Strategic Planning Analogy #477: Waiting for Avocados

THE STORY
There’s a story about the early days of the Chipotle Mexican Grill restaurants.  They had a winning formula which looked poised for rapid growth.  McDonald’s invested in the company in the 1990’s, because they could see the huge growth potential as well.

But there was this little green mush getting in the way, called guacamole.  As the story was told, guacamole was only a minor item on the menu, but a significant roadblock to rapid growth.  The key ingredient in guacamole is avocado.  Avocados are not a particularly widely grown crop.  The acreage devoted to avocado trees in the US at the time was very small.  If Chipotle Mexican Grill was going to hit their growth targets, there would have to be a lot more avocado orchards than currently existed.

But there were three problems.  First, you cannot just plant an avocado pit into the ground and get a tree full of avocados.  Avocado trees grown from seed tend to be barren of fruit.  To get the tree to grow avocados, you need to graft branches of fruit-bearing trees onto the seedling.  That takes a lot of time and effort.

Second, even after the tree is sprouted and grafted, it can take from 5 to 12 years before the tree starts to bear fruit.  So even if Chipotle got an immediate increase in avocado orchards, it would be many, many years before it would impact their ability to make guacamole.

Third, farmers needed to be convinced that demand for avocados would skyrocket before they would make such a commitment to increasing the crop.  Why should they believe that this small restaurant chain of a few dozen outlets (primarily in Colorado) would have enough growth to absorb all of the extra avocado output?  If Chipotle doesn’t follow through on its growth plans, they’d be stuck with crops they couldn’t sell at a profit.  And for the first 5 to 12 years, the farmers wouldn’t have anything to sell from those trees to anybody.

Eventually the folks at Chipotle convinced farmers to increase the output of avocados.  And now, about a dozen years later, Chipotle is selling a lot of guacamole in their more than 1,300 restaurants.  Chipotle claims that on an average day they go through 97,000 pounds of avocados (or about 44,000 kg).  That’s over 17,000 tons of avocados in a year.

Even little things can become big things if you grow large enough.

 

THE ANALOGY
Some issues can be resolved quickly.  Others take more time.  Avocados are an issue which takes years to adjust.  If you want a lot of avocados in 10 years, you have to start planning for them right now.  Even though avocados were a minor part of the entire menu, they became a major concern when plotting restaurant growth.

A similar situation can happen in many other businesses.  Small items can make a mess out of carefully crafted long-range plans because they cannot be adjusted fast enough to accommodate the plan.  This is particularly true if one ignores the slow changing issue until the last minute.

Therefore, when planning the big picture, you also need to look at the small picture.  You need to find those little “avocados” that can destroy the big picture if you did not start adjusting them soon enough.

 

THE PRINCIPLE
The principle here is that a large strategy can only move as fast as its slowest component.  Therefore, if you want to move quickly, you need to find where the slowest components are and find ways to speed them up. 

Not Just Avocados

This applies to a lot more than just avocados.  The US version of the Mars candy bar was originally designed with hazel nuts.  However, Mars was not proactive in getting a grip on the small, slow-adjusting hazelnut market.  As a result, the supply and pricing of hazelnuts was erratic.   It was destroying the elaborate growth plans for the US version of the Mars Bar.  As a result, after introducing the candy bar to the market, Mars changed the formula from hazelnuts to almonds.  The almond market was larger, more stable and could more quickly adjust to the growth requirements of the Mars Bar.   

Of course, using almonds made the Mars Bar less distinctive in the market place and probably made the strategy less successful than originally planned.  But at least it kept the brand alive (at least until 2002).

Another story was less successful.  Back in the 1970s General Mills came out with a cereal called Buc Wheats.  It was sort of like corm flakes except made from buckwheat.  Like avocados and hazelnuts, the buckwheat supply was small and slow adjusting.  General Mills never fully got control in the supply of this ingredient.  As a result, even though the cereal was in high demand, they ceased production.  All because they didn’t do like Chipotle and put early effort behind shoring up the weak link in the strategy.

Not Just Food

This principle also applies to non-food issues.  Many industries, like mining and pharmaceuticals have very long lead times before an investment becomes productive.  I worked with a mining company who understood the long lead times and had already done the hard, slow work to find and secure a replacement site for a mine.  That way, they were prepared for when the current mine was no longer viable and could continue operations uninterrupted.  Had they waited until the first mine was nearly depleted before looking for a replacement, there is a good chance they would have spent years without any mining output (like waiting for avocado trees to reach fruit-bearing years). 

Lately, there has been a large movement in both the mining and pharmaceutical industries to shift strategies more towards acquisitions.  But that’s what you have to do when your efforts to build a pipeline of new products fails and you still want to grow.  You have to buy someone else’s pipeline.  And when you have to buy the pipeline, a big chunk of the profits from that growth are given to the person you bought the pipeline from.

Amazon

A great example of a company who really understands this principle is Amazon.com.  In the early days of e-commerce there were a lot of companies that wanted to become a huge player in this space.  Nearly all of them quickly disappeared.  Amazon.com is one of the few left standing from those days and it is standing strong.

Why?  Amazon understood that to become a massively successful e-commerce firm for the long haul, it would need a lot of capabilities that are time consuming or expensive to develop.  There were a number of “avocados” they had to deal with, like search capabilities, recommendation engines, one-step check-outs, big-data algorithms, efficient distribution centers, and so on.  Amazon worked very hard in the beginning to master these skills, knowing they would pay long-term dividends. 

With an avocado tree, you don’t get any fruit for many years, but once you reach fruit-bearing years, you get a big crop every year.  Similarly, Amazon did not produce any meaningful profits for a long time because they were putting all the money into growing their avocado trees.  Now those trees are bearing fruit year after year after year.  Not only is Amazon benefitting from those plantings, but they are becoming an outsourcer of choice for other ecommerce firms who did not prepare in advance to plant their own avocado tree infrastructure.

And Amazon hasn’t stopped.  Recent profits were depressed because of the massive spending Amazon was doing to expand internationally.  But Amazon knows that a half-hearted effort will fail.  It needs to really invest big into slow returning infrastructure.  Otherwise it won’t have enough avocados (infrastructure) to handle the growth plan.

And Amazon did not wait until the demise of analog media to work on its replacement.  It made the early investment in Kindle so that it was ready and strong with a replacement when the current stream of profits dry up.

Lessons Learned

So what can we learn from all of this?

1. Make sure you understand what is needed to make your growth plan succeed (from yourself and from your supply chain).
2. Put special effort around those issues which require more time and attention in order to not derail your growth plan.
3. Don’t wait until a need arises before trying to resolve it.  Anticipate what you need and prepare in advance to be sure it is already established when needed.
4. Be willing to invest in slow-returning areas if they help build long-term enduing strength.   

 

SUMMARY
Most strategies involve growth.  And growth both requires and causes change to the status quo. If you do not anticipate and prepare for the type of change needed to make your growth strategy a success, your strategy will most likely fail.  Since that preparation can take a lot of time and effort, start working on it early in the process.  Otherwise, you may not be prepared in time.  Then, your well-crafted strategy will become a worthless piece of paper.

 

FINAL THOUGHTS
I guess what I’m asking for is “Patient Greed”—an understanding that you might become a lot wealthier in the long run if you are patient enough to invest early in the right slow-returning activities.  Unfortunately, greed and patience rarely seem to go together.  Greedy people rarely want to wait for the avocados to grow.  But if you are able to put these two qualities together, you will gain a competitive advantage.

Strategic Planning Analogy #370: Infrastructure

THE STORY
Although China and India are both large countries with rapidly growing economies, there are many differences in how the countries operate. One of those areas where countries differ is in the approach to building the national infrastructure (transportation, utility grid, etc.).

In general, China has tried to get in front of the issue by attempting to build the infrastructure in advance of growth. The idea is to anticipate future needs and build the infrastructure prior to building the economic elements which will rely on that infrastructure. By building extra capacity into the infrastructure in advance, China believes that the infrastructure can be built more efficiently. In addition, by building in extra capacity, the Chinese hope that economic growth will continue to remain strong, since the economy is less likely to be held back by a lack of infrastructure.

By contrast, India tends to have more of a tradition of chasing the economy with its infrastructure. The current infrastructure tends to be left in place until economic growth stretches the infrastructure to near its capacity (or a bit beyond). Then the Indian government steps in and tries to upgrade to infrastructure to catch up with near-term capacity. Unfortunately, by the time the upgraded infrastructure capacity is in place, the economy has already outgrown this capacity, so the infrastructure rarely ever catches up with demand.

THE ANALOGY
Both approaches to infrastructure have their plusses and minuses, and taken to an extreme, either approach can lead to problems. However, most experts would say that a more proactive approach to infrastructure (similar to China) is preferable to a reactive approach (similar to India).

Just a countries need to build an infrastructure for their economy, companies need to build an infrastructure for their businesses. A company’s infrastructure would include things like:

1) Manufacturing Capacity
2) Distribution Network
3) Sales Network
4) Intellectual Capacity
5) A Sufficient Amount of Adequately Trained Labor
6) Access to Raw Materials in Sufficient Amounts at Competitive Prices
7) Access to Customers
8) An Adequately Filled and Functioning Innovation/New Product Pipeline

Unfortunately, it seems that a lot of companies take more of an approach like that of India when it comes to their infrastructure, rather than following the approach of China. There is this idea that the only “good” infrastructure is a “lean” infrastructure, and that every cost which can be driven out of infrastructure should be driven out. Additional infrastructure expenditures are never spent in advance and are instead always trying to catch up with current needs. As one can see by looking at many of the problems facing India, such an approach can become costly and counterproductive.

Now I’m not advocating big, bloated, bureaucratic infrastructures. Waste is never a good thing. However, if you do not feed your business with an adequate infrastructure, you will starve the business and limit your ability to grow and prosper.

You may have the greatest business idea in the world. But if you have no way to get adequate amounts of raw materials, or no way to manufacture adequate quantities, or not enough qualified employees to product sufficient quantities at the required quality level, or no way to get the goods to the customer in a timely manner, then you will most likely fail. At the very best, you will far less prosperous than you would have been if that entire infrastructure had been in place.

THE PRINCIPLE
The principle here is that infrastructure concerns should be an integral part of a strategic plan. If the business infrastructure is not of sufficient capacity to meet the demands of the plan, then you will not achieve the plan. For example, having a strategic goal to sell a billion dollars worth of goods is a worthless goal if your infrastructure can only support the production, distribution and selling of a thousand dollars worth of goods. To win, you need an infrastructure with the capacity to achieve what you desire. And the only way to achieve that is by putting infrastructure capacity concerns directly into the plan.

To those who prefer to chase after infrastructure like India, I have the following responses.

A) You Do Not Operate In A Vacuum.
In most cases, there are other companies operating in the same space as you are, trying to give the customers a similar solution. If the competition invests in adequate infrastructure and you do not, then they will be in a superior position to capture most of the demand. For example, I know of a retailer who refused to adequately reinvest in their store infrastructure. Their stores became old, ugly and in disrepair. The customers had moved to newer and nicer neighborhoods, but the stores were stuck in the old, decaying neighborhoods. At the same time, competition built nice, new stores in the better, newer neighborhoods, closer to the customers. As a result, the customers defected to the competition—because they had the superior store infrastructure.

B) Human Capital Is Fluid.
In today’s knowledge-based economy, a key part of one’s infrastructure is the knowledge in your employees’ brains. Unfortunately, that employee is relatively free to leave your company at any time. When that employee walks out the door, a lot of your intellectual capacity leaves as well. That is why Google treats its employees so well, spending money on things like free food, and recently giving everyone a 10% raise in pay. Google realized that was money well spent if it keeps that intellectual capacity in place at a time when other companies are trying to hire that capacity away from them. The patience level of employees only goes so far. If you wait to long to reward them, or deny them the tools they need, they will leave.

C) Playing Catch-Up Never Leads to First Mover Advantage
You can never build a leading edge if all of your investments in infrastructure lag behind the industry. Much has been written about the advantage of being a first mover. To be a first mover, one needs to get the capacity in place quickly. Apple had first mover advantage with the iPhone and iPad because it had the infrastructure needed to get to market well before the competition. Microsoft keeps failing in its attempts to catch up to Apple in these spaces, because its infrastructure is not built in a way which allows them the speed and creativity to win in these areas. You can read more about this principle here.

D) Spending More Up Front Often Costs Less in the Long Run
Many times, it is cheaper to spend the money to build a better infrastructure than to try to limp along on the “lean” process currently in place. For example, I know a retailer who refused to upgrade its outdated warehouse & distribution system. Yes, it would have cost money to do so, but the payback was less than a year. And the old system was so inefficient that it made it impossible for the retailer to make a profit on a large percentage of the products going through the old system. The inefficient costs in the old system wiped out much of the profits.

I know of another situation where a retailer liked to brag that it had one of the least expensive IT departments in the industry. Of course, it also had one of the least effective IT departments in the industry, which cost the company dearly. The bare bones IT operation starved the company of the data it needed to be competitive in the marketplace. Lowest cost infrastructure is rarely the most cost-effective.

E) Not All Infrastructure Solutions Are Costly
Some are reluctant to build sufficient capacity because they are afraid it will be prohibitively expensive, particularly in the near-term. However, there are often ways to get capacity without a lot of upfront investment. For example, one can arrange for outsourcing. There is a reason why so many companies in the US outsource their payroll infrastructure to ADP. It is a way to get a state of the art payroll infrastructure without having to make a huge up-front capital expenditure.

One can also come up with creative payment plans. For example, it is common for retailers to place both a fixed and variable component into their store rent. The variable amount of the rent goes up in proportion to store sales. By making part of the infrastructure cost variable, the retailer only has to pay the higher rent if it is justified (and affordable) with higher sales.

Just because one has access to infrastructure does not mean they have to own it. There are lots of creative ways to partner with others to get that access without a lot of up-front investment.

SUMMARY
Strategic goals are only as good as the infrastructure capacity behind them. Without the proper infrastructure investments, one cannot reach one’s goals. Therefore, the strategic process needs to concern itself with infrastructure.

FINAL THOUGHTS
Remember, the ultimate goal is not to spend the least on infrastructure, but to make the most in profits. Wal-Mart is a very large and very profitable company. It did not get there by being cheap on infrastructure. They spent a ton of money on infrastructure, especially in IT, distribution and new stores. It would have been impossible for Wal-Mart to get as large as it has without that huge infrastructure investment. And, even though it spent more on infrastructure than any other retailer, it has one of the lowest cost structures in the industry. The investments caused Wal-Mart to be more efficient. It was money well spent.

Strategic Planning Analogy #131: Gimme Shelter (In a large Infrasructure)

THE STORY
In 1993, Walt Disney Pictures released the movie Cool Runnings, which was the story of the beginnings of the Jamaican Bobsled team. Although the movie took great liberties with the facts and showed little resemblance to what really happened, it did get a few things right:

The Good News:
1) The Jamaican Bobsled team had some very talented athletes.
2) The Jamaican Bobsled team had some talented coaching
3) The team worked hard to condition itself for competition

The Bad News:
1) The Jamaican Bobsled team had difficulty getting sponsorship and funding.
2) Relative to other Bobsled teams in the 1988 Calgary Olympics, The Jamaican team had virtually no support infrastructure and very little practice time on a bobsled course.

As a result, the Jamaican Bobsled team did poorly in the 1988 Calgary Olympics. The fans loved them, but love alone was not enough to win.

THE ANALOGY
Many businesses start out like the Jamaican Bobsled Team. They have several key components necessary for success. Just as the Jamaican team had talent, coaching and conditioning, these businesses may have talent, great ideas, and great managers.

However, visions of greatness can be shattered without the proper infrastructure. If the Jamaican team had been part of a stronger Winter Olympics infrastructure, had better financing, and better training facilities, it most likely would have seen far greater success. Similarly, if a business tries to seek success with insufficient infrastructure, it can also fare very poorly.

Consider tiny East Germany, which won far more Olympic Medals in the 20th century than a country of its size should normally expect. Was East Germany blessed with exceedingly better athletic breeding? No, East Germany had unusually good success because it built one of the finest Olympics infrastructures in the world.

Therefore, when considering a strategic plan for success, do not forget to consider the Strategic impact of your infrastructure.

THE PRINCIPLE
A couple of blogs back (see “Time for a Change”), we talked about how it can be a mistake to throw away a company just because its current business model is obsolete. Rather than abandon the firm and shift investment to a new start-up in a growing industry, it is often better to reinvigorate the established firm with a revitalized strategy. This blog will expand on that topic by looking at the power of an established infrastructure.

In the December issue of Portfolio magazine, there is an article talking about this very issue (and was referenced in the November 20, 2007 issue of the Wall Street Journal).

According to the article, Andy Grove (co-founder of Intel) has been working with Stanford University on research into business innovation. The conclusion? Firms with large infrastructures are often best suited for tackling the problems of innovation.

To quote the reference in the Wall Street Journal: “When people think of radical innovations, they usually think of start-ups that shake an industry from the ground up. Some sectors are hobbled with ‘intractable, industry-wide problems’ that only a large company can solve.”

The research found that large companies from outside the industry have two factors which make them most successful in innovation. First, they are not hampered by outdated internal industry conventions because they are outsiders. Second, their large size and infrastructure give them the clout and credibility necessary to effectively get the industry to rewrite the rules.

For example, many small startups tried to rewrite the rules of the music industry to innovate it out of the CD era and into the digital downloading era. All of these small startups failed. It wasn’t until a large established company from outside the industry (namely Apple) entered the game that the innovation was possible. Apple’s large position and infrastructure was necessary to budge the artists and labels into accepting a new paradigm.

On the other side of the issue, the problems of the small start-up can be seen in the story of Robert Black and Clean Shower. Back in 1993, Robert’s wife asked him to clean the shower. He hated the task and vowed never to do it again. Being a chemist and inventor, Robert Black decided to invent a product that would prevent the need for cleaning showers. His research lead to the invention of Clean Shower.

By the late 1990s, Robert’s innovation was selling well and starting to look like a huge success. And he got that far with virtually no infrastructure. The big consumer product companies could see the potential and were starting to make big offers to buy his company.

Robert decided at the time not to sell out to any of the big infrastructure companies. Instead, he decided to go it alone. However, once the big companies discovered they could not buy Clean Shower, they decided to compete against it. They used their huge infrastructure and large budgets to out advertise and to influence the retailers. Over time, the big companies with the big influence, big money and big infrastructures started to win the battle for market share. Robert Black and his little company began to suffer.


Eventually, Robert could see that his little company was not in a position to win against the big firms, so he sold out to the Arm & Hammer folks (presumably at far less than he could have gotten earlier). Eventually, even Arm & Hammer couldn’t compete against the lead of firms like Dow and they discontinued the product.

So here is the point. Great, innovative ideas are important, but so are other factors. Many people had the great idea of rewriting the rules of music, but only someone with clout the size of Apple could pull it off. Robert Black had a wonderful innovative idea, but it was the firm with the big infrastructure (Dow) who benefited from it.

So, if you want to innovate and rewrite the rules, here is what you need to consider:

1) Do I have enough clout to break through the conventions of how things are done today and get the rules of the game rewritten?

2) Do I have enough staying power to withstand competition from the big players once they start going after my success? (And they will attack. For more on this, see my blog “Bombs Start Wars”)

If you answer no to at least one of these questions, then you may want to seek shelter by joining up with someone who can say yes, either by selling out early to a big company or by forming joint ventures/strategic alliances. And if you are a big company, perhaps your strategy should involve looking for places in other industries where you can change the rules.

SUMMARY
In many cases, the best way to innovate is not by starting up a small little company. Instead, the best way to innovate is to be a large company with a strong infrastructure and be from outside the industry. As an outsider, you have nothing to lose in changing the industry. As a big player, you have the resources and clout to get the job done.

FINAL THOUGHTS
After doing the research with Stanford University, Andy Grove decided that one of the best ways to get breakthrough innovation in the automotive industry and lessen our dependence on oil would be if GE decided to build an electric car. According to his logic, GE has little to lose by rewriting the rules of the automotive industry. In addition, they have the technical know-how and credibility to pull it off.