Strategic Planning Analogy #524: Forgetting Our Spouses

THE STORY
Back when I was a young boy, my dad used to spend a lot of time driving across the state of Michigan to take care of things for his mother (my grandmother). Sometimes he would take the trips alone. Sometimes he’d take me and my sister along. Sometimes my mom would come along.

I remember one time when we were done visiting my grandmother. My dad was getting ready to begin the two to three hour drive back home. As he started to back down the driveway, I yelled, “STOP!”

My dad stopped the car. Then I said, “Aren’t you forgetting something?”

As my dad sat there trying to figure out what he was forgetting, my mom came out of the house and headed towards the car to go home.

If I had not been there, my dad would have gone home without my mother. And I’ll bet she would have been pretty mad about it.

THE ANALOGY
Businesses can cover a lot of topics as part of their strategic planning. They can look at internal strengths and weaknesses. They can look at their industry, their competition, the economy, and so on.

But how often do they look at the spouses of their key leaders?

Businesses can be like my dad, who was so focused on getting the job done that he was going to forget his wife and leave her feeling abandoned. In the long run, you know that would not have been a good thing for their marriage. And it could curtail the number of future trips my dad made.

The same idea applies to businesses. If they shut-out the spouses and act as if they do not exist, they can create an environment where their leaders are under unnecessary additional stress and become less productive. Their spouses could even talk these leaders into leaving the company if it gets bad enough.

It’s hard enough to implement change in a company when everything else is running smoothly. But if your leaders are undergoing significant stress in the rest of their life, it will impact what they can contribute to the company.

Therefore, don’t forget the spouses as you drive the company down new roads.

THE PRINCIPLE
The principle here is that strategies are implemented by people. And if the external lives of these people are all messed up, then they will be less effective at implementing the strategy. Therefore, do not create a strategy process which needlessly contributes to the stresses of the external lives of those implementing the strategy.

1) The Entrepreneurial Test

Two stories come to mind when I think about this principle. The first story is about a time when I was considering leaving the corporate world and buying a franchise to run. A franchise broker gave me a test. The purpose of the test was to see if I was a good candidate for running a franchise.

After taking the test, I added up my score. If I got an extremely high score, it meant that I would be such a successful entrepreneur that I would not need a franchise to succeed. If I got a score in the wide middle ground, it meant I could succeed in my own business, but only with the help of a franchise. If I got a low score, it meant that I was not cut out for business ownership and should remain an employee in the big corporate world.

One of the more important factors which helped determine your score had to do with friends and family. If you thought you would have the full support and endorsement of friends and family in your business venture, you score went up. If not, your score went down.

The point was that it can be stressful and time consuming to start up a business. If you do not have the support of the people in your lives, you probably succumb to the pressures and quit. Failure is more likely to be your outcome.

I think a similar effect can take place with leaders in a business undergoing strategic change. It is a stressful and time consuming event. If the ones doing the work are not getting support from their outside circle of influence, they will be more likely to fail in their part of implementing the strategic change.

2) Best Buy

My second thought turns to Dick Schulze, the founder of Best Buy Co. Starting by selling audio equipment out of the trunk of his car, Dick created a large and successful corporation. Dick would tell you that a large contributor to that success was the love and support of his wife Sandy.

To quote from Dick’s autobiography, “Without Sandy, and her unflagging support of me and her participation in every aspect of our operation, Best Buy would not be the company it is today.”

Two important aspects of Best Buy’s success can be seen here. First, Dick did not forget his wife as he drove the company forward. Sandy was kept in the loop so that she had an emotional attachment to the business as well. Second, Sandy supported her husband in a way that made it easier for Dick to do what it took to succeed.

For example, when Dick was about to mortgage everything he had to start his business, he went to his wife for support. Sandy responded by saying, “You’ve learned a lot already. You’ll land on your feet.” That support allowed Dick to put together the seed money to get his business started and that support got him through the long hours and stress that come with building a business. I dare say that if Dick did had not kept Sandy in the loop and gotten her support, there would not have been a Best Buy Company.

3) Implications

So how can we apply this to taking a business through strategic change? First, we need to identify ways to make sure our leader’s spouses are partners in the effort rather than enemies of the effort. We need to find ways to get them emotionally involved with what is going on…so that they have a vested interest in its success. They need to feel like partners in the car going on the journey rather than forgotten like what happened to my mom.

How much do you even know about the lives of your leaders outside the office? Are you aware of the support (or lack thereof) that they are receiving at home? Have you ever met their spouses? Have you ever personally acknowledged and rewarded the spouses for the support they gave to their spouse?

Second, we can help rectify some of the issues which can cause unnecessary stress in the lives of the employees we count on. How many company policies do you have which can help minimize life stresses and free employees to be more productive? Benefits like on-site daycare, flex-scheduling and concierge services could make a world of difference in keeping the type of life balance needed for healthy, productive employees.

You wouldn’t want to fill your factory with broken-down tools. Similarly, you wouldn’t want to fill your company with broken-down people. Help them heal. The gratitude will pay back itself many times over.

SUMMARY
Strategic planning often has to deal with implementing major change initiatives. These efforts can be very stressful and time-consuming. If the lives of the people implementing the change have too much stress in their lives and lack the proper support at home, the change effort is likely to fail. Therefore, companies have a stake in ensuring that home life and stress levels are kept healthy. This requires an active effort to reduce stress and increase support from spouses.

FINAL THOUGHTS
An idea may look good on paper, but it really isn’t useful until successfully implemented. Pay attention to ALL the impediments of implementation, which include the emotional well-being of your employees.

Strategic Planning Analogy #466: You’ve Got Personality

THE STORY

Over the past year or so, I’ve been splitting my time between looking for clients for my strategy consulting business and looking for a full-time strategy job.  This has given me the opportunity to talk to a lot of executives at a number of companies.

In the vast majority of cases, I eventually received a rejection.  Now, one might at first think that these rejections would make me feel more negative towards these companies.  After all, they rejected me.

However, just the opposite is true.  After meeting with the people at these companies, I like the companies a lot more.  I feel that I’ll be more likely to patronize them than before and I even feel a bit more loyal to them—even though they rejected me.

 

THE ANALOGY
Before I met with these companies, they were just faceless, impersonal businesses—just words and numbers.  There wasn’t much of any reason to feel any personal connection with them.  But after I met and talked with people in the business, that all changed.  I got to see the people behind the company.  I got to hear the passion in the voices of the leaders.  I got to see people enthusiastically working at the company to do something great.  I got to see the awards in the lobby display cases, hear the chatter in the lunch room.

In other words, the company was no longer a faceless, impersonal entity.  Now it was a real living breathing entity with a personality.  I could feel the drive and the passion.  I could see there were people who cared.  Now I could relate to the business on a deeper, more personal level.  The emotional bonds became stronger, because now because there was a deeper connection.

Most businesses would be tickled to death if they could create these deeper, more loyal ties with their customers.   In my case, these great feelings continued in spite of being rejected.  Wouldn’t it be great if customers had such strong feelings towards your business that it could even overcome an occasional consumer disappointment?

In most businesses, it would not be practical to fly all of one’s customers to headquarters to talk to senior leadership about the business, like I was doing for interviews and business pitches.  But anything a company can do to move from being a faceless, impersonal entity to being a personality that customers can relate to is a move in the right direction.

 

THE PRINCIPLE
The principle here is that the personality of the brand or company matters.  If done properly, it can help deepen the bonds between company and customers.  If done improperly, it can create an image that will turn people away from the company.  Therefore, as part of a strategic plan, one should consider the proper personality for the business and tactics for bringing it alive to the potential consumers.  The personality needs to be managed, just like any other asset.

Example: Best Buy

I first realized the importance of this fact when I was working at Best Buy.  I was shown some research Best Buy had done before my time there.  I believe the research was from the early to mid 1990s. 

The research was asking customers their opinions of the various consumer electronics retailers in the US.  At the time, there was a dozen or so regional retailers in this space who wanted to become national leaders.  It included retailers such as Circuit City, Silo, Highland, Fretter’s, Best Buy, and many others.  Today, all of them have long since disappeared—except for Best Buy.

Did Best Buy survive when others failed because consumers saw it as a far superior consumer electronics retailer?  This research at that time would say no.  In fact, consumers saw all of these retailers as pretty much the same.  On all of the rational variables of retailing (price, selection, etc.), all of the brands were rated fairly equally.  There wasn’t much of any reason to prefer one retail brand over the other.

As I say in my book “The Most Important Question,” one of the most important tasks of strategy is to discover and strengthen reasons for customers to naturally prefer your company or brand more than the alternatives.  In this case, the consumer electronics retailers were failing on this most important point.  There was no reason to prefer a particular store because they were seen as indistinguishable from each other.

That is, except for one little difference.  At that time, Best Buy had a person who would dress up in a costume which looked like a giant price tag.  This walking price tag would interact with customers in Best Buy’s advertising. 

According to the survey, people liked this giant walking price tag.  Why?  Because it helped give Best Buy a personality.  They liked the way it interacted with the customers.  It seemed to enjoy the same fun, entertaining things they did.  It had a personality as being like one of them.

In a sea of faceless competition, the personality which came from the giant Best Buy Tag gave customers deeper, more positive feelings towards Best Buy than towards any of the competitors.  It gave a reason to like Best Buy more, to prefer it.

Now I’m not claiming that all of Best Buy’s success was due to that giant price tag.  Success comes from doing a lot of things correctly.  But I do believe that the uniqueness of having a personality gave Best Buy an edge at a critical time when industry consolidation was about to occur.  It bought time in order for Best Buy to improve a lot of other variables, so that Best Buy could be the superior brand which survived the consolidation.  Without that personality edge, I am not sure Best Buy would have survived the transition.

Lately, however, Best Buy’s future seems to be under threat.  There are many reasons for that, and it will take many changes to return strength to the Best Buy brand.  But I am willing to bet that if you asked consumers to describe the personality of Best Buy today, you would get a lot of negative attributes.

Based on the chatter I read on the internet, Best Buy appears to have lost control over managing that personality.  It is being redefined by disgruntled customers in a negative way.  That is not a good thing.  Now Best Buy has to fight an additional war.  Not only does it need to fix the problem of becoming irrelevant in a changing marketplace, it needs to overcome a bad personality.  It would have been easier to transition to relevancy if it had the advantage of a likeable personality on its side.  Then people would be more forgiving during the transition, just as I liked companies even though they rejected me.

Suggestions

So how can we manage the personality for our benefit?

1.      First, think about personality strategically.  Decide which personality is most in sync with your strategic point of preference.  Figure out how to instill that personality into everything you do.

2.      Consider a more public profile for the leadership, so that they can bring their face and personality to an otherwise faceless firm.  Richard Branson is a great example of this.  His strong personality is very public and has helped give a strong personality to all of the Virgin divisions.

3.      In lieu of real employees, one can use symbolic representations to make the personality come to life.  This can be things as crazy as a giant price tag, or the Geico Gekko. 

4.      Actively manage your interactions with customers.  Some lowly sales clerk on the front lines may be the only human interaction a customer has with your firm.  If that clerk has a bad personality, it can reflect negatively on the entire brand, since it is the only human reference point.  Work to instill the proper personality into all employees based on the way you hire, the way you train, the way you reward.  Zappos provides a good example of this.  They were so intent on having a staff with the right personality that they only hire people with the personality which fits their culture and mission.  It  a huge part of the interview process.  To make sure employees are there for the mission and not just the money, after someone has been employed for a week they offer them $2000 if they want to leave.  That weeds out the people who only work for the money.

 

5.      Actively manage your interactions with society.  Society expects businesses to be good citizens.  They want you to give back.  This is particularly true with the younger adult generations.  If you are not seen as a good corporate citizen, it will damage your personality and you will lose business.

6.      React quickly to threats to your personality.   Monitor what people are saying about you.  As soon as your personality is being threatened, act to rectify the situation.  Don’t let little issues grow into big negatives.  Be fast and aggressive in protecting that reputation.  Cisco is a company which takes this very seriously and has developed tools to help others do the same.

 

SUMMARY

Personalities help companies build stronger bonds with their customers.  These company/brand personalities need to be managed like any other strategic asset.  Incorporate personality development/management/protection into your strategic planning.

 

FINAL THOUGHTS

Ask the marketplace this question:  If my company were a person, what type of personality would it have?  You might be shocked at what you hear.

 

 

 

Strategic Planning Analogy #411: Strategic Pep Rallies

THE STORY
Back when I was in high school, we used to hold a big pep rally for our football team. All of the students would leave their classes to go to the gymnasium and sit on the bleachers. The band would play peppy music.

There would be speeches about how wonderful the football team was. The team would come out on the gymnasium floor. The students would scream with excitement. It was a fun time of camaraderie filled with inspiring speeches and things designed to boost everyone’s emotions regarding the coming football season.

These pep rallies were done because it was felt that it built up fan support and made the team feel more confident about winning. All of this was to help increase the success of the football season.

THE ANALOGY
High School football teams are not the only ones looking for success. Businesses want their strategies to succeed as well. So maybe companies should also hold pep rallies.

In a way, many companies do. Think about those annual strategy retreats. They’re a lot like pep rallies. People leave their offices to congregate together. There is lots of camaraderie and lots of inspiring speeches. People get more emotionally tied to the strategy. Enthusiasm to win is increased.

A lot of people complain about these types of strategy retreats. They think they are a waste of time because not a lot of serious strategic activity takes place. But consider this…you don’t see the football coaches doing serious planning activities at pep rallies. They aren’t sitting there at the pep rally developing their playbook. They are not designing their plan of attack against the next opponent.

I’m not even sure that such activities could even be possible with the band playing loudly and the students screaming in the background. Yet schools continue to hold pep rallies because they see value in the activity.

So maybe there is even value in a strategy retreat when strategy is not created at the event.

THE PRINCIPLE
The principle here is that strategic success requires more than just a well thought out mission and viable plan of attack. At the end of the day, strategies have to be properly implemented by people in order to succeed. Ignore the people element, and even well thought out plans are usually doomed.

People are both rational and emotional beings. And for most of them, strategy work is layered on top of a full burden of day-to-day activities (with lots of pressure to get them accomplished). If you do not break through the clutter of the day-to-day and create enthusiasm for the plan at both a rational and emotional level, the strategy will lose the battle for attention against the day-to-day. Implementation will suffer.

Studies show that strategies typically fail due to weak implementation. Strategy retreats can help “rally the troops” around the strategy in a manner which increases the enthusiasm for the plan. This improves the level of commitment in the people and increases the likelihood of successful implementation.

Here are some suggestions about how to make the best use of a strategic retreat.

1) Don’t Try to Use Strategy Retreats to Create Strategy
As it turns out, strategy creation is a complex, time consuming process. Great strategies cannot be created over a weekend once a year. Besides, not everyone is great at strategy creation. It takes a different kind of thinking to be great at strategy creation. Therefore, trying to create strategy at a strategic retreat is a waste of time. Don’t even try.

Instead of trying to get people to “create” strategy, try to get them to “react” to strategy. As I’ve mentioned in a prior blog, most people are better at reacting to ideas than creating them. Therefore, use the retreat to deal with reactions. Find out:

a) Where the rational and emotional resistance lies among those required to implement it.
b) How the strategy can be improved.

By incorporating this feedback into the plan, you give the people a sense of having participated in creating the plan without actually having a creation session. This minimizes implementation resistance and increases emotional commitment in a very efficient manner. And efficiency is important if all you have is a weekend at your disposal.

Pep rallies don’t create strategies. Follow their lead.

2) Use Strategy Retreats to Break Through the Daily Clutter
It is difficult to get enthusiastic implementation from people who do not fully understand or comprehend what it is they are being asked to implement. Lack of comprehension can be one of the biggest enemies of implementation. Therefore, use the retreat to maximize comprehension and understanding of the strategy.

It often takes time for all the rationale and all of the nuances of a strategy to sink in. It cannot be done in little “sound bites.” Back at the office, where all the daily pressures take place (the “tyranny of the immediate”), about all the time the strategy can get is little sound bites—spoken when the audience is only half-listening. The real benefit of the retreat is that it pushes away the tyranny of the immediate, so that the ears have the time and the attention levels necessary to fully comprehend and embrace the strategy.

Use that time to fully explain why the strategy is so critical to future viability and success. Explain how the environment is forcing a need to change and why this is the best change to take. Explain the dire consequences of the status quo. Show how its importance truly eclipses the day to day. Show why this strategy is worth becoming a priority in their life. Make them BELIEVE in the rightness of the strategy, both rationally and emotionally.

This is more than just lecturing. Make it come alive through demonstrations and role playing. If you let them play the part of the competition who seeks to destroy the company, they will quickly see the vulnerability of not embracing the right strategy. Show them interviews with disgruntled customers. Let them experience the competitor’s products first-hand. Appeal to all the senses—seeing, hearing, touching, experiencing.

Keep the daily pressures as far away as possible. Ban electronic devices. Prevent digressions into daily problems. Don’t let them communicate with the office. That way you have the full attention of all the senses. Then you can make the strategy truly come alive and become something more than just a clever slogan. It is then something real which can be understood, believed and embraced.

3) Use Strategy Retreats to Break Down Silos
Not only does strategy implementation require people, it requires people to cooperate. Cooperation relies on three elements:

a) A willingness for people to set aside personal agendas for the greater good.
b) A willingness to trust others and work together.
c) An understanding of how your role fits within the larger picture—what you are responsible for and how that interacts with what others are responsible for.

Strategy is not a “corporate” thing. It is an “everybody” thing. If people don’t understand how they fit into the implementation plan (and make it a priority), they cannot fulfill their part of making the implementation a success. It has to get very personal at all levels.

Strategic retreats are a good time to break down those individual silos and improve cross-departmental cooperation. After all, this may be one of the rare times when these executives get to interact with each other in a neutral environment where daily pressures don’t get in the way. It is a time to build bonds of trust.

It is a time to show how all the pieces fit together…a time to for people to see how they fit into the plan and what they need to do. Never let a strategy retreat end without people seeing how their role fits into the strategy implementation. You may never get a better opportunity.

Pep rallies break down own individual concerns and get us thinking about the entire school and the entire football team. It makes us want to do whatever we can to help the TEAM win. That sounds pretty good for businesses, too.

SUMMARY
Although strategy retreats are not great places for strategy development, that doesn’t mean they are a waste of time. Strategy retreats are a great place for improving the rational and emotional commitment of people to the strategy. And that goes a long way towards improving strategy implementation. Use them to increase understanding, get feedback and increase cooperation.

FINAL THOUGHTS
Pep rallies are not the only time students think about football. They also go to where the games are played each week. The support follows where the action goes.

The same principle should apply to businesses. The strategy cannot be isolated to a remote location once a year. It needs to come along to where the game is being played every week. Regular interaction is needed so that people are reminded of the strategic implications of their daily decisions. I think that strategists should have an audience with senior management at least once a month in order to keep the commitment to strategic implementation strong all year long.

The retreat should just be one small piece in the larger context of influence.

Strategic Planning Analogy #397: When a “Best” Strategy Isn’t

THE STORY
There is an interesting story in the June 6, 2011 edition of Strategy+Business concerning the coffee business. About the time when Starbucks was beginning its rapid growth phase, the activity caught the attention of Folgers, the massively huge coffee brand then owned by Procter & Gamble.

The Folgers brand managers were concerned enough about the potential threat of Starbucks that they conducted independent taste tests. The tests results were reassuring for the gang at Folgers — most people preferred the Folgers taste to the more bitter Starbucks. Not only that, but Folgers cost a lot less than Starbucks—you could get a large can of Folgers coffee grounds for about the price of one serving of Starbucks.

With proof that Folgers tasted better and cost less, the Folgers managers relaxed under the assumption that Starbucks was a passing fad. Of course, history has shown their complacency to have been misguided; between 1993 and 2008, revenues at Starbucks grew from less than $200 million to $8 billion, a 40-fold increase. And Proctor & Gamble gave up on the Folgers brand and sold it.

THE ANALOGY
Folgers fully embraced the philosophy of Procter & Gamble at that time. This philosophy believed that the best performing product typically wins. That is why Procter & Gamble spent so much money to ensure that its portfolio of products had technological advantages. By having products with superior performance, Procter & Gamble expected superior sales and market share.

Unfortunately, this “best features” approach lead Folgers into disaster. The worst-tasting, more expensive coffee won the day.

As it turns out, a lot of companies base their strategies on a similar assumption. The The results of Folgers versus Starbucks is enough to make one question the validity of this strategy.

THE PRINCIPLE
In reality, striving to be the best is still a good strategy. The problem is in how one defines what they are trying to achieve this superiority in. If you choose the wrong thing to be best at, you will lose to a supposedly inferior competitor. So before embarking on a “best at” strategy, ask yourself these questions.

1) Better for Whom?
If you ask a company who they are trying to make a product or service better for, the typical initial answer would be for the customer. After all, the customer is the one using it, so their opinion of what is best is most important. Right?

Well not necessarily. Many people in the supply chain have a stake in the success of a product. If it is not “best” for them, it may never get to the consumer. For example, a new premium liquor introduction is rarely successful unless it receives a lot of bartender recommendations at the prestige bars and nightclubs. If you don’t find a way to make it the best liquor for them to recommend, the customer will never even get to taste it; and without the recommendation the customer will lose a key reason to perceive the liquor as superior.

Supermarkets are asked by vendors to stock more items than their shelves can hold. If you want to get on their shelf, you have to convince them that it is the best item for them to put there. Otherwise, the customer will never see it.

In the case of VHS vs. Beta, or Blu-Ray vs. HD-DVD, there are many players to please—the studios, the distributors, the retailers, the playback device manufacturers, etc. All of these players start to take sides depending on which option appears best for their particular self-interests. If you do not actively and aggressively manage all these players in your strategy, the appeal to the customer will be irrelevant.

And the medical field is probably the trickiest. You need to please doctors, hospitals, insurance companies, governments, and so on, before a customer ever has a chance at access to what you are selling. If you don’t convince all these parties that you are the best, then winning the consumer’s opinion is of little value.

In your business, all the players may not be this obvious, but consider them all before embarking on a “best at” strategy. Otherwise, you may be targeting your efforts at the wrong audience and focusing on the wrong features to emphasize.

2) Better at What?
In the attempt to be best, one needs to ask what one should try to be best at. The easy answer is to tackle attributes which can be easily measured, where one can easily show superiority, and something tangibly related to functionality of how the customer uses the product/service. Unfortunately, this is not always the best choice.

Customers are both rational and emotional beings—even business customers. Often, the softer emotional issues of prestige, status, acceptance, risk-aversion, and self-worth are more important determinants of choice than rational, functional attributes. Starbuck’s success wasn’t based primarily on rational features like taste and price. It won on emotional appeals to social factors, status and prestige. The “experience” of Starbucks transcended beyond mere coffee. This was an experience not to be found in a can of Folgers bought at the supermarket.

How much attention are you spending on the softer, emotional attributes?

3) How Much Better Do I Need to Be?
Before a customer switches from one product to another, they often need to consider the cost of switching. For example, if I decide to switch from one technology source to another, I have impacted a host of other issues:

• I have to give up a comfortable relationship with one vendor representative who I like and who understands me and form a new relationship with a stranger.

• I have to convert all my old files to the new technology…will they still work? Will I lose data?

• I have to throw away all the supplies and replacement parts I kept in stock to maintain the old technology and buy a whole new set for the new technology.

• There will be unproductive time as I adjust to the new technology.

Even if a new solution is superior to the old, it doesn’t automatically mean I will switch. To switch, I need to be convinced that the superiority is so great that it overcomes the costs of switching. Depending on how entrenched the status quo is and how much it costs to switch, you may not be able to create enough superiority to cause the switch to occur.

For example, there are people who are fully attached (rationally and emotionally) to products and services offered by Apple. Everything is all connected; they have access to all the apps at the app store, the status of owning Apple products, etc. How much superior to Apple would you need to be to get them to switch and lose all of that? Is it even possible to become that much superior to Apple?

4) What is the Context?
People are not always looking for the same type of attributes all the time. Depending on the circumstances, people’s preferences may change. For example, the attributes one looks for in the type of beer they drink at home alone may be different than the attributes they look for in a beer they drink in public with people they are trying to impress. The “best” beer for each situation may be entirely different because you are looking for something different.

If you don’t understand the context, you may choose the wrong attributes to become best at. Purchases are not made in a vacuum. They are made within a context. Does your strategy manage both your product and the context you desire for that product? If you don’t actively manage the context, it may not end up being the context you desired, thereby making your choice of attributes to be best at incorrect.

SUMMARY
A strategy of just being better is not enough. You need to be better in the right way. You are more likely to be better at the right things in the right amount if you consider a) a broader list of “customers” within the supply chain; b) a list of both rational and emotional attributes; c) switching costs; and d) the context surrounding the use of the product/service. If you ignore these issues, you may find yourself with a superior product with inferior performance.

FINAL THOUGHTS
Sometimes, consumer research is used to determine what attributes to emphasize. Unfortunately, that research can often lead one astray, particularly if all you are doing is asking for opinions. Customers like to appear rational, so they may overestimate the rational attributes and underestimate the emotional. Consumers like to appear helpful and supportive, so they often underestimate the switching costs when asked how likely they would switch. Questionnaires are often asked in a different context then how the product will be used. As a result, be careful at taking opinion research at face value. Behavioral research is a much better indicator of how a product would really perform.

Strategic Planning Analogy #389: Ransom Pricing

THE STORY
My wife and I recently purchased the DVDs for all eight seasons of the TV show “24.” As you may recall, each season of 24 consisted of a terrorist attack on the United States. Jack Bauer and his co-workers at the government agency CTU (Counter-Terrorist Unit) had only 24 hours each season to stop the terrorists.

A common plot device used over the eight seasons of the TV show was the hostage/ransom situation. Typically, someone Jack Bauer cared deeply about would be taken hostage by the terrorists. The hostages would then make outrageous ransom demands. If Jack did not follow through on the demands, the person he loved would be killed.

This taught me something very important: Don’t ever let Jack Bauer care deeply about you. For when that happens, you get captured by terrorists and there is a good chance they will kill you.

THE ANALOGY
In the TV show 24, terrorists could convince Jack Bauer to do things he would not normally do in order to save his loved ones. Jack was willing to pay a high price to get his loved ones released, including putting his own life at risk. Jack didn’t spend a lot of time trying to negotiate a lower ransom fee. Jack didn’t wait until the terrorists decided to hold a Clearance Sale on Hostages, where ransom demands were reduced for a limited time. No, Jack would ask what the demands were and then try to satisfy the demands as soon as possible (no matter what the price).

Most companies would love to be in the position of those terrorists when it comes to pricing. The terrorists could charge pretty much whatever ransom fee they wanted. There was no fear of getting into a pricing war. They never had to put the hostages “on Sale.” And the terrorists knew that Jack would rush to pay that price as soon as possible.

Unfortunately, most companies find themselves in the opposite situation. Intense competition gets them into price wars, where margins are eroded to next to nothing. And then customers wait for even further price reductions. If the company makes customers work too hard to get the product or service, the customers will lose interest and go somewhere else. Rather than being able to collect whatever “ransom”-sized fee they want, the companies find themselves having to pay whatever “bribe”-like incentives are needed in order to get customers interested.

THE PRINCIPLE
The principle here is that if you want to be able to charge ransom-like fees for your product or service, then you need a strategy more akin to that of a terrorist holding a hostage. Otherwise, you will become a victim of low-margin price wars. This is not to imply that you need to become a terrorist. It just means you need to borrow some of their strategic tactics.

There are three tactics terrorists use to create a favorable pricing situation for themselves.

1) Create/Exploit Deep Emotional Ties
Jack Bauer would only cave in to terrorist demands if it involved people he cared deeply about. How deeply do your customers care about what you have to offer? Is there a deep emotional tie between your brand and your customer? To what extent will your customers go to maintain that emotional bond?

For example, would you pay a higher ransom to get back your mother or your refrigerator? Most of you, I assume, would pay more to get back your mother, in large part because you have a stronger emotional attachment to your mother than your refrigerator.

Most of the companies which command premium (ransom-like) prices have positioned their products to hold a strong emotional tie to their customers. Examples include Harley-Davidson (motorcycles), John Deere (tractors), and Apple (iPods, iPads, iPhones). The tie is so tight that one’s own sense of identity is wrapped up into the identity of the product. The product represents who you are as a person. Abandoning the product would be like abandoning a piece of yourself. You will pay almost any ransom to maintain that emotional identity.

Harley-Davidson owners have owner clubs (Harley Owners Group, or H.O.G.s). Even though other companies make higher quality motorcycles at lower prices, emotionally loyal Harley owners will never consider them at any price. It is common for these owners to get tattoos of the Harley Davidson logo. This emotional attachment allows Harley-Davidson to stay out of price wars and charge more ransom-like pricing.

There were lots of firms which came out with music players to compete with the iPod, but they didn’t stand a chance, because of the emotional bond and attachment between the iPod and image-conscious teens. To own another brand would be to commit severe damage to your coolness image. As a result, while the competition kept lowering prices to lure away business, the iPod kept both the business and the premium (ransom-like) price.

I have always been fascinated by the cars and trucks I see on the road with a particular decal posted on the window. The decal is of a young boy urinating on the logo of a competing brand. If you can create such a strong emotional bond that your customers see the competition as good for nothing but urinating on, then you know they will not be easily swayed to switch to that competing brand merely due to a small price reduction. You have earned the right to charge ransom prices.

2) Create a Unique or Irreplaceable Offer
I think there is another reason why you would pay more to ransom your mother than ransom your refrigerator. You have only one mother. She is irreplaceable. By contrast, you can always get another refrigerator, perhaps even better than the old one. And the food inside is also easy to replace. Why pay a huge ransom to a terrorist to get the old refrigerator, if you can just go to a store pay less to get a brand new replacement?

That’s why terrorists hold up for ransom items which are unique and difficult to replace, like your mother. It is worth more to you, because you have no way to replace it. And the same idea applies to business. If you want to be able to charge ransom-like prices, you need to offer something which is unique—where there are few alternatives.

It sort of goes along with the idea of The Godfather in wanting to “make an offer he can’t refuse.” You cannot refuse an offer if there are no suitable alternatives.

That is why there is such a big movement among retailers to sell unique products and brands not available at any other store. If the retailer can convince you to desire that product, then the retailer knows that you will have to go to them to get it. With no other options, the retailer stays out of price wars. They can charge a higher price, because you have no other choice if you want that product.

Apple products link the hardware to the software to the apps to the app store. If you want a unique killer app, you have to link into the whole Apple system (no matter what the price). There are no other choices, because it is a closed system. Even though people did not prefer the AT&T mobile network, they accepted it as part of the cost of getting an iPhone in the US, since at first it was the only system iPhone worked on. You cannot haggle on prices for the various parts because of the unique linkage.

General Motors is the only firm in the US to offer the OnStar service on its cars. If you are the type of person for whom the OnStar service is critically important, than you have to own a GM car, no matter the price.

If people see your product or service as no different than the competition, then you become a commodity. With no perceived difference, sales go to the firm with the lowest prices. The only way to get out of that price war is to find a way to differentiate yourself from the pack. Find some sort of unique added value that a group of people will pay more for. Or link up and bundle yourself to other desirable products. Make it impossible to do direct comparisons with competition. Only then can you extract ransom-like prices.

3) Have the Power to Follow-Through on Threats
Usually, the terrorists told Jack Bauer on 24 that if he did not do as he was told, they would kill Jack’s loved one. Jack obeyed because he knew that these terrorists had the will and the power to carry out their threat. These terrorists were used to killing and had no qualms about killing a loved one of Jack.

Conversely, if the terrorists did not have the will or the power to carry out their threat, the ransom demand loses value. If you know that the threat to kill is a hollow threat they will not carry out, then you can ignore the demands. I’ve often seen this with children in public places. When parents tell an unruly child to behave “or else”, some immediately behave while others continue the bad behavior. Although there can be many reasons for this, one reason is because children know whether the “or else” is a hollow threat. If it is a hollow threat, then there is no reason to take it seriously.

One of the reasons why Best Buy was so profitable at its peak was because its vendors knew that Best Buy followed through on its threats. When a new technology was developing, Best Buy would tell all the vendors in the field that they would not support all of the brands trying to claim a position in this space. They would point to history, where the brands Best Buy supported thrived, and the ones they did not back usually failed. Then, they would essentially ask the vendors how much of a “ransom” they were willing to pay to get the support of Best Buy (and avoid not getting their support). Because Best Buy carried out its “threats”, people took these negotiations very seriously, and Best Buy reaped higher profit margins.

Lots of people procrastinate and wait for sales when they know that a retailer does not have the will to resist holding a sale. However, if a retailer gets a reputation for following through on a threat of not holding sales, then customers will tend to not wait and buy early at full mark-up prices.

SUMMARY
If you want to escape endless price wars and instead charge prices with healthy margins, think like a terrorist in a hostage situation. Terrorists can extract a huge ransom price because they:

1) Choose Hostages with High Emotional Value
2) Choose Hostages with are Unique and Difficult to Replace
3) Follow through on their Powerful Threats

As a company, you can do similar things to create your ransom-like pricing.

1) Create Strong Emotional Ties Between Your Brand and the Customer
2) Create an Offering which is Unique and Irreplaceable in the Marketplace
3) Follow Through on Your Threats.

FINAL THOUGHTS
A strategy to follow the leader will never set you apart in a manner which allows ransom-pricing. Instead, strike out on your own and create a unique offering which has high emotional appeal.

Strategic Planning Analogy #275: Bias to Go

THE STORY
I worked with a company that desired to have a new corporate headquarters building. The company at the time was spread over several buildings around the city, making things inconvenient. Not only would a new headquarters get rid of that problem, but many thought it would be fun and a boost to the ego to work in a flashy new building.

The problem was that the new headquarters was difficult to justify based on financials. New headquarters can be very expensive, and the benefits to the rest of the business are difficult to quantify.

To make the financials more appealing, two assumptions for the model were changed. First, the resale value of the old headquarters was increased in the model. In other words, if we moved to a new building, it was assumed we would get more when we sold the old building (to help pay for the new building).

Second, it was assumed that the company’s unusually rapid growth rate would continue for awhile. This meant that the current infrastructure was even less adequate moving forward (we’d have to add more office space anyway). It also made the cost of the new headquarters more efficient, since a bigger headquarters costs less per square foot to build.

These changes gave the new headquarters scenario just enough of an edge so that it looked slightly better to build an impressive new corporate headquarters building than work with the current hodge-podge of buildings. So the decision was made to “go” with the flashy new headquarters.

Well it takes a year or two to get one of these headquarters built. Between the time of giving the go-ahead to build the new headquarters and the time it opened, two particular things occurred. First, the bottom dropped out of the real estate market, meaning that the old headquarters sold for a lot less than what was put in the model. Second, internal growth had stopped and the company had actually shrunk the headquarters staff. So the new headquarters opened up as about half empty. At this point, it would be difficult to justify that new building. But it was really cool and people still liked the prestige of being there.

THE ANALOGY
At the end of the day, that huge new headquarters was not built because it was the wisest financial move. It was built because people wanted a cool new building to work in. That bias of desire overtook common sense. The financial model had been unjustly modified to make it look like a wise move, but in the end, reality told a different story.

In the business world, there are all sorts of similar types of business decisions. They are some variation of this question: Do we stick with the old and familiar or go with the new and different? This applies not only to headquarters, but to potential new product offerings, brand extensions, acquisitions, diversifications, and the like. The sexiness of the new initiative lures people in like the songs of the Sirens.

People seem to forget that most new initiatives fail. They think that this one is the exception to the rule. So they push forward on the new initiative and create one more disaster, confirming one again that most new initiatives fail.

THE PRINCIPLE
The principle here is that when it comes to “go” vs. “no go” decisions on new initiatives, there are many internal biases towards “go.” If we don’t understand the impact of these biases, we can become blinded into making less than ideal decisions. Therefore, this blog will look at three things: Sources of a bias to “go,” distortions to the decision-making process which come from the biases, and the questions we need to ask ourselves to unmask the bias to “Go.”

In the next blog, we will do the same thing for the biases to “No Go.”

1. Bias Source #1: Fun Factor
Let’s face it. It’s fun to work on the “new” project. It sure beats working on the old routine stuff. You get to go to lots of committee meetings (and eat lots of yummy donuts). If you keep saying “yes” the fun continues. If you say “no” the fun ends.

2. Bias Source #2: Freedom
The old routine stuff has all sorts of tight budgets and short performance deadlines. There is a clear line of authority and accountability. It’s a hassle and you get yelled at a lot if budgets are missed. By contrast, the new stuff is usually more open-ended. There is a lot more freedom and less accountability as it is being set up.

3. Bias Source #3: Career Enrichment
The new stuff is highly visible. If you can make the new project a success, you can quickly become a hero in the organization. That can lead to all sorts of bigger titles, promotions, perks and money. Your rise in the organization tends to be faster if you work on the new stuff (and succeed), so you are biased to work on these projects and promote them so that you have a chance to succeed with them.

4. Bias Source #4: Linkage of Person and Project Image
Of course, this also works in the other direction. If the highly visible new project fails, your “failure” is very visible. The more a person sees their personal success as linked to the project success, the more likely they will push the project forward. After all, saying “no” to the project is viewed as being like saying “no” to the people working on it. This creates a strong bias to avoid shutting a project down, no matter how bad it looks.

5. Bias Source #5: The Panacea Phenomenon, or the Optimism of Ignorance
We all tend to know the shortcomings of our current businesses. However, when we venture into new territory, there are more unknowns. Given all of the other biases, we tend to take a more optimistic slant to those unknowns. After all, we have expectations to grow corporate sales and profitability. We know we cannot hit those aggressive goals with our current ventures. Therefore, the gap has to be filled by new ventures. If we say “yes” to the new ventures, we have a shot at filling the goal (our panacea for our problems). If we reject the new ventures, we run out of options for filling the gap.

So, given all of these biases, there is a tendency to create financial models which are biased towards moving the new ventures forward, even when they should be halted (whether we are aware of it or not). Some of the ways the models get distorted are as follows:

1. Distortion #1: Forget about Life Cycle Impacts
New ventures are often very profitable in the beginning. This is because it tends to be in an uncontested space with little competition. However, once we show that profits exist in the space, others will jump in. Competition will erupt and profits will go down. In addition, all that new business is probably coming to us at the expense of someone else’s old business. As soon as they see their business being attacked, they will fight back and get some of that business back. This is all part of the natural rhythm of the product life cycle. Eventually the industry matures and profitability drops to something near the cost of capital. If you only project the good, early times into your model, you will distort the model to be too optimistic. This is particularly true if there is a large residual value at the end of your model’s time frame.

2. Distortion #2: Forget about Transition Costs
The models for the new business often look at the venture once it is up and operating smoothly. That’s nice, but there is usually a costly transition to get there. For example, I’ve seen lots of people model out the benefits of an acquisition and only look at how the acquired company will perform once acquired. They leave out all sorts of very expensive costs associated with doing the acquisition, like investment banker fees, legal fees, PR fees, severance costs on the people let go, and so on. When you factor in all of these transition fees, a supposedly “good” deal can become a money loser. There are also substantial transition costs in new ventures. It takes a lot of time and money to get them up and running, which may not get into your model.

These two distortions can make your models biased more towards the new venture than they should be. They reinforce the bias to “go” which was already there, increasing the likelihood that you will vote to “go” when “no go” is the better response.

To help avoid the consequences of making poor decisions due to the bias to “go”, ask yourself these questions:

1. If it were your money, would you still do it? (We tend to have less of a bias to “go” when it is our own money at stake)

2. If you were assured of a promotion regardless of the success or failure of the project would you still want to go forward? (This unlinks your fate from the fate of the project, so that you can look at it more objectively)

3. Can the new venture overcome the competitive reactions and the copycats that will naturally occur as part of the life cycle? (Put it into the model and see)

4. Can the new venture absorb all of the transition costs and still work? (Put them in the model and see)

SUMMARY
Since most new initiatives fail, there is reason to be skeptical when new initiatives are proposed. Double check to see if the new initiative is truly worthy of a “go” vote. Don’t just assume the analysis is telling the whole story, since the bias to “go” can distort the analysis (even if you are unaware of it at the time). And check out your own biases to be sure you are choosing based on reality not some irrational emotion.

FINAL THOUGHTS
According to the book Parkinson’s Law, “During a period of exciting discovery or progress, there is no time to plan the perfect headquarters. The time for that comes later, what all the important work has been done. Perfection, as we know is finality; and finality is death.” So when people are pushing for a luxurious new headquarters, it may be time to get out of there, before it is too late.

Strategic Planning Analogy #268: We're All in the Fashion Business

THE STORY
A few years back I was working on a project with a number of people in the recorded music industry. I noticed that most of the people who worked in that industry tended to wear black clothing—from top to bottom—nearly every day.

I finally couldn’t take it any longer, so I asked one of them why he (and the others) wore black every day.

He paused for quite awhile, with a puzzled look on his face. Finally, he said, “I don’t know. I guess it makes it easer to get dressed in the morning.”

THE ANALOGY
It’s easier to get dressed when the element of fashion is taken out of the equation. If everything in your closet is black, you can grab just about anything and look okay.

For most people, however, clothing is not so simple. Fashion is a concern. Clothes need to be in fashion and coordinate together. If your clothes are out of fashion or not well coordinated, it will reflect poorly on your image. When clothes go out of fashion, they need to be replaced with the newest and latest. Wearing the right labels is also a concern.

As a result, when the element of fashion is added, getting dressed in the morning suddenly becomes a more complex affair. It takes some effort to stay on top of the fashion cycles, so that you are not looked down upon. There are even TV shows to help us understand fashionable dressing.

Most of us are aware that clothing is driven by fashion. However, as we will see in this blog, virtually all businesses have a significant element of fashion to them. Just as being out of fashion in clothing can hurt your image, being out of fashion in your business can hurt your company’s profitability. Businesses need to get in tune with the fashion complexities of their industry.

THE PRINCIPLE
The principle here is that everyone is in the fashion business. You ignore the fashion element at your own peril.

Everyone? We’re all in the fashion business? Sure…things go in and out of fashion in business all the time. Take finance. Sometimes private equity is in fashion, sometimes stock is in fashion. We tend to be somewhat faddish over the latest new wrinkle in debt structuring. Sometimes entrepreneurs are in fashion, sometimes big business.

In the automotive industry, sometimes big ol’ trucks are in fashion, sometimes tiny little cars are in fashion. Even the fashion allure of some brands come and go out of fashion. When it comes to Japanese imports, first it was Datsun that was the fashionable one to have. Later, it was Honda. Then Toyota. And now the Toyota brand may be starting to lose its fashion appeal as the hot import brand.

Governments go in and out of fashion. Sometimes it’s more fashionable to be liberal; sometimes it is more fashionable to be conservative. Fringe political groups go in and out of fashion, too.

Food is fashionable. Sometimes Thai food is in. Other times, it’s Indian or Italian. Organic is now fashionable. Carbs were totally out. Now they are back.

In computing, netbooks are in, desktops are out. And mobile phones are extremely fashionable—an older phone really looks out of date and makes you look unfashionable.

The point is that nothing lasts forever and no purchase is 100% rational. Emotional/Fashion elements suddenly make things far more desirable than what makes rational sense. Just as suddenly, they become passé and out of favor. Look at those crazy foam-like Croc shoes. At first they were in such high demand that Crocs could not manufacture them fast enough. Now, sales have plummeted and Crocs is on the verge of bankruptcy. The shoes didn’t change. Demand changed due to a change in fashion.

This phenomenon affects more than just apparel. Consumer markets, business markets, industrial markets, governmental markets, and so on, go through fashion cycles. And as we all know, business management practices are among the trendiest of them all.

So if everything has an element of fashion to it, what can we learn from the fashion apparel industry? I think there are three important principles.

1. The First Markdown is the Best Markdown
When things start going out of fashion, it is usually not a long, slow drawn-out affair. The transition is rather quick. Just ask Hummer how fast they went from cool to embarrassing. When the mortgage market went sour, it killed the fashion for fancy new housing construction almost instantly. In the fashion apparel world, they understand how fast the latest hot thing can go cold. As a result, as soon as there is a small hint that things may be turning bad they go into action. Production is halted; huge sale signs go up; inventory is pushed out the door as fast as possible, regardless of cost. This is not a time to be tentative. Soon the value of that inventory will be nearly worthless, so get whatever you can right now.

Think of bananas. Once you start seeing a few black spots, you know that soon the whole banana will be rotten. You can’t sell a totally rotten banana at any price (you can’t even give it away), but you can sell one with a few black spots if the price is low enough. So mark it down quickly, when there is still a chance of making a sale.

This applies to all businesses. Don’t assume your offering will always be in high demand. Eventually, it will become obsolete, either through new innovation, changes in demand, or competitive moves. And when that time comes, the desirability of that offering will fall far faster than you think. Therefore, when things start to turn bad, be ready to liquidate quickly, even if it means severe markdowns. Don’t procrastinate. Ford got out of Range Rover quickly, selling at a reasonable discount. GM procrastinated with Hummer and will sell it for next to nothing. The first markdown is the best markdown. Take advantage of it by pushing to sell while there is still a bit of fashion in your favor.

2. Don’t Put All Your Eggs in One Basket
If all you sell are Crocs, and Crocs go out of favor, you are doomed. The US auto makers were moving closer and closer to being just manufacturers of big trucks and SUVs. Now that those are out of fashion, they are scrambling to become serious in cars again.

The smart fashion houses don’t put all their eggs in one basket. First, they diversify by holding a portfolio of brands/styles. Second, they keep the product development pipeline full. They are always trying and testing new things. They always have one eye looking towards the next fashion season.

You should do the same. Have a portfolio of products or offerings, so that you can easily shift your mix to the changing whims of fashion. Make product development a priority—keep the development pipeline full. Keep an eye out for the next big thing and pounce on it when the time is right.

3. Seasons Come and Go
People in apparel fashion know that their world operates in seasons. What is hot in the Spring Season will be gone by the Fall Season. Something new will be hot in the fall, which will be obsolete by the following spring. Even what is hot for fall changes from year to year.

Therefore, smart apparel people never rest on their laurels. They know that just because they succeeded in the spring, they have no guarantee that they will succeed in the fall. Each season is a new battle to be won all over again. Reputation only goes so far. You have to win each season by adapting to the new seasonal whims better than anyone else.

The same is true for your business. Although the seasonality may not be as predictable as it is in apparel, there are cycles and rhythms to your business. These cycles and rhythms will significantly alter the landscape, making the successes of the past fairly meaningless. When photography fashion moved from film to digital, the reputation of Kodak only went so far…not enough to keep them successful. It was a new digital season and they were still pushing the last season’s (film-based) products.

One needs to fight hard to win each season by reinventing your offering to meet the mood of the new season. Again, it is not a gradual thing. The seasonal shift is fairly swift. You need to proactively try to predict the next season—just like apparel fashion houses do—so that you are ready when the new season comes.

SUMMARY
Every industry has an element of fashion to it, so apply some of the principles of the apparel fashion industry to your own industry. First, be prepared to make the most of the first markdown. Second, don’t put all your eggs in one basket. Third, realize that every season is a new battle.

FINAL THOUGHTS
Fashion people also realize that just because you blew it for the current season, all is not lost. There is always next season to regain the top. So cheer up. There is always the opportunity to win when the next fashion shift comes—if you are prepared.

Analogy #190: Who's Bribing Whom?

THE STORY
Back around 100 years ago, San Francisco was a pretty wild place for doing business. The city was growing rapidly and it was busy putting together its infrastructure—utilities, transportation, etc.

If your company became a part of that infrastructure, you would become extremely wealthy. Therefore, companies were highly motivated to use bribery to convince the San Francisco city aldermen to include their companies in that infrastructure.

Examples of companies who were bribing city officials at the time included PG&E (Pacific Gas & Electric), Bay Cities Water, and United Railroads. United Railroads had a $200,000 pool of money just to be used for bribery (which would be a huge amount in today’s dollars).

One of the biggest scandals was in the telephone utility. Pacific Telephone and Telegraph was currently serving customers in San Francisco. Newcomer Home Telephone Company wanted a piece of the action and allegedly paid $5,000 per official to get approval, along with $125,000 for political boss Abraham Ruef. Of course, Pacific Telephone did not want to lose its monopoly, so it bribed the officials to keep out Home Telephone. They supposedly spent about $50,000 in bribes.

Home Telephone appears to have made the bigger bribes, so on March 5, 1906, the San Francisco city supervisors awarded Home Telephone Company a 50 year franchise to operate in the city.

While the city was using bribery to build up the city, Mother Nature decided to tear down the city. On April 18, 1906, little more than a month after the Home Telephone decision, San Francisco was destroyed by a great earthquake and a fire lasing four days. Shortly after cleaning up from the earthquake, the city cleaned up its government. In March of 1907, the city officials and the businessmen who bribed them were convicted in a court of law. Abraham Ruef was charged on nearly 70 counts of accepting bribes.

THE ANALOGY
Although most businesses today do not resort to the level of bribery found in San Francisco 100 years ago, “bribery” is extremely common today. I’m not referring to the illegal type of bribery, but a legal form of bribery.

In reality, any time one must resort to added incentives to get a customer to make a purchase, you are “bribing” them. In essence, these incentives show that you cannot create sufficient sales at the original value, so you have to “bribe” people with something beyond the original value (such as a price cut), in order to get them to act as you want and buy your product/service.

Recently, I got a call for a time-share resort company who was willing to offer me all sorts of prizes and gifts in order to get me to drive to their resort to hear a sales pitch. All of their bribery in incentives was not enough to get me to go, though. It would take a much higher bribe to get me to overcome my lack of desire to hear their sales pitch.

The worse your original value proposition, the higher the bribe (in added incentives and price cuts) is needed to get customers interested in making a purchase. Ultimately, this cuts into your profits. Although this type of bribery will not get you convicted, it is not a very efficient way to earn profits.

THE PRINCIPLE
The principle here is that offerings with an inherently strong internal value are typically more profitable than offerings where bribery is needed in order to create sufficient value.

Take, for example, the automobile industry. GM and Ford are currently offering huge bribes in terms of incentives and price cuts in order to sell their slow-moving gas guzzlers. By contrast, Toyota can sell all of the Hybrid Prius automobiles they manufacture at full-price (and a premium price at that).

Because the Prius is more in tune with what customers want, Toyota does not need to add any bribes to the offering. The basic offer is strong enough on its own and can command a premium price. On the other hand, the big gas guzzlers at Ford and GM are out of tune with the marketplace. Consequently, they have to load on so many bribes to move the goods that there is very little left to create a profit. As a result, GM is in serious risk of going into default, while Toyota is doing well.

This is not an unusual example. Throughout history, one can find industries where one firm has such a superior perceived value that it can sell at a premium, whereas the competition has to resort to bribes in order to get any attention. Just compare Ipod to its competitors. Or look at Virgin Atlantic versus traditional airlines, where extensive bribery through special promotions and discounts has been a financially disastrous way of life.

Although he does not look at the issue in terms of bribes, J.C. Larreche covers similar territory in his book “The Momentum Effect.” Larreche is a marketing professor at INSEAD. Based on his studies, Larreche discovered that firms which spend a lot of marketing money to “push” goods on consumers (with what I call “bribes”) do not grow as fast, have lower stock prices, and are not nearly as profitable as companies who focus on creating the types of superior values which do not require bribes.

To paraphrase, Larreche’s advice is that rather than rushing to get a product to market, one should stop and first take the time necessary to ensure that the product you have has enough intrinsic value that it will sell without the need for bribery (what he calls achieving “compelling value” or the “power offer”).

Well, that all sounds logical and intuitive—superior offerings sell better (and more profitably) than inferior values. But how do you create these compelling power offers?

There really aren’t any shortcuts. It’s a lot of hard work. I divide the work into three buckets: Left Brain (Rational) Work, Right Brain (Emotional) Work and Whole Brain (creative) Work. The idea for the first two buckets is that you have to choose a particular customer segment and then get inside their brain. You have to understand all of their needs/wants/desires as well as what triggers satisfaction.

Some of these discoveries will be highly rational. Some will be highly emotional. You need to understand both. It is not always the technologically superior product that wins. Instead, it is the product which connects best with the customer on all levels, including emotions and psyche. Apple is very good at making the connections on all of these levels. Their products are technologically great, esthetically great, and create great emotional connections with their customers (see “Reason Vs. Rationale” for more on combining both rational and emotional appeals).

This takes time. It requires getting close to your customers…spending lots of time watching and talking to them…getting below the surface to the true human motivations. This is the data gathering phase.

But it doesn’t stop there. I know lots of companies which brag about being fact-based operations. But facts alone are not enough. It takes intuition and creativity to convert those facts into original superior value propositions. This is the third bucket of work.

Sure, it takes time and money to go through these three steps. But this is a far more productive use of your funds than using them for bribes.

And the beauty of the whole thing is that if you do this properly, the bribes will start flowing in the opposite direction. Instead of you having to bribe others, others will start bribing you.

1) Customers may start bribing you by offering to pay a premium to achieve faster access to your products. Customers can even start to act like free sales reps, singing the praises of your product to their friends.

2) So many people will want to work for your company that they will do whatever it takes to get a job there. They may even be willing to work for free as interns in order to be a part of this great value.

3) Other firms will want to do tie-ins so that they can have their products associated with your products. They will come up with all kinds of legal bribes to try to get permission from you to do this.

With all of these benefits, it should come as no surprise that I recommend that strategic planning efforts focus around trying to come up with a position which is so compelling to your customers that bribery is unnecessary. Your strategic planning process needs to incorporate some form of these three buckets (rational, emotional, and creative).

SUMMARY
It is more profitable to offer unique, compelling values than to push mediocre products. Pushing mediocrity requires an expensive form of bribery. However, if your value is compelling enough, people will start bribing you. Compelling values come from those who do the hard work of first leaning the deep-seated motivations of their customers (rational and emotional) and then finding a superior way to deeply satisfy them.

FINAL THOUGHTS
These days, whenever I look at advertising or an advertising budget, I imagine them as being distasteful bribes. It’s as if your advertising budget is like the $200,000 United Railroads had set up as their bribery budget back in San Francisco 100 years ago. Once you get into this mindset, one naturally starts to focus on ways to create extra internal value, so that you can get out of the distasteful business of supplementing your mediocre value with bribes.

This is not to say that advertising disappears. It just becomes more productive through informing and reinforcing the value, rather than trying to overcome the lack of sufficient value.

Eat Your Children

THE STORY
Back in 1729, Jonathan Swift wrote an essay entitled, “A Modest Proposal.” In this essay, Jonathan Swift was writing about the deplorable situation that existed in Ireland at that time. In particular, he was concerned about the large number of children in Ireland living in poverty. In the words of Swift, his goal was to “find out a fair, cheap, and easy method of making these children sound, useful members of the commonwealth.”

In the essay, Swift makes “a modest proposal” for achieving this noble goal: Sell the children at the age of one for the purpose of being eaten by the wealthy. In a cold and unemotional writing style, Swift calmly points out many benefits from the proposal, including the elimination of problem children and an improvement to the economic condition of the community.

Naturally, this is just one of the many satirical pieces Swift wrote during his life. You can find the entire essay at http://art-bin.com/art/omodest.html.

THE ANALOGY
The thought of eating one’s babies is disgusting. This was anything but a “modest proposal.” Of course, this was the point of the essay, that the real disgusting thing was that society had become callous to the societal ills around them. By pointing out the absurdity of the eventual outcome of extreme callousness, Swift hoped to encourage more compassion.

The business world is full of its version of babies—all of the products and services that the company has nurtured over many years. Just as people would find it disgusting to kill and eat their children, businesses often find it disgusting to think about killing off their products and services. The emotional ties are difficult to sever.

However, sometimes the best strategic options for a business include the need to kill and/or sell off our corporate children. It may not be pleasant, but it may be necessary for the survival and prosperity of the firm. The trick is to find a way to make the move without destroying the emotional fiber of the company.

THE PRINCIPLE
The principle here is that all strategic initiatives eventually fail. If you stick it out with a product throughout its entire life cycle, when that product or service reaches the end of its life cycle, your company will die along with that product. To avoid the premature demise of a company, it must at times be willing to let go of the heritage of the past and adapt the strategy to the changing environment.

A great example of this dillema occurred at Intel. Intel’s heritage had been in memory devices. In the 1980s the memory chip was called the DRAM ( Dynamic Random Access Memory) chip. Employees thought of memory devices such as the DRAM as being a part of the heart and soul of the company. It was how they defined the company in their mind. It was what put Intel “on the map.” To abandon it would be like abandoning your parents. One middle manager, for instance, said that the idea of Intel getting out of DRAMs would be aking to “Ford deciding to get out of cars."

Emotions aside, reality was telling a different story. Intel was increasingly becoming a non-factor in DRAMs. The DRAM business was unprofitable for Intel and was putting the fate of the entire company at jeopardy. A rational person could see that microprocessors were the more logical future of Intel. Yet humans are not entirely rational people. Emotions also drive decisions. And the emotions kept Intel in the DRAM business longer than it should have.

Emotions are important to strategy, because without an emotional commitment, it is difficult to endure the difficulties which come with trying to bring a strategy to life. An emotionless strategy rarely gets the company’s rank and file motivated to go the extra mile to achieve greatness. So it is important, when taking a new strategic path, to make sure that the emotions and morale are not destroied in the process.

Intel COO at the time Andy Grove knew that the company needed to move on. The dilema as he saw it, and the way he resolved it was like this:

“Don't ask managers, What is your strategy? Look at what they do! Because people will pretend. . .The fact is that we had become a non-factor in DRAMs, with 2-3% market share. The DRAM business just passed us by! Yet, many people were still holding to the "self-evident truth" that Intel was a memory company. One of the toughest challenges is to make people see that these self-evident truths are no longer true. . .I recall going to see [President] Gordon [Moore] and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So, I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.”

The solution was to:

A) Get people to see that their version of the truth really wasn’t the truth; and

B) Point out that if they didn’t make the change themselves, new management would probably be brought in to do it without them.

In today’s era of hedge funds and activist shareholders, the risk of being replaced or having the change thrust upon you anyway is a far more frequent and real threat. Why let the outsiders come in and make all the changes and reap all the profits? If it is going to happen anyway, do it yourself and allow current management and current stakeholders reap the benefits. At least if you do it, there will probably be more compassion and understanding. The emotional aspect may be easier to take and the healing may be more rapid if the insiders do it rather than the unknown outsiders.

It can hurt to abandon one’s children, like the DRAM. It can hurt more if you do not. The company may die along with the death of the product. Another related problem is the fear of cannibalization. As discussed in an earlier blog, “This Candy Melts in Your Hand”, many companies over the years have failed to invest in the next big thing in their industry for fear that it would cannibalize the sales of the current portfolio of products. By avoiding investment in the new, these managers hope to prolong the life of the old.

Unfortunately, just because your company does not invest in the new does not mean that others will do likewise. Firms with less to lose will dive into the next big thing and ruin your business anyway. It is better that you ruin the the business yourself by killing off your baby and at least own an entry into the next big thing, than to have someone else kill your baby and leave you with nothing.

However, using only a rational justification to do so is rarely as effective as combining it with an appeal to people’s emotions and sense of heritage. Jonathan Swift’s cold and rational essay could never pursuade anyone to kill babies, because it did not address the moral outrage. Similar feelings of outrage could occur in your business if you appear as cold as Jonathan Swift.

For example, there could be emotions of fear to be dealt with—fear that by leaving the old, everyone will lose their jobs and that one’s personal stake in the company will disappear. This is a real threat to company employees. In the case of Intel, leaving the DRAM business resulted in the loss of 3000 jobs. Although not all jobs can be saved, one should point out that change can often lead to greater growth, and greater growth can lead to greater opportunity.

There could be great sense of loss in purpose. Although the paycheck is great, people are happier and more productive if they feel like their work has a greater sense of meaning and purpose. By severing the heritage with the past, the company could appear like a cold uncompassionate piece of money-grubbing capitalism. This could disrupt morale to the point that productivity drops and good people leave to find a more fulfilling position elsewhere. It is important to link the killing of the corporate baby with a shift to an even greater sense of purpose which builds on the heritage of the past.

Finally, it is important to continually manage the perception of the company by its employees. If the identity of the company is too wrapped up in a single product, or the perception is based on a false “self evident truth,” then you could have problems down the road. It is better to manage this image prior to the need to kill off a baby then to wait until the last minute.

SUMMARY
Because the world is changing, strategic initiatives become obsolete. At some time, it may become necessary to kill off the babies that made the business what it has become in order to ensure a better place for where it must go in the future. Although this sounds great on a rational level, people live and act based on emotions as well. The emotional aspect should be addressed when making this change. If it is not addressed, either powerful internal forces will keep the change from occurring or the transition will not be as smooth and successful as it could be.

FINAL THOUGHTS
Companies are only as good as the people who do the work. If you destroy the morale, you destroy a part of what makes your company great.