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

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

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

THE ANALOGY

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

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

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

Ruleset #1: the Three P’s

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

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

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

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

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

Ruleset #2: The Three F’s

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

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

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

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

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

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

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

Ruleset #3: The Three S’s

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

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

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

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

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

To do this, you follow the 3 S’s:

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

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

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

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

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

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

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

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

This is just the beginning….

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

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

Strategy Planning Analogy #560: Gas and What??

THE STORY

When I brush my teeth, I just put my toothpaste on the toothbrush and put it in my mouth. I thought this was normal.

Then I read an article about the research done by a toothpaste manufacturer. They wanted to figure out what would be the optimal consistency for their toothpaste. Therefore, they did a survey to find out how their toothpaste was used.

The research showed that there was no single, dominant way that toothpaste is used. Instead, there were three common approaches. Some wet their toothbrush before putting on the toothpaste. Some wet their toothbrush after putting on the toothpaste. And what I did (and thought was normal—no wetting the toothbrush) was the least popular of the three.

As a result, the manufacturer had to design its paste to work under all three conditions. So much for normal.

THE ANALOGY

We like to assume certain activities are normal, just because that’s the way we’ve always done it. It doesn’t occur to us to consider alternatives. Our current habitual behaviors seem just fine. There doesn’t appear to be any need to change.

Yet, as we saw with the toothpaste, there are alternative approaches and different ideas about what “normal” toothbrush behavior is. So what seems odd to us can seem normal to others.

This trap often occurs in strategy development. We get trapped into thinking that the way we’ve been doing things for years is “normal” and that any other approach would be odd and undesirable. Just as I thought that putting toothpaste on the toothbrush did not require water, you may think that your approach does not require any additions or changes.

Yet, as the toothpaste story shows us, there can be many viable alternatives out there. And if we do not consider that there can be viable alternatives, we will miss out on many strategic opportunities.  

THE PRINCIPLE

The principle here is that some of the best strategic opportunities may come from looking at options that run counter to what you consider normal. You may have to abandon your ingrained habits and preconceived notions of “how things are done” in order to reach a better condition (a newer, better normal).

We will be using retail gasoline as an example of this principle.

Normal #1: Gas Plus Auto Repair

Back in the 1960s, when I was a child, pretty much every gas station was also an auto repair facility. The gas pumps were in front. Behind them was usually just two stalls for auto repair and a place for a cash register. And that was it.

It was like the gas station run by Gomer and Goober on the Andy Griffith Show on TV. This was normal, and almost nobody did it differently.  

But then the world changed. Cars got more complicated to repair and the tools to do it became more expensive. The mechanics at the gas stations were not skilled enough or had enough money to invest in fixing the newer cars. As a result, auto repair moved from gas stations to large, specialized repair facilities.

The old normal for gas stations became obsolete. If you stuck with the old normal, you were in trouble. A new normal was required.

Normal #2: Gas Plus Convenience Store

The new normal was to convert those repair stalls into a convenience store. It became the strategy of the “eens”: Caffeine (coffee & soda), Nicotine (Cigarettes), and Gasoline. This became the new way to run a gas station and almost everyone used this same basic strategy.

Beyond Normal

Although this became the typical approach, there is no law that says it must be the only approach. Here are some other options in the US.

In the Carolina’s, Sheetz has positioned itself as primarily a great restaurant which just so happens to also sell gasoline. In fact, they are experimenting with hiding the gas pumps in the back in order to improve the image of the restaurant.

In Ohio, United Dairy Farmers essentially operates gas pumps in front of an ice cream store. And this is no one-store operation. They run over 200 of them. You may not think it normal to buy your gas at the same place as you get an ice cream cone, but it is normal in Ohio.

Large, big-box retailers like Costco and Wal-Mart sell gasoline. In addition, many grocery stores use gas stations as a loss-leader for selling more food. The more food you buy, the bigger the discount on gasoline. At some places, if you buy enough food, your gasoline is free.

You can find gasoline pumps in parking garages. Farmers can install large tanks on their own property and pump it at home. The list goes on and on.

The Next Normal

With electric cars, we move from gasoline pumps to electric recharging stations. Where will these end up? In front of convenience stores? They are ending up in all sorts of places, like parking structures and people’s own garages. The rules can be reinvented all over again.

Implications

There are two main implications from all of this. First, just because something is normal today does not mean that it will be normal forever. The gas plus repair shop was normal for a long time but eventually became essentially obsolete. A move to electric cars could make any of today’s mass selling of gasoline obsolete.

So don’t assume that today’s success will last forever. It is a better assumption that today’s successful normal will become obsolete sooner than you think. In your strategic planning, always look for what’s on the horizon that could make you current approach obsolete.

Second, just because the marketplace has defined a normal way of doing things, that doesn’t mean that there are no other viable alternatives. Just as there were three viable ways to put toothpaste on a toothbrush, there can be many viable ways to sell gas. You can sell it with ice cream, a restaurant, with parking ramps or a host of other ways.

Your only limit is your creativity and your willingness to break away from “normal” and do something differently. In many prior blogs, we’ve talked about the benefits of differentiation. If you do things differently, you create a unique appeal that can put competitors at a disadvantage in trying to attack you. Perhaps you should break away from the pack and do things differently.

And these implications do not only apply to the selling of gas. They apply to all businesses. In a prior blog, we talked about all the ways you can sell pizza. If there are a variety of ways to sell gas and pizza, then there are probably many ways to sell your product, including options nobody has done yet. Perhaps you can be the first in a new alternative and reap all the benefits.

SUMMARY

Just because you call something normal does not mean that it is the only strategic option. There can be a whole host of alternative approaches which could be more successful for you than sticking with the normal way. In addition, because the environment is continually changing, even today’s normal could eventually become obsolete, to be replaced by a new normal. Therefore, strategic analysis needs to look outside today’s “normal box” to ensure that you are doing what’s right for you and right for the times.

FINAL THOUGHTS

Every time you fill up with gas at the pump, remember this blog. It can be a weekly reminder to take off the blinders which keep you from seeing alternatives beyond “normal.”

Strategic Planning Analogy #544: Competitor or Co-Conspirator

THE STORY
For decades—in fact for most of the 20^th Century—baseball was America’s sport. It captivated the minds of the people and was their sporting passion. Nothing else came close.

There was all sorts of competition in baseball, with the players battling it out over the summer to see which team would come out on top and win the World Series Championship. The fans were captivated by every nuance in every game.

But gradually, over the latter part of the century, American Football started winning over the hearts of the sports enthusiasts. Today, football has become America’s sport. Sports enthusiasts are captivated by every nuance in every football game. Outside of New York City and Boston, most sports fans really only get a bit interested in baseball in the post-season. Television viewership of baseball during the season is miniscule compared to the ratings for football.

It makes you wonder…where did the real competitive battle in baseball take place? Was it on the field between baseball teams or was it in the hearts and minds of the sports fan at home? They may still be winning baseball games, but they lost the battle in the mind.

THE ANALOGY
An important aspect of business strategy is competitive strategy. The idea is to develop a plan to win share versus the competition. Why? Winners tend to reap the majority of the financial rewards, so the goal is to find a way to beat the competition and win. The result is a strategy with a focus on the competition.

The problem is that the competition are not the ones purchasing products. The consumer is. The consumer is the one who ultimately determines your success, not the competition.

If you are not careful, you could end up in the situation like baseball. You could become so focused with beating the competition (the other baseball teams), that you fail to see that the consumer (the sports fan) is abandoning baseball and consuming football. You may win the baseball game, but lose the fan, which is the greater loss.

In business, Kodak was so focused on beating Fuji that it failed to act sufficiently on the customer abandoning both and moving to digital imaging. Target and Walmart were so busy battling each other that they let Amazon grab a huge chunk of the market. Pepsi and Coke spent years fighting each other while the market for cola in the US was shrinking and the customer was abandoning colas for coffee, tea and healthier alternatives.

Competitive strategies may be nice, but consumer strategies are better.

THE PRINCIPLE
The principle here is that the real competition are not the companies that tend to look and act a lot like you. Instead, the real competitor is the one who can render your entire product category obsolete (or at least a lot less relevant). In baseball, the real competition was not other teams that wore similar baseball uniforms and played a similar game of baseball. No, the real competitor wore something a lot different (football uniforms) and played something a lot different (football).

In fact, I will contend that those who look like you really aren’t your competition, but are more like a co-conspirator. You actually work together to keep your category relevant. The noise you both make in the marketplace usually doesn’t change market share all that much. But is does draw attention to the category. So, in a sense, you are both working together on the same side—the side that wants customers to still be in love with your category.

Mature Market Stability

The more mature the market, the more this principle is true. Just look at the mature product categories found in the supermarket. Executives at the companies in these mature categories (like cereal and canned goods) go crazy with celebration when they can move their market share a small fraction of 1%.

Why are they so excited about so little? It is because mature markets tend to be very stable. Brand images are set, habits are ingrained, and preferences between brands in the category are etched in stone. There is little that can be done to move the needle, so any movement, even small ones, are celebrated.

We’re even starting to see this now in traditional computers. The market rankings are becoming stable and changes in share from quarter to quarter are hardly noticeable. The only sizable movement is from consumers moving their purchasing to other devices, like smartphones. So who is the real competition for computers? It’s the devices that don’t look like computers. That’s where the real gains and losses occur.

In fact, the vast majority of business categories are fairly mature. Rapid competitive movement is rare in most sectors. Unless someone comes up with a major technological breakthrough, share doesn’t move much. And even then, the gain is usually temporary as the others find a way to catch up.

The only meaningful movement is between categories. It’s a battle between teams wearing entirely different uniforms and playing different games.

The Response

With this in mind, how should companies respond?

First, they need to define themselves by what consumer needs they are satisfying rather than what product they sell. As mentioned earlier, the consumer is the one who decides the winner, not the competition. The customer is purchasing solutions to problems. If an entirely different product better solves their problem, then they will abandon their old category for an entirely new one. So if you want to win, see the world like the consumer and take off those product category blinders.

For example, Bausch & Lomb defined itself as being in the vision solution business rather than the lens manufacturing business. Bausch & Lomb saw its competition not as other lens makers but as anyone who was improving vision. As a result, when newer, non-lens businesses started offering better vision (like Lasik surgery), Bausch & Lomb was there, establishing a leading position.

If you define yourself by your product, your firm will die when your product category is replaced by something new. If you define yourself by consumer solutions, you will always have relevancy.

Second, don’t just focus on the same old competitors who are similar to you. Keep one eye on the periphery. Look for what the leading edge people are doing…what is coming next. Look for the new thing that will make you the obsolete thing. Look for the exciting thing wearing a different uniform. Look for the new rules that turn the tables.

SUMMARY
Rarely is the real action taking place between competitors approaching the market in a similar way. Instead, the big action is between dis-similar solutions to the same problem. In fact, your traditional competition is more like a co-conspirator, working with you to create interest in your product category. Therefore, focus more of your effort on aligning with the consumer rather than beating up the similar competition. After all, the consumer is doing the spending, not the competition. And they aren’t limited to spending it just in your category.

FINAL THOUGHTS
I suppose that someday American Football will be replaced in popularity by something else. The wheel of change never stops.

Strategic Planning Analogy #537: Three Questions (Part 2)

THE STORY
For as long as anyone can remember, there had been the ice brigade at the US Congress building. The 29 employees with this job had the responsibility of making sure every congressional office had a bucket of ice by its door before 9AM every morning.

Nobody remembers when it started, but the tradition pre-dates air conditioning and mini-refrigerators. The idea was that Washington, DC can get very hot. Ice could be used in a number of ways to help counter the heat, either externally or internally.

Of course, now that congress has air conditioning, mini-fridges and other ways to conquer the heat, those ice cubes were less necessary. Yet they still came, every day, like clockwork. Many of the ice buckets were just thrown away each day by congress people who did not want it.

Finally, in 1994, Republicans took over control of Congress and started a program to eliminate waste. They saw the ice delivery program as an unnecessary waste and the practice stopped May 1, 1995.

Another waste looked at during this time was the fact that even though every elevator in the building had self-service buttons which anyone was capable of pushing, each elevator had a paid employee to operate those buttons.

THE ANALOGY
Time changes things. Something which may have made perfect sense in the past may be foolish today. Yes, there was a time long, long ago when ice deliveries to congressional offices made sense. But times changed, making that no longer necessary or even particularly desired. Yet the practice continued for decades.

Similarly, when elevators were first invented, it made sense to have elevator operators. But the elevator technology advanced over time to the point where elevator operators had become unnecessary and obsolete. Yet they were still there, working away in congressional elevators.

We may see these as silly and obvious examples of being out of touch with the changing times. Surely, our business would not get that out of touch with the changes in the world around us, would it?

Well, there are business bankruptcies every day, and many of those bankruptcies are due to the fact that a company did not adequately adapt to the changing times. The digital revolution made a lot of analog businesses look rather silly and out of touch—leading to many bankruptcies. For example, Kodak was an expert at analog film. But in a world of digital imaging, they seemed as necessary as elevator operators or ice deliverers in congress. The social revolution is having a similar impact.

Therefore, we must always be on guard to ensure that the times are not passing us by and making us silly relics of the past. Even congress eventually figured this out and did something about the relics around them. I assure you that the marketplace will act quicker than congress. 

THE PRINCIPLE
This is the second of three blogs looking at the three questions businesses need to ask themselves if they want to prosper into the future. Those question are:

1. What problem are you trying to solve?
2. Why should the customer naturally prefer your solution over the alternatives?
3. What are you doing differently to prove your superiority?

In the first blog, we looked at the first question. We saw that successful companies focus on solutions rather than products. Multiple products can be focused on the same solution, and multiple solutions can be had for the same product. Therefore, if you want to win in the marketplace, you need a strategy concerning which problem you want your product to solve.

Now we will turn our attention to the second question. Once one comes to understand that consumers choose based on which product is best at solving their problem, one realizes that the goal of their company must be to supply the best solution to their customer segment. In other words, you need to get a consumer segment to prefer your solution over all of the alternatives.

Understanding the Alternatives

If you want to be the preferred alternative, then you had better understand who the alternatives are. As we saw in the last blog, alternatives can come from products quite unlike your own. For example, many luxury brands can solve the problem of providing prestige or status. This could be anything from fashion clothing to automobiles to the latest technology to trophy wives to the liquor you drink to exotic vacations to yachts to whatever.

The point is that being the best at your particular product may not make you preferred if other products are better at solving the underlying problem.

For example, there is a big difference between the way high school students act today versus when I was in high school. The underlying problem for most high schoolers has not changed over the years. They are still looking for ways to achieve status and fit in with the cool group. The preferred solution, however, has changed.

In my day, clothing was a key way of solving this problem. If you wore the right status clothes, you got an edge in achieving status and fitting in with the cool group. Today, however, clothing is not the preferred solution. Just look at firms like Abercrombie & Fitch who built their entire strategy around being the best status clothing for high schoolers. These firms are doing poorly in the marketplace because students are looking for status somewhere other than in clothing.

Instead, students have found that having the coolest technology is the preferred solution over coolest clothes. In order to afford the coolest technology, students have shifted their clothing purchases to value brands like H&M or Forever 21. In fact, I just read where thrift stores are a hot place for teens and young adults. So now, clothing is looked at as a place to solve the problem of saving money in order to afford cool technology rather than as a solution for cool.

This leaves Abercrombie & Fitch out in the cold. Even if they are the coolest clothing retailer, it is irrelevant if the preferred cool solution is from technology, not clothes.

So understand the full spectrum of options for your customer. If your offering is not preferred over these alternatives, either change your offering or change your solution. Even Abercrombie & Fitch is starting to figure this out and is repositioning its Hollister brand to be less of a cool solution to more of a stretching your money solution.

Staying Relevant

Since times change, technology changes, competition changes and consumers change, one has to continually monitor the marketplace to ensure that your solution remains the preferred alternative.

For example, think of all the ways the smartphone and all its apps have changed people’s expectations and behaviors. Much of this new behavior is because the smartphone and its apps are being seen as preferred solutions over the older ways of doing things. If mobile is not a part of your solution, you may becoming as relevant as ice men at congress or Kodak in imaging.

Alternative If You Are Not Naturally Preferred

Let’s say you have not created a clear preference for your solution. Perhaps you have parity with the leaders or near-parity. You may think that’s pretty good.

But here’s the problem: if you cannot win them over with natural superiority, then you have to win them over with artificial superiority, which I call bribery. I don’t mean the illegal type of bribery. I just mean you have to sweeten the value by offering large discounts or added goodies. In other words, you are essentially paying them to pick you, because the natural offering alone is not enough to create preference.

And we all know what those discounts and added goodies do to our profitability formula. They transfer the benefit from us to the customer. There had better be an awful lot of price elasticity in order to cover the loss of profits per item. Unfortunately, in a highly competitive marketplace, the competition will tend to match your bribery, so no advantage is had anyway. You just lowered the profitability for the entire industry.

Segmentation

The goal here is not to be preferred by EVERYBODY. That is unrealistic since people are seeking value in different ways. You cannot be the best at pleasing everyone with the same offering. Trying to please everyone usually means you are preferred by no one.

Therefore, the goal is to choose a consumer segment for whom you can create the preferred solution. The chosen segment should be large enough to satisfy your requirements.

SUMMARY
Of the three important questions, the second one is “Why should the customer naturally prefer your solution over the alternatives?” Preference is important because without natural preference, you have to lower profits through bribery in order to lure business. Worse yet, your solution may be so irrelevant that even bribery will not be enough to create preference.

Since times change, you have to be constantly on the lookout to ensure that your solution remains preferable through time. Otherwise, you may need to change your offering or change your solution.

FINAL THOUGHTS
Superiority is determined in the mind of the customer, not in your laboratory. When determining whether you are the preferred alternative, ask your customer segment, not your employees.

Strategic Planning Analogy #522: Timeless Timepieces

THE STORY
I used to work with a retailer who sold low-end watches. Suddenly the sales of these watches plummeted. Was it because someone had suddenly become better at selling low-end watches than this retailer? No.

What had happened was that one of the primary customers of this retailer was early adopters of cell phones. They were using their cell phones to tell time, so they stopped wearing watches…which meant they stopped buying watches.

This retailer wasn’t the only one seeing portions of the watch market vaporize due to people using their phones to tell time. Look at watch ads today. Watches are no longer sold as functional timepieces. They are either sold as a piece of jewelry or as an heirloom to be passed on to future generations.

Think about it…timepieces being sold as the epitome of timelessness. It can’t get much more bizarre than that.

THE ANALOGY
Watches were originally designed as a portable way to tell time. They were the superior solution to solving that problem. But then along came the cell phone. For a large sector of the population, the cell phone became a superior solution to the problem of portable time-telling.

When watches became an inferior solution to the problem, the demand for them dropped. It wasn’t that the phones became less effective at what they did. They were as good as before. It’s that a totally new solution appeared that was superior. Suddenly, a watch’s biggest threat came from phones.

This problem does not just impact watches. All businesses succeed by providing a superior solution to a problem. As a result, businesses tend to work diligently on perfecting their solution. They want to keep getting better, faster, cheaper with their solution offering.

But then…BAM! Something from out of the blue blows your solution out of the water. It no longer matters how good of a watch you make. The best, most accurate watch suddenly became an inferior portable timepiece to the phone. Making a better, faster, cheaper phone won’t get them back. The rules have changed.

This can happen to any business. A solution from an entirely different industry can make your industry irrelevant. The best, fastest, cheapest obsolete item is still obsolete.

Watch out for the unrelated industry (like phones) which can make your entire strategy (like watches) suddenly obsolete.

THE PRINCIPLE

The principle here is that while problems can be eternal, particular solutions to these problems can have a short time span of viability. This poses a risk to any business with a product mindset. While your product may be a great solution today to a given problem, that does not ensure that it will be the best solution tomorrow—no matter how well you execute on delivering that product.

Examples:

1. Laser Surgery has made eyeglasses an inferior solution to vision correction.
2. Digital communication of news has made paper-based communication of news (newspapers and magazines) an inferior option.
3. Every few months, somebody comes up with a new solution for losing weight. The solutions come from a wide variety of industries, from new food solutions to new exercise solutions to new surgical procedures to hypnosis to pills to whatever. Each solution’s time of relevance is so short that we call them “fads.”

Now you may be saying that this risk does not affect your business, because you are not product focused. You are “solution-focused.” You are always working to be a better solution for your customers.

Well, that may be true. But how broadly do you approach that solution? Do you only look for solution improvements within your industry? Are you only looking for better portable time solutions within the watch industry or are you considering solutions from different industries like phones?

Consider the situation facing GM which we talked about in an earlier blog. Teens and young adults used to look to cars as the superior solution to their desire for freedom. Suddenly, the youth of today fulfill their desire for freedom via their cell phone. Cars are no longer something to lust after to satisfy this freedom urge for this demographic. To many of them, cars are just a means of transportation. And given that the young adults of today often prefer to live in city centers, cars aren’t even seen as a particularly good solution to them for that solution. Mass transit, taxis and new car-sharing options like Zipcar appear cheaper and more convenient in an urban environment.

As a result, car ownership (and driver’s license ownership) is down in this demographic.

So GM is not just competing against other cars. On one front, it is competing against anything else that can do a better job of satisfying the urge to be free. On another front, they are competing against an urban lifestyle (where cars can be seen as a burden). And they are competing against new options to transportation ownership made possible through cell phones (like Zipcar). And they are competing against trends which reduce the need for transportation in the first place (working at home, shopping on-line, visiting via Skype, etc.).

Will traditional car ownership eventually fall victim to some form of the same fate as watches? I would certainly have some concern if I was in that industry.

Even teen/young adult clothing sales are down, due in part to a shift of spending from clothing to gadgets (like iphones and ipads). It used to be that clothing for teens was a superior solution for trying to be “cool” with their peers. Now, spending that money on gadgets creates a superior coolnesss. So gadgets get the money that used to go towards clothing.

So what does this imply for strategists?

1) Look Broadly for Solutions

First of all, if you want to own a solution over time, you’d better be prepared to look way outside your conventional industry, because the next leap in superiority may come from somewhere totally different.

Think about Bausch & Lomb. They used to be in the lens business because that was the superior way to improve eyesight. But they could see that non-lens solutions could do a better job at some eyesight solutions, so they diversified into areas far afield from lenses, like laser surgery and eye vitamins.

Proctor & Gamble used to look to chemistry for their cleaning solutions. Then they thought more broadly and looked to physics for cleaning solutions. The result is a number of new cleaning innovations like the Mr. Clean Magic Eraser.

How far afield from your core are you looking to find superior solutions to your core? Do you only read publications in your own industry and only go to trade shows in your own industry? You won’t find it there until it is too late.

2) Be Prepared to Redefine Solutions

Sometimes, if your product is no longer the best solution for a problem, you can reposition the product to be the right solution for a different problem. As mentioned above, watches are repositioning themselves as jewelry and heirloom solutions rather than timepiece solutions.

In the 1800s, circuses were the superior way for small communities to learn about the latest and newest things. When that no longer worked, they repositioned themselves to be a great solution for nostalgia. I talked about that here.

When Hamburger Helper was introduced, it was a superior solution for dinner convenience because it could be made much faster than a conventional dinner at that time. Later, when other alternatives (microwave, take-out, etc.) could provide dinners more conveniently (faster & with less effort), Hamburger Helper was no longer the winner on convenience. General Mills has tried to come up with other solutions for Hamburger Helper such as:

1. The convenience meal your kids will actually eat; or
2. The convenience meal you can feel better about serving because you actually took part in preparing it with your own fresh beef.

I’m not sure any of these tactics are working, but at least they are trying. You may need to do the same in order to stay relevant.

SUMMARY

Problems may be eternal, but the best way to solve the problem changes over time. Often the superior replacement solves the problem in an entirely new way from an entirely different industry with entirely different skills, technologies and business models. It is not an incrementally better status quo, but rather something which makes anything remotely similar to the status quo obsolete. The long term solution is to either: a) Keep an eye outside the industry to discover solutions which can keep you from becoming obsolete; or b) Find a way to redefine your product so that it can be the superior solution to something else (where it can still be relevant).

FINAL THOUGHTS
The best timepiece on the wrist” is not a solution. It is a description. The solution is at a higher level—portable time-telling. If you don’t define the problem at the higher level, you will miss some of the creative ways to solve the problem.

Transcendent Strategy

THE PREMISE
There seems to be a consensus building in the business world claiming that concepts like positioning and competitive advantage are becoming obsolete. This premise is based on the assumption that the business world is moving too fast. In such a fast-paced changing world, nothing lasts—including positions and competitive advantages.

This leads to the conclusion that if competitive advantages and positions have no lasting value, then it is a waste of time to focus much effort on them.

I tend to disagree. Here is my rebuttal to this point of view.

THE REBUTTAL, PART 1
Yes, technologies come and go; products come and go. But the truly important issues endure.

Has the desire for value gone out of style? Has the desire for quality gone out of style? Have the desires for prestige and self-esteem gone out of style? No.

These eternal desires have been around or hundreds of years and will continue to be around for hundreds of years to come. Eternal values such as these do not become obsolete.

The problem is not that positioning and competitive advantages have to—by their very nature—become obsolete. No, there is nothing inherent in positioning or competitive advantages which creates obsolescence. Instead, the problem is that people are focusing on the wrong things to build a position or competitive advantage around. If you focus your position or competitive advantage on a particular “product”, “technology”, or “feature set”, then of course your position or competitive advantage will not last—because the best alternative in these areas is constantly changing.

By contrast, if you focus your position or competitive advantage around mastering and owning the enduring attributes of prestige, self-esteem, quality, value, etc., then your position and competitive advantage will endure. Advantageous strengths in areas like this transcend all of those ever-shorter life cycles in products, technology or feature-sets.

Your company lasts, survives, and thrives even if particular products come and go, because your position and competitive advantages in understanding and providing solutions to enduring desires allow you to better migrate to the next iteration of how that need is satisfied. You continue to win, because you have built your strengths around owning the solution itself (e.g., prestige) rather than merely owning the current manifestation of that solution (e.g., a smartphone).

Think of Virgin. The company is not linked to a particular product, industry, technology or feature set. Virgin is into hundreds of diverse businesses from media to transportation—even transportation into space. Instead of focusing on a particular product or technology, Virgin has built competencies and advantages in winning a position in the enduring values. Here’s how Richard Branson, founder of Virgin, describes it:

“We've become a sort of way-of-life brand. ... People think of Virgin — if they hear that Virgin's going into a new area, they know that the quality will be good, that we'll do it in a fun way, that we'll give good value for money. And so it gives us a leg up when we go into a new venture. People already [trust] us, and they'll give us a try and, generally speaking, people seem to like what they find.”

Virgin the corporation wins and endures, even when particular ventures come and go, because it is always on the prowl looking for the next evolution for its “way of life” solution. It takes its skills (competitive advantage) in imbuing these way of life values into an industry and wins.  

And think about Apple. Its popularity has transcended a wide range of obsolescence in products, technology and feature sets. People love Apple because it wins on enduring values. Status, elegance, simplicity, easy-integration, and being “cool” are all integral to everything it does. Apple built competitive advantages in pursuing these enduring traits. This allows the company to endure, because positions and competitive advantages in these areas endure.

The fact that Apple is hiring Angela Ahrendts, the CEO of the Burberry fashion house, to run its retail division shows that Apple is structuring its competency around status, elegance and “coolness” rather than particular products or technology.

So if you build your position and your competencies around the enduring values (like Virgin or Apple), you can have a competitive advantage which can last a relatively long time.

THE REBUTTAL, PART 2
Winning positions and competitive advantages win because they best fit into the context of the environment in which they operate. The battle is decided in the marketplace. To win in the marketplace, you have to be designed to win within the context of that marketplace.

If we buy into the original premise that the business world is undergoing accelerated change, then that is the context where we must design a winning strategy. Therefore, a good way to win in this marketplace is by building competitive advantages in adapting to change.

Competitive advantages in adapting to change could include superior competencies in areas like:

1. Monitoring the environment to get early detections in the direction of change.
2. Building a flexible supply chain.
3. Having an organization that can quickly reallocate resources (human, monetary, etc).
4. Building skills around enduring values rather than temporal products and technologies.
5. Speed in execution.
6. Developing a tolerance for risk.
7. Quickly building strategic partnerships in areas needed to adapt to the change.

Companies which can do things such as these better than anyone else will have an enduring competitive advantage within the context of a rapidly changing marketplace.

SUMMARY
It is a false notion to claim that positions and competitive advantages can no longer be enduring. Yes, many positions and advantages will not be enduring, because they are linked to particular products, technologies or feature sets. But that is the fault of the people who picked the wrong things to focus their positions and advantages on. If, instead, one focuses on enduring values or adapting to change, then you can build enduring positions and competitive advantages.

FINAL THOUGHTS
Don’t blame the concepts of positioning and competitive advantage when your business becomes obsolete. These tools still work well if applied properly. Think of the axe. In the hands of a skilled lumberjack, the axe is a wonderful tool. In the hands of an axe murderer, it is a horrible tool. Are you more like the lumberjack (building enduring skills) or the axe murderer (focusing on products, technology and feature sets)?

Strategic Planning Analogy #465: Put Another Log on the Fire

THE STORY

One time while camping I began cooking dinner on a campfire.  The fire was nice and hot, so I thought cooking would be easy.  I filled a pot with some soup and put it on the fire.

The fire was so hot that it burned a hole in the bottom of the pan.  Not only did I lose my dinner as the soup fell through the hole, I also lost my fire which was doused by the soup.


THE ANALOGY
The purpose of a campfire is to provide light and heat for your camp.  This needs to be managed.  If the campfire gets too large and too hot, it is no longer useful for cooking and you cannot get near it to warm yourself.  It also can become very dangerous and quickly get out of control, perhaps burning down your campsite and the surrounding forest.

Conversely, if the fire is ignored and allowed to go out, then it takes forever to restart the fire and get it back to a reasonable size.  In the mean time, it is cold and dark.  And if you run out of matches, you may never get the fire restarted.

In my story, I mismanaged both extremes—I got the fire too hot to cook, which caused the fire to go out when the soup fell through the hole.  And the wet logs didn’t want to re-light.

In the business world, you can think of the logs as being like investments in the business and the fire as being like the financial output of the business.  If you don’t manage these inputs and outputs properly, you can end up in a mess, just like I did with my campfire.

THE PRINCIPLE
The principle here is that future growth should be managed in relationship to the current situation.  In other words, you are more likely to have a strong future if it is leveraged off the current strengths.  We can see how to do that by looking at the lessons of the campfire.

Lesson #1: All Fires Left Without New Fuel Eventually Die

There is only so much fire potential in a log.  Eventually, it will be completely consumed by the current fire and no longer produce additional fire.  Therefore, if you do not want the fire to go out, you have to keep adding new logs to the fire.

The same is true in business.  Like each particular log, each particular business strategic initiative eventually fails.   Times change; customers change; competition changes; technology changes; the environment changes.  New, superior solutions for the evolving customer needs make your old strategic initiative obsolete.  It no longer provides any financial output (the flame goes out).

As a result, you cannot just sit back and enjoy the success of today.  Even a perfect campfire right now will eventually go out if you do not add logs to it.  Similarly, perfect financial output today does not guarantee that it will go on forever.  You have to keep investing in the business (adding more logs).  Otherwise the business will die.

That investment can take two forms.  First, you need to invest in maintenance and upkeep.  As a lifelong retailer, I know what happens if you do not reinvest in the look of your store.  Eventually, it becomes so ugly and worn out that customers refuse to come back.  The fire goes out.  

Second, you need to invest in modifications to your business in order to keep it relevant to the changing marketplace.  

Remember, if you tie the success of your business to a single initiative, your business will die when the original logs of investment in that initiative are spent.  If you want your business to last beyond that, you need to keep investing in the business.

Lesson #2: Big Logs Require a Big Fire to Ignite

Big logs do not automatically combust into flame.  If you want to get a big log lit, you have to stick it in a place where a big fire already exists.  It then uses the current flames from the older fire to start the process of creating its own flames.

The same is true in business.  It is a lot easier to get a new initiative off the ground and running successfully if it can leverage off the power already inherent in the base business.  That power can come from strong customer relationships, a great distribution network, economies of scale from the base business, and so on.  The new business can “borrow” these strengths just as a fresh log “borrows” the flames of the old fire to get going.

This implies two things.  First, the best time to invest in the future is when you are still strong in the present.  If you wait until the flames go out before adding the new logs, the new logs won’t ignite.  You have to add the new logs while the old flame is still strong if you want them to quickly take off.

Although this is common sense with fires, this idea is often ignored in the business world.  In retail, I saw executives wait until people no longer wanted to shop a store before remodeling it.  By then it was too late (the fire had gone out).  Since customers no longer patronized the store, they did not see the improvements   They had already moved on to someone else’s store.  It was a wasted investment which didn’t catch on.  No, the best time for that remodel would have been while the customers were still in the store and had a positive feeling towards that store.  Then they would have seen the improvements and then felt even more positive about that store.  

For a more dramatic example, think of Kodak.  It stayed with the analog film “logs” way too long—all the way until their flame was nearly extinguished—before adding on the digital “logs.”  It was too late.  There was not enough power in the weakened core to ignite the new business. It never caught fire.  Instead, the digital fire belonged to the competition. 

Had Kodak made the transition to digital when they were at the peak of analog power and still had a strong brand and consumer franchise (i.e., when their fire was still strong), those digital logs would have had a better chance of catching on.  

The reason for waiting too long to invest in the future is usually a fear of cannibalizing the current core business.  But do we worry about cannibalizing the old logs of a fire when putting a new log on top of them?  No.  We understand that those old logs are going to die anyway and that they are most useful to perpetuating the flame if you put a log on them while they are still strong.  And besides, the goal is not to optimize a single log, but to optimize the entire campfire.  So we toss the new log on without a second thought. 

We should have a similar attitude in business.  Assume cannibalization is going to occur anyway (either by us or by someone else).  So if it is going to die anyway, it may as well be us to gets the future business.  And we are more likely to get it if we put the log of the future on now, when the flame of the current business is still strong enough to ignite it.  Leverage your strengths while they are still strong.

The second implication is this:  just tossing a log near the current fire won’t do anything.  It will just lie there unlit, even if the other fire is still blazing strongly, because the new log does not touch the current flame.  This is what happens when we invest in a future that does not leverage the current strengths.  It there is no fit with the core, it cannot leverage the flame from the core.  It is like trying to start a completely new fire next to the old one. 

And we all know how hard it is to start a new fire.  You cannot start with big logs.  You have to start with small sticks and easily ignitable tinder.  Then you can gradually increase the size of the sticks over time (if the small fire does not go out—which is common).  Eventually, you might be able to get that new fire to support a big log.

Wouldn’t it just be easier to leverage the fire you already have?  So as you invest in the future, find a future that can leverage what you already have built.  It makes the chance of it taking off quickly more likely.   Don’t be lured to invest in the hot new thing just because it is a hot new thing.  If it has nothing to do with your core, you bring no advantage.  You are starting a new fire from scratch.  You will most likely lose out to others who bring an advantage to the business.

Lesson #3: Managing Multiple Fires Can Be Difficult

This leads to the next point.  It is easier to manage one fire than two.  With two fires, one can become distracted and lose control of the situation.  This can lead to one of the fires either going out or burning up the camp.

That is why the principle of focus is so important in business.  Focus eliminates the distractions and allows you to excel at the point of focus.  It is better to have one great fire which goes on forever through careful, focused management than a handful of unrelated flames that are weak and always going out.

Lesson #4: Don’t Use Up Your Logs Too Quickly
If you toss too many logs on a fire too quickly, two negative consequences can occur.  First, you can lose control of the fire.  It becomes too hot to use and may engulf your entire campsite in flames.  Second, it uses up your logs too quickly, so you cannot keep the fire going a long time.

In business, there are also negative consequences to investing too much, too fast.  You can lose flexibility because all the resources are committed up front.  And if you invest faster than your company can manage it, you lose control of the business.  Instead, invest wisely for the optimum long-term results.


SUMMARY
Managing a business is like managing a fire.  To keep the fire burning successfully for a long time, you need to:

a) Put new logs of investment on the fire while the old flame is still strong.

b) Make sure the new logs can leverage off the strengths of the old flame by having strategic fit.
c) Make sure you don’t put too many logs of investment on too quickly (faster than you can manage).


FINAL THOUGHTS
Fires are fun to watch, but if all you do is watch, then the fire will go out. 

Strategic Planning Analogy #451: Too Much Cotton in the Bottle

THE STORY
The other day I bought a bottle of ibuprofen. I bought it to help with the occasional headache I get with my spring allergies.

When I opened the bottle, I couldn’t get the pills out. There was so much cotton stuffed in the bottle that I couldn’t get to the pills. It was quite a struggle to get that cotton out of the jar.

I understand why the cotton is put in the bottle. It is to protect the pills from bouncing around in the bottle and getting damaged during shipping.

But here is my question: What is the benefit of having perfectly undamaged pills if I am unable to get to them and use them for my headache? If they are locked up in a bottle behind too much cotton, they cannot help my headache. They are worthless to me.  I’d rather have easier access to a slightly damaged pill.

THE ANALOGY
That ibuprofen is only useful to me if I can get those pills into my bloodstream. Having them in a bottle does nothing for the pain.

A similar situation can occur in the business world. Businesses have all sorts of resources. They can be financial, technological, intellectual or a wide range of other resources. These resources are like those ibuprofen pills. If properly used, they can be productive and solve problems.

However, if the company tries too hard to protect those resources, it can be like over-stuffing the medicine bottle with cotton. The protection makes it nearly impossible to get access to those resources. And if you cannot use the resources, it is irrelevant that you kept them in top condition. They become worthless to you in your battle to increase your prosperity in the marketplace. THE

PRINCIPLE
The principle here has to do with risk. The problem is that if a company gets overly protective of its resources in order to eliminate downside risk, they will not only prevent undesirable activity—they will prevent all activity. Like over-stuffing the medicine bottle with cotton to prevent any damage, over-stuffing your business with policies to prevent any risk leads renders your resources worthless.

The only way to be 100% certain that activities with downside risks are eliminated is to eliminate all activity. And that leads to another 100% certainty—100% certainty that the company will cease to exist due to a lack of investment. And so, ironically, the policies intended to minimize downside risk actually increase the likelihood of the greatest downside risk—the risk of destroying the entire business through resource starvation.

As the old saying goes, you have to take some risks in order to receive any rewards. So, the goal should not be to stuff the medicine bottle with as much cotton as possible. The goal should be to find the best way to use the pills in the bottle. Or, to use business terms, the goal is not to avoid risk by preventing investments, but to find the most prudent ways to invest.

Now I understand the need to prevent wasteful and reckless use of resources. For example, if I had been reckless and swallowed all of those ibuprofen pills at once, I would have killed myself. But, if used properly, ibuprofen can do wonderful things. And similarly, wise use of company resources can do great things.

So the rest of this blog will look at ways to prevent over-stuffing the bottle with cotton and promote more prudent investing.

Problem #1: Personal Biases
Scientists and researchers tell us that most managers have built-in biases when it comes to making decisions. They say that the typical manager over-emphasizes the potential downside risk and under-emphasizes the upside potential. As a result, managers become too protective and miss out on making perfectly sensible investments.

I have a theory about why that occurs. I believe the problem is that the upside and downside risks for the company are not always in sync with the upside and downside risks for the individual making the decision.

For example, let’s assume that a manager has a tough decision to make. If you just look at the math from a probability analysis, you would see that although the downside risk is large, the upside risk is a little bit larger and a little bit more likely. Therefore, the “experts” would say that the manager should make the investment.

However, that is just considering the risk to the business. Now consider the risk to the manager making the decision. The manager may think that if the upside potential occurs, he/she may only get a minor recognition. After all, it is their job to make good decisions, so if the decision turns out well, they were just doing their job properly.

On the other hand, if the downside were to occur, the manager may rightly assume that he/she would lose their job. Just look at what is happening at J.P. Morgan. Some trading deals went bad and the downside scenario came to pass. And as a result, a number of people at J.P Morgan are losing their job.

So, from the manager’s perspective, there is very little personal upside potential from recommending the deal and if the downside potential occurs, he/she could lose their job. Therefore, it is no wonder that executives appear irrational (from the company’s perspective) in saying no to “reasonable” risk. After all, from a personal perspective, saying no seems highly rational.

Consequently, if you want management decisions to be in the best interests of the company, you need to make the personal risk profile more similar to the company risk profile. Otherwise, you can end up with managers overstuffing the medicine bottle, which hurts the company but protects their career.

Problem #2: Departmental Biases
Large business decisions often impact large sections of a business. Problems can occur if the risk profile varies between the sectors of a business impacted by a decision.

For example, one part of a business might bear the biggest brunt of the investment while another department may reap most of the benefits. In such a circumstance, the department needing to make the investment may resist the move, because the math may not make sense when just looking at that particular department in isolation.

To prevent this “irrational” cotton stuffing, one needs to get all of the affected parties to share in the entire company-wide risk profile. That way, decisions will be made for the good of the company rather than the good of the individual department.

Problem #3: Excessive Busyness
Just because a resource is kept busy does not mean it is being invested properly. There is an opportunity cost risk in missing out on potentially huge gains because resources are focused on surer, but much smaller gains.

Take, for example, your human resources. Since the start of the great recession, there has been a push to keep those human resources as busy as possible. Individuals are often doing a workload previously done by two or three people before the recession. At first, this may be admired as a wonderful productivity gain.

However, if someone is too busy with the mundane, they will not have the luxury of time to ponder larger issues which produce major breakthroughs. As we’ve seen in prior blogs (here and here), some down time is needed if you want the brain to discover that next huge breakthrough.

As a result, excessive busyness can act like that cotton, and prevent you from being able to use those resources for greater benefit. Therefore, one may need to program in some more “slack” time in order to get the most out of the resource.

Problem #4: All or Nothing
Often times, an investment can look scary because it is positioned to appear so massive. It is proposed as an all or nothing deal. You are told you are either in or you are out. And if you are in, you have to make the big bet all at once. And that can scare people away.

Well, this is often a false premise. Most big deals can be broken down into smaller deals. You may be able to test it in a small fashion before rolling it out. You may be able to borrow or rent resources before committing to purchase. You may be able to do a joint venture with a firm rather than have to acquire it.

Tactics such as risk-sharing, stage-gating or real options theory can help keep the risks manageable by placing them into smaller chunks. If a small chunk goes bad, you can stop before investing in the next stage.

Problem #5: A Portfolio of One
One of the best ways to overcome downside risk is to avoid putting all of one’s eggs in a single investment basket. That is just another scare tactic akin to the all or nothing approach mentioned above. Instead, invest in multiple investments. With a portfolio of investments in your pipeline, then the odds increase that the entire mix of investments will be positive (even if some of the individual investments are negative).

Therefore, to encourage better levels of investing, two actions should occur. First one needs to diversify the risk by building a portfolio of investments (at least in their initial stages). Second, one needs to move away from treating risk in isolation but look at the risk in terms of the whole portfolio. Accept some individual failures as a necessary part of the overall quest to create a positive portfolio.

Problem #6: Fear of Obsolescence
Often times, there can be a fear of investing in something new out of fear that it will hurt the core business. For example, Kodak did not aggressively invest in digital imaging for fear of hurting the core analog film business.

But here is what one needs to realize. If it is a good investment, somebody else will make it. Consequently, the core business is at risk whether you make the move or not. So in most cases you’d be better off making the move, since at least then you would be a part of that which destroys your core. Otherwise, you core is destroyed by someone else and you are left with nothing.

SUMMARY
There are many factors which can act to hold people back from making the investments which they should. We were only able to scratch the surface here. However, in the areas we looked at, it was seen that these factors can be minimized/reduced by becoming proactive in addressing them. By getting in front of these issues, we can establish approaches which keep people from stuffing the investment bottle with too much cotton.

FINAL THOUGHTS
By first investing in policies and approaches which help us to better handle risk, we will end up making more good investments in the business.