Strategic Planning Analogy #495: The 3 Keys to Success (Part 2)

THE STORY

I was excited the first time I was to visit the Museum of Modern Art in New York.  The museum is full of famous works of art.  I had read about or seen pictures of this art in books, but now I was going to get a close up look at the original paintings. I imagined that it would be a very inspiring visit.

Instead, it turned out to be a very disappointing visit.  As it turned out, not only do you see the greatness of the paintings when you see them up close.  You also see all the imperfections.  In particular, I remember looking at some very famous Picasso paintings.  When you studied them up close, you could see the rough pencil sketch underneath the paint.  They looked a lot sloppier than the little photographic reproductions I had seen of them earlier in art books.  After awhile, I became so fixated on the imperfections that I couldn’t enjoy the paintings.

I kept thinking to myself that I could probably find many artists who would be able to reproduce all of these paintings and have fewer imperfections. But in later reflection, I realized that I was missing the point.  No matter how much more “perfect” these reproductions would be, they would never be more valuable than the original.

THE ANALOGY

Copying is a lot easier than creating something entirely new. Imitators may even be able to make small improvements over the original.  But in the world of art, the value belongs with the original, no matter how flawed it might be. 

A similar situation exists in the business world.  The ones who create, get known for and exploit exciting new business models first usually create more value than the later imitators.

Therefore, you’d think that there would be more business people striving to be the next Picasso—creating something new, exciting and very valuable. Yet, when I look around, it seems that the business world is more often filled with imitators and copiers. The idea seems to be that “People like that original over there, so if I make something just like it, they will like mine just as well.”

But as we all know, a “just like Picasso” is never as valuable as a real Picasso.  Why should we expect the rules to be all that different in business?

THE PRINCIPLE

We are currently on the second blog in a series on the three characteristics which tend to determine whether a business is a great, lasting winner, or a long-term loser. In the first blog, we looked at “Passion” and saw that the winners have a passion for the business and the intricacies of the business model which makes it work in the marketplace.  The losers focus their passion on the money that comes out of the business and are only tangentially concerned about the details in how it is made.

In this blog we will look at “Direction.”  Winners tend to move in new and different directions, like Picasso.  Losers direct themselves to follow what is already working (the imitators).

The Problems With Following

There are many reasons why the followers rarely become the great companies. It doesn’t matter if you are following the standard rules of convention for your industry or following the innovation of the leaders.  You are still following.  And followers rarely reap great rewards.

There are three problems with focusing on following the conventional rules for how your industry works.  First, if everybody is doing the same things in the same way, then you tend to have parity of offerings amongst the competition.  How do you win over the competition if you are all perceived as being the same?  This tends to lead to price wars (“everything is the same, but we cost less”), and we all know that price wars are not the path to creating above average prosperity.

Second, even if you can execute within the conventional rules a little bit better than everyone else, it is usually only a temporary advantage. In an earlier blog, we looked at the battle between Fuji and Kodak in conventional analog photographic film.  Sometimes Fuji would have a slight advantage; then Kodak would get a slight edge—back and forth it went with no clear winner.  The real winners were the innovators who abandoned the conventional rules of photography and brought digital imaging to the masses.

Third, there are limits to how much better one can become by playing by the same rules. The law of diminishing returns tells us that ever increasing improvements tend to lead to ever smaller perceived benefits.  For example, I could make an ever more perfect nail, but at some point, the guy hammering that nail into a board won’t be able to see how those perfections improve his hammering.  In other words, superior executions of the status quo often do not create enough of a differentiating benefit to shift habitual shopping patterns for the customers.

So what about following the innovators?  Well, you’re still a follower.  The last time I checked, followers never win races.  Just as Picasso gets superior credibility for pursuing a new path, business innovators get superior credibility over their followers.  The innovator becomes synonymous with the innovation.  The rest are seen as mere copiers. 

For example, Google means search.  Even though the follower Bing claims a slight superiority in blind tests, Google still wins the war for market share in search.  Why?  We are not brand blind.  The emotional bonds associated with the leader brand overcome the slight differences.  The same thing happened when follower Pepsi claimed superior taste in blind taste tests over Coke.  Coke still won the war.

Finally, the follower usually is one step behind the innovator.  By the time the follower catches up to where the leader was, the leader has moved on to the next innovation. That is why hockey great Wayne Gretzky attributed his success to ignoring where the puck currently is and instead going to where the puck is going to be.  Rather than following the puck, he got in front of it. 

There are only two ways to win by following.  First, you can win by having your competitors make colossal mistakes. Their failure becomes an opening for your gain.  But a strategy that depends on others to make mistakes is not much of a strategy.  In addition, if you are a follower, you will probably follow them into similar mistakes.  For example, the financial collapse which triggered the great recession was caused by colossal mistakes in the banking industry.  But because most of the big banks tended to be following each other and playing by the same flawed rules, most of them fell victim to the flaw and could not gain meaningful advantage.

The second way to win playing by conventional rules is if you are substantially larger than everyone else and can leverage your size to your advantage.  However, this begs the question of how one gets to be so much larger than the others in the first place.  Usually the bigger players got to be so much bigger because they were the innovative leaders which rewrote the old conventional rules into what became today’s conventional rules. It was their leadership which made them big, not any form of followership.

The Value of Being Different

There are two ways to be different.  First, you can create a new business model which is inherently superior to the status quo model at delivering value.  For example, Southwest Airlines has been a consistent success competing against other airlines who struggle to survive.  Why?  Southwest Airlines played by a different business model, focused on point-to-point (among other things).  It’s unique business model allowed it to provide superior value that those playing by conventional rules could not imitate.  Even the best player by conventional rules could not exceed the value offered by Southwest’s different approach to the business.

Another example would be Salesforce.com.  While others were playing by the old rules of installing and supporting software scattered everywhere, Salesforce.com eliminated the software paradigm and was a leader in putting everything up in the cloud.  That change in business model gave Salesforce.com inherent advantages that the conventional operators couldn’t match if they stayed in the old paradigm, no matter how well they executed it.

This helps reinforce the first differentiation we talked about in the prior blog—where winners focus on business models.  You won’t find the success of a Southwest Airlines of Salesforce.com unless you spend time focused on business models. 

The second way to win in difference is by creating a new value proposition which did not exist before.  Apple has been a winner by creating wholly new types of value expectations.  The iPod, iPhone, and iPad changed the whole way people thought about how to live and enjoy their lives.  They created new values in new places.

The “Fast Fashion” operators, like H&M, Zara and Forever 21, helped change the definition of what to value in fashion for a significant segment.  Instead of defining fashion by Exclusive Labels, High Prices, High Quality and Fashion Seasons, they made fashion more disposable, where frequent change/variety combined with low prices (and lower quality) was a new winning formula.

If you look across the spectrum of business, you will find that nearly every great company at some point took one of these different directions.  They either came up with a new business model which had inherent advantages over the old model in the conventional industry, or they invented whole new industries by redefining or creating new value formulas.

SUMMARY

One of the key differences between business winners and losers is the direction the leaders take the company.  The losers tend to move in a following direction—either following the conventional rules or following the innovators.  By contrast, the winners tend to move in a new direction, either by finding new ways to better satisfy old values or by creating new values through new industries.

FINAL THOUGHTS

Artists create; craftsmen copy.  Are you an artist or a craftsman?

Psst...It's a Secret

THE STORY
Once upon a time, there was a businessman who made a lot of money. He was afraid that one of his nearby competitors would steal his money, so he buried the money in a hole on his business property and did not tell anyone where it was hidden.

The wealthy man thought that he was very clever. “Those competitors will never get the better of me now,” he said. “If I ever run into a little bit of trouble, I can just dip into my underground treasure. There’s enough hidden treasure to keep this company strong for generations. My children will never have to worry.”

Unfortunately, shortly after burying the treasure, the wealthy man died in an automobile accident. His children were not yet wise enough to run the business without him. When times of trouble came, they did not have any extra money to use because they did not know about the buried treasure or where it might be hidden.

As a result, the business eventually fell into bankruptcy. The children sold the business, at a huge loss, to one of the neighboring competitors, a person that the wealthy father hated, and one of the people he thought might steal his money (which was why he buried it in the first place).

After this competitor took over the business, he decided to renovate the property. He brought in some earthmoving equipment to build a new foundation. While digging, the equipment found the buried treasure. So, in the end nothing turned out like the wealthy man had planned. His business did not last for generations, and his competitor “stole” his money anyway.

THE ANALOGY
Sometimes, if we keep something too much of a secret, it can lead to ruin. Money is only useful for its ability to purchase something of value. If the money is never ever used, it has no real usefulness or value. The children of the wealthy man owned a great deal of money. Technically, they were wealthy people. However, because they were unaware of their wealth and unaware of how to tap into that wealth, it did them no good. Instead of living in wealth, they had a lifestyle of poverty.

Had their father been less secretive about his money, the children could have tapped into that money and put it to good use in saving the business. Instead, because they didn’t know what they had, they gave away the wealth to the competition.

Sometimes, businesses treat their strategy similar to how that wealthy businessman treated his treasure. They hide their strategy so the competition cannot get hold of it. Because they are afraid of it getting in the wrong hands, they don’t let it get into anyone’s hands. They don’t ever talk about it around employees or customers. It is protected as a highly valuable secret, buried away somewhere in a company vault.

The problem is that if nobody is aware of the strategy or how to tap into the value behind the strategy, it is as useful to the company as that buried treasure was to those children. For a strategy to have any value, it has to be used out in the marketplace. Just as those children couldn’t spend money they were unaware of, employees cannot implement and reap the benefits of a strategy they are unaware of. Customers cannot prefer your business if you hide from them the reasons why they should prefer it.

In the end, if you bury your strategy, you have taken the power of it away from your employees and the benefit of it away from your customers. As a result, that competition you were trying to keep the information from will end up winning anyway, because the strategy was never effectively used against them.

THE PRINCIPLE
The principle here is that strategies are most useful when they are widely discussed. Keeping them a secret robs them of their value. There are four key points related to this principle:

1) It’s Okay For Your Competition To Know Your Strategy
2) Employees And Customers Need To Hear The Strategy Often
3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy.

We will talk about these points in the context of the “Fast Fashion” strategy used by a handful of apparel retailers like H&M, Zara, and Forever 21.

1) It’s Okay For Your Competition To Know Your Strategy
A CEO once said to me, “You know how every once in awhile we somehow get access to ‘secret’ documents from other companies? Well, you can pretty much assume that those other companies are also getting some ‘secret’ documents of ours.”

The point is that in today’s digital age, it is fairly easy for some items to get into the wrong hands. It is almost impossible to hide everything. Therefore, unless you completely hide your strategy from everyone, including employees and customers, some of it will leak out, either through vendors or disgruntled customers, or former employees who start working for the competition. Therefore secrecy really is not an option, because it cannot be held secret.

To paraphrase a former boss of mine, “We should just mail our strategy to all of our competitors so that we can get rid of the suspense and get on with the business of executing the strategy.” The reason he could be that nonchalant about the strategy is that he knew that if your strategy is strong enough, it doesn’t matter if the competition knows what it is.

A strong strategy takes advantage of the unique position and strengths of your organization and builds an integrated approach so strong that even if the competition knew what your strategy was, they couldn’t copy it because it would take them years to figure out all of the intricacies behind it. Besides, because their starting position and their strengths are different than yours, they are not starting form a place which even makes the strategy most appropriate (or perhaps even achievable for them). By the time they could catch up to where you are today, you will already firmly own the position in the mind of the customer and have improved upon the model.

In fact, if a competitor knows your strategy and fears your power, they might respond by choosing an alternative strategy which is compatible and complementary to your strategy in order to avoid direct confrontation. That is a win-win for both companies.

As I mentioned in a prior blog, former Green Bay Packer Coach Vince Lombardi used to say that a team should execute its strategy so well, that even if the opposing team knows in advance every one of your plays, they could not stop it (see "Keep an Eye on the Ball").

In the case of the Fast Fashion strategy, the apparel retailers which use this strategy are successful because they have reinvented the supply in a new way, so that they have a constant supply of new, spot on fashionable goods comparable to the big designer labels at inexpensive prices. Rather than having about 5 new seasons a year, these retailers have 10 or more new seasons a year. Customers love it because there is always something new, current and exciting in the store and the prices are a great value. The retailers love it because customers come in more frequently to see the newness and they are more likely to pay full price, because the customers know the goods won’t be around very long before being replaced on the racks with something else.

It is okay that other retailers know this strategy, because just knowing the strategy does not benefit the competition. They do not know the secrets behind how to reinvent the entire supply chain to make it work. Even if they did, it would take them years to put it into place. And it would be so disruptive in the interim that their business would suffer short term. In addition, it might not be compatible with their other strategic goals to match this strategy. For example, if the competition is known for carrying the authentic designer labels, adapting this strategy could cause those labels to no longer sell to them, which might destroy decades of image building.

2) Employees and Customers Need to Hear this Strategy Often
For the Fast Fashion strategy to work, everyone in the company needs to be working in the same direction. There is no room for time lost due to misdirected activity. This is not a strategy that works in a vacuum. Everyone in the organization needs to know the strategic priorities around supply chain speed in order to pull it off. If the strategy is totally hidden, to protect it from the competition, how can the employees be rallied together around the principles and priorities of the strategy?

The same is true for the customers. If they are unaware that you are rapidly moving the inventory in and out, they will not frequent you more often. They will wait for a clearance sale and be disappointed when none of the goods they wanted made it to clearance. This will disrupt the sales side of the equation, causing the operational side to no longer be successful. The supply side reinvention only works when customers change to fast fashion buying patterns. The customers need to know the strategy in order to appropriately change their behavior to make the entire integrated strategy work.

3) Although Strategies Should Be Open To Public, Tactics Should Be Kept Private
It’s one thing for people to know that you have a Fast Fashion strategy. It is quite another thing for people to know the tactics behind how you reinvent the supply chain to not only be faster, but also less expensive. The Fast Fashion retailers all carefully guard their trade secrets around these tactics.

Even though tactics tend to appear as lesser and more mundane when compared to the broad strategy, in reality these little tactics are the crown jewels which need protection, not the strategy. As the old saying goes, the devil is in the details. Protect your tactical details and you protect your strategy from being mimicked. Coke spends a fortune telling everyone why they should love their product, but they never give away the tactics behind the secret recipe and how it is made.

4) If Your Strategy Is Nothing But Platitudes, Then Forget Point 1 Through 3 And Go Build A Real Strategy
If your strategy is a variation on some useless platitudes like “We strive to be leaders” or “We want to make a lot of money” or “We want to be a great company” then it really doesn’t matter who knows it. It doesn’t tell employees what to do or how to prioritize when making decisions. It doesn’t tell customers why they should prefer you. And it is irrelevant to competition. Heck, it is irrelevant in general. Get rid of it and form a real strategy (this topic requires it own blog).

SUMMARY
It’s okay to let everyone know your strategy. In fact, it is impossible to successfully implement a strategy if employees and customers do not know what it is. And if the strategy is a good one, it really won’t matter very much if the competition knows it as well. Just make sure to hide the tactics.

FINAL THOUGHTS
I’ve seen places where companies not only keep employees in the dark about their strategy, but about almost everything. The employee is not the enemy. Remember, the only thing that grows well in the dark are mushrooms.