Strategic Planning Analogy #576: How Strong is Your Foundation?

THE STORY

I think the scariest commercials on TV are sponsored by the companies that rebuild house foundations. They talk about how—if you neglect your house foundation—it will collapse and your house will be ruined. That sounds pretty scary to me.

THE ANALOGY
Businesses are like houses. They are built upon a foundation. The better that foundation, the stronger that business will be. Strategic planning is a tool to help build a strong foundation for your business.

But let’s take this deeper. Even the process of strategic planning is built upon a foundation. If the foundation behind your strategic planning is weak, it will become a weak tool in helping to build the foundation of your business. So if you want a strong business foundation, you first need a strong foundation in your strategy process.

THE PRINCIPLE
To me, the foundational assumption behind long range strategic planning is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This is the foundation behind strong strategic processes. Focus your process on adhering to this foundation and the process will be strong. Focus on anything else and you may just end up wasting your time. And then, your organization’s foundation will also falter.

There are two key words in this foundation that I will focus on here: risk and control.

1) Risk

Nothing is certain in life except death and taxes. Everything else fluctuates in complex, interdependent ways. Strategies are built to be executed in such an uncertain, interconnected world. In fact, the mere exercising of your strategy will change the environment it is being executed in. 

Therefore, strategies cannot be structured in such a way as to guarantee success. There are too many variables. The best you can hope for is a reduction in the risk of failure.

As a result, a good strategic process will spend a disproportionate time focusing on those vulnerabilities where you are at greatest risk. These are chosen based on two criteria:

a) What situations will have the greatest impact on my chances for success?

b) What are the areas most uncertain in knowing how they will unfold?

If something has both high impact and high uncertainty, then it should be a key part of your strategic discussion. After all, a high impact, uncertain situation has the greatest potential for increasing your risk of failure.

Often times, these may be items that fall outside what is traditionally focused on in strategy. Yes, there is a place for mission statements, values, core competencies, goal-setting, metrics, and the like. But if you don’t spend enough time addressing the high risk issues, the other activities will not save you. You will be blindsided by a future that surprises you and you are unprepared for.

That is why scenario planning and contingency planning can be such valuable strategy tools. Scenario planning can help you discover the risky areas to focus on and contingency planning can help you prepare your responses to these risks so that you can minimize any negative impact.

This leads to a second aspect of risk. Because the environment is constantly changing, you cannot address all of your risks in a single, one-time strategy document. The world is dynamic, so the strategy process must be dynamic as well.

Notice that I keep using the word strategy PROCESS. Strategic planning should not be seen as a single annual event, but as an ongoing process which happens whenever there are decisions to be made. If you want to increase your likelihood for success, you need a strategic approach that adapts to the changes around you and helps you make the everyday choices that reduce the risk of failure.

This does not mean that your basic strategy will keep changing every day. A strategy with no lasting impact is worthless. But you may need to switch to different (well thought out in advance) contingencies as the future reveals itself.

As soon as you realize that strategic planning is about minimizing risk rather than about creating a perfect plan, you will see the folly in many strategic processes that spend way too much time trying to craft “perfection.” “Direction” is more important than “Precision” when it comes to planning. If I know my desired endpoint (i.e., direction), I will know what to do when all the changes occur: adapt so that my endpoint is still in front of me. However, if I only have a detailed roadmap as my plan with clear steps on what to do (i.e., precision), my organization can quickly become lost if the future blows up one of my steps.

Don’t waste time trying to create the perfect planning document. Instead, use that time to create the right general strategic framework (which minimizes my risk of failure).

2) Control

The second key word is “control.” Even though one cannot gain full control over the future, it is possible to increase one’s control over the future through planning. As Peter Drucker once said “The best way to predict the future is to create the future.” In other words, the more control you have over how the future is created, the less uncertainty and risk there is in the future. Therefore, one of the most important parts of good strategic planning is planning how to increase your control over how the future is created.

One thing I know for sure is that if your organization is not focused on increasing control, it will lose control to someone else who is  focused on increasing control (on creating a future that is detrimental to your organization).

This really gets down to the issue of power. The more power you have, the more control you have. And if you have both power and control, you can create strategies with less risk of failure.

Power is a relative term. To say one has power means that you have a greater ability to control the future than others who are also trying to influence how the future is created. Therefore, an analysis of power is very external in its orientation. It requires a deep understanding of all the players who can impact how the future unfolds. They may be current or future competitors, legislators, influential consumer groups, or whatever. Don’t limit your thinking here.

Your task is to figure out how to maintain your current power within this environment and increase it over time. This can include topics such as size/scale, public relations, lobbying, alliances/joint ventures, the setting of international standards, control of patents, branding, acquisitions, speed to market, and so on. You need to convince the world to march to your beat and heed to your rules (the ones which give you the advantage). Are these issues/topics part of your strategic agenda?

This idea of building strategies which increase control was a key point of focus in my previous blog, seen here.

This is one of the key advantages of the Blue Ocean strategy. If you focus on building a strategy in a place where there aren’t any rules yet, you have a better shot of gaining control over how those rules are written. There is often a better shot at creating the future if you go to a place where there is not an entrenched competitor who already has control (provided you enter the blue ocean with power).

How much of your strategic process is focused on internal issues versus trying to gain control of the eternal environment? My guess is that your process probably needs to increase the time spent on gaining external control.

SUMMARY
One’s foundational philosophy behind strategic planning will determine the type of planning process you adopt. I believe that the foundational philosophy that creates the best strategic planning process is this:

“By planning, an organization can minimize its risk for failure by taking greater control over how its destiny will unfold.”

This foundation will lead to a greater focus on the external issues of minimizing risk and controlling power. And that has the greatest return on your strategic efforts.

FINAL THOUGHTS
Some say that planning is no longer valuable because the world is changing too quickly. Well, if your strategic process is focused on the wrong foundation, that statement is true. However, if your strategic foundation is focused on minimizing risk, increasing control, and long-term destiny, then it is more important than ever.

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 #482: Owning Vs. Driving

 

THE STORY
In automobile racing, the drivers get all the glory.  They are the heroes; the ones who get in all the photos and are adored by the race car fans.

Yet are the drivers really all that special?  Most are mere employees of large race car companies.  They don’t own the car they drive in the races.  Heck, they don’t even own the clothes they wear while driving.  Both the clothing and the cars are covered with decals and logos of the company sponsors who invest in these large racing enterprises.

Winning in car races requires more than just drivers.  There are the car designers, the pit crew, and a whole host of others.  Yet the glory goes to the one driving the car.

In an episode of The Simpsons, there was a child’s race of coasting “soapbox derby” cars down a hill.  While all the boys were clamoring to be the drivers, one of the coaster car designers lamented, “It’s all in the design.  The drivers are basically ballast in these cars.”  Yet the drivers get the glory.

 

THE ANALOGY
The drivers don’t own anything but they get all the glory.  That’s because, to most fans, it’s not who owns the car that is important, but who drives it. 

A similar idea applies to all businesses.  Many business leaders seem possessed with the idea that their company has to own a lot of things.  They are constantly involved in a wide variety of acquisitions and other M&A activity.  They focus on building a portfolio of owned businesses.

Yet is ownership really all that important?  In auto racing, the glory goes to the one who drives the car, not the one who owns it.  Similarly, as long as your company is driving the way an industry works, does it really need to own that many pieces of the industry?

The key is not ownership, but control.  And as long as you are in control (behind the steering wheel), you can have as many people putting their logos and decals on the venture as they want.  Because it is the driver who gets the biggest prize.

 

THE PRINCIPLE
The principle here has to do with control.  Those who control how an industry or business ecosystem works control how the money flows.  So a business with more control can make more of the money flow to themselves.  

Increasing ownership does not necessarily lead to increasing control and increasing profitability.  In fact, as we will see later, increased ownership can actually reduce control and profitability.

There are many alternatives to ownership, including alliances, joint ventures, partnering, outsourcing, buying on the open market, and a host of contractual arrangements.  These can often lead to greater control and greater profitability than ownership.  If you do these types of arrangements properly, you can be in the driver’s seat for the industry—and get the glory (and the biggest prize).

Problems With Transfer Pricing

Ownership can destroy control and profitability in many ways.  First, there is the problem of transfer pricing.  As an item moves through the pipeline—from raw material to the hands of the ultimate consumer—there are numerous places to transfer ownership, from the extractor to the part supplier to the assembler/manufacturer to the distributor to the retailer to the consumer. 

At each point along this chain a transfer price is negotiated.  Those with power control who benefits the most from how the transfer price is negotiated.  For example, Walmart is a very powerful part of many pipelines. When manufacturers sell to Walmart, I’m sure the Walmart does much better on the transfer price than do the manufacturers or other retailers negotiating with those same manufacturers.

A problem can frequently occur, however, if a company owns too many parts of that pipeline.  If they forward and backward integrate significantly through acquisition, they can end up owning most of the transfer points.  In essence, the company ends up negotiating with itself.  Therefore, the fully integrated company cannot use control, power and leverage to extract above average returns through transfer pricing.  After all, if you own both sides of the negotiating table, if one side wins and the other loses, you are no further ahead in total, because you own the winner and  the loser in the negotiation.  In other words, the extra ownership reduces your control over how the money flows in transfer pricing.

Problems With Alienation

The mere fact that you own an additional piece of the supply chain can destroy the value of what you have purchased due to the reaction of others.  For example, let’s assume you buy one of your suppliers—someone who was a supplier to you as well as some of your competitors.  Those competitors, who were happy to purchase from that supplier before you owned it, may no longer want to use the supplier after you own it, because they don’t want to give business to their competition.

For example, when Walmart purchased McLane Distribution, it thought it would gain knowledge of fast moving consumer good distribution in groceries.  What they failed to consider was how many convenience store customers would drop McLane as their supplier because they didn’t want to help Walmart.  Walmart had to sell McLane in order for McLane to keep its customers.  So, by owning McLane, Walmart destroyed McLane’s power to control its other customers.

Problems With Focus

The more diversified your ownership, the less focused one tends to be.  It takes considerable effort to be state-of-the-art at everything all the time.  There are more opportunities to slip up.  However, if you keep your sphere of ownership smaller, you can specialize at being the very best in a narrow focus.

There are reasons why people outsource things like payroll and IT and other back-office functions to specialists.  That way, they know that there is someone whose whole livelihood is based on being the very best in that area doing the work for them.  Specialization makes those outsourcing firms more powerful and it allows their customers to focus on the areas more critical to their success.  It is a win win.

Nike and Apple

Nike and Apple are two firms which avoid a preoccupation with ownership and instead preoccupy themselves with control.  In both cases, Nike and Apple focus on only two areas—design (business model and product design) and consumer image.  Pretty much everything else is outsourced (including the making of the products).  Nike and Apple own the key drivers for their whole ecosystems.  It puts them in a powerful position to drive how the rest of the entire ecosystem operates, even though they don’t own it.  And both are doing well.

Apple is able to focus in on what matters and leave the rest to the other experts.  And because it is the driver, it negotiates tough deals.  Just ask anyone in media who has had to deal with Apple.  By contrast, Sony tried to own everything—from design to manufacturing to even trying to own the media.  The added ownership worked against Sony.  They lost focus and could not win the battle on transfer pricing.  Worse yet, even though it owned most of the parts, Sony did not build as integrated a business model as Apple.  So Apple—owning fewer of the parts—created a superior integrated model.  Apple was like the race car driver—they didn’t own the car, but they made it go in the right direction because it was their hands on the wheel.  And now, Apple is very profitable and Sony is struggling.

Implications

The key implication of all this is that ownership should not be the automatic default option when looking at how to gain an element for one’s strategy.  In fact, there are so many reasons why other alternatives may be superior that acquisition may need to be the option of last resort.  Ownership may need to become the exception, not the rule.

Before jumping to the conclusion of ownership, check to see if there are ways to gain control without the need to own.  Find a way to drive someone else’s car and steal the glory.

And finally, instead of focusing on how to do M&A deals, focus on how to do non-ownership deals in such a way they you get to be the driver.

 

SUMMARY
When developing strategies, one often finds a need to add certain elements in order to succeed.  But just because you need them does not mean that you have to own them.  It only means that you have to control them.  And in many cases, you gain more control and more profitability if you do not own them.  Therefore, do not automatically default to acquisition as the way to get what you need.

 

FINAL THOUGHTS
A read a study recently which looked at businesses and their level of successes with acquisition, partnerships and building from scratch.  Their conclusion was that acquisition tended to produce the least amount of success when compared to building or partnering.  Their conclusion was to only acquire when building or partnering didn’t make sense.  That sounds logical to me.

Emergent Vs. Positioning (Part 2)

 

INTRODUCTION
In the last blog, we looked at a comparison between the Emergent view of strategy and the Positioning view.  I explained why I prefer the positioning view.  In today’s 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.

 

POINT #1: SUSTAINABLE COMPETITIVE ADVANTAGE

The Issue

The emergent position brings up two good issues.  The first has to do with sustainable competitive advantage.  The positioning school tries to find positions which provide sustainable competitive advantages.  The emergents respond that sustainable competitive advantages are becoming increasingly more difficult to create, so finding those types of positions can be a more futile undertaking.

First is the “sustainability” part of the phrase.  In a seemingly ever faster changing environment, very little appears sustainable.  So if change is constant, why seek sustainability? 

Then there is the “competitive advantage” portion of the phrase.  With rapid change comes frequent upgrades and frequent obsolescence.  It makes any advantage very temporary.  It is like a ping pong game, where the ball keeps bouncing from one side to the next—first side A has the advantage and then side B has the advantage, then side A regains the advantage, and so on.  So instead of trying to achieve lasting advantage, emergents just try to stay in the game by responding with their ping pong paddle in a way to keep the game alive.

The Solution

Is this phenomenon a concern?  Yes.  Is the problem as dire as the emergents believe?  I don’t think so.  First of all, this is not the first time rapid change has occurred in business.  We’ve gone through the industrial revolution, the widespread adoption of electricity, the movement to a knowledge-based economy, and so on.  Yes, there is some turmoil during the transition, but companies with a good strategy find a way to make it through the transition.

The solution is to change the focus of where one looks for advantage.  Even when many things are changing, many others stay the same.  In particular, when products and technologies are changing rapidly, basic human needs and desires still stay the same.   There is always a segment wanting low prices.  There is always a segment wanting status.  There is always a segment wanting convenience.  There is always a need to feel loved or appreciated.

Now the means by which these constants are achieved may change.  The core solutions do not.  So the solution is to find positions which are not tied to particular products, but to enduring solutions.  For example, Wal-Mart positioned itself around the enduring solution of offering low prices.  Now the way it has done this has changed.  It started as a discount store.  When it looked like wholesale clubs could provide lower prices, they opened up Sam’s Club.  When it looked like supercenters could provide lower prices, they aggressively replaced discount stores with supercenters.  When it appeared that building a more sustainable and eco-friendly supply chain could lower costs and prices, Walmart aggressively went in that direction. 

The point is that Walmart’s low price position gave them an anchor.  As the world was changing around them, they did not panic.  They just kept migrating to wherever that position could be best met.  And through that singular focus, they were able to reinforce that position with the customers and become continually stronger.

Bausch & Lomb was in the lens business, but they focused their position on the end solution—better sight.  As a result, they migrated in to contacts, eye surgery equipment and eye enhancing vitamins.  Yes, the product changed radically, but because of their focus, they knew what had to be done to stay relevant.  They found a place where they could differentiate and win.

Apple keeps changing their offering, but each offering is true to their position of selling cool, easy to use interfaces between people and their data.

Without these positioning anchors, the myriad of strategic choices would overwhelm a company.  You cannot do it all.  You have to focus.  You have to make trade-offs.  And these enduring positions help light a path within the confusion of change.  In fact, they can help you better anticipate where to go, due to that focus.  Without it, you are always trying to catch-up to whatever looks hot today.  And by the time you match it, the world has moved on to the next hot item.  You never get ahead that way.

Another positioning approach to take is to create a position around speed and flexibility.  The emergent view is to always be racing to keep pace with change.  If speed and flexibility are so important in a rapidly changing environment, wouldn’t building excellence around speed and flexibility be a great position?   Build your positioning trade-offs around speed and flexibility, so that you become faster and more flexible than those who do not make those trade-offs.  This position actually makes rapid change an advantage for your position.

 

POINT #2: LOSS OF CONTROL

The Issue

The second key point emergents make is that businesses are losing control of the interaction with their customers.  The power is shifting to the consumer.  Social media and web 2.0 have given the consumer more of a voice.  They are having a greater say in how products are designed and marketed. 

If consumers are gaining a greater control over the conversation, then emergents would say that consumers are gaining greater control over a company’s position.  If that is the case, then a company can no longer rely on managing its business by managing its position.  Instead, a company needs to chase where the consumer conversation is going and whatever emerges from that is the strategy.

The Solution

Well, this is true to a point.   And that point ends when you shift from incremental strategy to transformational strategy.  Consumers can be great critics of the status quo.  They can tell you what is wrong with a product and how to incrementally make it better.   However, they tend to be quite bad at voicing opinions about transformational issues which go beyond what the consumer has experienced. 

This is because a) most consumers are too busy living their current lives to spend time dreaming up all the particulars around the business model for the next big thing; and b) if they have no experience to relate to, then they have trouble getting their arms around it and give an accurate assessment.

That is why Henry Ford supposedly said, “If I’d asked my customers what they wanted they would have asked for a faster horse.”

That is why Steve Jobs supposedly said, “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.”

So if you want to remain in an approach to strategy which is only incremental, then perhaps the idea of following the customer makes sense.  But if you want to transform the world like Henry Ford or Steve Jobs, it would seem that following the customer is a poor choice.  Instead, you still need to lead the customer and be pro-active in what you do.  And if the world is moving as fast and creating as much obsolescence as the emergents proclaim, then I think the transformation approach is even more important.  And that means that significant control is still in the hands of the successful companies.

 

SUMMARY

The emergents make some good points, but not enough to get me to abandon the positioning perspective.  Instead, I just altered the positioning perspective slightly to accommodate the concerns.  You can see them in the chart nearby.  For the concern of the world changing too quickly, I suggest either shifting positions to timeless solutions or to speed & flexibility solutions.  For the concern of losing control, I suggest focusing more on transformations, where control is still strong.

 

FINAL THOUGHTS
Although there is good and bad in both points of view, that does not give an excuse to abandon all approaches to strategy.  It is still worth doing.

Strategic Planning Analogy #461: Watersheds

THE STORY
Years ago, I was hiking in a wilderness area in northern Minnesota.  I felt like I was out in the middle of nowhere.  But there on the ground was a small plaque.  The plaque said that I was standing at the Hill of Three Waters.  This was the point where three great watersheds meet.

To the north of this point, all of the water flowed north to Hudson Bay in Canada and into the Arctic Ocean.  To the southeast of this point, the water flowed into the Great Lakes and the St. Lawrence Seaway, eventually flowing into the Atlantic Ocean.  To the southwest of this point, the water flowed south into the Mississippi River and eventually into the Gulf of Mexico.   All three watersheds get their start at this point in the wilderness. 

Of course, since this was the high point in the area, there really wasn’t any water here.  It had already drained into the three great watersheds.  So I poured a little water on the point to see which way it would flow.  It didn’t flow at all.  I was just absorbed into the dry ground. 

So much for my great experiment.

THE ANALOGY
Watersheds are powerful systems.  They channel huge amounts of water into a singular direction.  The force of gravity pushes the water on its predetermined path.  The water doesn’t have a choice.  It goes in the direction dictated by the watershed it is in.

The water doesn’t get to vote on where it goes.  If it is in the Northern (also called Laurentian) Watershed, it will go to Hudson Bay.  If it is in the St. Lawrence Watershed, it will flow to the Atlantic Ocean.  If it is in the Mississippi Watershed, it will flow towards the Gulf of Mexico. 

Similar forces take place in society and in business systems.  Certain situations will come together in such a way that the pull on the economy will be like the gravity on the watershed.  Society will naturally flow in particular direction and you won’t be able to do much to change it.  If your strategy runs counter to the flow of society, it will have difficulty succeeding.  However, if it exploits the power of the watershed, then success can be multiplied many times over as cash naturally flows in your direction.

THE PRINCIPLE
The principle here is that business ecosystems operate like watersheds.  Individual companies/brands have the power to not only exploit the forces of these watersheds, but to change the contour of the watershed.  Just as a bulldozer can change the contour of the land, a business can change the contour of the marketplace.  The result can cause even more cash to naturally flow in your direction.   Therefore, strategic planners need to consider more than just their own internal business.  They need to create plans which encompass the entire watershed.

We will now look at four key points in planning the watershed and then show examples of two companies which have done this well.

1) The Flow is Most Obvious Near the End of the Journey

When I was at the Hill of Three Waters, I could see no evidence of the three watersheds.  The land was dry.  This is because the beginnings of the water flow are very small.  However, if I were to go to the ends of these watersheds, I could easily see the power of the water flow.  As the Mississippi River gets near the Gulf of Mexico, or the St. Lawrence Seaway gets near the Atlantic Ocean, you can see the great accumulation of water moving strongly towards its goal.

But here is the problem.  By the time the flow of the watershed is that obvious, it is really strategically too late to do much.  The flow is already set in place.  And just as the end of the flow is a consolidation of huge number of earlier tributaries, mature business watersheds are consolidated into a small handful of firms.  It is too late to break in and make a big difference.  This is not the time to push into the system.  The winning company (river) has already been determined.

So the dilemma is this…the best time to make a strategic move into a business watershed is early on, when you have more power to control the flow to your advantage.  However, that is also the hardest time to detect where the great watersheds would be.  It is not as obvious. 

As a result, companies need to step away from the obvious of today and envision where future flows of cash could go.  This is part research (science) and part imagination (art).  Consider the beginnings of Starbucks.  The idea of converting a society used to buying cheap coffee as an ingredient in supermarkets to buying expensive finished product coffee in restaurants was not obvious.  That new ecosystem (watershed) really did not exist in the US at that time.  It looked like the dryness of the Hill of Three Waters. 

Yet instead of going down the established flow of the old system, Starbucks crossed the divide and created a new watershed.,,and was very successful.

This is somewhat akin to the Blue Ocean Strategy approach.  Rather than fight the flow of water when it is strongest against you (in a mature structure at the end of a watershed), go to a new location and build your own flow of water.  This is where you have the power to mold the flow to your advantage.

So don’t just strategize around where the water is today.  That game is likely already set against you.  Go to new watersheds, where you can build flows that come to you.

2) Manage the Entire Watershed

Depending on the contour of the land, more or less water will flow in your direction.  Similarly, the contour of the marketplace will determine how much flows towards a particular company.  Suppliers have choices.  Distributors have choices.  Customers have choices.  If you proactively contour the marketplace, there will be a natural desire for those choices to be made in your direction.  Just as gravity naturally moves water in a particular direction, your actions to shape the greater marketplace will move business in your direction.

Don’t assume that if you run your small part of the ecosystem well that everything will naturally flow your way.  It may not.  Take strategic steps outside your small part to encourage the rest of the ecosystem to give you preference.  By working together, Microsoft Windows and Intel created a strong “Wintel” watershed which made software developers and computer manufacturers naturally prefer to work with them over any competing system.  It became a near-monopoly standard.  Like gravity, practically the entire business computing world flowed in the direction of Windows and Intel, because they locked up all the key players into their watershed.

As we shall see below, Apple and Wal-Mart have also been extremely successful because they built strategies to encompass the entire ecosystem.  This forced more business to flow through their core operations.  This doesn’t mean that you have to own the entire ecosystem.  But it does mean you need to exert a degree of control over it.   Spend time to find ways to create advantages with all the players in the system.  Help define the standard operating procedures for the entire system in your favor.   Make this a key part of your strategic plan.

3) Grow By Exploiting the Flow You Already Control

One part of strategic planning is to find new avenues for growth.  This is often best accomplished by taking advantage of the advantages one has already developed in the marketplace.  In other words, take advantage of the strong water flows you have already created, rather than start from scratch.  This is akin to the idea of building on one’s core.

The problem is that businesses which appear to be near the core may not necessarily benefit from your watershed.  Consider Anheuser Busch a few decades ago.  They saw the salty snack business as being very similar to their core beer business in the US.  Both businesses used direct store delivery to get to similar retailers.  Both businesses were relatively inexpensive indulgences.  They were often consumed together.  So Anheuser Busch made a big push into salty snacks with Eagle Snacks.  It failed.

Why?  As it turns out, all the power flowing through Anheuser Busch’s beer business really didn’t provide a competitive advantage in salty snacks.  Rather than being the same watershed, they were parallel watersheds.  And the salty snack watershed was already mature and flowing into Frito Lay.    

Example #1:  Wal-Mart

Wal-Mart was successful because it followed these principles of the watershed.  In the beginning, rather than fight the entrenched watershed of discount retailing which flowed through large cities, Wal-Mart crossed the divide and built a watershed flowing through small towns.  Here, the game was wide open and they could write the rules in their favor.

Second, Wal-Mart knew that to be successful in small towns, it would need to control the entire supply chain (watershed).  It built its own distribution network, to make it the most efficient path to reach small towns.  It built the most sophisticated data network, so that it knew what was happening across the system.  This created the superior system, so both customers and vendors flowed to its stores like gravity.

Finally, when Wal-Mart wanted to grow beyond its US base of discount stores, it stayed within its watershed.  It added food to the mix to create supercenters.  This took advantage of the infrastructure and power already in place and made it even stronger.

Example #2: Apple

When Steve jobs came back to Apple, he didn’t try to fight the entrenched Wintel watershed.  Instead, he crossed the divide and created a new watershed around specialized portable computers dedicated to music (the iPod).

Apple did not just create the iPod device.  Instead they created the entire ecosystem, with the iTunes store, the Apple store, the software to easily download tunes, and so on.  As a result, they had designed the contours of the digital music space so that they were the superior place for everything to flow.  It all worked together well because the entire system was strategically designed to work together well.

Finally, when it was time to diversify and grow, Apple built off the strengths of the iPod watershed and exploited them with the iPhone and the iPad.  They utilized many of the same strengths Apple had already built in the marketplace.  The music flows flowed into the phone and the pad.  The distribution channels, the strength in design, the app store as an extension of iTunes, and so on.  It was building on prior flows, rather than starting over.

   
SUMMARY
Exceptional levels of success require exceptional levels of business activity to flow in your direction.  This does not occur by accident.  It occurs when one proactively makes plans for the entire business ecosystem.  And it is easiest to influence the direction of the ecosystem when it is still young.


FINAL THOUGHTS
Once your watershed is built and the water is flowing strongly in your direction, there can be a desire to just sit back and enjoy the flow.  Unfortunately, the business landscape is not as stable as a physical landscape.  Society may shift; competitors may dam up your river; rain may pour into a new watershed.  You need to remain diligent in managing the watershed.

Strategic Planning Analogy #457: Doorways and Destinations

THE STORY
Let’s assume you’re an expert at building doors.  You may be able to create the most beautiful door, or the most technologically advanced door, the most secure door, the highest quality door, or some other type of superlative door.  But if that door doesn’t lead to anything, it’s really rather useless. 

The main purpose of a door is to provide a passageway to get from one side of the door to the other.  If there is nothing worth going to on the other side, or if you can get to the other side without using the door, then the door really has no value.

It reminds me of the western comedy movie Blazing Saddles, where a toll booth was placed out in the middle of the desert (see photo above).  There was no road anywhere near the tollbooth.  It just sat out there in the middle of a huge abandoned area.  There was nothing stopping you from getting to the other side by just going around the toll booth (after all, there weren’t any roads anywhere near the toll booth).   Hence, the tollbooth had no value, because you could easily cross the desert by avoiding it.  Yet, the humor in the movie was that the cowboys, as you can see in the picture above, stopped to pay the toll anyway.

So if you want to make a door really valuable, the irony is that you really don’t need to spend much time focusing on the door.  Instead, the door is made most valuable if you focus on two non-door issues:

   a) Does the door get you access to something valuable?; and

   b) Is it the only way to get to that location?

THE ANALOGY
The digital world is full of doors and destinations.  For example, devices, like smartphones, ipads, computers, gaming devices and cable TV systems can all act like doors.   They are the passageway to get to desirable digital content. 

You could also look at certain digital sites as doors as well.  The Google search site can be seen as a door to reach knowledge.  The Apple Apps store can be seen as a door to get to valuable apps.  Your Outlook or email portal can be a door to get to messages from your friends.  Netflix is a door to get to desirable movies.

You can even look at digital content as a door.  Although in this case, the purpose of the door often is so that businesses can get access to you.  For example, television shows can be a door to allow brands access to viewers via commercials.  Zynga’s free digital games can be seen as a door to allow Zynga to reach players to sell them game enhancements.  Google’s search results are a powerful door for advertisers wishing to have access to people when a specific subject is on their mind.

There is all sorts of talk about strategies to extract value out of the digital space.  Often, the best way to look for value in the digital space is similar to how one gets maximum value out of a door.  In other words, does your digital offering:

     a) Get people to a valuable destination?; and

     b) Is it the only way (or best way) to get to that destination?

THE PRINCIPLE
The principle of doors is this:  A door is only valuable in its relationship to destinations and those seeking the destinations.  If the door doesn’t lead to a desirable destination, or if there are lots of other doors going to the same destination, then the value of that one door is very small.  Conversely, if you are the one providing exclusive access to something highly desired, then you have a very valuable door.

There are several factors to keep in mind when applying this principle. 

1) Choose what you want to be and actively manage it.

Often times, the same digital entity can be positioned as either a door or a destination.  For example, Facebook could be positioned as a door to get to your friends or as a destination where friends want to hang out.  You have a positioning choice to make.  And you had better be clear about that choice so that you know what to do and how you are going to win.

And don’t forget that competitors may want to position you differently than your own choice.  For example, Facebook may want itself to be positioned as a destination, but Google+ may want to re-position Facebook as merely a door and then tell people that Google+ is a superior door for accessing those same friends.  And, if Facebook becomes too abusive in the way it increases monetization of its “destination,” customers may get fed up and migrate to a better door to reach each other.

Similarly, cable TV has traditionally tried to position itself as the destination for TV entertainment.  They even call the content “cable TV” (as if it were theirs), not “TV as seen via cable.” But now, there are all sorts of internet startups, like Hulu who are saying that cable TV is just a door to that entertainment and that the internet can be a superior door to reach that same content.  And the formerly unthinkable is happening—people are cancelling their cable TV and getting that same content through an internet-based door like Hulu.

So the battle is not just in making a one-time positioning choice.  One also needs to continually monitor how the market is positioning you, so that you can control your position.  And as technology and business models evolve, your old positioning strategy may need to be modified from time to time in order to stay relevant.

2) Value depends on which side of the door is most conjested.

Sometimes the door is more valuable than the content (the destination) and sometimes the content is more valuable than the door.   It all depends on the relative congestion on either side of the door.   If the customer side is more congested than the content side, then the content usually has the most power.  This situation occurs when a highly desired movie can only be accessed by a limited number of outlets. There are lots of people rushing to get access to one movie.

In this case, outlets will bid very high to get access to that movie and can often end up giving access to consumers at a loss, hoping to make up for it with sales of popcorn or advertising.  So the strategy for the door to win is to find alternative monetization schemes to exploit all the people coming in at a loss who don’t care about the door.  The strategy for the movie is to raise the bid to access it.

The opposite extreme could be something like You Tube.  There are millions upon millions of inconsequential videos wanting to reach people who have no idea that the content exists.  In this case there are lots of videos rushing to get access to the same people.  Here, the door is disproportionally more powerful because of its role as an aggregator.    Without the help of an aggregator like You Tube, all these videos would find it almost impossible to get the attention of the public.  This puts You tube in the driver’s seat in negotiating how to monetize the content.  So here, a key to the door strategy is to build a superior aggregation tool, making it the easy destination to sort out all the content confusion.

Money can be made in both situations (for both the doors and the destinations), but it is made differently because the power levels are different.  So one of the things one needs to consider in a strategy is which side of the door is the most congested.  

3) Have a strategic approach to exclusivity/control

Having the only door to content can be very valuable.  One thousand doors to that content diminish the value of a particular door.  Therefore, control of value for your door means controlling how many other doors other people can make.  If you can tie up content through exclusivity or close up the potential for others to build doors, then you have made yourself more valuable.

One of the keys to Apple’s success is its passion over controlling a relatively closed system.  Apple wants to own all of the doors—the device door (phones, pads, computers, etc.), the apps/iTunes door, rules for how content interacts with those doors, etc.  Apple not only owns all the doors, they try to own the whole house and every room in it.  This closed system forces everyone on a path that benefits Apple.

Now if you are Amazon and you see Apple owning all the doors to content and see Apple’s doors completely bypassing Amazon, you can get justifiably very nervous.  As a result, Amazon needed to aggressively invent and promote its own doors, via Kindle and Amazon Prime, so that an alternative path would become viable.  And the more exclusive content Amazon can tie up, the more viable its path becomes relative to Apple.

Control and exclusivity can also relate to the other side of the door.  The more you can tie up customers into loyalty programs or long-term contracts, the harder it is to get them to try someone else’s door.

So, if the nature of the relationship to content is what makes your door valuable, actively manage that relationship to create as much control and exclusivity as possible.  Create strategies to broaden your door while narrowing others…from both directions.

4) Don’t build the most beautiful door to nowhere

If you only focus on your door and ignore where it leads, you can create a worthless door.  As mentioned earlier, the best door is not necessarily the prettiest one, or the most advanced one or the one with the most features.  It is the one that does the best job of managing the whole relationship on both sides of the door. 

Sony has been going through troubled times in recent years.  A lot of that has to do with their heritage of focusing on just making great devices.  In other words, they put all their effort into making great doors rather than a great system connecting all the pieces on both sides of the door.  By thinking devices instead of systems, they are missing out on the best value-making business models.  One reason why Playstation tended to be one of Sony’s better performers was because it was the division with the best systems-based business model.

Just as a bridge to nowhere is a worthless bridge, a door to nowhere is a worthless door.  Don’t just focus on making a better door.  Manage the bigger picture.

SUMMARY
In the digital economy, money flows through a system of digital doors.  If you do not exert enough control over the complete system, others will direct the flow through that system so that very little gets to your door.  Therefore, your strategy must take a holistic approach to consider more than just your small piece of the puzzle.  You need to consider how to get your door near desirable content and customers and how to block other doors from doing the same. 


FINAL THOUGHTS
Did you ever notice that very little thought is given to real doors?  We take them for granted.  About the only time we think about them is when they are not working properly.  In the digital space, however, one should never take those digital doors for granted.  We need to consider them all the time.

Strategic Planning Analogy #435: We’re In This Together

THE STORY
Back between December 3, 2006 and March 6, 2007, Menu Foods was manufacturing dog and cat food using imported wheat gluten from China. This wheat gluten was a thickening agent used in the manufacturing of the gravy for the dog and cat food.

Unfortunately, this wheat gluten was not pure wheat gluten. It included melamine, a chemical to make the gluten appear to have more protein. It also included cyanuric acid, a disinfectant. This tainted gluten started causing dogs and cats to die from kidney failure.

As a result, Menu Foods needed to issue a recall on these cat and dog food products. Since Menu Foods was a contract manufacturer for other brands, they had to list all of those brands in their recall notice.

As it turns out, Menu Foods was manufacturing pet food products for nearly every private label (store) brand in North America, including Wal-Mart, Kroger and Safeway. In fact, 17 of the top 20 retailers were selling their store brand pet product using items made by Menu Foods.

Some of the premier name-brand manufactures also put their labels on products made by Menu Foods, including Iams, Eukanuba, and Nutro. In total, the recall encompassed dog food products under 51 brand names and cat food under 42 brand names.

Many consumers were shocked to discover that the majority of the brands of pet food they had to choose from were coming out of the same factory. People started asking themselves, “Why should I care about what brand of pet food I choose if most of the brands come from the same factory?” Many switched to the few brands which did not use Menu Foods and they never went back.

And what about the brand “Menu Foods”? If you go on the internet, you’ll find that its brand name is now “Simmons Foods.” Menu Foods is never mentioned. I guess that Menu Foods was a brand name that lost its value. Apparently, people still cared about that brand (and not favorably).

THE ANALOGY
We live in a world where outsourcing is a way of life. It seems like there is nothing immune from outsourcing. The story talks about outsourcing of manufacturing. But companies also outsource functions like distribution, sales, customer service, installation, human resources, payroll and just about anything else.

Outsourcing can look great on a computer spreadsheet full of numbers. However, the more of your business you outsource, the less control you have over all the inputs to that spreadsheet. If one of your partners fails to deliver as desired, your carefully created spreadsheet becomes worthless. All it took was a poor choice in outsourcing of wheat gluten at Menu Foods to create a public relations disaster for dozens of pet food brands who outsourced to Menu.

Outsourcing increases our dependence upon the decisions of others. Yet in most companies, strategic planning focuses almost exclusively on one’s own company’s actions. Unless our planning takes a broader perspective to include those in our outsourcing family, we will not be properly planning for our future. We will be increasing the likelihood of falling victim to a Menu Foods type of disaster.

THE PRINCIPLE
The question then becomes, “How do I properly conduct strategic planning in an outsourced world?” The principles basically come down to three words—control, communication, and contingencies.

1. Control
In an outsourced world, you no longer own very much of the process. However, just because you do not “own” the process does not mean you cannot “control” the process. The beauty is that as long as you have control, you do not need to own.

Look at Apple. Apple does not own the manufacturer of the ipod, but it tightly controls the design and the expectations around the output from the manufacturer. Apple does not own the rights to the music, but it tightly controls how the music is presented, how it is accessed, and what the prices will be. Apple made sure that each part of the entire music system worked exactly how it wanted to work, whether it owned it or not. As a result, the strategy worked brilliantly.

In developing a strategic plan in an outsourced world, one of the most important tasks is to determine the key elements of success. What is the position you are trying to own in the marketplace? What is your point of distinction/superiority which will cause people to prefer you over the alternatives? Which elements reinforce this position?

Once you make that determination, the next step is to build into your strategic plan a way to control those elements throughout your entire network, whether you own them or not. For example, if quality is important, then find ways to control the quality throughout the entire network.

Control can be achieved in a number of ways. You can place high expectations in the contracts with your partners on these critical elements with severe penalties if not met. You can demand the ability to inspect their premises for compliance. You can limit your choice of partners only to those with a shared vision (rather than just basing the decision on lowest price).

For example, Sears wanted its Kenmore appliances to be known for innovation. Therefore, Sears set up its contractual arrangement with Whirlpool (who makes a large percentage of Kenmore’s appliances) as follows: Any new innovation developed by Whirlpool must be exclusive to Kenmore for a period of time before it can appear on a Whirlpool appliance. This helped Sears to control its innovation reputation, even when it did not create the innovation.

2. Communication
If you want all of your outsourced partners to support your strategy, then it would help to let your partners in on what that strategy is. These are not just partners in your business, they are partners in your strategy. Therefore, they need to be a part of your strategy communication.

Who do you invite to your strategy sessions? How many of your outsourced partners are present? Are they part of the discussion? Do they get to participate on any of the implementation teams?

Once the strategy is formulated, do you communicate it with your partners? Do they know what is most critical to your success?

A lot of business decisions revolve around making trade-offs. You cannot do it all, so you have to decide what you will focus less on in order to be able to focus more on something else. Your partners make trade-off decisions all the time. If they do not know what is most critical to your strategy, then they might make the wrong trade-offs.

For example, Eukanuba and Iams base their reputation on high quality and health for their pet foods. They associate themselves with veterinarians in order to show how concerned they are with health. They are able to charge a premium price because of that reputation. Menu Foods made a trade-off away from quality and health in order to get the lowest price on wheat gluten. This was the wrong trade-off for Eukanuba and Iams.

The more you communicate with your partners, the more likely everyone will make decisions which support, rather than harm, your strategy.

3. Contingencies
If the automotive industry learned anything from 2011’s tsunami in Japan and flooding in Thailand, it was the need for contingencies. Too much of the outsourcing system rested in just a handful of suppliers. When the tsunami and the flooding wiped out those few suppliers, the whole automotive network came to a screeching halt.

For example, Xirallic is the additive in automotive paint which gives the paint a metallic shimmer. All the major automotive companies use this additive in some of their paints. However, there was only one factory in the world which made this additive. And that factory was wiped out by the Japanese tsunami. It was estimated that car production worldwide was reduced by 600,000 vehicles shortly after the tsunami just because of a lack of Xirallic.

To keep these network shutdowns from happening, one needs to incorporate contingencies into the strategic plan. For example, I worked with a retailer who built about 90% of its stores with fixturing from one company and 10% with fixturing from another company. Why? Just in case anything happened to that company who supplied the 90%, there was a relationship and a plan with an alternative—a built in contingency that was part of the plan.

And if you are the supplier, you may want to consider a plan to diversify some of your manufacturing to multiple locations in order have an alternative if major disasters strike.

Yes, just-in-time and lean manufacturing have benefits, but in the extreme this plan can hurt in times of emergency. Incorporate a little more flexibility into the plan to help avoid the disasters felt by the auto industry in 2011.

SUMMARY
Outsourcing can provide many benefits. It can give you access to better expertise, greater speed and lower costs than if you tried to do everything yourself. However, the more one outsources, the less direct control one has over the outcomes of the network. Therefore, if one wants to achieve strategic success in an outsourced world, one needs to proactively consider the entire network as part of its planning process. In particular, strategic plans should consider:

a) How to increase control over the critical elements throughout the network.
b) How to communicate with the partners so that everyone understands the plan and how they fit into the plan (and what is expected).
c) How to place contingencies into the plan to help avoid disaster when partners cannot live up to their expectations.

FINAL THOUGHTS
Many automakers (particularly those based in Japan) posted severe profit drops in 2011 because of the impact of the tsunami and the flood. If all you do in your negotiations with outsource partners is beat them up to get the absolute lowest price, you may save a tiny bit of money, but turn around and lose all of that (and more) when the network falls apart. Take a broader, more strategic approach with your network. It can save you from big losses (like in the automotive industry) or big embarrassments (like in the pet food industry).