Analogy #179: Taking it to the Max

THE STORY
Back in the 1920’s there was a person named Max who immigrated to the United States from Poland. In 1929, just prior to the Great Depression, Max opened a grocery store in Milwaukee, Wisconsin.

That was a tough time to open a new business, but because he was a very efficient operator who knew how to please the customer, he survived the Depression. He did well enough to eventually build up a chain of 48 supermarkets in Wisconsin, before selling the business in 1970.

Along the way, the story goes that one day Max went out to buy some clothing. He went to the available department stores in Milwaukee and did not like the experience. Max came to the conclusion that the only way he would ever get to patronize a Department Store to his liking would be if he built his own. So he did, opening his first department store in 1962.

Max didn’t know much about department stores or fashion, but he did know how to build successful supermarkets. He applied those supermarket principles to his department store. He put in centralized checkouts. He put in efficient and easy to shop fixtures in an easy to navigate “racetrack” format. He emphasized extreme efficiency in operations and made sure he had depth of inventory in the most wanted brands. Finally, Max took the supermarket emphasis of low prices to his department store. He could afford the low prices because of the efficiencies he applied from his supermarket heritage.

At the time, this was all Department Store heresy. Nobody in the industry did things that way. But since Max was not from the department store industry, he did not see it as heresy. He simply saw it as the type of store he would like to shop in.

He only built a few of these department stores, because he was more interested in running supermarkets. However, by the mid-1980s, the management of the Department Stores group felt they were sitting on a powerful concept. Therefore, they started ramping up expansion. They took the department stores public in 1992 and have had quite a good run.

By the way, Max’s last name was Kohl, and the department store chain he started in 1962 was called Kohl’s Department Stores. There are now nearly 1,000 of these stores in operation, and sales for fiscal 2007 were $16.5 billion.

THE ANALOGY
There’s an old saying that most new innovation comes from outside the industry. That was certainly the case for Max Kohl. It took an outsider—a supermarket man—to show the department store “experts” a new way to do department stores.

This happens in all types of industries. The inbreeding of executives and the lack of fresh insight causes the insiders to become blind to new ways of doing business. The “old ways” become the “only ways” of looking at the world.

In the long run, this can be shortsighted. Innovation is the lifeblood of growth. Innovation usually requires new approaches to the business. Outsiders, who aren’t wedded to the old ways, tend to embrace more options and different approaches. As a result, new businesses like Kohl’s, replace old established businesses like the May Department Stores.

If you don’t want your business to be replaced by an outsider, then you need to start thinking more like an outsider.

THE PRINCIPLE
The principle here has to do with having a fresh set of eyes. Being around young children can be very entertaining, because the see the world with a fresh set of eyes. Everything is new and wonderful to them, and they come up with some of the craziest ideas.

Businesses also need fresh sets of eyes—people who are not wedded to the ways of the past. These are people who have not been around long enough to have bought into to the idea that the “standard operating procedures” are the only way to get things done. Like children, they ask “Why can’t we do this differently?”

In the department store industry, most of the insiders are “fashion” people. They approach problems from a strong sense of fashion and a keen eye for style. Max Kohl was a supermarket guy who approached problems from a strong sense of efficiency and an eye for value. By looking at the industry from this different perspective, he developed a different solution.

Even today, his legacy lives on. Kohl’s department stores tend to have an operating cost structure which is about half that of many of its competitors (as a % of sales). This allows them to provide superior and still be very profitable.

Not too long ago, I was talking to the President of a Department Store brand. He had worked in the industry for many decades. I suggested that he might be better off if he changed his store design around a bit. He looked at me condescendingly and said something like this,

“Gerald, I know you’re trying to help, but you don’t know this industry as well as I do. I’ve been doing this a long time, and let me tell you, that is not how it is done. People expect a department store to look a certain way and they will not accept change.”

Well, it’s true that I haven’t been in the department store industry as long as him. But it is also true that my experience with supermarkets, supercenters, big box retailers and discount stores gives me a fresh set of eyes that can borrow from these other related businesses and apply them in a fresh way to his business.

After he made his comment that people expect things a certain way and will not change, I started thinking about the outsiders who have been extremely successful in reinventing the way people shop for department store goods. In addition to the Kohl’s example, there is DSW, who successfully reinvented the way people shop for department store quality shoes. You can read about DSW's fresh approach in their IPO document.

If the old ways are so good, then why isn’t Sears doing any better than it is? It hasn’t changed much in decades, sticking to the old ways of running a department store. The old ways are causing it to lose market share. Yes, the new owner, Eddie Lampert, has a fresh set of eyes, but everyone is still waiting for a fresh set of ideas.

This is not to say that you want a company which only has fresh sets of eyes. You need a mix—people who have experience in the industry and understand its subtle nuances, as well as industry newbies who bring different experiences to the problems. Kohl’s really did not start to grow rapidly until it got a good blend of people into the mix. The key is diversity—diversity in age, background, experiences, and so on.

A friend of mine once interviewed at a major international retailer. When he got back from the interview, he said that everyone he interviewed with seemed like a clone of everyone else he interviewed. They were of the same gender, the same general age, had an MBA from one of the same small number of universities, and had all previously worked at the same consulting company.

Unfortunately for my friend, he was of a different gender, a different age, had an MBA from a different school and had never worked for that consulting company. As a result, he did not get the job.

This is so sad, because that company would have been better off with a more diverse employee base, with eyes that see problems from many fresh perspectives. To quote former general and US Joint Chief of Staff Colin Powell, “If you surround yourself with people who think like you, then at least one of you is redundant.”

The irony is that the company in question was not doing well at the time. It was shrinking in size and destroying profitability. Why continue to fill your company with clones if the current thinking isn’t working?

Seek out variety of thought and perspective. Bring the outsiders inside your company so that the next innovation comes from the inside, rather than the outside.

SUMMARY
Eventually, the conventional wisdom of your industry will be replaced by an innovation based on a different set of wisdom. If you cling too long to conventional wisdom, your firm will die off and be replaced by outsiders with a fresh set of eyes. It is better to have a diverse blend in your business, so that you can exploit those fresh ideas yourself.

FINAL THOUGHTS
If you want to take your company to the Max, you need to find people like Max (Kohl), who bring a fresh new perspective.

Avoidance

THE STORY
When I was a boy, I was terrible at sports. I had very little muscle tone and was not well coordinated. As a result, I avoided sports in order to avoid ridicule.

The exception was high school gym class. Here I had no choice. Playing the sport was mandatory. It was my daily bout with humiliation.

The one exception to this rule was when the gym class played touch football. I was not a big fan of the game and I didn’t know the rules all that well, but still you had to play the game.

I would play as a tackle on defense. I was told that my role was to try to touch the quarterback before he got rid of the ball. I figured that the easiest way to get to the quarterback would be if I lined up in a place where there was nobody from the other side was standing. Since everyone knew how terrible I was at sports, the other team didn’t seem worried that I lined up in a place that was unguarded.

When the ball was snapped, I just ran unabated to the quarterback and touched him for a sack. Even someone as bad at sports as I was could occasionally get to a quarterback if nobody stopped him. Eventually, the other team figured this out and made sure someone tried to block me. But I figured that avoiding a tackle would still be my best tactic, so when the ball was snapped, I’d just spin to the left or the right and run in untackled towards the quarterback.

To keep me from spinning to the left or to the right, the other team started putting two guys on me—one on each side so I could not spin. Since I was in such poor athletic condition, there was no way that I could overcome that. However, by double teaming me, it left someone else uncovered who was often able to sack the quarterback. So I was still helping out my team.

THE ANALOGY
Businesses often use sports analogies to describe their strategies. They talk about “winning” or “defeating the enemy.” The strategy sometimes is described as a direct confrontation with a competitor and that we must fight hard to overcome them in glorious victory.

Although there are some benefits to describing strategy in sports-related terms, it can lead to some problems if taken too far. There are two weaknesses to a sports mindset. First, it assumes that the battle is a head to head confrontation with a single opponent. Second, it assumes that both sides are playing the same game by the same rules.

As we saw in the story above, I was not well schooled in knowledge about the game of football and only vaguely understood the rules. I only knew that I was supposed to try to touch the quarterback before he got rid of the ball. To achieve this goal, I did two things. First, I tried to avoid direct confrontation with the opposing team. Second, I didn’t pay any attention to the conventional rules which would make a tackle believe that they had to “tackle” someone (after all, it is part of the position’s name).

Because I avoided direct confrontation and didn’t play by the conventional “rules” of my position, I was able to succeed, even though I had no athletic skills.

Business strategies often work the same way. In most cases, business success does not come from directly attacking a competitor and their position, but rather by avoiding direct confrontation and moving into an uncontested space. In addition, most winning strategies tend to reinvent the rules for playing the game.

Think of how easy it would be to win a sporting event if you played in an arena where there was no opposing team, or if there was opposition, they were forced into playing by a less competitive set of rules than your team. Well, if you invent your strategy properly, you can set up that type of situation for your company.

THE PRINCIPLE
The principle here is “avoidance.” Great strategies typically either avoid direct confrontation with a competitor, or they avoid playing by the conventional rules of the marketplace.

1) Avoid Direct Confrontation
Over the years, there have been many classic head to head battles in the marketplace: Coke vs. Pepsi, McDonalds vs. Burger King, General Motors vs. Ford, and so on. One thing history tells us is that even over long periods of time, direct confrontations rarely cause a change in leadership. Coke stays on top of Pepsi, McDonalds stays on top of Burger King, General Motors stays on top of Ford, and so on. Head to head confrontations by a challenger are rarely successful.

Instead, success usually comes when a challenger avoids direct confrontation and moves into uncontested space. Pepsi may have lost the cola war, but they have a winner in Mountain Dew, which took on an uncontested space in the beverage market. Every time Coke has tried a direct attack on Mountain Dew, they have lost (remember Mello Yello?).

And then there was little Gatorade, who invented an entirely new beverage category, called sports drinks. By building strength in a brand new and uncontested space, it was difficult to overcome. The only way Pepsi could win in the new space was to acquire Gatorade.

Ford may have lost the automobile war, but they took an early lead in what was at the time the more uncontested space of pickup trucks. Ford has been able to successfully withstand direct attacks from GM on their pickup business for generations.

Finding a new, uncontested area and gaining an early strength can give a company an edge which is hard to lose. Good strategies exploit this principle. I heard a great story recently about Steve Jobs at Apple. When he came back to run Apple the second time, Jobs was taking over a company that had some difficulties. At that time, Jobs was asked what he was going to do in order to get Apple back in shape. His answer was that he was going to wait for the next big thing. As it turns out, the next big thing was digital music. Jobs quickly dove in to capture that new uncontested space with the ipod.

Jobs knew that if he tried a direct confrontation in computers, he would lose, so he looked for new uncontested space where his core competencies would be useful. With the ipod, Jobs made Apple into a strong winner again.

2) Avoid Conventional Rules
The second principle is winning by avoiding conventional rules. In this way, business is not like sports. The rules in business are not etched in stone. You can steal share away from the competition by playing by a different set of rules.

Take the retailer DSW. Its early success came by reinventing the rules about how shoes are sold. Before DSW, the traditional way of selling shoes in department stores was to hide nearly all of the inventory in a back room. Consumers were forced to give up control and sit down while a salesperson made choices for them out of the back room. DSW changed all that by putting all of the inventory on the sales floor. Customers could control their destiny and make their own choices.

Traditionally, shoes at department stores were sold through extensive promotions. The standard price was held quite high, so that huge % discounts could be claimed on frequent sales. This forced customers to wait on buying shoes until there was a sale. DSW changed the rules by having everyday prices that were similar to the sale prices of the other companies. Now customers could come in any time they wanted and be assured of paying a low price.

By changing the rules, DSW created a more appealing consumer proposition, giving them more control over the experience at a better overall value. It was difficult for department stores to change their rules to match DSW. First, their stores were not designed to display all of the shoes. It would take extensive and expensive remodeling to adopt the new rules of display. Second, the entire department store’s strategy revolved around high regular prices with deeply discounted sales. It would be difficult for department stores to price shoes in a manner differently than the rules being used for the rest of their store.

SUMMARY
Strategies tend to be more successful if they follow one or both of the following principles. First, they avoid direct confrontation with an established leader and instead try to create leadership in a new and relatively uncontested space. Second, they reinvent the rules of competition in their favor, preferably in a manner which is hard for others to easily imitate. These two rules of avoidance tend to be much more successful than direct head-to-head competition.

FINAL THOUGHTS
During the 1930s, the Green Bay Packers won nearly all of the football championships. Why? They had examined the rules of football and realized that the forward pass was legal. Nobody else in the league was using the forward pass at that time. As a result, opposing defenses were not designed for defending the forward pass. By changing the rules, they were able to win championships. You can do the same.