepsi and Coke spent years fighting each other while the market for cola in the US was shrinking and the customer was abandoning colas for coffee, tea and healthier alternatives.

Competitive strategies may be nice, but consumer strategies are better.

THE PRINCIPLE
The principle here is that the real competition are not the companies that tend to look and act a lot like you. Instead, the real competitor is the one who can render your entire product category obsolete (or at least a lot less relevant). In baseball, the real competition was not other teams that wore similar baseball uniforms and played a similar game of baseball. No, the real competitor wore something a lot different (football uniforms) and played something a lot different (football).

In fact, I will contend that those who look like you really aren’t your competition, but are more like a co-conspirator. You actually work together to keep your category relevant. The noise you both make in the marketplace usually doesn’t change market share all that much. But is does draw attention to the category. So, in a sense, you are both working together on the same side—the side that wants customers to still be in love with your category.

Mature Market Stability

The more mature the market, the more this principle is true. Just look at the mature product categories found in the supermarket. Executives at the companies in these mature categories (like cereal and canned goods) go crazy with celebration when they can move their market share a small fraction of 1%.

Why are they so excited about so little? It is because mature markets tend to be very stable. Brand images are set, habits are ingrained, and preferences between brands in the category are etched in stone. There is little that can be done to move the needle, so any movement, even small ones, are celebrated.

We’re even starting to see this now in traditional computers. The market rankings are becoming stable and changes in share from quarter to quarter are hardly noticeable. The only sizable movement is from consumers moving their purchasing to other devices, like smartphones. So who is the real competition for computers? It’s the devices that don’t look like computers. That’s where the real gains and losses occur.

In fact, the vast majority of business categories are fairly mature. Rapid competitive movement is rare in most sectors. Unless someone comes up with a major technological breakthrough, share doesn’t move much. And even then, the gain is usually temporary as the others find a way to catch up.

The only meaningful movement is between categories. It’s a battle between teams wearing entirely different uniforms and playing different games.

The Response

With this in mind, how should companies respond?

First, they need to define themselves by what consumer needs they are satisfying rather than what product they sell. As mentioned earlier, the consumer is the one who decides the winner, not the competition. The customer is purchasing solutions to problems. If an entirely different product better solves their problem, then they will abandon their old category for an entirely new one. So if you want to win, see the world like the consumer and take off those product category blinders.

For example, Bausch & Lomb defined itself as being in the vision solution business rather than the lens manufacturing business. Bausch & Lomb saw its competition not as other lens makers but as anyone who was improving vision. As a result, when newer, non-lens businesses started offering better vision (like Lasik surgery), Bausch & Lomb was there, establishing a leading position.

If you define yourself by your product, your firm will die when your product category is replaced by something new. If you define yourself by consumer solutions, you will always have relevancy.

Second, don’t just focus on the same old competitors who are similar to you. Keep one eye on the periphery. Look for what the leading edge people are doing…what is coming next. Look for the new thing that will make you the obsolete thing. Look for the exciting thing wearing a different uniform. Look for the new rules that turn the tables.

SUMMARY
Rarely is the real action taking place between competitors approaching the market in a similar way. Instead, the big action is between dis-similar solutions to the same problem. In fact, your traditional competition is more like a co-conspirator, working with you to create interest in your product category. Therefore, focus more of your effort on aligning with the consumer rather than beating up the similar competition. After all, the consumer is doing the spending, not the competition. And they aren’t limited to spending it just in your category.

FINAL THOUGHTS
I suppose that someday American Football will be replaced in popularity by something else. The wheel of change never stops.

Strategic Planning Analogy #301: Management by Voting?

THE STORY
We Americans love democracy. The idea of dictators dictating orders without a vote is not in our DNA. That’s why the USA likes spreading democracy around the world.

However, I’m not sure that putting everything to a vote in all situations is always the best idea. What if parents were barred from taking any action unless voted on and approved by their children? And what if parents had to do what ever their children voted on for them to do? I think that would cause a bit of a mess.

And what if every employee had the sole vote in how their individual career was managed (how much they got paid, what their title was, what work they did, whether they could get fired, etc.)? Probably the closest we ever came to that was the high levels of unionization in Detroit, and we can now see how that helped eventually destroyed Detroit’s economy.

And what if, in the middle of a war, soldiers refused to take any military action until all of the soldiers could have time vote on it? Military “orders” would merely be propositions to be voted on. With enemy bombs coming in your direction, reaction tactics would have to wait until a sufficient time for campaigning and voting occurred. And if each military unit independently voted on what tactic to take, there would be no unified military action…only chaos.

No, I think some areas of life need more balance between the input of the people and the wisdom of the leaders.

THE ANALOGY
Businesses are not true democracies. Most items are not put to a vote of the Board of Directors, the Employees or the Customers. Instead, business leaders tend to determine what they think is best and get the company to follow.

The advent of Web 2.0 technology has made it easier for businesses to gather the input from a wide variety of stakeholders. This makes it easier to, in essence, put all management decisions up for a vote with customers and employees.

Many are hailing this as a great and wonderful thing. There are even books and business pundits declaring that Web 2.0 requires business leaders to relinquish control of the business to the customers, who have now supposed taken control of all the power.

Indeed, having access to all of that Web 2.0 interaction can enrich the decision-making process. The input is very valuable. However, I’m not ready to abdicate all business leadership to “the will of the people.”

Just as children need good parenting and soldiers need good commanders, businesses need good, strong leaders. And just as employers need to consider more than just the will of their employees, businesses must consider more than just what the latest Web 2.0 feedback says. And just as there are times when children need to obey their parents and soldiers need to obey their commanders, there are times when “voting” needs to be set aside so that business leaders can be obeyed.

THE PRINCIPLE
The principle here is that all the exciting new Web tools are just that—tools to be used in the hands of leaders. They are not substitutes for leadership—especially when it comes to strategy.

About a month ago or so, I was reading a story in Fortune magazine about Best Buy. There was a quote in there from current Best Buy CEO Brian Dunn.

“One of my roles as CEO is to be the chief listener. I don't believe that the model is any longer that there are a few really smart people at the top of the pyramid that make all the strategic decisions. It is much more about being all around the enterprise, and looking for people with great ideas and passionate points of view that are anchored to the business and connected to things our customers care about.”

At first, this quote sounded good to me. Dunn was using the wisdom of others to help make more informed decisions. Then I thought about it for a second longer. This is more than just getting input. This was starting to sound like abdicating responsibility for creating strategy. Strategic leadership seems to have been banished from the organization. Rather than having tactics derived from strategy, strategy appears to be belittled to nothing more than the culmination of a series of independent and unconnected tactical decisions made “by the people.”

Tactics shouldn’t drive strategy. Strategy should drive tactics.

Dynamite can be a very useful tool, but without skilled dynamite users, the tool can destroy you. Similarly, feedback from others is a powerful tool, but if you eliminate the role of professional strategists at the top of the organization to properly apply it, it can destroy your company.

You need both—the tool (feedback) and the professional tool handler (the strategist). Eliminating the strategist can lead to the following problems.

1. Mistaking Ideas for Strategy
Interaction with stakeholders is a wonderful way to get ideas. Ideas are great, but they are not strategy. Strategy gets to the heart of the matter: What business should I be in? What is my competitive advantage? What business model should I use? How do I win in the marketplace?

Not all ideas are appropriate for all companies under all conditions. Good ideas are the ones which support the strategy. Great strategic leaders understand their strategic thrust and can cull out the best ideas for their particular firm from the others. Leaving it up to a vote gets what’s popular, not what’s appropriate. For example, consumers may all want low prices, but typically only one firm in an industry is the lowest-cost operator. For everyone else, a priced-based strategy is probably not going to win, regardless of what the people say they want.

2. Missing the Big Picture
One of the major benefits of business strategy is getting “the big picture” vision correct. Great “big picture” visions rarely materialize out of merely following the whims expressed in a series of votes on minor tactics. Creating these visions cannot be fully abdicated to others. Leadership needs to take possession and ownership of visioning process.

Your big picture goal is to optimize the opportunities for your firm. That is not the same goal as your stakeholders. Your customer’s goal may be to get everything, perfectly, instantaneously, and free. If all you do is try to serve their selfish need, you will not be optimizing your own goal. Their objectives are not always in complete alignment with yours. You need to filter their ideas through your objectives.

In addition, the people you talk to only have limited knowledge of a small part of your overall situation. Hence, their ideas are biased towards their limited perspective. You need professional strategists to bring all of the knowledge together in order to create a comprehensive and complete picture of what is going on in the world. Only when you can see the big picture will you see the best strategic alternative.

Finally, great strategy, according to Michael Porter, is about choosing the right trade-offs. Your customers may not like it when you make trade-offs (they want it all), but it is often the only way to create excellence at some point of differentiation. You need to be a strong strategic leader and determine where those trade offs will be. Then you need the fortitude to stick to the principles of your tradeoff and not fall victim to the trap of trying to do everything well and failing to do anything well.

3. Missing Discontinuous Change
Change in the marketplace tends to revolutionary, rather than evolutionary. New categories and business models seem to spring out of nowhere. On-line travel firms like Orbitz, Expedia, and Travelocity gave a death blow to traditional travel agents almost overnight. Bottled water came out of nowhere to become a huge industry. Digital everything destroyed analog everything. Mobile phones, microwaves and laptop computers changed the entire nature of how people live and work, impacting almost every other industry. Newspapers used to be one of the most profitable industries in the world. Now they are bleeding badly. The recent recession quickly changed the fortunes and the rules for a lot of industries, particular in the financial arena.

As long as the marketplace is stable and the rules and players don’t change, it is easy to forget about strategy. Just talk to all of the stakeholders who are comfortable with the current situation and you will get all kinds of ideas for useful tactics to tweak the system.

However, when radical change occurs, this management by talking becomes far less useful. There is no consensus in your stakeholders as to what to do. They have no direct experience in the change for you to benefit from. Mere tactical improvement suggestions won’t succeed when all the rules are changing.

Professional strategists are needed to:

a) Help anticipate the discontinuous change
b) Develop scenarios in advance so as to be prepared when change occurs
c) Help the company to become proactive in change and help bring about change in a fashion which disproportionately benefits your company.

Apple doesn’t wait to react to change. They didn’t “take a vote” of the world before introducing change. They lead the change. Ipod and iTunes reinvented the business model for music. Iphone reinvented smart mobile devices and the selling of aps.

As Henry Ford put it, “If I’d asked my customers what they wanted, they’d have said ‘a faster horse.’” Suggestions from the masses tend to be extensions of what they know, which is the old business model. They are not very useful in proactively getting to the discontinuous new. And unfortunately, the discontinuous new is all around us. This is where professional strategists are most valuable.

SUMMARY
Although there are many tools available for mining the ideas of your stakeholders, this is no substitute for having professional strategic leadership activity at the top of your organization. The best of all worlds is to have both—the insights of your stakeholders put into proper perspective by professional strategists.

FINAL THOUGHTS
Benjamin Franklin once said, “When the people find they can vote themselves money, that will herald the end of the republic.” Similarly, when users of Web 2.0 tools find out how to manipulate the system, it could herald the end of the current fashion of capitalism (of abdicating strategy to the masses), because they will suck all the money out of the business model, leaving you with the losses.

Strategic Planning Analogy #286: Who’s Strategy is it?

THE STORY
Let’s imagine for a moment that a friend of yours asked to borrow your conservative-looking car for a few days. Being the nice person you are, you let the friend borrow the car.

After those few days are up, your friend returns the car. To your shock and horror, you notice that your friend had made changes to the automobile. The exterior had been repainted to a color you do not like. Flame-like decals were put on the sides of the car. The interior was redesigned in an awful checkerboard pattern. The carpeting was replaced with some awful shag that looked like something out of a 1960s Hippie “Love Van.”

Naturally, you would be furious with your friend for trashing up the look of your car. You’d probably say something like, “What is the matter with you? I let you drive my car for a few days and you totally destroy its appearance. Have you lost your mind? This was MY car! You had NO RIGHT to change it like that!”

You friend answers as follows: “I knew I’d only be using the car for a short time, but during that time I wanted to be able to make a statement. I wanted to car express my personality.”

At this point, you’re probably ready to scream, “Well now you can express yourself on a check to pay for all the damage you did to my car!”

THE ANALOGY
It’s hard to believe that someone would be that disrespectful of your car. After all, it is your car. It belongs to you.

Yet something similar seems to occur often in the business world. A newly hired CEO, CMO or strategist will come on the scene. As the new person in the company, they want to quickly make their mark on the firm. They want to make a statement and express themselves. As a result, they start to make all sorts of changes to the brand.

The consumer then screams back, “What are you doing to MY brand? You are destroying it! You had no right to make those changes! Make it the way it was before!”

Remember the debacle of “New Coke?” There was a consumer revolt because the consumers felt that “their” brand had been violated. New Coke had to be eliminated and the classic form needed to return.

The Coca-Cola brand was like the car in the story. Consumers felt they owned the brand. The executives, who tend to stick around in their job for a only short time, had “borrowed” the brand and returned it as an ugly “New Coke.”

THE PRINCIPLE
The principle here is that consumers of a brand tend to stick around longer than the managers of that brand. So, in essence, the brand belongs to the consumer and the managers are only borrowing it for a short time. Therefore, our brand strategies should take more of a “borrower” approach.

A typical CEO holds that position for about 3-4 years. A CMO typically holds its position for only about a year. A Chief Strategist probably falls somewhere in-between. This is a very short period compared to the expected life of the brand or company being managed.

The only one sticking around for the long haul tends to be the consumer. In many ways, they are the ones who own the brand. After all, branding success depends on creating the proper image/position in the mind of the customer. The customer owns their mind. They don’t like people playing mind games to mess it up (even more than they hate having people mess up their car).

Look at what Pepsi did in 2009 by redesigning all of its brand logos. Between the cost of the redesigns and the cost of the transferring all of the visuals to the new look, Pepsi probably spent well into the hundreds of millions of dollars world-wide.

What were the results? First, the redesign of the Tropicana orange juice carton was received so poorly by the consumers that Pepsi had to return to the former design. The consumer response was “How dare you change MY juice carton. You made it ugly; change it back!”

Changing Gatorade to “G” caused a lot of initial confusion for the customer. Is this the same old Gatorade I’m used to or did you mess it up like Coca-Cola did with New Coke? As for the other Pepsi logos, I doubt one will ever be able to find a positive return on the huge investment. The new management over-stepped and wasted a lot of money.

Remember, we are only borrowing the brand/product/company for a short time. We need to act more like borrowers. As a borrower, we should manage by a few rules.

Rule #1: Do Not Ignore the Legacy You Are Inheriting
Typically, the brand/product/company was around for a long time before you got there. You are not starting with a clean whiteboard. That whiteboard is already filled with years of impressions and experiences between the brand and the customer. Some of those impressions/experiences are etched in pretty deep. You cannot just erase this history as if it never occurred.

Before embarking on any strategic or cosmetic change, first make sure you understand all of that historical heritage. That legacy tends to box you in on your strategic options. Depending on the history, certain strategies will be compatible. Others will not.

Coca-Cola’s legacy was around authenticity. Coke was “the real thing.” Coke was “it.” The historically-based impression was that the Coke formula was the enduring essence of refreshment throughout the generations and that everything else is a poor imitation.

This legacy boxed in the strategic options. Throwing away the old formula and replacing it with a new one was not compatible with this legacy. If old Coke was “real” then new Coke had to be “fake.” If old Coke was “it,” then new Coke was “not it.”

Based on the history one has inherited, you only have permission to go in certain strategic directions. If you stray too far from history, consumers will tell you that you had no permission to do so and will try to force you to return the brand back. We talked more about permission in a recent blog.

In this Web 2.0 world, the customer has more power to fight back than ever before. So do not ignore the history you are inheriting. Pay heed to impressions already in place. Go only where history allows you to go.

Rule #2: Remember Where the Battle is Taking Place (the Consumer’s Mind)
To win with the consumer, you have to win at the point where decisions are being made—in the mind of the consumer. You do not own the mind of the consumer. You can visit it, but trust me, the consumer is very protective of what goes on there.

As I said earlier, if you think someone is going to be mad because you messed up their car, just watch what happens if you try to mess up their mind.

Therefore, treat the consumer’s mind with respect. Respect the historical impressions which already are already embedded in the brain. If you stray too far, your message/strategy will not be believed.

Remember, you are only a visitor, borrowing a bit of their mental attention.

Rule #3: You Are A Caretaker of the Brand For the Next Generation
Just as the brand/product/company was around well before you got there, hopefully it will be thriving well after you leave. You are a caretaker of the brand for only a brief time. If you are a poor caretaker, you will destroy the brand’s long-term viability.

If you only think short-term, you can find many ways to get a quick bump in profits. Some of these tactics, however, can destroy the long-term prospects.

Think of the luxury fashion industry. The heritage is wrapped up (in part) in exclusivity. In the near term, one can get a boost in luxury goods sales/profits by taking the brand to the masses. However, once the masses embrace the brand, the exclusivity heritage can be destroyed. In the long-term, this will lead to defection from the brand by luxury customers. Once the luxury customers no longer embrace/endorse the brand, the masses will no longer see the value, so they will eventually reject it as well. The net result is that the short-term boost lead to long-term brand destruction.

Remember, the key determinant of stock price is anticipated future cash flow. If your actions appear to be destroying long-term prospects, the stock price will be depressed, even if you get a near-term bump. Keep a long-term perspective in your strategy. When you hand off the brand to the next manager, give them a strong brand.

SUMMARY
We are managers for only a brief period in the life of what we are managing. We are inheriting the legacy of those who came before us and we are leaving a legacy to those who come after us. The best strategies understand this larger perspective. They take advantage of the opportunities provided by the old legacy and create enduring strength which transcends our tenure. After all, the brand really belongs to the customer. We are only caretakers.

FINAL THOUGHTS
When I was a Boy Scout, we were taught about treating nature with respect. We were told that we were nature’s caretaker on behalf of future generations. When it came to camping, the rule was to “leave the campgrounds in a better condition than you found it.” I’d say this concept applies equally well to strategic management.

Analogy #234: Context

THE STORY
Awhile back, I needed to purchase a refrigerator for my house. As part of the search for a refrigerator, my wife and I went to one of those warehouse appliance stores.

There is a reason why these places are called “warehouse” appliance stores. The building was little more than just a huge warehouse. There were no interior walls, no finished ceiling…just a mammoth open area, with row after row after row after row after row of refrigerators.

Eventually, my wife and I agreed on a refrigerator from this store and made a purchase. At the time, I thought we had made a great choice. But then came the shock when the refrigerator was delivered to our house.

The refrigerator was HUGE. It barely fit into the spot designated for refrigerators in the kitchen. When I started filling it with food, it seemed like there was no limit to how much it could hold. I could probably stock enough food in it to meet the needs of a large army of hungry teenagers. And I only needed to meet the needs of my wife and myself.

My first reaction was to double check to make sure they delivered the correct refrigerator. They did.

So then I tried to figure out how I ever convinced myself that this Paul Bunyan-sized refrigerator was such a great choice. Finally, it came to me…

In that large, cavernous warehouse store, all the refrigerators looked small. None came anywhere near touching the high, unfinished roof on the warehouse. There was no kitchen-sized reference point to compare the refrigerators to.

Now, if the inside of my home looked like the inside of a cavernous warehouse, with no interior walls or finished ceilings, I suppose that refrigerator would have looked in my home just like I remembered it at the store. But my home is not a warehouse. So now I have this over-sized white monster in my kitchen.

On the plus side, it’s easy to see where everything is in the refrigerator.

THE ANALOGY
The problem with my refrigerator purchase was that the context in which I purchased my refrigerator (a huge warehouse) was different from the context in which I use it (my small kitchen). The wrong context of the warehouse distorted my thinking and my judgment about the appropriateness of the refrigerator in my kitchen.

The same thing can happen in strategic planning. A supposedly great idea dreamed up by a bunch of old, rich white guys at a strategic planning off-site at a resort (after playing a round of golf) may not seem as great to the targeted customer: a young Hispanic woman who is struggling to make ends meet and has screaming children tugging on her jeans.

These two groups are living two entirely different lives. Their thinking comes from distinctly different contexts. Dreaming up a strategy in one context and implementing it in another may create a mismatch many times worse than my refrigerator problem.

THE PRINCIPLE
The principle here is that strategies work best when they are designed to operate in the context in which they will be implemented. Just as I would have made a better refrigerator decision if I had done it in the context of a kitchen, strategies should be evaluated in the context of where they will be practiced.

We will look at three aspects of strategic context.

1. Environmental Context
Your strategy will not be executed in a vacuum. It will have to fight for supremacy against competitors. As mentioned in an earlier blog, all successful strategies work by taking share from someone else and you should expect counter attacks form the ones who are losing that share. In other words, the mere entry of your strategy will inevitably change the environmental context. Therefore, you must not only design your strategy for today, but also so that it will work in the new context created by your entry.

Strategies succeed by winning a position in the marketplace. If you don’t incorporate the marketplace into your strategy, how will you ensure your ability to win? For example, if your strategy depends on winning with price by having prices 15% below competition, what will you do if competition decides to match your prices? In this case, one needs to understand the pricing context they are putting their product into—how stable is the pricing? Do you have a cost advantage that can sustain itself in this environment?

What if someone larger copies your strategy? As we saw in an earlier blog, this can be devastating.

Just as chess players study the mind of their opponent to determine the best moves, you must study the minds of the opponents in the marketplace.

2. Consumer Context
You would think that it would go without saying that your strategy should be designed to be desirable to the chosen customer. However, given the extremely high failure rate for new products, there must be a flaw in here somewhere.

Companies say they spend a fortune on consumer research and testing. Supposedly, all of this knowledge gathering is supposed to mitigate much of the risk. Just listen to the consumer via web 2.0 technology and you’ll know exactly what to do. At least that’s what people say.

The problem is that much of that research is done under the wrong context. Consumers are often put in sterile, unfamiliar surroundings and asked questions in an abstract form with a professional researcher watching them. This is not the environment in which the item will be purchased or used. It is like asking me in that giant warehouse if I think that refrigerator is too big. The context is wrong, so the answers you get are likely wrong. The closer your research can mimic the context in which a product is bought or used, the more reliable your results will be.

Sometimes, a new product or strategy will be so radically different that the customers have no reliable reference point in their lives to judge it. Sure, they will answer your question, but because they have no internal context for judging it, the answer will be wrong.

Most radical departures which eventually become huge successes were first viewed very skeptically by the consumer marketplace. Because it was so different from their past behavior, they had trouble imagining it within their future behavior. Computers, microwave ovens and other such items might never have come to the market if the decision was entirely based on initial consumer response. Therefore, if your strategy/product is too far outside the context of the consumer’s past, it may not be worth your time to even do the research (unless the research allows people time to interact with the product over a long period of time in the customer’s own environment—long enough to develop hands-on context).

3. Employee Context
Your employees are the ones that have to implement the strategy. If they cannot envision how the strategy works within the context of what they do every day, they will probably fail to execute the strategy well. When explaining the strategy to the troops, be sure to use words that put it into the work-world context. Tell them how their behavior fits into the larger context of the strategy—what is good behavior, what is bad behavior.

The entire context for the employee—job descriptions, rewards, punishments, promotions, etc.—should be linked to the strategy. That way, right behavior for the employee is right behavior for the strategy. Their context is your context.

SUMMARY
Strategies do not exist in a vacuum. They only succeed if they make sense within the context of the way people will interact with it on a daily basis. Therefore, don’t evaluate them in isolation outside of that context. Keep in mind the way competitors, consumers and employees naturally live their lives—what motivates them, how they react to change, how they derive satisfaction. Anticipate how your strategic change will change that context. Then communicate the strategy with language relevant to that context. As part of your strategic planning, try to plan tactics that keep this context in your favor. Take nothing for granted.

FINAL THOUGHTS
I used to work for a furniture retailer whose store was in a giant warehouse building. However, unlike the warehouse store in my story, this furniture warehouse store was divided with walls into 200 little rooms, fully furnished and accessorized, with lamps, paintings, fake windows with curtains and everything. You felt like you were in a 200 room house rather than a warehouse. It was easy to get a feel for how the furniture would look in your home. They were able to make a warehouse building achieve the right context. You can do the same.

Strategic Planning Analogy #139: Learn Your Love

THE STORY
Once, there was a young man who loved a beautiful young woman. Since he loved the woman so much, he wanted her to have great riches. Therefore, he devised a plan to give her great riches.

He left the United States to go work in a rapidly developing Asian country. The young man figured that he could become richer faster in one of these countries. He was right.

While living in Asia, the young man did well. On a regular basis, he would send money back to the United States to the woman he loved. He would also send her expensive pieces of Asian art.

After many years, he finally had become sufficiently wealthy that he could now fulfill his dream of supplying the woman he loved with great riches. Therefore, he came back to the United States to be with her.

When he returned, the young man expected the woman he loved to be happy to see him. Instead, she was very angry. He asked why she was so upset. She said,

“I never wanted great riches. I never wanted expensive Asian art. I don’t even like Asian art. All I ever wanted was to spend time with you.

“But instead of giving me what I wanted, you ran off half way around the world where I couldn’t spend time with you. You were so busy trying to become rich that you would not come back to visit me or even answer my calls.”

The young man replied, “But I did it for you. I love you so much that I want you to have all the riches you could desire.”

To this, the young girl said, “If you had really loved me, you would have done a better job of learning what was truly important to me. Spending time is what was most important to me. I found someone else who understood this. We recently got married. I saved all your money and your art. You can have it back.”

THE ANALOGY
Many companies talk about how important the consumer is to them. They use terms like being “consumer centric” or “customer first.” They may even talk about a goal of “delighting the customer.”

This professed “love” of the consumer is similar to the love that the young man had for the young woman. Just as this young man devised a plan to please the woman he loved, many businesses devise strategic plans with the aim of pleasing their customers.

Unfortunately, the young man discovered that having great love and having a great plan were not enough. Because he did not take the time to truly understand the woman of his affections, his plan was a failure. Rather than making her happy, he made her so unhappy that she left him for another man.

This also happens all the time in the business world. Companies may profess their love of the customer, but spend so little time trying to understand them that their well-laid plans fail. Instead of giving the customer what he or she really desires, they give the consumer what they think the customer wants. Often times they guess wrong. As a result, the customer leaves them and marries-up their loyalties to another company.

THE PRINCIPLE
The principle here is that customer love without customer intimacy leads to failure. Good intentions and well thought out plans are not good enough. One needs the intimate knowledge of the customer to truly satisfy them.

Although this has always been true, it is even more critical in today’s marketplace. Thanks to web 2.0 technology, consumers have more control of how business works. If you are out of touch, they can use their power to quickly punish you and abandon you.

Facebook’s recent failure with their Beacon technology is a great example. Facebook thought its customers enjoyed sharing all of their information. So, in order to help monetize this fact, they used Beacon to post where Facebook members were shopping (along with some shopping-related ads). They did this without asking permission.

Consumers hated this new intrusion into their lives and made a big stink about it all over the web. Facebook quickly relented and pulled Beacon.

Now you would think that a big consumer products company like Kraft would have figured this out a long time ago. But they have stumbled as well. About a year and ahalf ago, Irene Rosenfeld came back to Kraft to become their CEO (after spending a couple of years at Frito-Lay). What she found when she came back was a company focused almost exclusively on lower costs. Quality suffered. Innovation suffered. And profitability suffered.

As it turns out, customers were willing to spend more, if the product was right. Lower, put still premium prices on mediocre quality weren’t worth much. At that point, one may as well pay a little less and get the store brand rather than Kraft (which is what people did). Being out of touch with the customer was hurting the corporation.

With Maxwell House coffee, Kraft was so focused on beating Folgers that they failed to realize that the customers had abandoned both for Starbucks. Starbucks was more in tune with what the customer was looking for. Kroger pretty much missed the boat on healthy and organic as well.

Finally, Kraft is waking up to what the customer wants in coffee, but it may be too late. Like in the story, customers are only willing to wait so long before they abandon you for another love.

It is very easy for a strategic planning process to get focused on non-consumer issues such as raising margins, lowering costs, improving efficiency, improving supply chain relations, beating up the competition and so on. Although these are important issues, they can blind us to the impact our strategy has on the consumer (the one we profess to love).

In the strategic planning process, we need to continually keep asking ourselves two questions:

1) Do I truly, intimately understand what the customer I love wants from me? and

2) Do I truly understand how my strategic action will impact my ability to please the customer I love?

In business, what we do tends to fall into two categories: things the customer can see (like products, services, and prices) and things the customer is unaware of or doesn’t care about (like how you run your finance department or where you buy your office supplies). You may have a little flexibility on how you approach things in the second category, but never make a strategic decision in the first category without keeping the customer in the forefront of your minds.

Sometimes things which used to fall in the second category move up to the first. For example, most customers used to not know or care where their toys were manufactured. However, after all of the recalls of dangerous toys made in China, country of origin has become an important consumer issue. Therefore, consumer knowledge needs to be continually updated.

SUMMARY
Saying you love your customer is not enough. Well-meaning plans that misunderstand the customer are not enough. Strategic plans need to incorporate knowledge gained through customer intimacy in order to succeed.

FINAL THOUGHTS
Today’s customer is less likely to put up with phoniness and hypocrisy than any prior generation. They are smarter and have more access to knowledge and power. Giving mere lip service to “customer centricity” is more perilous than ever before. There is no place to hide. It’s either authenticity or rejection. Don’t just say you love the customer. Show them you love them by some tangible action which resonates to their core.

Watch, Don't Listen

THE STORY
I used to work for a company that gave its executives free access to all of the health care resources of the Mayo Clinic executive program. It was a great benefit. They would test you for all sorts of potential medical problems with a very thorough examination (maybe a little too thorough in some areas, if you know what I mean). Then the doctors would take the time to explain all the results to you in great detail.

One time, the doctors were concerned that I was starting to put on a bit too much weight, so they wanted me to spend time talking to one of their nutritionists/dieticians. This dietician started talking to me about all sorts of subjects, like exercise, food choices, meal portions and the like, but I could hardly hear a word she was saying. I was too fixated on noticing the fact that this woman was significantly more overweight than I was. I had difficulty taking her words seriously, when the results of her own behavior were staring me in the face.

THE ANALOGY
In the story above, it was hard for me to take the advice of this dietician seriously, because it was apparent by looking at her that she was failing in heeding her own advice. I figured that this type of thing is what she did for a living, so she would be more motivated than anyone else to follow through. Being more aware of the health risks, she should have more motivation to lose weight. Being an advocate for slimness, you would think that she should be more motivated to be slim than most people. Being smarter about the topic, you would think she would be more successful at finding what works.

Yet she was fatter than I was. And I’m not all that motivated to be slim. So if she couldn’t follow her own advice with her added motivation, what chance did I have? I couldn’t hear her words, because her actions were speaking too loudly.

In our last blog (see “Stop Listening to Me”), we talked about the dangers inherent in listening to our customers too much. What they say can be too limiting and not take into account everything necessary to create great strategy. Worse yet, customers may not be telling us what they truly believe, based on a desire to please or a bias caused by the interview itself.

If there are problems in asking and listening to our customers, then how can we get their input? As in the story of the dietician, we can learn a lot by observing behavior. It’s much harder for our everyday actions to lie. The cumulative impact of everyday behavioral decisions by the dietician were plain to see.

THE PRINCIPLE
The principle here is to learn through observation rather then intervention. It is less about surveys and more about anthropology. We are to be more like Dian Fossey and her study of the Gorillas in the Mist or Jane Goodall and her study of the Apes. They learned by observing their objects in their natural environment.

There are two worlds where you can observe your consumer, the physical world and the internet world. We will look at each of them.

1) Observations in the Internet World
Rather than using the internet to directly connect to the consumer, you can use the internet to observe what people are saying in general to each other. There are enough people saying enough things online that you can find out what people are thinking on a wide variety of topics.

Now you still have to be a little bit wary of biases out there, particularly if you are pulling data from advertising-supported sites or blogs with a very strong bias in a particular direction. To please their advertisers or fellow extremists, these sites could mis-represent general sentiments. However, a lot of what is out there is just regular people saying what is on their mind. Tapping into this can be a relatively inexpensive way to learn what people truly think—about your company and about how they live their lives.

There are a number of companies out there who can help in this task. A partial listing would include BuzzMetrics, owned by AC Nielsen, Cymfony, owned by TNS, and Dow Jones’ Factiva. They can help you pick up on trends very quickly by aggregating all of the noise on the internet and distill what the key trends are.

The beauty of these types of observations is that you get results relatively quickly and they tend to have fewer biases than traditional consumer research. The problem is that the web chatter tends not to be equally distributed amongst all demographic groups. If your particular target is not well represented in chatter, this is more limited in scope.

2) Observations in the Real World
Sometimes, the best information can come from just watching people live their ordinary lives. For example, if you are marketing to teens, you can learn a lot by just observing teens doing what they do in the places they congregate, such as shopping malls or basketball courts.

Often times, if your observations take place in locations which tend to catch onto trends more quickly (or tend to be places where trends originate), you can learn about trends in their infancy and take advantage of them before the competition. This is particularly useful in categories where there is a strong fashion element, although useful in many other areas as well. The practitioners give it the fancy name of being “Cool Hunters.”

Back when I lived in Minneapolis, I would sometimes go to the Mall of America (one of the largest malls in the world) and just watch the people—what they were wearing and which store bags they were carrying. I would make a note of which store shopping bags I was seeing more of and which I was seeing less of. Then, later, when the monthly retail sales reports came out from all the retailers, I would compare national sales results to my mall observations. Normally, the more bags I saw in the mall, the better the official sale results.

Retailers have been known to follow people around in the store, to see what path they used to get through the store, where they stopped to look at something and so on.
Consumer product companies are famous for observing people over long periods of time to see how they actually interact with their products. They take photos of the inside of the refrigerator, or ask customers to take photos periodically of what they are doing or a whole host of other things. The idea is that once people get over the initial thought of being observed, they will eventually go back to their normal routines. Seeing this “real” behavior gives great insights into what can make or break your success. The practitioners like to give this the fancy name of “Ethnography.”

The real significance can be making observations related to problem solving. Through observations, one can see the types of problems people have, the innovative ways they try to solve them, and the level of success they have had in solving them. I have talked to many executives in the consumer products industry who have told me of all sorts of ways in which their products are used that are not at all as the company intended them to be used. When you see problems where customers are having difficulties, this could lead to the development of new solutions.

SUMMARY
Although strategies should never be totally developed based solely on consumer insight, it is an important element. And often, the best way to get that insight is not by asking the consumer directly, but by observing them in their natural course of activity, be that activity on the internet or activity in the physical world. Good strategists are often pretty good anthropologists.

FINAL THOUGHTS
There’s an old saying, “Do as I say, not as I do.” Well, in my case, I would rather pay more attention to the “do” than to the “say.”

Stop Listening to Me

THE STORY
Auto executive Bob Lutz likes to talk about the disasters one creates when designing cars based on consumer research. Regarding the Ford Thunderbird, he said,

“Ford ruined the Thunderbird by taking [consumer survey] responses too seriously. The original Thunderbird was a sleek, zippy, tightly designed two-seater. Ford asked T-bird customers what they’d like more of: Would they like, say, a little extra room? They would. How about a back seat? You bet. So Ford introduced an “improved” four-seater (and later a four-door). The restyled car was no longer the sleek sportster that had first attracted drivers. It’s mystique paled, and what had been a unique addition to Ford’s line was now just another car.”

The larger, more boring Thunderbird sold poorly enough that it had to be retired.

When at Chrysler, Lutz saw this problem again. In the 1980s, the Chrysler sub-compacts were not selling as well as the Ford Escort. Chrysler asked the customers what the problem was. In Lutz’s words:

“By a vast majority, respondents said they would like the car much better if it were just a little bigger—say four inches longer on its wheelbase. Now, anyone even passingly familiar with the US auto market knows that most people buy subcompacts because that’s all they can afford, not because they have some warped desire to sit with their knees up around their chest. Thus, when asked what they’d like changed about their cars, it’s axiomatic that subcompact owners would like them bigger.”

According to Lutz, the Chrysler executives were so fixated on giving the customer what they wanted, that they embarked on a $170 million campaign to find a way to make their sub-compacts four inches longer and still sell them at the same low price. It never occurred to these executives that Chrysler already had popular cars that were four inches longer for which people were willing to pay a higher price. Eventually, Lutz had to put his foot down and stop the nonsense.

And then, there was the Edsel, one of the biggest design disasters in automotive history. Oh, by the way, it was also one of the most consumer-researched designs in automotive history. Consumers were given choices of many different types of designs on each part of the car. Then Ford took the winners of each part and put it all together. When all of the “consumer chosen” parts were assembled, the total design was a mess that consumers rejected.

THE ANALOGY
We live in a Web 2.0 world. Because the Web 2.0 provides unprecedented opportunities for two-way dialogue, companies are rushing to get consumer interaction—even moreso than in the heyday of Bob Lutz. It is not uncommon these days for companies to have their advertising designed by consumers or even have their products designed by consumers.

In fact, based on what companies are doing, you might conclude that the need for strategy in a Web 2.0 world is being made obsolete. Why develop strategies, when all you have to do is whatever the customer says?

Although it can be insightful to learn what customers are thinking, the examples in the auto industry above point out that if you put too much power in the hands of the customers, it can actually destroy your business.

Just because we have new web tools to better interact with customers does not mean that customers have suddenly gotten any smarter or more insightful. They still say some silly things that could get us into serious trouble. All these new tools merely do is make it easier to fall into the trap of listening too closely to our customer to our own demise.

THE PRINCIPLE
The principle here is that strategies should incorporate many issues which transcend the interests or opinions of customers. If you limit strategy to merely the level of consumer interaction, we can end up making some self-destructive decisions.

The weaknesses of relying too much on consumer input can be summarized as follows:

1) Consumers Don’t Care If Your Business Survives
2) Consumers Can Only Interact Incrementally
3) Consumers are More Interested in Being Polite than in Being Honest

Each of these will now be discussed in greater detail.

1) Consumers Don’t Care If Your Business Survives
One of the chief goals of strategy is to provide a path to long-term prosperity (or at the very least a path to cash out of the business well). Consumers do not typically care about these things. They don’t worry about whether investors (shareholders, banks, hedge funds, etc.) get a return on their investment or whether the employees have prosperous careers. They just want what’s in it for them. And if they are honest, that means they want it all, they want it now, and they don’t want to pay for it.

Very few businesses can develop a sustainable business model around those qualifications. And guess what…in most cases, the customer doesn’t care if you business is sustainable. There are usually enough options that they will just go somewhere else to make their demands.

So if you single-mindedly try to please the customer by giving them whatever they want, and ignore your other stakeholders, you will typically end up with an unsustainable business model.

2) Consumers Can Only Interact Incrementally
Even if customers did care about the long-term viability of your business, they do not have the proper perspective to make long-term decisions. They do not know what is technologically possible. They have full-time jobs and concerns of the immediate. Consumers do not spend 40 hours a week thinking about the potential for where your brand and where it could go in the future.

As a result, consumers can only react incrementally to what is in front of them today. In the case of autos, they may be able to tell you to make them a little bigger or put in more cup holders, but they cannot help invent the future of personal transportation. Nobody was clamoring for a minivan before it was invented. They only clamored for it after a business put it on the market.

Most great business ideas are transformational—upsetting current conventions by providing something completely different than what was in the marketplace. These came out of the minds of visionary business people, not consumers. Nobody asked for the transformational coffee phenomenon of Starbucks, but now they are everywhere.

At Sony, they are proud to say that nobody ever asked for any of those great transformational inventions they have given us over the years. Instead, Sony’s great inventions came out of a deep understanding of consumer behavior (perhaps knowing people better than they know themselves) and a deep understanding of technological possibilities (for which consumers are unaware).

Incrementally, a consumer can suggest a new coffee variation for Starbucks or a new feature for a Sony computer, but beyond that, they are typically not much help. And if your company stays at only the incremental level in its thinking, your company will be passed by from other firms who are thinking transformationally, and who end up taking your customers with them (even though the customers did not ask for the transformation).

3) Consumers are More Interested in Being Polite than in Being Honest
When consumers are asked their opinions, they want to be helpful, but certain biases tend to creep into their responses to cause distortions. For example, there is a bias for consumers to say they will buy your product in your survey at a given price even if they would not, because they want to please you and encourage you. People don’t want to appear to be cheapskates, so they will tell you they are more willing to part with their money for something than they would in reality.

To quote an article in the May 18, 2007 Wall Street Journal, “The moment you ask someone for their opinion I have created a bias because of the natural human instinct to please.” Bob Lutz puts it more bluntly when he says “consumers often lie—albeit for the noblest of reasons.” Lutz’s point is that we tend to give very rational answers when being surveyed, because that is the “responsible” thing to do. Unfortunately, our true behavior is more likely to be driven by emotions.

So even if the consumer has our best long-term interest at heart and thinks about transformational issues, they may still give us answers that do not reflect their true intentions.

SUMMARY
Although consumers can tell us a lot of things, they cannot tell us what our strategy should be. If we let too much consumer commentary affect our strategic decisions, we will most likely miss the mark and allow others to take our business away, because these firms give the consumers what they really want, rather than what they say they want.

FINAL THOUGHTS
Web 2.0 technology is a great tool, just as a hammer is a great tool. But to build your strategic house, you need more than a single tool; you need the entire tool belt.