Strategic Planning Analogy #575: You’re Fighting the Wrong War

THE STORY
There’s an old military saying that goes something like this: In peace time, military leaders prepare for the next war as if it is going to be played by the same rules as the last war. Unfortunately, each new war comes with a new set of rules, making all that planning obsolete.

In other words, instead of looking backwards to figure out how you could have done better in the last war, anticipate the rules of the next war and prepare a way to win under the new rules.

THE ANALOGY

This recommendation does not only apply to military strategy. It also applies to business strategy. The rules of the game in business strategy keep changing, just as in warfare. The leaders in many businesses are older and got to the top by following the old rules. As a result, these leaders have a tendency to prepare for the future by falling back on those old rules which made them a success in the first place.

Unfortunately, as times change, those old rules become obsolete. If CEOs continue to run their businesses by those old rules, their businesses (and themselves) run the risk of becoming obsolete. To prevent that, strategists must continually update their mindset to stay in tune with the rules of the times.

THE PRINCIPLE
In my opinion, we seem to be at a point where the rules of strategy are shifting again. This would be the third major set of rules during my adult lifetime. If the rules are changing as I think they are, then it is time for strategists to update their mindset again.

Ruleset #1: the Three P’s

Back for most of the latter half of the 20^th century, the rules of strategy revolved around what I called “the 3 P’s.”

During this period, the major strategic objective was to maximize cash flow over a sustained period of time. The best way to do this was by focusing on three areas:

1. Positioning: The idea behind positioning was to convince consumers to associate your product/brand with being the superior solution for a meaningful problem. Make the problem and your solution inseparable in the consumer’s mind so that no other brand can unseat you as the best way to resolve the problem. For example, different brands of toothpaste became associated with different solutions: Crest for getting rid of cavities, Sensodyne for sensitive teeth, Plus White for smokers, Colgate for healthy teeth and gums, and so on.

2. Pursuit: To hold a position over the long haul, a business had to act quickly and invest in whatever it took to maintain that position. For example, Walmart wanted to hold the position of being the low price alternative, so it would invest in whatever retail format had the advantage in holding the low price position. That is why Walmart migrated from discount stores to supercenters and added Sam’s Club. It was pursuing the winning path to hold the position.

3. Productivity: To maximize cash flow, the cost of investments in positioning and pursuit had to be less than the profit margins available from the business. Therefore companies also kept a keen eye on keeping costs down, pursuing tactics like re-engineering.

Ruleset #2: The Three F’s

As the 20^th century was winding down, a new strategic ruleset was evolving. One of the key forces behind this change was the movement from selling physical products (atoms) to selling apps. This was the world which spawned companies like Google & Facebook (and all the people that wanted to copy their success). Under the new rules of that era, there was a new major strategic objective. Instead of trying to maximize cash flow over the long term, the objective was to maximize the selling price when you flipped the ownership.

Not only was the idea of maximizing cash flow out, the entire idea of profits lost favor. It was okay to lose money so long as a future buyer would pay a lot for your business. In other words, your return did not come from the ongoing business but from what you could make when the business changed ownership. I spoke about that in more detail here.

And the idea of managing for the long haul was also tossed out. After all, if you are going to flip the business to a new owner in a few years, your time horizon is only as long as it takes to cash out.

In this new environment, the strategic rules were as follows:

1. Fund: Find venture capitalists who are willing to fund your business. This is where the money comes from, not the user of the app. So, in reality, the venture capitalist is the customer of your business and the product you are selling them is access to all the people using your app.

2. Flex: In the wild world of apps, one has to keep flexing the model until a version is found that resonates with a critical mass of users. Venture capitalists of the time knew that the end product app was rarely the same as what was originally pitched to them to get the money. Therefore, the venture capitalists were betting more on the flexing ability of the founders to eventually hit on a winner rather than on the original pitch.

3. Flip: Since all the value is created at the time the ownership changes, the strategic emphasis is on optimizing the flip—who to sell to and for how much. For example, a lot of people of the time thought that Cisco Systems might be a good potential buyer. Cysco said it would only buy businesses located in Silicon Valley CA, Austin TX or Research Triangle NC. Therefore, if you wanted to flip to Cisco, your strategy would be to locate in one of those three areas. If your plan was to sell out via an IPO, the strategic emphasis was placed on maximizing those factors/metrics which would sell well in the IPO pitch.

Ruleset #3: The Three S’s

Just as people were getting used to this set of rules, it appears to be changing again before our eyes. There are many reasons for this. First, future innovations do not appear to lend themselves to start-ups in the garage. They are too complex and costly. Starting small and flipping no longer works as well.

Second, the innovations of the digital age have sucked a lot of the value out of entire industries. For example, the news and entertainment industries have seen the overall profits of the whole industry shrink dramatically. When people expect things for virtually free, it is hard to rake in huge profits. A new way to move money in your direction is needed.

Third, the more recent flips in general are nowhere near as dramatic as in the days when Google and Facebook flipped. If flipping is much less of a “sure thing”, investors will hold back and IPOs won’t be as easy to create. The whole idea of flipping is being questioned as a primary way to think about business. You can’t sell to investors if they aren’t investing in the old type of startups like before.

So what is replacing it? I call it the three S’s.

In the world of the 3 S’s, the key objective is to exert maximum control/power over an entire business ecosystem. It is no longer good enough to just have a good product or a leading app. You need to control the entire business system in which you exist. If you do not control how the ecosystem evolves, it will evolve in a way that blocks you from achieving adequate profitability. Power becomes the great goal, because power dictates where the limited amount of money goes.

To do this, you follow the 3 S’s:

1. Size-Up: This strategic approach requires thinking big. You need to not only size up the space you compete in, but the entire ecosystem your space lives within. This includes not only your traditional competitors. It includes anyone who has influence on how your ecosystem will evolve and how ecosystem profits are divvied up. It can include governments, businesses and advocacy groups. You need to size it all up to get your arms around the magnitude of the ecosystem.

2. System: Your strategy must encompass more than just how your business works. It has to encompass how you want the whole ecosystem to work. You have to strategize for the entire system. Your best individual performance will still leave you in trouble if the ecosystem defines the rules against you. Therefore, you have to make sure you have a powerful seat at the table where the rules are made. And you only get such a chair if your planning takes an entire system point of view.

3. Structure: To get the system to work in your favor, you have to help determine how it is structured. You have to put all the ecosystem building blocks together into a structure where you have a disproportionately larger influence than others. Some of these building blocks you will own. Others will be partnerships. Others will be voluntary followers of your plan because your power makes it in their best interest to comply with your wishes.

Here are some recent examples of this type of strategic approach:

1.      CVS: CVS realized that it needed to be more than just a major pharmacy/drug store chain in the US. It needed to have control over the entire healthcare ecosystem. To accomplish this, it started in 2006 by acquiring MinuteClinic, who operated health care facilities inside a retail setting. This gave CVS some control over the practice of medicine. In 2007, CVS acquired the Caremark pharmacy benefit management company in 2007. This helped them have influence over how company pharmacy benefit plans would impact CVS. In 2015, it acquired Omnicare, a leader in pharmacy distribution to institutions. And this year, CVS announced the acquisition of Aetna, one of the leading health insurance providers in the US. CVS is no longer a drug store company. It is a strong player throughout the entire healthcare ecosystem. It even changed its name to CVS Health.

2.      Disney: Disney realizes it cannot just be good at parts of the entertainment system. It needs control over the entire entertainment ecosystem. As the digital aspects of the entertainment ecosystem evolve, Disney could get squeezed if it does not influence how the rules are written. Therefore, Disney just announced the acquisition of a huge chunk of 21^st Century Fox. The logic is that the combined content and distribution controlled by such a combination will be so powerful that nobody will want to make any moves in entertainment without them.

3.      Another recent announcement include the merger of Ascension and Providence to create the largest hospital chain in the US. It is like CVS in that it is trying to exert more power in healthcare. It is like Disney in trying to get such a large chokehold over a major aspect of its ecosystem that it becomes a force that cannot be ignored. In their words, they are trying to create a voice “that can’t be ignored.”

And Target recently announced the purchase of Shipt. Shipt is one of the largest providers of the software and trucks used in the home delivery of items like food.  In this way, Target is expanding its influence in the consumer retail ecosystem by getting a big share of the out-of-store experience.

This is just the beginning….

SUMMARY
The environment is always changing, so the rules of strategy must adapt. We’ve moved from the 3 P’s to the 3 F’s. Now we are moving to the 3 S’s. If you’re still doing your strategy under the older rules, you may lose your grip on the future and be left out in the cold.

FINAL THOUGHTS
Don’t fight future wars with the rules from prior wars. Fight with the rules appropriate to the times.

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.