Analogy #161: Buy My Food

THE STORY
My daughter spent many years in the Girl Scouts. As a result, I have many years of experience helping to sell Girl Scout cookies.

Back when my daughter was very young and a Daisy/Brownie scout, it was easy to sell those cookies door to door. People would see that sweet little 6 year old girl and be more than willing to buy cookies from her.

However, it seemed that as my daughter got older, the door to door selling became less productive. By the time my daughter became a teenager, it became a waste of time to go door to door. Apparently, people would much rather buy cookies from a cute little 6 year old than a 15 year old.

Therefore, as she got older, my daughter turned to other activities in order to raise money for Girl Scouts.

THE ANALOGY
Things change over time. Early successes do no imply that success will last forever. My daughter had early successes in selling Girl Scout cookies. However, over time, her success in selling cookies door to door diminished, until it was no longer worth doing.

Was it because my daughter became less capable of selling cookies? No. As she got older, she had more strength and stamina to walk to more doors. Also, she became less bashful and could make a better sales pitch.

Was her declining ability to sell door to door because nobody wanted to buy Girl Scout cookies anymore? No. The Girl Scouts still sell an enormous amount of cookies.

The problem was that my daughter matured from a little girl to a young woman. As it turns out, people are more sympathetic towards cute little girls and feel more inclined to buy from them. By contrast, it is easier to say no to a teenager.

Just as people mature, so do industries. Maturity/decline can reduce one’s potential. You may become more productive and more efficient over time (just as my daughter became better at selling skills over time). But being better at what you do does not automatically make your performance better. If the maturing industry is working against you, there is only so much you can do.

If you want growth, you may need to shift to a different (less mature) industry, just as my daughter had to shift to different fund raising strategies.

THE PRINCIPLE
The key principle here goes back to a prior blog where I quoted a study from McKinsey. That study said that if you want to be a high profit, high growth company, the best thing to do is become a company which sells high profit, high growth products (see “Dip Your Ladle in the Right Stew”). In other words, if you want success as a growth company, keep adjusting your portfolio to have products in growth industries.

We can see this by comparing two companies: Procter & Gamble (P&G) and Kraft Foods. In recent years, the business press has been far more glowing about P&G and far more critical about Kraft. Now there are a lot of reasons for this, but one major reason is because P&G did a better job keeping its portfolio centered in growth.

Both companies have a long heritage in food processing, stretching back over most of the 20th century. Both companies created or acquired strong, well known food brands with a large following.

However, the problem was that by the end of the 20th century, the food processing business was becoming highly mature. Some of the problems in maturity were the following:

1. It was harder to differentiate name brand food products from each other or from private label products. As a result, they were becoming more like commodities, which squeezes profitability.

2. The rapid growth from consolidating the industry was pretty much over. Instead of the big companies growing at the expense of little firms, they now had to battle each other for tiny share gains.

3. Discretionary spending was moving away from processed food to the restaurant industry.

4. Innovations were harder to come by, more rapidly copied, and smaller in scope.

Proctor and Gamble could see this coming, so they decided to transfer the portfolio out of industries that were less mature (like food) and into industries that were less mature (cleaning products, health care and beauty care). The facts were on P&G’s side. According to the US Economic Census, between 1997 and 2002, the value of shipments in food manufacturing grew only 8.6%. By contrast, home cleaning products grew at 16.2% and pharmacy/medical products grew at 53.7%.

So here is what P&G did to reduce its food portfolio:

1. Sold Duncan Hines cake mixes to Aurora Foods in 1997.
2. Sold Jiff peanut butter and Crisco to J.M. Smucker Co. in 2002.
3. Sold Sunny Delight to Sunny Delight Beverages Company in 2005.
4. Announced the intention of getting out of the Folgers coffee business in January 2008.

To get stronger in health care and beauty care, P&G did the following:

1. Purchased Richardson Vicks in 1985 (obtaining Vicks healthcare brands and Oil of Olay beauty products)
2. Purchased Noxell in 1989 (Cover Girl cosmetics and Noxzema)
3. Purchased Max Factor in 1991
4. Opened a health care research center in 1995
5. Got US FDA approval for its prescription drug Actonel in 2000,
6. Purchased Clairol in 2001
7. Introduced ThermaCare heat wraps in 2002.

During this same time, Kraft stuck to having basically a portfolio of food products. Even then, it was late and slow in adapting to the few areas of growth in food processing, such as organic and low cal.

As a result of this one simple difference in strategy, there is a big difference in performance. As you can see in the chart below, over the last seven months Kraft has struggled to try to keep its stock price up with the S&P 500. By contrast, P&G is performing much better than the S&P 500.


So what have we learned?

1. Don’t Just Rely on Being Better
P&G was pretty darn good at running food processing businesses, but they realized that doing an excellent job in a slow growing mature business doesn’t get you very far. More could be gained by migrating to a better industry, like health care or beauty care. It’s important to do well, but a strategy which only looks at improving execution may miss a greater opportunity that could come from shifting the product mix.

2. Get The Facts
There are many independent sources of information for determining if your portfolio is entering maturity/decline as well as point to industries on the way up. Earlier, I quoted the US Economic Census. Another great source is all of the data accumulated by Stern School professor Aswath Damodaran (look here). Understanding trends will allow you to maximize your portfolio within those trends.

3. Make a Choice
If the trends point to a need to shift, then make the choice of what to let go of and what to add on. But choose carefully. Just because an industry is growing does not mean you will do well there. Move into areas where you can add significant value. For example, in the case of P&G, they were experts at building strong national brands through mass channels. They applied that skill to health care and beauty care.

4. Make the Move
Although it may be difficult to sell off a product core to your history when it is still making money, remember this. It is easier to sell off something when it still is seen as strong by the buyer. Early action will make the sale quicker, at a higher price. In addition, the sooner you start the transition, the less pressure there is to hold a fire sale to dump old things or pay way too much to quickly get into the new things. A moderate pace, started early, allows for more rational decision-making. Rash moves are minimized.

Because Kraft waited longer, it may be more desperate in trying to quickly fix its portfolio mix. This may create less value-added in the transition.

SUMMARY
Being a good operator is nice, but operating in a good space may be even more important. The definition of what is a good space changes over time. Therefore, your portfolio may need to change over time.

FINAL THOUGHTS
My daughter couldn’t bring back the past make herself young again. She eventually had to leave the Girl Scouts and do what adults do. You cannot bring back the past, either. Get over it and move on.

Hometown Bias

THE STORY
At the height of the popularity of the Dave Matthews Band, I saw a documentary about the history of the band. The documentary makers went back to where the band started in Charlottesville, Virginia. They interviewed some of the people who remembered the early beginnings of the Dave Matthews Band.

One of the people they interviewed was a guy who used to hang out at the first little local clubs where the band played. This guy blurted out, “I knew from the very beginning that eventually the Dave Matthews Band would become hugely famous” (or something like that).

My first reaction upon hearing him was, “My, this guy has a good sense about what music will sell in this country.” Then, I started to think, “I’ll bet that every little garage band that ever started playing in some local bars had some adoring fans who said, “I just know that some day this band will become hugely famous.”

Although every one of these local bands probably had fans who “knew” they would become famous, in reality over 90% go nowhere. That Dave Matthews fan in the documentary wasn’t an astute judge of success. He just happened to be lucky enough to be living in a place that had a local band that was one of the rare groups to actually become famous.

Some of us aren’t as fortunate. Back in the 1970s when I was in college, I enjoyed the music of a local Michigan band called the Whiz Kids. Pat McCaffrey, the leader of the duo, was a highly talented musician. He would simultaneously play the bass using the bass pedals on an organ, while playing keyboards with his left hand and playing a saxophone with his right hand. It was a sight to behold. I “just knew” that the Whiz Kids would eventually become famous.

Well, it didn’t turn out that way. The Whiz Kids never broke into the big-time like Dave Matthews. I went on the internet recently to see if I could find out whatever happened to the Whiz Kids. I found out that on October 9th of 2007, Pat McCaffrey and the Whiz Kids will be performing the after dinner music at the 38th Annual Conference of the “Excess/Surplus Lines Claims Association.” It will be at the Hyatt Grand Champions Resort near Palm Springs. It was nice to see that Pat was still earning a living in music some 30 years later, but I don’t think the “Excess/Surplus Lines Claims Association” conference is the same as the types of gigs the Dave Matthew Band gets.

THE ANALOGY
Strategies are used in businesses in order to help them determine where to place their “bets” on the future. Businesses have limited money, people & time, and they want to invest these limited resources where they believe they will get the best return.

As a result, the strategic process is often used to help find where the next big success will be. They are looking for strategies that will be “winners” for the company. Trying to pick the next winning strategy is similar to trying to predict who the next great band will be.

Just as over 90% of all those local bands never make it to the big time, around 90% of new business ventures never live up to expectations and destroy shareholder value. Every company believes they are betting on the next “Dave Matthews” type of business venture, when in reality, it is more like a “Whiz Kids” outcome (or worse).

In spite of the terrible odds, companies continue to try to pick winners. Take Kraft, for example. In recent years, they have spent a fortune on a huge number of new products and innovations, most of which were duds. The real money comes from things invented long ago, like Oreo cookies (which have been around since 1912) and Miracle Whip (a recipe they bought during the depression of the 1930s for about $300).

THE PRINCIPLE
The principle here is “the hometown bias.” We tend to have a sense of pride around our home-grown ideas and strategies, just as the locals have a sense of pride for their home-grown bands. Just as it is easy to imagine how our local band could become famous, we can imagine how our home-grown ideas can hit the big-time.

This bias can blind us to reality. I spent some time as a radio DJ. It gave me the opportunity to listen to a great deal of music. I tried to analyze the situation to try to see if there were any common factors which caused some of those bands to become a big hit and why some went nowhere. I discovered that sometimes highly talented musicians made it big, and sometimes they didn’t. Similarly, sometimes marginally talented bands made it and sometimes they didn’t. I couldn’t find much of any correlation for factors which created success.

I think the Australian band Skyhooks (one of the bands I heard as a DJ and didn’t make it) put it well in one of their songs. They said that the successful bands find a “million dollar riff” (a lucky twist of music that tickles the ear).

Now I’m not implying that business success is all luck. But it is true that sometimes just as there are only small nuances between a dud riff and a million dollar riff, there are small nuances between a huge strategic success and a dud.

Here are some tips to help avoid some of the duds of strategy:

1) Be aware of the hometown bias.
Realize that there are more Whiz Kids than Dave Matthew Bands and that local pride can blind us to giving too much credit to our homegrown ideas. Stand back and look at it with a more critical eye. If your bias does not let you look at it critically, then use unbiased research to help you see how the concept will be seen in the real world.

2) Realize that pride and egos can distort our judgment.
Examine your options with a dispassionate eye. Although it may hurt our egos for a time, it is okay to stop a pet project if it is starting to look like a dud. Pulling the plug early can often be a very smart thing. It’s not an admission of failure, but rather an avoidance of a bigger failure later.

3) Sweat the Details.
Because the difference between huge success and huge failure in music can hinge on the nuance of a riff, it is really important to sweat the details. Great ideas are important, but great execution can often be even more important. Designing and selling digital music players was a great idea. A lot of companies dove into the business. Yet most of these companies have failed to catch on, in spite of it being a great idea. Ipods did catch on, however. One of the reasons they succeeded with that same idea when others didn’t was because Apple did a better job of sweating the details. They spent more time mastering the nuances of the business.

4) Spread your Bets.
In the music industry, even though the music labels had experts with the “golden ear” who had a good sense about what music would sell well, they were still often wrong. As a result, the music label would hedge their bets by investing in a large number of bands. The logic was that even if nine out of the ten guesses were wrong, the tenth would be so profitable that it would more than make up for the losses on the other nine. Similarly, businesses need to use tactics to reduce the risk, like:

a) Don’t put all your hopes into a single idea. Have multiple experiments going on all the time. That way, you stand a better chance of hitting the idea that makes you a winner.

b) Stage your investments. Don’t bet the whole thing at once. Invest in the idea in stages. If a stage fails, then you can back out before you’ve invested everything. If a stage succeeds, you can ramp up.

5) Understand that your idea will not be executed in a vacuum.
Eventually, your idea will need to be executed out in the marketplace, where competition will try to minimize your success (for more on this, see the blog, “Bombs Start Wars”). To avoid future disasters out in the marketplace, ask yourself these questions:

a) Does my idea provide a superior enough solution in the marketplace for a consumer problem to cause people to switch from their current solution alternative to mine?

b) If the big, powerful competitors also decide to enter this space, do I have what it takes to beat them in head-to-head competition?

SUMMARY
Most new ideas fail. Don’t let egos or homegrown pride cause to you to back a bad idea. Be willing to do what is necessary up-front to reduce the bias and what is necessary later to pull the plug early if the idea does not pan out.

FINAL THOUGHTS
Good decision making requires looking at an issue both rationally and emotionally. Although we need to eliminate emotional biases that blind us to reality, we do not want to eliminate emotions entirely from our thinking. After all, our customers use emotions to make their purchases.