Strategic Planning Analogy #541: Necessary for Whom?

THE STORY
I was in a business meeting recently where we somehow got on the topic of Southwest Airlines. I was explaining how Southwest had been so much more profitable than most other airlines for decades because of its unique business model, which in part included the avoidance of the hub and spoke model used by most of its competition.

Someone in the meeting objected to the praise of Southwest. He countered that the traveling world needs a hub and spoke business model. Since the hub and spoke model is necessary, it is not proper to praise a company which avoids this necessity.

In my mind, my reaction was “Necessary for whom?” Is it necessary for some business travelers? Yes. Is it necessary for Southwest? Absolutely not.

THE ANALOGY
Two of the key aspects of strategy are determining WHERE to compete and HOW to compete. Answer these concerns properly and success is more likely. Answer them wrong and success is nearly impossible.

One method businesses use to determine where and how to compete is by looking for necessity of demand. After all, if something is viewed as a necessity and demanded by a large sector of society, it must be a good place to be, right?

Just look at the illegal drug business. The junkies feel that getting their next fix of the drug is the most necessary thing they must do. And the suppliers of those illegal drugs make a lot of money off that perceived necessity.

The problem is that there is not a strong correlation between necessity of demand and profitability. It worked in the illegal drug business. It didn’t work so well for those satisfying the necessity of hub and spoke in the airline business.

Southwest chose its “where to compete” principally in the lower price, non-business portion of the airlines industry. Southwest chose its “how to compete” by doing a number of things differently, including the elimination of the hub and spoke model. These were very profitable choices for Southwest.

In fact, it was a more profitable choice than going after the demands of the business traveler, even though the demand for business travel is higher (and presumably more necessary) than for non-business travel.

Just because something out there in the marketplace is a necessity does not mean that you have an obligation to provide it. Like Southwest, it may be better to avoid it.

THE PRINCIPLE
The Southwest example illustrates a common situation in business. This is the principle that the highest profits are often found by avoiding the highest demand. This may seem counterintuitive at first, but there is logic behind this point of view.

Why High Demand Items Are Often Not Very Profitable to Supply

There are many factors which tend to lower the profitability of serving many high-demand segments. The first is that high demand segments tend to attract a lot of competition. Businesses like to flock to where the big sales potential lies. But when too many companies are fighting for those sales, the profitability of those sales plummet. Price wars suck the desirability out of those sales. You may be able to get a much higher return going after smaller, less competitive markets.

A second problem is that high demand necessities tend to attract a lot of government regulation. Food and health care are high demand necessities. Many governments get involved in significant regulation how those necessities are supplied. This often takes a lot of the profitability out of the system.

Just look at the results when communism gets involved in the necessity of supplying food. They impose all sorts of regulations and price controls. They often insert themselves into owing a lot of the food businesses. The net result is that businesses pull away and consumers are stuck with shortages and long lines.

A third problem is that high demand needs pull in the masses. And the masses do not always have a lot of discretionary income. They cannot afford to pay as much for their demands as other, smaller segments. You cannot charge more than they are able or willing to pay, no matter how much it costs you to serve them. Just look at the automobile industry. Those selling cars to the masses tend not to do as well as those selling cars in luxury or high performance segments. Customers in the luxury and high performance segments are willing and able to pay a lot more for their cars, making them more profitable, even if the segments are smaller than the mass segment. That's the reason why Tesla decided to start by targeting the high performance end of the electric car business.

When you try to appeal to the masses, you often end up with “average” offerings. Unfortunately, there will always be competitors who specialize in targeting the smaller niches. The specialists will offer items that are cheaper, or of higher quality, or of higher prestige, or of higher functionality. These more profitable niches will eat away at your mass market, leaving you with some of the less profitable middle ground. This is what Southwest did when it specialized in the profitable low price, non-business segment (and firms like Virgin Airlines and Net Jets at the high end), leaving the other airlines fighting over the unprofitable middle.

Fourth, high demand areas are often in fairly mature businesses. Mature and aging businesses, by their very nature, tend not to be as profitable as businesses in their younger, faster growing stage. Look at Procter & Gamble. They completely divested out of the food business (an extremely high demand business). Why? Because it did not have high prospects for future growth and profitability. It was too mature.

Instead, P&G has been pouring money into beauty care. You can say that food is a necessity and beauty care is a more discretionary luxury (less necessary). Yet, beauty care is where P&G have better prospects for growth and profitability. P&G is doing a great job of choosing where and how to compete, even if it means walking away from a lot of high demand products. 

Choose Wisely

As a business, you have choices. Strategy is about helping you make better choices. Those choices need to consider more than just the size or necessity of demand. They also need to look at the profitability within that demand. Smaller segments can often be better strategic choices.

In most businesses, there is no law that says that you have to target unprofitable segments. Even if you think that a particular function is necessary to make the world work, that doesn’t mean you have to serve it. It’s okay to walk away from some businesses and leave it to someone else.

Others may have business models better suited to those situations. Keep in mind that when P&G has been divesting all of its non-desired businesses, it has been finding buyers for those businesses. Many of those buyers are companies who do things differently from P&G and are better suited for wringing value out of mature, slow growth businesses.

Is There a Moral Obligation?

There may indeed be some moral issues here. Is it right to only serve the profitable rich and ignore the masses? Can we ignore the poor because they are unprofitable? Businesses work within a society and they have some obligations to that society. But they also have obligations to shareholders, debt holders and employees.

If businesses choose to or are forced to take on bad business models, this is bad for everyone. If they cannot make an adequate return, employees lose their jobs, and equity/debt holders don’t get a return. More importantly, the companies don’t make any profits which can be used for charity or for taxes to governments to help solve these issues.

Strong, healthy businesses are in a better position to provide jobs and provide funding for social issues. Then the question turns from business models to social accountability.

SUMMARY
Strategy is ultimately about making choices, such as where and how to compete. These few strategic choices can have a bigger impact on business success than almost any other thing you do. Choosing what not to do is usually more important than choosing what you do. And some of the things you should not be doing are perhaps serving large “high necessity” demands. It’s okay to walk away from them and go in a direction better suited to who you are.

FINAL THOUGHTS
When you look at large, mass oriented businesses, there are usually only a small handful of winners (often only one or two). The rest struggle to stay alive. If you are not the winner in that mass space, it is usually better to walk away and switch to leading in a smaller segment. And that’s okay.

Strategic Planning Analogy #534: You’re Older Than You Feel

THE STORY
According to a study reported in the Psychonomic Bulletin and Review in 2006, adults tend to feel younger than their chronological age. Beginning around age 25, people start reporting a sense that they don’t feel as old as they really are.

The gap between their subjective and chronological age continually increases between age 25 and 40. By the time adults are 40, most adults report feeling about 20% younger than they really are. This 20% gap tends to remain for most of the remainder of their years.

So if we are “only as old as we feel,” then I guess we’re not that old.

THE ANALOGY
Perception is a powerful thing. If we feel younger than we actually are, then we will act younger than perhaps we should. This could lead to foolish behavior and get us a trip to the emergency room at the hospital.

I dare say that the same phenomenon can occur in the business world. I think a lot of executives feel that their company (or business model) is not as old as it really is.

There’s this sense that maturity doesn’t apply to their business. They feel like their industry is still young and growing and that their company is still a growing youngster, too.

But let’s face it. Businesses and industries have life cycles, just like humans. They may start out young and growing, but eventually they reach maturity and then decline. You may not always feel like your company is progressing through these life stages, but it is. And it is probably further along on this path than you think.

The problem is when you manage your company based on the way you feel about its age rather than what its age really is. Each stage of a business’ life requires a different type of strategy. If your company has reached maturity and you still feel like you are in your growth phase, you will be using the wrong strategy. And just as adults when not acting their chronological age can do foolish things that get them into the hospital, managers who do not manage to their business’ actual life stage age can get their companies into serious difficulties.

THE PRINCIPLE
The principle here is that although the growth phase of an industry may appear to be the most fun and most desirable, the truth of the matter is that in most mature economies, most of the industries are mature as well. Therefore, most of us should be focusing on mature industry strategies.

IBIS World Data

This was really brought home to me when I was looking at a report produced by IBIS World. IBIS World produces reports on a wide variety of industries. To give a perspective, each report shows where that industry fits on the industry life cycle. They do this with a comparative scatter plot showing where about 700 industries fit on the life cycle path. I’ve put a sample of one of these charts in this blog.

As you can see in this chart, the largest number of industry dots are in the mature phase. And although the later growth phase gets the next largest number of dots, the decline phase is not all that far behind. Early growth has the fewest number of dots.

This chart shows just how old most industries are. Mature and decline together dominate the landscape.

The Disconnect

Yet when one looks at business literature and strategic discussions, it seems that the topic of growth dominates. There appears to be a disconnect between the reality of maturity and the desire to act as if maturity has not yet occurred.  Just as our society is preoccupied with youth culture, our businesses are preoccupied with younger business stages.

We may feel younger, but the disconnect between that perception and reality can get us in trouble. Talking like we are in the growth phase or acting like we are in the growth phase does not alter the reality that for many of you, you are already in the mature or declining phase. And by not acting your age, you could be doing your business a disservice.

The Downside of Not Acting Your Age

Here is a list of the major negative consequences from managing to growth when you should be managing for maturity.

1.     Overinvesting in the industry: Because you over-estimate the growth and life expectancy of your industry, you tend to value investment opportunities within the industry as higher than they really are.  This leads to paying too much for bad deals. Hence, you destroy value by overinvesting in areas where the returns will never cover the cost of capital.

2.     Working too hard to grow the top line: If you think there’s still a lot of growth in the industry, then you will have high expectations for what your own growth should be within that industry. However, in maturity, those high growth expectations may be quite unrealistic. Therefore, the only way to hit those high sales goals is to start a price war rampage in order to steal sales from the other mature competitors. This destroys the profit margin for you and the entire industry. If competitors follow your downward pricing, you may not end up with any additional business—just lower margins. But even if competition does not follow you in this downward spiral and you get some of their sales, you may still end up as less profitable because of how you destroyed the margins in order to get the business.

3.     Under-investing in future business models:  If you think there is still a lot of growth and vitality in the current business, then you will see little incentive to investigate or invest in the next big thing that will make your status quo obsolete. The problem is that your business model’s obsolescence is probably a lot closer than you think. By ignoring that, you will be unprepared for when that day comes. You will end up like Kodak, who saw their entire world fall apart because they delayed making the transition from analog film to digital imaging until it was too late. For more on Kodak, look here.

So, as you can see, acting as if your business is younger than it really is is not a small issue. At best, it will cause you to destroy value. At worst it will cause you to destroy the company.

A Better Approach

To avoid these negative consequences, consider the following:

1.     Continually monitor your life cycle using objective tools: Don’t rely on your feelings. They can deceive you. Use objective tools to monitor your path through the business life cycles.

2.     Act Your Age: If you are in maturity, then use the appropriate strategies for maturity such as:

a.      Moving the focus from top-line growth to process efficiency and cost control.

b.     Focus on reaping the maximum return from prior industry investments rather than creating new ones.

c.      Consider shifting emphasis to pockets where maturity is further away, such as emerging nations.

d.     Examine the relative merits of consolidating the industry versus selling out to someone else who wants to consolidate the industry.

e.      Invest in the next big thing that will replace the status quo.

I love what I see in the packaged food industry. P&G realized that its corporate culture and business model were optimized for growth industries. P&G also realized that its food products portfolio had moved on to maturity. Therefore, it sold its mature food businesses to other companies, like Pinnacle Foods. It was a win-win. It freed up money so that P&G could invest in growing industries like health and beauty. And, since Pinnacle Foods has a corporate culture designed to excel in mature businesses, the food businesses were under better management.

In fact, it worked so well that P&G is considering a more massive divestiture of brands.

SUMMARY
The business world is a dynamic place, where new business models replace the old. As a result, businesses do not stay in the growth phase forever. Maturity and decline occur. Unfortunately, many business leaders think their business model is younger than it really is. This leads them to manage for growth when they should be managing for maturity. By using the wrong strategies (growth strategies instead of mature strategies), these leaders destroy value. The better move is to align your strategy with the reality of where your business model lies in its life cycle.

FINAL THOUGHTS
You can use this disconnect to your advantage. If you know that your business is in maturity or decline and someone else still thinks it is in its growth phase, you can sell your business to them for more than you think it is worth.

Strategic Planning Analogy #532: Planning for Others

THE STORY
Years ago, I worked for one of the largest grocery wholesalers in the world. They were very proud of being the best place for small, independent grocers to get their food supply. This wholesaler continued to put its effort behind becoming even better at supplying groceries to small independent grocers.

There was only one problem. Small, independent grocers were disappearing at an alarming rate. The growth of large supermarket chains and Walmart Supercenters were squeezing the small independent grocers out of business. And many of the more successful, larger independents were being acquired by the large supermarket chains.

As a result, the customer base for this wholesaler was shrinking away. It really doesn’t matter how proud you are of serving your customer if your customer is disappearing. Being the best at serving a non-existent customer isn’t much to be proud of.

THE ANALOGY
Strategists and business leaders work very hard to position themselves for success. They find a place where they can win and then work diligently to improve their ability to deliver that winning position.

The problem is that businesses do not operate in a vacuum. A company’s success is also dependent upon external factors, like customers and suppliers. If your customers and suppliers are going out of business, it really doesn’t matter all that much how well you are executing your strategy. In spite of all your internal efforts to greatness, your strategy will fail if your external partners fail.

In the story, the company I worked for was trying ever harder to perfect a business model designed to service small independent grocers. As the small independent grocer was shrinking away, so was the relevance of the wholesaler’s strategy. Better execution of that strategy would not ultimately turn things around. Even a perfect wholesaler for small independents will fail if its customers go away.

This is true for any organization which relies on having suppliers and customers (which would include nearly all organizations). For your plan to succeed, you need those partners to succeed.

THE PRINCIPLE
The principle here is that our planning efforts must not just myopically focus internally on our own company. We need to broaden our planning to create strategies to ensure the success of our partners, be they suppliers or customers. If we do not actively plan to help others, then our own well designed and well executed internal strategy may collapse.

We should not rely on luck that our partners will do okay. We should actively plan for their well-being along with our own.

Department Stores

This is not a new concept. Department store owners in the 19^th century spent a lot of time away from their stores and focused on boosting the economy of their local community. Why? They knew that if the local economy was strong, the sales at their department stores would be strong. Conversely, if their cities became weak and the population shrank, then their department store sales would shrink.

Therefore, the department store owners spent a significant amount of their planning time planning for their cities. They wouldn’t take the health of their customer base for granted. External planning for the city was as important as internal planning for the department store.

Automotive Industry

Early in the 20^th century, Henry Ford did something similar for the automotive industry when he dramatically raised wages for his factory workers. There were many reasons why Henry Ford dramatically raised factory wages, but one reason was very relevant to our discussion: You needed a middle class income to afford a Ford automobile.

By setting a new wage standard, Ford was moving factory wages to middle class levels. Therefore, as others followed Ford’s wage example, Ford was dramatically increasing the number of people able to afford to buy one of his cars. Ford was proactively planning his customers.

Over the decades, the automotive industry seemed to forget this principle. The industry started squeezing their suppliers harder and harder. They didn’t care how much they were hurting the suppliers as long as it helped their internal bottom line. And then came the great recession and the suppliers started going bankrupt. On top of that, the great tsunami hit Japan around the same time, wiping out even more suppliers to the automotive industry.

Because the automakers did not adequately plan alternative sources of supply or other backup provisions, they suffered along with their suppliers. Assembly lines were shut down for extended periods.

Modern Technology

As we all know, modern technology is very disruptive to the status quo. Suppliers and customers appear and disappear rapidly. Being a great traditional travel agent didn’t mean much when their customer base disappeared and went directly to web travel sites. Building a near-monopoly in phone books isn’t worth much if nobody is demanding them due to superior digital information alternatives.

So What Should You Do?

There are three strategic alternatives when planning for your partners. The first is to alter your internal strategy to improve the health of your partners. For example, the grocery wholesaler I worked for knew that the small independent grocer would be stronger if it could be placed in retail formats that competed less directly with Walmart and the big chains. Therefore, they developed these types of formats and reinvented a portion of their wholesale operations to optimize under these new formats. It was a different way of doing business than in the past, but it created a business model that was better for both the independent retailer and its wholesaler.

The second alternative is to alter your strategy to move to where your partners are moving. Netflix redesigned its strategy when customers who wanted DVDs in the mail were moving to getting their movies from the internet. By shifting quickly to an internet option, Netflix migrated at the same pace as their customers, so they were able to keep them connected to the Netflix brand.

The third alternative is play the end game. As a market shrinks, you can consolidate what is left and then cut costs until one can make a profit. This is happening in many processed foods, where growth has disappeared. The original players, like Proctor & Gamble have gotten out of the business and moved to newer growth businesses. In their place are companies like Pinnacle Foods, who are buying up all these brands and playing an endgame.

The grocery wholesale company in the story also played an endgame with many of the traditional independent grocers who were left and did not migrate to the new formats. Although there are far fewer of these independents, the wholesaler has less competition for their business, so it can still create a meaningful business with them.

Common Approaches

Regardless of the strategic outcome, there are common approaches to success.

1)     Don’t just look internally at optimizing your own piece of the puzzle. Optimize the whole puzzle.

2)     Keep an eye on the external environment to understand when market shifts not only impact you, but also your partners.

3)     Treat your partners as partners, not enemies. Be willing to plan jointly and share information for the betterment of all.

4)     Be willing to abandon or modify a strategy when customers and suppliers are at risk of going away.

SUMMARY
Businesses do not operate in a vacuum. Therefore, their strategies should not be developed in a vacuum, either. Don’t just plan your internal affairs. Consider plans for your customers and suppliers as well. And if they are moving away from your core business, you may need to change your business to follow them. After all, a “perfect” strategy for a customer who ceases to exist is really not perfect at all.

FINAL THOUGHTS
If you develop a win-lose proposition with your partners, eventually your partners will go away. Instead, build a win-win situation with your partners. That way, you can feed off each other’s success and succeed together for a long time.

Strategic Planning Analogy #529: Stick to Your Stage

THE STORY
I read a story recently about how John Breck introduced shampoo to the United States back around 1930. Before then, people used some form of soap to wash their hair. But John Breck showed how to use a pH-balanced detergent which more easily rinsed away from the hair and left the hair and scalp in better condition.

I was shocked to learn how recently shampoo, as we know it today, was invented. I started thinking about all those generations of people in the past who have not had the simple benefit of shampoo.

I guess there was a reason why royalty in the past liked to wear those big crowns on their heads and why the ancient pharaohs of Egypt shaved their heads. As royalty, they did not want to be seen with dirty hair.  

THE ANALOGY
Shampoo is not the only common everyday consumer good that was invented relatively recently. Nearly all common consumer goods which fill our supermarkets are less than 100 years old. In fact, Uneeda Biscuits is considered to be the first broadly advertised branded food product. That happened in 1898. Before that, most food items were sold to grocers unbranded in bulk barrels—put into a plain brown bag for the customer by the local grocer.

Even self-service supermarkets, themselves, have only been around since abut the 1930s. They had to wait until all these products, like Breck Shampoo, were invented and branded so that consumers could choose items on their own.

You could say that a century ago, branded consumer products were the internet economy of their time. They were inventing whole new categories of products, like shampoo. They were changing the way people lived and spent their time and money. A radical transformation was going on in a burgeoning new industry. New trails were being blazed and new concepts were being invented (like couponing, which really didn’t begin to take off until all these branded products came about).

This was the era in which consumer product firms like Proctor & Gamble really grew into the huge and successful businesses they are. They were the masters of inventing new categories and inventing ways to market them to create incredibly large businesses which did not exist before (you could say that disposable diapers were like the Facebook of their day).

These consumer product companies understood how to use chemists and other scientists to invent major breakthroughs in performance (not unlike how companies in the digital economy use engineers). They blazed trails in new distribution and marketing channels, just as the digital economy did with marketing on the internet and smartphones.

Yes, less than 100 years ago, the big consumer branded product companies were Googles, Linkedins and Apples of their time.

But now look at those branded consumables found in supermarkets. Right next to them is a store brand that is just as good and costs a lot less. Sales growth is virtually non-existent. The old marketing tricks don’t move the sales needle much. It’s a very mature business driven mostly by cost control and price wars.

Consumer branded products are not at all anymore like the digital economy. And I suspect that at some point in the future, the digital economy will look a lot like the consumer branded goods industry today—very mature and without much growth. And it may happen sooner than many people think, just as I was surprised how soon shampoo went from a new category to extreme maturity.

THE PRINCIPLE
The principle here is that industries go through life cycles. There’s the introduction stage, followed by rapid growth, maturity and decline. Each stage has its own challenges—the keys to success and the skills required to win vary by stage as well.

Two Strategic Choices

As a business, you can choose one of two strategies:

1. Stick with your industry (become and industry expert) and ride the industry through its stages.
2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.

Looking at history, it seems that the second option is the best. General Electric has been so successful for so long because it keeps changing its portfolio. It gets out of businesses that are maturing and reinvests in newer industries that can take advantage of its corporate strengths. Proctor and Gamble has succeeded by getting out of the mature industries it helped develop and reinvest in industries (like beauty care and health care) where it’s traditional skills are still valuable.

And today, we see a lot of “serial entrepreneurs”—people who are great at the start-up stage of a business. As soon as their business leaves the start-up stage, they sell it and work on their next start-up. They succeed because they stick to the stage of business they have mastered.

It’s easy to understand why the second option is preferable. It’s hard to change one’s nature and instincts. As industries move from one lifecycle stage to the next, what is required to win is different. You have to radically change your business model and culture to adapt to the change. Most companies find it difficult enough to excel when dealing with relative stability. It becomes exceedingly difficult to excel when moving into a phase where all the rules for success are changing.

So stick with what you know—and the most important thing you know (most likely) is how to operate in a particular life stage, not the particulars about your industry.

If your company stays with your industry, your company’s life cycle will follow the industry lifecycle. You’ll decline along with the industry. Is that what you want?

It all happens faster than you think

The second option is not without its own risks, though. The trick is knowing when is the right time to make the shift—to exit one industry and enter another. If you get the timing wrong, you miss out on a lion’s share of the value creation.

One point to keep in mind is that industries move through their stages a lot quicker than we usually think. When you are in the middle of the day to day within an industry, you can sometimes lose sight of the bigger external factors that about to shake your industry into the next phase. From the inside, today looks a lot like yesterday, and tomorrow looks like it will be a lot like today. So we get lulled into thinking things are moving slowly.

But then, one day, everything seems to change. It only surprises us because we didn’t keep a closer eye on what’s happening outside the industry—where the disruptions start.

Experts tell us that industry lifecycles are getting ever shorter; the transitions come ever sooner. While I am a bit surprised about how fast consumer branded products went from invention to complete maturity, that process occurred far more slowly than what is happening today.

Back in the early 2000s, I was working with Best Buy and was trying to convince them to look for a “post retail” strategy. My concern was that the traditional retail industry was going to get extremely mature relatively quickly and if they wanted to continue to be a growth company, they would need to think beyond retail.

Best Buy thought they had a lot of time, so they didn’t act. And now, only about a decade later, Best Buy finds itself struggling because its retail foundation is in maturity (or maybe even the beginnings of decline). This just goes to show how fast this change can sneak up on you if you are not watching carefully.

So to play the second strategy, one needs to keep one eye focused on the external environment, in order to know when the times are about to change.

SUMMARY
Businesses have two strategic choices:

1. Stick with your industry (become and industry expert) and ride the industry through its stages.
2. Stick with the business stage you are good at operating in and change your portfolio so as to stay in that stage of the life-cycle.

In most cases, the second option is more likely to lead to lasting success. However, to make the second option really successful, you have to get your timing right on knowing when to shift your portfolio. That requires keeping an eye outside your industry—where the disruptions which cause your industry to shift occur.

FINAL THOUGHTS
Google is not content to think its current business foundation will be a growth industry forever. They keep investing in places where they think the next growth may come. You should

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.

Strategic Planning Analogy #458: When Superior is Inferior

THE STORY
It seems like it isn’t good enough to just build an automobile.  Now it has to be an automobile plus something else.  Some cars are both automobiles and entertainment centers.  Some cars are both automobiles and communication/computer centers.

How about a combination car and kitchen?  After all, a high percentage of meals are already eaten in a car.  Why not cook the meals in the car as well?

I can see it now…When you try to start up the car, the dashboard has dozens of cooking icons all over it.  It takes forever to find the icon for driving.  And if you want to heat the car, you have to be careful, because if you turn the heating dial the wrong way it will turn on the oven or the stovetop coils above the dash.  And the legroom is cut in half to make room for the refrigerator.  And every time you press on the brakes, the dishes fall out of the cupboards and the saucepan falls off the stovetop, spilling hot liquid on your lap.  And if you want to cook at home, you have to do it in the garage, because all the appliances are in the car.

On second thought, the combination kitchen and car is not such a good idea after all.  Maybe the “More Features” approach doesn’t work so well afterall.

THE ANALOGY
In the business world, there is a strategic approach which I refer to as “More Better.”  The idea is that if you take the status quo and either a) add more features, or b) make the current features perform better, then you have something superior to what you had before.  And this superiority will drive great market share gains and great profit improvements.

Sometimes, the More Better approach works.  However, in a large percentage of cases, More Better fails miserably.  You often end up with something like my kitchen car.  Sure, the kitchen car can do more than just a kitchen or more than just a car.  But is it really a superior offering when you put them together?

The combination kitchen car makes both driving and cooking a disaster.  Instead of making everything better, it has made everything worse.  It is now an inferior option.

But what about the “Better” approach?  What if we made the engine a lot better, so that the car could go 700 miles per hour (or about 1,125 km per hour, or roughly 3 times the average speed of the drivers of the Indianapolis 500)?  Does that really make the car better?  First, there is virtually nowhere where you could safely or legally drive at that speed, so the feature is pretty useless.  Second, the engine would weigh so much and be so inefficient that it would waste a lot of expensive fuel even at normal speeds.  And to fit such an engine in the car would require eliminating half of the car interior space.  And you probably couldn’t afford a car like that or its insurance.  So, in this case the “better” approach isn’t really better.

Yes, these may be ridiculous examples, but as we will see, even more seemingly rational attempts at More Better can create a disaster.

THE PRINCIPLE
The principle here is that true superiority must be defined from the perspective of the consumer, not the product.   More Better is focused on WHAT THE OFFERING CAN DO (more features, better performance).  This does not necessarily lead to higher share or higher profits.  No, true superiority comes from convincing a customer that his/her problem is solved better.  It focuses on WHAT THE CUSTOMER EXPERIENCES.   And this includes the whole experience of purchasing, price paid, usage, maintenance, upgrades, feeling of status, and so on.  And in many cases, the customer experience is improved when the offering is less and not as advanced.

There are three main reasons why More Better frequently does not lead to increased share and increased profits.

1) Diminishing Returns on Investment

Back in the 1980s and 1990s, each new advance in the Intel chip and the Microsoft operating system were quantum leaps of improvement for the computer.  The usefulness and productivity enhancements with each stage were so large that people would rapidly abandon the old and adopt the new. 

But after the Windows XP era, things started to change.  Many businesses found out that the hardware and software associated with XP did pretty much everything most people needed to do in the office in a pretty efficient way.  As a result, when the next generation Vista came out (Windows Vista), a lot of companies did not automatically upgrade everything as they would have in the past.  They decided the XP was good enough for their needs and stayed with the old.

That’s part of the problem with focusing on improving features.  Eventually, the features get pretty good…good enough that additional improvements to the features have very little impact on consumer experience. 

Since XP, most of the Microsoft improvements have either been cosmetic or have involved tweaks on the fringes for features the majority of people do not regularly use.   It’s hard to justify purchases when the additional benefits have such little impact on an experience which was already good enough.

This is also happening all over the place with CPG (consumer packaged goods).  How much better can you make canned vegetables or peanut butter?  Will anyone even notice the difference in a taste test? 

In a lot of mature categories, needs are already met.  Spending tons of money on R&D to create small improvements may not be a good return on investment.  There’s a reason why P&G has sold off a lot of its mature categories—they no longer reacted well to the More Better mindset.

And the situation can be even worse when you try to add more features, because the new features can cancel out the old features.  There’s an old saying that you cannot excel at all three features of cheap, quality, and fast to market at the same time.  The reason is because becoming superior in any two of them makes it impossible to also excel at the third, because the very structural requirements needed to meet the two work against being able to attain the third.

In other words, the more features you add, the more your offering gravitates towards average across the board.  You no longer excel at anything, because the added features cancel out the consumer experiences.  You have actually made things worse.

2) Increasing Hurdles to Switch

Not only are there diminishing returns to improvements, there are increasing hurdles preventing consumers from wanting to adopt those improvements.  These hurdles include:

a) Pricing – The improved products usually cost more.  When you factor in the price, the total value experience may be worse than before.  Private labels are exploding in growth because consumers see a superior value.  The name brands cannot create enough superiority to justify the higher price.  P&G discovered that recently when they tried to raise prices and saw volume drop.

b) Switching Costs – Switching to the new item may require consumers to create new vendor relationships, learn a new way to operate, have difficulties in getting rid of old products and a warehouse of obsolete replacement parts, experience near-term cash flow issues, a loss in productivity as they learn the new product, and so on.  A product has to be more than a little bit better to overcome all of the negatives associated with switching.  Just ask the people competing against John Deere farm machinery.  The users love their relationship with the local John Deere dealer so much that even modest improvement by a competing brand leads to little market share movement, since the customers do not want to switch away from the dealers they love.  That is a key to total experience.

c) Added Complexity – “More” often means “more complexity.”  Complexity rarely improves consumer experience.  The complexity of a kitchen car makes cooking and driving worse.  Ford’s reliability ratings have recently gone down.  Is it because the cars don’t drive as well?  Actually, most of the decline is due to problems with all the added computerized communication features being added to the car.  The complexity is weighing them down.  Branding genius Al Reis says that convergence products rarely excel in the marketplace when compared to narrowly focused products.  The focused brands are the ones that win the war.

3) Consolidating Markets

Increasing market share requires lots of market share available to take.  In mature markets, that is not usually the case.  First, you already have a sizable share of the market (less available to incrementally gain).  Second, the weaker players are already gone.  The remaining share is mostly in the hands equally strong players who are doing More Better about as well you are.  Large, lasting, sustainable superiority is almost impossible to come by.  As a result, large sustainable gains in share are hard to come by.  So all that work and money on More Better doesn’t lead to corresponding gains in share or profits.

During the great recession, Walmart tried a massive price rollback to gain share.  The problem was that they already owned most of the customers most susceptible to low prices.  So very few new customers were added by the move.  And since the current customers also benefitted from the lower prices, the total sales per store went down.

SUMMARY
So when you add up these three factors—decreasing returns, increasing hurdles, and consolidating markets—you can see how the More Better strategy by itself can destroy value.  It leads to products that may have more features and better specs, but often diminishes the value to consumers while increasing your costs of business.  Rather than trying More Better with status quo offerings, you may be better off moving to totally new approaches which use a wholly different business model to solve customer problems.

FINAL THOUGHTS
Digital downloads of music are replacing sales of music CDs, even though the music on a CD is of a measurably superior audio quality.  Even though New Coke had superior specs when it came to taste, it lost out to the supposedly inferior tasting Classic Coke.  In both cases, the superior quality product lost out because it did not create a superior total consumer experience.  Never forget that.    

Strategic Planning Analogy #438: Business Vs. Capability

THE STORY
One day, Bob was sitting in his garage. Suddenly, his neighbor Joe was running towards the garage. Joe quickly looked around Bob’s garage and noticed a shovel.

Panting from being out of breath, Joe said to Bob, “I’ll give you $1000 dollars for that shovel.”

Bob replied, “Are you crazy? That shovel is hardly worth $10. Why you can get a brand new one at Home Depot for less than $30.”

Joe said, “I need a shovel right now. Will you sell me yours for $1000?”

Bob answered, “Sure, Joe, you can have it for $1000.”

Before Bob could finish his sentence, Joe had tossed $1000 at Bob, grabbed the shovel and ran.

At the time, Bob thought Joe was crazy for paying so much for his shovel. But he soon forgot about it.

A week later, Bob saw Joe driving a new expensive sports car. Bob asked Joe how he could afford such an expensive automobile. Joe replied, “I used that $1000 shovel to dig up a treasure chest that was full of millions of dollars of gold and jewels. If I hadn’t had a shovel at that exact moment, I would have missed the opportunity to dig up that treasure chest.”

Suddenly, the idea of paying $1000 for that shovel didn’t seem as crazy to Bob anymore.

THE ANALOGY
The value placed on an object can vary significantly between people. Bob thought his shovel was worth about $10. Joe gave it a value of 100 times that price.

Why such a big difference? Bob looked at his shovel as a standalone object. He knew that new shovels were worth about $30 and that he had an old shovel. Therefore, Bob figured that the worth of the object was about $10.

By contrast, Joe looked at the shovel as a capability tool. If used immediately, that tool would give him the capability to get a treasure chest worth millions. It was well worth paying $1000 to get access to millions.

Successful business acquisitions depend on an accurate assessment of value. And often times, the greatest value is not in the standalone business being acquired (the “shovel”), but rather the value of the capability it gives you (access to the “Treasure Chest”).

Therefore, if you want a great return on your acquisition investment, the best path can be to first have a strategy to locate treasure chests. Then acquire whatever tools are necessary to dig up that chest.

Otherwise, you can be like Bob. Sure, he paid a lot less than Joe for that shovel, but when Bob had the shovel all it did was sit in his garage. The return on that $30 investment for Bob was worse than the return Joe got with the same shovel for which he paid $1000.

THE PRINCIPLE
The principle here has to do with capability planning. I think this is an under-emphasized part of the strategic planning process. People love to spend time talking about financial targets or market positions. These are fun topics. However, unless you have the right capabilities in place, those financial targets and market positions will never become a reality—no matter how much you talk about them.

Capabilities can cover items such as technology, patents, expertise, distribution capacity, access to raw materials, access to scarce talent, access to real estate, access to legal rights, and so on. You could have everything you need except one of these items and fail miserably—because none of the rest of it works unless you also have that missing piece. It could be something small, like a shovel, but if that missing piece keeps you from the getting the treasure, then merely knowing where the treasure is can be worthless.

The Problem With the Standalone Approach
Most acquisitions are looked at primarily as standalone business opportunities. Sure, one factors in a few synergies, like reductions in overhead and overlap, but the vast majority of the value is typically from the business itself.

But here is the problem with that approach. First, you have to pay a premium to get the business. Depending on the industry and the time in the business cycle, that premium can be on the order of 30% or more.

Second, to make that acquisition worth doing, you need a return on investment which exceeds your cost of capital. In other words, if you pay 30% more and you earn 30% more, all you have done is break even. And that is an unacceptable return. Depending on your balance sheet and the time of the business cycle, your stakeholders may require an additional 10% improvement or more.

In the end, this means that the only way that a standalone business is worth acquiring is if you can get 40% more out of it than the so-called experts who are already running the business (I spoke about this in more detail here). Remember, if it were easy to make such a large improvement, why aren’t the current owners doing so?

A few reductions in overhead or overlap rarely are enough to fill this large of a gap. And the gap may even need to be larger than 40%, because most acquisitions have some built-in dis-synergies which also need to be overcome. An example could be customers who no longer want to buy from the company after it is acquired because they don’t want to do business with you. I spoke more about these dis-synergies here and here.

The only way to assure that you can cover a 40% gap is to look outside the standalone business. You probably need to create an entirely new business to supplement the old business to cover the gap. In other words, the only way you can afford to overpay for a shovel is if you can use the shovel to obtain new treasure.

As long as you focus on positions or profits, you will look for acquisition targets that have great positions and/or produce great profits. And those are the targets which will typically have the greatest premium prices and the lowest potential for you to come in and cover the 40% (or more) gap.

The Benefit of Capability Planning
Capability planning looks at acquisitions more as a means rather than an end in themselves. The prize is not the acquired business. No, the prize is the separate hidden treasure which can only be obtained if the acquired firm is used as a tool to reach it. It is the capability value, not the operational value which makes the acquisition worth doing.

Consider the Pringles potato chip business. Proctor & Gamble has been disappointed with this piece of their portfolio for a long time. They have tried to find ways to get rid of it for literally decades. The fact that P&G could not sell it for such a long period implies that there was not enough inherent in the standalone business to ever justify paying a premium. The gap could not be covered.

But then along comes Kellogg. They see a buried treasure—international growth for their Keebler snack business. Unfortunately, Kellogg is missing a key capability—access to powerful global snack distribution. Pringles has that capability. It is the shovel that will help Kellogg get to their buried treasure. There is probably more value in Pringles as a distribution capability for Kellogg than as a snack business. Therefore, Kellogg can afford to pay for Pringles when others could not. They can cover the gap, because they have an addition treasure beyond what Pringles offers as a standalone business.

Therefore, rather than developing “Business Acquisition Strategies” focus on “Capability Acquisition Strategies.” And don’t forget that many times you can obtain access to the capability without having to buy a company (and pay the huge premium). This opens up more options, like start-ups, aggressive hiring, strategic alliances, licensing, and so on.

Acquisition is just one way to get capabilities. As long as you see acquisitions as a means, rather than an end, you can compare it to alternative means for obtaining that end. This can lead to superior strategic moves.

SUMMARY
Most acquisitions destroy shareholder value. One of the reasons is because there is not enough of an opportunity within the core business to increase the value to cover the premium and the return on capital requirements. Therefore, if you want to create value with acquisitions, start first by looking for treasure beyond the core business. Then look for acquisitions which are a tool to get to that treasure.

FINAL THOUGHTS
There’s the old story that for the lack of a nail, a shoe was lost. For the lack of a shoe, a horse was lost. For the lack of a horse, a battle was lost. For the lack of a battle, a kingdom was lost. When you look at that big picture, it makes that nail appear pretty valuable. Strategists love planning out the big battles, but if the capability to put nails in the horseshoe is missing, it can all be for naught.

Often times the great leaps in value can come from these capability issues which at first appear minor or are often overlooked. Don’t overlook capability planning in your strategy work.

Strategic Planning Analogy #384: Salty Popcorn

THE STORY
Back when I was a young boy, I was part of the Cub Scouts, the younger version of the Boy Scouts. One time, the leaders took a group of us young Cub Scouts to a scout campground to spend the weekend camping in tents.

One night during that weekend, a few of us boys got hungry for some popcorn, so we quietly left our tent and sneaked over to the rustic kitchen. Without any adults to supervise us, we made a big batch of popcorn. This was in the days before microwaves. I’m surprised we didn’t burn the place down.

One of the boys wanted to be in charge of salting the popcorn. He put practically an entire box of salt on the popcorn. This made the popcorn so salty that it was inedible. So we got the bright idea that if we made a second batch of popcorn and mixed it with the first, the whole thing would taste good. So we made a second batch and mixed the two. It was still too salty to eat.

So we decided to mix in a third large batch of popcorn. The end result was still extremely salty, but almost tolerable, if you only ate one handful and had a lot of water to wash down the salt.

Of course, by now we had a huge supply of popcorn—more than we could possibly eat. So we went outside and yelled that we had free popcorn for anyone who wanted it. Suddenly, all these other Cub Scouts showed up to get some popcorn. They each took only one handful, because it was too salty. But eventually that got rid of most of the popcorn.

Unfortunately, our yelling also woke up the leaders who were supposed to be supervising us. They weren’t very happy when they found out what we did.

THE ANALOGY
At the campground, we had something bad—over-salted popcorn. We thought we could make it good by adding something good to the mix—unsalted popcorn. However, we kept adding more and more good and the end result was still bad. In the end, all we had was a bigger pile of bad. We would have been much better off just throwing away the first batch and starting over.

It seems like a lot of businesses act like I did at that campout. They have a bad situation on their hands—not enough growth, not enough profits, etc. And just as I tried to fix my bad popcorn by adding new popcorn to the mix, these businesses try to fix their bad business situation by adding new businesses to the mix. It could be line extensions, diversifications, or other types of new product introductions. Whatever the means, the focus is on growing the top line with new lines of business. Unfortunately, the net results are usually still below expectations. They probably would have been better off if they had focused on tossing out the bad businesses rather than adding the new businesses to the already toxic business situation.

THE PRINCIPLE
The principle here is that our strategic goal should not be to become bigger, but to become more profitable. And many times, the most effective way to increase profits is by shrinking the scope of our business. Tossing away the elements which destroy huge amounts profitability can often provide a greater improvement than layering on more elements which are only marginally profitable.

Just as it takes a huge amount of new popcorn to overcome a small salty batch, it can take a huge amount of new business to overcome a dysfunctional business base—probably more than you can afford to undertake (either in money or manpower). Rather than adding, it may be more desirable to subtract.

Proctor & Gamble Example
Think about Procter & Gamble. Back at the beginning of the 1990s, they had 31 varieties of Head & Shoulders shampoo and 52 versions of Crest dental products. All of those were a lot of additional versions which drove up the costs of manufacturing, distribution, inventory management, marketing, management and so on. So P&G decided to cut its variety.

By the end of that decade, P&G had cut the number of its products by one-third. In hair care alone, the variety was cut in half. So how did all that cutting impact sales? Well, the market share in hair care went up nearly five points and overall P&G sales grew by one-third during the mid 1990s.

And while sales were rising, costs were dropping, because a lot of costs can be eliminated when you eliminate all of the inefficiencies from excessive variety.

And it didn’t stop there. Back in December of 2010, P&G leaders talked to analysts about the benefits from even further simplifying their business. In 2008, P&G had 500 manufacturing platforms. By 2014, they plan on having only 150. That is expected to produce savings of about a half a billion dollars.

They are also going to simplify the processes used to run the business. By moving to fewer, but stronger regional centers over the next three years, they expect annual savings of $160 million. By replacing bad inefficiencies with new technology, they anticipate annual savings of about $50 million per year, not to mention other ways to cut which will add even more.

When you add it all up, we’re talking about an annual increase to the bottom line for P&G of hundreds of millions of dollars. Just imagine how many new businesses P&G would have to add to their mix to get the same amount of net impact on the bottom line. Keep in mind that a lot of that new innovation would probably cannibalize other P&G businesses and add to the complexity costs of the company. So these new businesses would have to create even more profits than this to make up for that cannibalization and added complexity costs.

It’s like that popcorn. Rather than trying to add on layer upon layer of new business (unsalted popcorn) to the mix, P&G threw out the salt that was causing the problems in the first place (too much variety, too much overhead, too many platforms, etc.). Getting rid of the salt (bad costs of excessive complexity) got to a good flavor much faster than heaping a lot more popcorn (marginal business) on top of the bloated cost structure. Tossing away can be far more profitable than adding on.

Wilson and Perumal, in their book “Waging War on Complexity Costs” claim that a focus on cutting out complexity can reduce a typical business’ cost structure by 15 to 35%. Can you imagine how much new business innovation would have to occur to create a similar improvement to your profitability?

Pressure to Innovate
Yet the current pressure in the business world is to increase innovation and pump even more new businesses into the company’s bloated product pipeline. Everywhere you look in the business press, one sees the thrust to innovate more and create more lines of business.

Remember, innovation can be very expensive, and about 80% of new business ventures fail. And, as P&G and others have found out, added variety doesn’t necessarily lead to additional net sales. It may just spread the same sales volume across more product lines (causing less volume per line—fewer economies of scale).

Worse yet, new ventures often lead to added overall business complexity, which increases the costs for every product you sell, even the old established ones. So you may be hurting the profitability of the status quo product mix almost as fast as you are adding marginal profits from the incremental variety. In other words, your business mix will still be too salty even though you add a lot of new popcorn to the mix.

Therefore, when you are having your strategy sessions, don’t just focus on ways to grow the top line. Don’t let the current wave of innovation pressure you into seeing additional new product lines as your only strategic option.

Instead, consider spending time strategizing around the benefits of cutting out complexity and redundancy. Look for ways to simplify your processes through standardization. Consider places to eliminate the variety and scope of what you offer. In other words, look for ways to get rid of your excess saltiness.

Yes, this approach can potentially hurt top line growth rates. But, it can make your bottom line skyrocket. And, at the end of the day, if profits are growing wildly, the market will reward you very well.

SUMMARY
When seeking to improve your business performance, don’t just look at strategic options which attempt to increase sales through new product innovation. Instead, consider ways to eliminate marginal businesses and all the needless complexities they bring. Shrinking the business and tossing away the bad can be a quicker and more powerful way to improve profits.

FINAL THOUGHTS
With all the emphasis on the word “innovation”, I figure we need another word to counteract it in the discussion. Innovation comes from the Latin—“in” for “in” and “nova” for “new”. In other words innovation is about bringing something new into the business. But what about the idea of taking something old out of the business? I fiddled around on the internet and invented my own Latin-like word: “eximotraditionalis.” This word means to remove some the stuff you traditionally have been doing. Hopefully, “eximotraditionalis” will become as popular in the business press as “innovation” (but somehow I doubt it).