Strategic Planning Analogy #516: Avoiding Driveways

THE STORY
My wife and I disagree on which types of roads are safer. I think expressways are safer. She thinks city roads are safer.

My logic goes like this: Accidents happen when the unexpected happens (like someone turning off or entering the street) or when change occurs (like a change in speed). By that reasoning, on a city road every driveway, every parking lot entrance/exit, every intersection, every stop sign, every traffic light is a place where an accident can happen, because they are potential sources for the unexpected or change. So, in a few miles of city driving, you may drive past literally thousands of these potentially dangerous locations.

By contrast, on an expressway, I only have to worry about the few cars immediately surrounding me and the rare entrance/exit ramp. That’s a lot fewer potential accident triggers.

My wife’s logic is simpler. The higher the speed, the more dangerous the accident, so drive on slower roads to be safer.

THE ANALOGY
Business strategies can take you on many journeys, including acquisitions, joint ventures, start-ups, brand extensions, new geographies, new customers, and so on. And statistics show that most of these actions end up as failures. There is no safe alternative—acquisitions, joint ventures, start-ups and other business changes all are statistically more likely to fail than succeed.  

It’s like driving when you know that you are more likely to have an accident than not. It’s enough to make one hesitant to get in the car.

But if you don’t get in the car, you will never reach your strategic destination. And because of all the changes in the environment, the status quo will eventually become obsolete. Therefore standing still is not an option, either. It too will eventually be a failure—a horrible accident.

So the business strategy dilemma is similar to the one in the story: What is the safest route to take to avoid terrible accidents?

THE PRINCIPLE
The principle here is that tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. In fact, they statistically increase your risk for failure. Instead of being your salvation, they are merely tools—and dangerous ones at that. To be successful, one needs a strategy for how to use these tools—a path which optimally avoids most of the accidents which often accompany these tools.

So which path should one take:

1. My wife’s approach (go slow in the city to avoid the biggest accidents);
2. My approach (go fast on the expressways which avoid the uncertainties which increase accidents by avoiding driveways and intersections);
3. Or a combination of paths?

Going Slow

Applying my wife’s advice, the answer would be to go slow. In some cases, that is good advice. Remember, the strategic goal is not to be the first to arrive, but the first to succeed. A strong and savvy follower is often more successful than the reckless trailblazer. As the old saying goes in US westerns, it is the advance scout who gets hit with the most arrows.

For example, Coke did not invent diet cola or cola in cans or caffeine-free cola or sports beverages or pretty much any other beverage innovation in the last 50 years. Yet, Coca Cola is a leader or strong player in just about any non-alcoholic beverage segment currently in existence. Why? Coke is a great fast-follower. By building superiority in distribution, points of customer contact and marketing, Coke can overcome the small innovators over the long haul. Coke lets everyone else take all the risks and then—once a successful innovation becomes apparent—they swoop in and eventually take over. They let other, faster people have all the accidents.

There are several effective tools in the “go slow” approach, like stage-gating and real options. The basic idea is to chop up a grand goal into smaller sub-goals. You aim for the nearest sub-goal. Depending on the success of that early effort, you will make changes in subsequent sub-goals or perhaps halt the project completely. This keeps all your accidents small.

A similar approach is doing a lot of beta-testing. Rather than speeding as fast as possible down a path, you pause to consumer-test the concept and make adjustments based upon the tests. Amazon is famous for doing a lot of testing.

However, the “go slow” approach often has its limits. Sometimes, the dynamics of the market do not provide the luxury of going slow. Faster competitors can get too much of a first-mover advantage (not all of us have as much power to overcome as Coke).

And even the “go slow” approach can eventually require big moves into big acquisitions, big joint ventures, big divestitures and the like. So even though you have eliminated some of the potential accidents, there can be many more that the go slow approach cannot avoid. So going slow it may be part of the solution, but it is not the whole answer.

Avoiding Driveways

So that leads to my go fast approach on the expressways. Accidents are minimized on the expressway because many of the causes for accidents are taken away—driveways, intersections, stop signs and traffic lights.

The business equivalent to avoiding driveways is to look at where the inherent risks are in each business tactic and then try to eliminate them. For example, key sources of accidents in joint ventures come from items like divergent objectives, conflicts between core businesses and the joint venture, governance issues, power issues and so on. The more you can eliminate these sources of accidents up front, the fewer the accidents. These are joint venture equivalents to driveways, intersections and stop signs. The more you can specifically eliminate risks in these areas, the less likely your joint venture will have an accident.

Similarly, in acquisitions many of the risks have to do with things like over-evaluating synergies, paying too much, poorly integrating the two companies, dealing with divergent corporate cultures, underestimating negative customer reactions, and so on. If you can eliminate these sources of accidents, your acquisition is more likely to be successful.

The folks at McKinsey did research and discovered that the companies which are most likely to avoid accidents in acquisitions are the ones who do a lot of acquisition and have built core competencies in how to do acquisitions well. In other words, the successful acquirers have enough experience to know where all the driveways and intersections are and have competencies in finding paths to avoid them (their expressways).

So the idea here is to first understand the key sources of risk in whatever tactical tool your choose. Then, take a path of implementation which avoids these sources of risk (Better yet, make understanding and avoiding core competencies of the firm).

For example, don’t even try to do a joint venture with someone who has a radically conflicting strategic agenda. That’s like driving the wrong way on a one-way road. You are just begging for an accident. Instead, take the expressway where that intersection doesn’t even exist.

A Combination

In reality, a combination of the two approaches can often work best. Don’t be so hasty that you take needless risks. Taking time out for stage-gating or beta testing can be very prudent. On the other hand, large, gutsy moves may eventually be required to reach a better tomorrow. Rather than delay them too long, move forward quickly, but smartly by proactively avoiding specific areas which are most likely to increase the risk of a failure/accident.

SUMMARY
Tactics like acquisitions, start-ups, joint ventures, and diversifications are not by themselves the salvation of your company. Instead, they are necessary, but dangerous tools which increase one’s risk of failure if used improperly. To improve one’s likelihood of success with these tools, consider the following:

1. Before rushing full speed ahead, take time to de-risk the overall strategy. Consider additional tools like stage-gating, real options, and beta-testing to make sure your ultimate goal is correct.
2. Consider building competencies which can make you a great fast-follower towards good strategic goals “proven” by riskier firms.
3. When implementing tools like acquisitions to reach the goal, understand the risks inherent to the particular tool. Then specifically address those risks prior to acting, so that those risks can be avoided.
4. Consider building core competencies in handling these tools before using them.

FINAL THOUGHTS
So, in a way, I guess my wife and I are both a bit right in our approaches to safe driving.

Strategic Planning Analogy #509: High Occupancy Vehicles

THE STORY

To help alleviate pollution, congestion and speed up traffic, some urban areas have put HOV lanes on their highways. HOV stands for High Occupancy Vehicles and is typically defined as a car having at least two people in it.  The HOV lanes usually only allow high occupancy cars and other efficient vehicles, like buses.

Because about 75 to 85% of workers commute by driving alone in their car, most commuters cannot legally take advantage of the HOV lanes. As a result, the HOV lanes are less congested and move along faster. Seeing the HOV cars moving faster makes some of those driving alone try to find ways to cheat in order to get into the HOV lanes.

One way used to cheat is to put a mannequin or a life-size blow-up doll in the passenger seat. For example, in 2010, a 61 year old woman put a mannequin in the passenger seat so she could ride in the HOV lane in New York. Unfortunately for the woman it was a cloudy day, and the hat and sunglasses on the mannequin looked out of place to a highway officer. The woman ended up having to pay a $135 fine and had two points taken off her license.

THE ANALOGY

We live in a business environment which has been described as faster than any time in history and getting even faster. Businesses feel the pressure to move ever faster or die. To a large extent, speed has become the default universal strategy.

One way businesses try to increase speed is by unburdening themselves of as much as possible. Management is eliminated, rules are eliminated, and strategic planning is eliminated—all in the cause for speed.

The elimination of strategic planning is justified with reasons like “We don’t have time to waste on that” or “Things move too fast to plan anything long-term” or “All we have to do is release the next version of our product before the competition—you don’t need strategic planning for that.”

The problem is that the business world is more like those HOV lanes than these people realize. All this unburdening is making businesses look more like those single person cars—going it alone. And since nearly everyone is taking this same approach, they are all crammed into the slower lanes.

Ironically, the faster HOV lane is the one where cars are “burdened” with extra passengers. And, as we will see in this blog, if companies load up their “car” with extra passengers like strategic planning, they will have access to the faster lane and get to their destination more quickly.

THE PRINCIPLE

The principle here is that the proper use of strategic planning does not slow a company down, but actually puts a company on a faster path. So instead of dropping strategic planning in the name of speed, we should be adding it to our “car”. Described below are three reasons why adding strategic planning gets you into the HOV lane of business.

1) Strategic Planning Improves Speed Via Focus

A focused company can move faster than an unfocused company, and strategy improves focus. Lack of focus leads to anarchy and confusion. You can yell at an unfocused company to “Move Faster!” all you want, and all you get is faster anarchy and faster confusion. Everyone is moving in random directions rather than making forward progress. Faster randomness is not improved progress.

Strategic Planning, when used properly, is a way to provide a business with focus. Not only can it tell a business what are the right things to work on; more importantly, it can tell a company what are the wrong things to work on. Strategic planning simplifies the agenda by taking a lot of options off the table (the things that are off-strategy). All the time-wasting rabbit trails are eliminated before they begin.

With a strong, focused strategy, you don’t have to waste time in endless meetings continually asking yourselves “should we be doing this or something else?” Instead, you can speed things up by focusing on how to improve on the things everyone already knows are important to the strategy.

Look at Apple. Under Jobs, Apple did not go in all directions trying to do everything as quickly as possible. Jobs had a specific strategy in mind as to what Apple would focus on. It had to do with designs that emphasized quality, elegance, coolness, and user-friendliness, made possible by focusing on building closed end-to-end systems. It became obvious what was appropriate for Apple to be doing and what was not.

The “not” list for Apple under Jobs was large. They did not work on low price products, or products not tied to the larger closed system. They did not even work on manufacturing. This allowed Apple to become very focused and quickly build a whole new digital future.

2) Strategic Planning Improves Speed By Overcoming the Leapfrog Trap

When speed alone becomes the substitute for strategy, a company is no longer building unique competitive advantages or competencies (except maybe the competency of speed). All they are doing is racing everyone else to be the first to release the next new improvement to the status quo. This is very common in areas like consumer electronics & digital media, and becoming more common elsewhere.

This process leads to what I call the leapfrog trap. Any small success gained by getting to the next improvement first is lost when a competitor leapfrogs you and gets to the improvement which follows before you. Gains are short and fleeting, since others are racing to leapfrog your most recent advancement as soon as they can.

Here is the crux of the problem. Because everyone is focusing on the same thing (speed), nobody is creating a competitive advantage. All the companies look about the same, with the same types of engineers in the same types of culture working on the same types of issues. You cannot create a lasting advantage in this scenario because you bring no real competitive advantage to the marketplace. Others can copy you almost immediately because they have a similar business approach with similar tools at their disposal.

By contrast, a true strategy builds differential advantages which allow a business to do certain things better than others. Rather than playing the same game of leapfrog with everyone else, you go your own way and build a different game where you have an edge and are not so easily copied. This leads to the third point below.

3) Strategic Planning Improves Speed Through Business Model Superiority

Great strategies understand the importance of making trade-offs. They don’t try to do everything well. They understand that:

a)     There are not enough resources to do everything well; and

b)     Even if there were enough resources, it is still not possible to win on all fronts because of conflicting agendas. For example, it is nearly impossible to win at lowest price AND highest quality AND most innovation at the same time, because what it takes to win in one of these areas makes it harder to win in the others.

Therefore, great strategies choose what to specialize in and make all the proper tradeoffs to win there, even if it means giving up abilities in places outside their specialty. Take, for example, Southwest Airlines in the US. For decades, they have had both consistently lower prices than their competitors as well as consistently higher profits. Why? Southwest Airlines built a business model to specialize in lowering costs. This caused many trade-offs, where Southwest didn’t do things everyone else did if it got in the way of the low cost strategy.

When other airlines tried to copy Southwest’s pricing, they did not achieve Southwest’s higher profits, but made their profits even worse. Why? Because their business models were not laser-focused on making enough tradeoffs to pay for the lower prices.

When all you look at is speed, you take your eyes off building the right trade-offs in your business model to allow real differential advantage. If the business model does not provide an edge, then you cannot quickly build a place where you can win. You are stuck in the leapfrog trap.

SUMMARY

Ironically, the singular drive for speed does not usually end up putting a business on the fastest track to lasting success. Instead, the faster track also needs to include a drive for great strategy. The addition of strategy improves speed by:

a)     Adding Focus (on what to do and what NOT to do);

b)     Adding Differentiation (to avoid leapfrog trap); and

c)     Adding a Trade-off Based Business Model Design (which makes it harder for others to copy you).

These additions allow you to take a superior path that speed-only businesses cannot get on.

FINAL THOUGHTS

There’s a reason why mannequins are referred to as “dummies.” And if you think you can sneak onto the fast lane without real strategy in the passenger seat, then that mannequin may not be the only dummy in your car.

Strategic Planning Analogy #502: Judo Strategy

THE STORY

Recently, the Quora question and answer site tackled the question of what was the shrewdest business move ever. One of the most voted on answers to the question, as reported by Inc magazine, was this:

"Herbert Dow founded Dow Chemical in 1895, and invented a way to cheaply produce the industrial chemical bromine in Midland, Michigan. He sold the chemical for 36 cents per pound throughout the United States—but couldn't expand overseas as the international chemical market was dominated by an incumbent company from Germany. A gentleman's agreement at the time dictated that the German company wouldn't encroach on the U.S. market as long as Dow didn't try to muscle in on chemical sales in Europe.

"However, by 1904, Dow's business was struggling and he needed to expand. So he began selling bromine in England and quickly cut down the German competition—which sold its product at the fixed rate of 49 cents per pound. Outraged, the Germans began flooding the U.S. market with even cheaper bromine, on the order of 15 cents per pound, in an attempt to put Dow out of business.

"That's when Dow got crafty.

"He stopped selling his product in the U.S. altogether—and began buying up the German-made bromine. Then he repackaged it, sent it back to Europe, and began selling it as his own—for 22 cents less than the Germans did. The Germans couldn't figure out why Dow wasn't going out of business—or why there was such a high demand for German bromide in the U.S.—so they just kept lowering their prices to 12 cents, then 10 cents. By the time they caught on, Dow had broken the German monopoly in Europe and forced it to lower prices on its home turf. Ouch."

THE ANALOGY

Companies can spend a lot of time trying to convince the competition to stop doing something. This effort is often futile, because:

1)     It is hard enough to get your own company to change, let alone a competitor.

2)     The normal reason you want to change a competitor’s behavior is because it is effectively hurting your business. Why would a competitor want to stop effective behavior?

When Dow was attacked in the story, it did not try to stop the competitor’s behavior. Instead, Dow let the competitor’s behavior continue and used their activity against them.

When designing your strategy, keep this story of Dow in mind. Instead of looking internally for a way to get an advantage over competition, look for ways to use your competitor’s strategy as a means of gaining an advantage.

THE PRINCIPLE

The principle here is based on the concept of Judo. In judo, one can defeat a stronger opponent by using the opponent’s power against them. Dow, in the story above, used strategic judo to defeat its opponent. Dow took the power of the opponent’s price war in the US to create a price advantage in Europe. Using judo to describe strategy is not a new concept. Back in 2001, David B. Yoffie and Mary Kwak published a book entitled Judo Strategy.

In this book, Yoffie and Kwak discussed how to use Judo Strategy to defeat your enemy. I’ve summarized it below.

Judo Strategy #1: Movement

The first judo strategy principle is called “movement.” The idea here is that big, strong companies tend to have a lot of power, but usually not a lot of speed. They tend to choke on their huge bureaucracies, creating slow reaction. In addition, they got big and powerful due to following the rules of the status quo. Therefore, they are slow to want to deviate from the status quo.

As a result, a smaller, weaker company can beat a larger, stronger company by taking advantage of the opponent’s slowness. They can outmaneuver the opponent through faster movement.

Faster, superior movement tends to work like this. First, don’t stand still and directly attack the opponent under the rules of the status quo. This invites the stronger player to retaliate when they have the advantage. Instead, move the battle to a different competitive space where the rules of the status quo give no advantage. Third, move quickly to build a powerful position in the new space so that you can become stronger player under the new rules.

An example used by Yoffie and Kwak of this “movement” judo strategy was Quickbooks in accounting software. Quickbooks was late to market and battling against huge, established software firms (like Microsoft) with much larger budgets and staffs.

The status quo rules for success in the accounting software space were to:

a)     Provide as many features as possible (the more, the better);

b)     Use traditional accounting terminology and processes.

Quickbooks avoided the status quo and produced its product under a new set of rules:

a)     Focused on doing the few, most common features in a superior (faster, easier) way.

b)     Avoided accounting references and made it easy to use by non-accountants.

This new space gave Quickbooks an advantage. By the time the big, slow incumbents figured out what Quickbooks had done, Quickbooks had quickly taken over 70% market share in the space and put most of the former leaders out of the business.

Judo Strategy #2: Balance and Leverage

The second principle has to do with balance and leverage. The idea is to keep your own balance while getting the competition off-balance. Counter-intuitively, the worst way to keep one’s balance is by directly resisting attack by a stronger competitor. In other words, if they push, don’t push back. Resistance at the point of attack is like arm wrestling—the strongest wins. If you are not the strongest, this approach is folly.

Instead, if they push, you pull. Or if they pull, you push. That way, you are doubling their force. And if you use proper leverage, you can direct that doubled force in a way which puts the opponent at a severe disadvantage. That is how tiny judo experts can flip to the mat a much larger and stronger opponent. The tiny one uses the opponent’s force to make the opponent lose their balance and then uses leverage to direct them to the ground.

In business, this means not directly retaliating in a price war or feature war or product war. Instead, help the opponent waste all of their resources in the attack and use the weakness which comes from that huge investment by the attacker. This is what Dow did in the opening story. They didn’t react to the price drop in the US to create a deadly price war. Instead, they stopped selling in the US and encouraged the competitor to continue their attack (pulling when pushed). This pulled the opponent off balance in Europe, where Dow used the goods they purchased in the US at a subsidized rate from the opposition to profitably undercut them in Europe.

In another example, one of Coke’s biggest strengths in the mid-20^th century was its huge network of independent bottlers. This gave Coke a big advantage in the distribution of cola in 7.5 ounce bottles. Pepsi did not respond product for product, but responded by doing something different—offering 12 ounce bottles for the same price as Coke’s 7.5 ounce bottles.

Coke was now off balance. First, the independent bottlers did not want to write-off their huge investment in equipment to handle the small bottles. Second, because the bottlers were independent, Coke was having a hard time coordinating a quick national response. Pepsi had turned Coke’s big asset into a disadvantage and quickly gained a huge jump in market share.

SUMMARY

The principles of Judo can help small companies gain an advantage over stronger competitors. The idea is to avoid head-to-head confrontations in places where the competitor is strongest. Instead, use speed to move the battle where the stronger opponent is weak/vulnerable and then use their own power against them to get the stronger player off balance and vulnerable.

FINAL THOUGHTS

In the strategic exercise known as SWOT, strategists label various things as being either a strength or a weakness. This is done both for their own company and for the competitors. However, as we can see with the principles of judo, weaknesses can be turned into strengths and vice versa. Therefore, be careful when permanently labeling something a strength or a weakness. It may only appear that way because you haven’t yet found a way to use strategic judo to flip it to the other side. The mere exercise of labeling may blind you from seeing a more superior—judo-based—approach.

Strategic Planning Analogy #490: The Indirect Route

THE STORY

One time, I was in Chicago on a business trip with some of my co-workers. It was a nice day and we had some time on our hands, so we decided to walk to the convention center, which was only a couple of miles away.

We looked at a map and found a simple, direct street to walk down. It looked easy. What the map didn’t show was the types of neighborhoods we’d be walking through. As it turns out, that direct route took us through a pretty dangerous section of Chicago. As we kept walking, the neighborhood kept getting worse.

My co-workers were starting to fear for their lives. Having grown up in the Detroit area, I was used to bad neighborhoods, but eventually even I was getting fearful.

We saw a taxi drive by and quickly got it to stop for us. Little did we know that we had almost completed our journey by then and the taxi only took us a few blocks to get to our destination.

THE ANALOGY

Had we been more aware of our environment, we would not have chosen that route to walk. Yes, it may have been the most direct, the most efficient, and the fastest route. But it was not the safest route. We needlessly put our lives in danger. It would have been better off choosing a slower, more indirect path that was far safer.

Strategic planning is also about choosing a path—a path into the future. On first glance, it may appear that the best strategic path is the direct route. After all, the shortest distance between two points is a straight line, so the strategic path is drawn as a straight line between where we are now and where we want to be. That type of thinking sounds practical, efficient, and speedy.

Unfortunately, it can also be wrong. The most direct route is not always the safest route. It may lead you into a mine field of difficulties.  The danger could be so great that it destroys the ability for the strategy to succeed.  It does no good to be faster and more efficient if you end up dying before reaching the destination.

No, sometimes the best path is longer and less direct. These paths can be safer and increase the likelihood of ultimate success. 

THE PRINCIPLE

Although we live in an era which emphasizes speed, we need to remember that speed is not the ultimate goal.  The real goal is success. And sometimes the fastest path is not the best path for ensuring success. Therefore, when choosing a strategic path, do not automatically choose the fastest, most direct approach.

The Disadvantage of Bold Moves

There are several reasons why the direct approach can be less effective. First, it tends to loudly notify to the world (and to your competitors) what your intentions are. That can cause those opposing your strategy to wake up and fight you hard to prevent that path. Remember, almost every winning strategy causes someone else to lose. If those who are about to lose find out your intentions, they will try to keep you from winning. 

However, if you act more slowly and less directly, the opposition may not detect the threat as being as imminent or as devastating as it is. Therefore, they may put up less of a fuss in trying to stop you. By the time they figure it out, it may be too late for them to stop you.

Take, for example, Wal-Mart’s desire to be a significant player in banking. Wal-Mart first tried a very direct and fast approach to this strategic intent. Back in 1999, they applied for the right to buy a bank in Oklahoma.

This bold action quickly awakened the status quo banking industry to the threat posed by Wal-Mart. The banking industry immediately did everything in its power to influence the government to stop Wal-Mart from getting that bank. Congress was inundated by whatever forces the banking industry could bring to bear to stop Wal-Mart from ever buying a bank. And it worked. Wal-Mart could not buy a bank.

A few years later, in 2002, Wal-Mart tried again by attempting to buy an ILC (Industrial Loan Company), which is a step lower than a full-fledged bank. That also failed.

At this point, Wal-Mart tried a different tactic—the indirect route. Slowly, Wal-Mart started forming alliances with companies performing banking services. Since Wal-Mart did not own these businesses and since the partners were already allowed to be in these businesses, they would be difficult to stop. Also, because Wal-Mart added these pieces slowly in small chunks, no single act was large enough to get the industry in an uproar.

For example, Wal-Mart did deals with Moneygram and Sun Trust Bank for services like wire transfers, money orders and check cashing. It did a deal with Green Dot to create the Walmart Money Card, a reloadable prepaid card. And most recently, Wal-Mart worked with American Express to develop the Bluebird Card, a more aggressive move into the prepaid card business. 

Slowly, Wal-Mart is putting together a powerful financial offering, branded together in the store as Walmart Financial Services. It is to the point now where Walmart’s website has claimed them to be “a trusted name in financial services.” The slower, indirect path is working far better for Walmart than their earlier, more direct approach.

   

The Disadvantage of Out-Pacing Your Stakeholders

Another problem with moving too quickly is that you can move faster than your stakeholders are willing to go. No strategy works in isolation. Success depends on getting alignment with all sorts of other stakeholders, like your customers, your regulators, your suppliers, etc. If you get to far ahead of your partners, the strategy can fail.

For example, when McDonald’s wants to enter a new geographic area with restaurants, it does not just get some real estate and put up restaurants. That could be too fast for its suppliers. McDonald’s wants to guarantee that the burgers worldwide come from similar beef and the french fries come from similar potatoes. Therefore, it takes the slower, more indirect route of first working with farmers and distributors to make sure the right kinds of cows and potatoes in the right quantity are in the pipeline so that the stores have the right stuff to sell.

And in the Walmart example above, if Walmart had advanced directly from nothing into full-service banking in one step, it might have been too much for customers to accept. By moving slowly, Walmart has been able to move consumer perceptions along to allow them to accept getting financial services from a discount store.

One of the more interesting examples, however, is in the online poker business. Online poker sites can be extremely profitable for the companies who run them. However, the US government was banning the sites because on-line gambling is illegal in the US. The on-line sites could have directly tried to fight this, but they knew they would fail. So they took an indirect route.

A few years back, I remember all of the sudden seeing poker championship games being broadcast all over the place on cable TV in the US. Why the sudden surge in broadcasting Poker Tournaments, I wondered.

Well, here’s the story. The online poker people wanted to change the perception of poker from being a form of gambling to being a game of skill. That is because on-line gambling is defined as being a game of luck, which is illegal in the US. But games of skill are not considered gambling. 

What better way to convince people that Poker is a game of skill than to broadcast it like a sporting event on sports cable networks? The shows created poker winners who were becoming famous like athletes for their skilled plays. They had announcers on the show talking about the skilled plays being used by these skilled players.  

Slowly, but surely, perceptions were being changed. Poker was no longer just viewed as distasteful gambling hidden away in dark places. Now it was a skilled sporting event out in the wide open lights. Over time, this approach should be far more successful than the direct approach for the on-line poker companies.

SUMMARY

A key part of strategic planning is developing the proper path to get from where a company is today to where it wants to be. Due to the desire to move quickly, many firms try to build direct paths to the desired future. However, direct paths can be fraught with dangers large enough to prevent success. As a result, it is often the slower, less direct approach which has the greater likelihood of success.

FINAL THOUGHTS

If you go online to choose a path to drive your car to your destination, the software often asks you which type of path you want: the most direct, the fastest, the one using the most highway, the one using the least highway, etc.  In other words, the software recognizes that the fastest path is not always the path you desire. If software can recognize that, then so should strategists. Check out other options which may lead increasing your chance of success.

Emergent Vs. Positioning (Part 2)

 

INTRODUCTION
In the last blog, we looked at a comparison between the Emergent view of strategy and the Positioning view.  I explained why I prefer the positioning view.  In today’s blog (part 2), I will explain why I think the emergent point of view also makes some good points and how to incorporate them into a positioning framework to get the best of both worlds.

 

POINT #1: SUSTAINABLE COMPETITIVE ADVANTAGE

The Issue

The emergent position brings up two good issues.  The first has to do with sustainable competitive advantage.  The positioning school tries to find positions which provide sustainable competitive advantages.  The emergents respond that sustainable competitive advantages are becoming increasingly more difficult to create, so finding those types of positions can be a more futile undertaking.

First is the “sustainability” part of the phrase.  In a seemingly ever faster changing environment, very little appears sustainable.  So if change is constant, why seek sustainability? 

Then there is the “competitive advantage” portion of the phrase.  With rapid change comes frequent upgrades and frequent obsolescence.  It makes any advantage very temporary.  It is like a ping pong game, where the ball keeps bouncing from one side to the next—first side A has the advantage and then side B has the advantage, then side A regains the advantage, and so on.  So instead of trying to achieve lasting advantage, emergents just try to stay in the game by responding with their ping pong paddle in a way to keep the game alive.

The Solution

Is this phenomenon a concern?  Yes.  Is the problem as dire as the emergents believe?  I don’t think so.  First of all, this is not the first time rapid change has occurred in business.  We’ve gone through the industrial revolution, the widespread adoption of electricity, the movement to a knowledge-based economy, and so on.  Yes, there is some turmoil during the transition, but companies with a good strategy find a way to make it through the transition.

The solution is to change the focus of where one looks for advantage.  Even when many things are changing, many others stay the same.  In particular, when products and technologies are changing rapidly, basic human needs and desires still stay the same.   There is always a segment wanting low prices.  There is always a segment wanting status.  There is always a segment wanting convenience.  There is always a need to feel loved or appreciated.

Now the means by which these constants are achieved may change.  The core solutions do not.  So the solution is to find positions which are not tied to particular products, but to enduring solutions.  For example, Wal-Mart positioned itself around the enduring solution of offering low prices.  Now the way it has done this has changed.  It started as a discount store.  When it looked like wholesale clubs could provide lower prices, they opened up Sam’s Club.  When it looked like supercenters could provide lower prices, they aggressively replaced discount stores with supercenters.  When it appeared that building a more sustainable and eco-friendly supply chain could lower costs and prices, Walmart aggressively went in that direction. 

The point is that Walmart’s low price position gave them an anchor.  As the world was changing around them, they did not panic.  They just kept migrating to wherever that position could be best met.  And through that singular focus, they were able to reinforce that position with the customers and become continually stronger.

Bausch & Lomb was in the lens business, but they focused their position on the end solution—better sight.  As a result, they migrated in to contacts, eye surgery equipment and eye enhancing vitamins.  Yes, the product changed radically, but because of their focus, they knew what had to be done to stay relevant.  They found a place where they could differentiate and win.

Apple keeps changing their offering, but each offering is true to their position of selling cool, easy to use interfaces between people and their data.

Without these positioning anchors, the myriad of strategic choices would overwhelm a company.  You cannot do it all.  You have to focus.  You have to make trade-offs.  And these enduring positions help light a path within the confusion of change.  In fact, they can help you better anticipate where to go, due to that focus.  Without it, you are always trying to catch-up to whatever looks hot today.  And by the time you match it, the world has moved on to the next hot item.  You never get ahead that way.

Another positioning approach to take is to create a position around speed and flexibility.  The emergent view is to always be racing to keep pace with change.  If speed and flexibility are so important in a rapidly changing environment, wouldn’t building excellence around speed and flexibility be a great position?   Build your positioning trade-offs around speed and flexibility, so that you become faster and more flexible than those who do not make those trade-offs.  This position actually makes rapid change an advantage for your position.

 

POINT #2: LOSS OF CONTROL

The Issue

The second key point emergents make is that businesses are losing control of the interaction with their customers.  The power is shifting to the consumer.  Social media and web 2.0 have given the consumer more of a voice.  They are having a greater say in how products are designed and marketed. 

If consumers are gaining a greater control over the conversation, then emergents would say that consumers are gaining greater control over a company’s position.  If that is the case, then a company can no longer rely on managing its business by managing its position.  Instead, a company needs to chase where the consumer conversation is going and whatever emerges from that is the strategy.

The Solution

Well, this is true to a point.   And that point ends when you shift from incremental strategy to transformational strategy.  Consumers can be great critics of the status quo.  They can tell you what is wrong with a product and how to incrementally make it better.   However, they tend to be quite bad at voicing opinions about transformational issues which go beyond what the consumer has experienced. 

This is because a) most consumers are too busy living their current lives to spend time dreaming up all the particulars around the business model for the next big thing; and b) if they have no experience to relate to, then they have trouble getting their arms around it and give an accurate assessment.

That is why Henry Ford supposedly said, “If I’d asked my customers what they wanted they would have asked for a faster horse.”

That is why Steve Jobs supposedly said, “You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new.”  And when commenting on what kind of consumer research Apple did for the iPad, Jobs said, “None. It is not the consumers’ job to know what they want.”

So if you want to remain in an approach to strategy which is only incremental, then perhaps the idea of following the customer makes sense.  But if you want to transform the world like Henry Ford or Steve Jobs, it would seem that following the customer is a poor choice.  Instead, you still need to lead the customer and be pro-active in what you do.  And if the world is moving as fast and creating as much obsolescence as the emergents proclaim, then I think the transformation approach is even more important.  And that means that significant control is still in the hands of the successful companies.

 

SUMMARY

The emergents make some good points, but not enough to get me to abandon the positioning perspective.  Instead, I just altered the positioning perspective slightly to accommodate the concerns.  You can see them in the chart nearby.  For the concern of the world changing too quickly, I suggest either shifting positions to timeless solutions or to speed & flexibility solutions.  For the concern of losing control, I suggest focusing more on transformations, where control is still strong.

 

FINAL THOUGHTS
Although there is good and bad in both points of view, that does not give an excuse to abandon all approaches to strategy.  It is still worth doing.

Strategic Planning Analogy #437: Eliminate Stop Signs

THE STORY
Shortly after receiving my driver’s license, I caused an accident. As a result, I had to go to traffic court.

In the case prior to mine, a lady was accused of refusing to obey a stop sign. She pleaded not guilty. Her defense was that she indeed made a quick stop at the stop sign before proceeding.

The court then pointed out that immediately after her “stop”, she drove into oncoming traffic and caused an accident.

The judge asked her if she looked both ways to see if it was clear before proceeding from the stop. She said no. She just stopped as the sign required and immediately drove ahead, never taking the time to see if it was okay to proceed.

Although she technically stopped, the judge found her guilty.

THE ANALOGY
We live in a fast-paced world. Like the lady in traffic court, we don’t want to waste a lot of time stopping. We want to just rush down the road. As a result, stop signs do not always get the respect they deserve.

Many executives see strategic planning as similar to those stop signs. Strategists are the people seen as always saying “Stop!” They’re always talking about being at a strategic crossroad, where we need to stop and determine which path to take. Either that, or strategists are seen as the ones who want to slow down the day-to-day decisions by forcing people to take the time to first examine the long-term implications of that decision.

Out of courtesy, these executives may momentarily give a token nod to strategy. But like the lady in traffic court, they immediately resume their fast pace. And because they did not take the time to carefully examine the ramifications of their actions, these executives cause a corporate accident.

As long as strategists are viewed as stop signs, they will not get the respect they deserve…and those accidents will occur. To gain respect, and reduce the accidents, I suggest that strategists reposition themselves as expressway builders—the ones helping you to avoid stop signs.

THE PRINCIPLE
The principle here has to do with speed. Companies want to move quickly. If you are viewed as something which slows a company down, then you are not seen favorably. However, if you viewed as one who helps the company move faster, then your image and stature improves.

Bad Assumptions About Strategic Planning
Therefore, if strategists want to make a major impact on a corporation, it helps if they are viewed as an area which helps companies move faster. However, the current image of strategy is often the opposite. The negative rap against strategy in this area usually goes something like this:

1) Building long-term strategies takes a lot of time.

2) The world is moving too fast and too unpredictably.

3) As a result of rapid change, long term plans are almost immediately obsolete (so you have to waste a lot of time constantly updating them).

4) As a result of unpredictability, you have to go with your gut and seize the opportunity of the moment. If you waste a lot of time in strategic analysis, you’ll miss out on that short window of opportunity.

5) Therefore, strategy should not be taken very seriously. It’s a bad stop sign that you want to drive through.

Good Assumptions About Strategic Planning
However, I believe this point of view can be rejected and replaced by one where strategists are seen as one’s allies in maintaining speed. The replacement line of reasoning would go something like this.

1) The world is moving fast and unpredictably.

2) The faster and more unpredictable the world is, the more often one has to adjust. The number of decisions to be made increases dramatically. Every street you drive by is potentially an opportunity to change course in a world of rapid change.

3) In the absence of context, thousands of people making thousands of rapid decisions leads to chaos. Precious time is wasted because the company is not unified and moving together down the same path.

4) Without a map, every road looks about the same. It takes longer to decide which road to take at every intersection if you have no guidance about which roads are better.

5) Strategic planning can fix all these problems by providing the context and the map. All of those decisions are easier and faster to make when you have a strategic context. The context help people focus on what is most important. They help a company understand what their winning formula is. This makes all those decisions easier. All you have to do is move in the direction which reinforces the context.

6) With a roadmap to the future, every path is not treated equally. There is a preferred path. You only need to deviate on rare occasions. If you use strategic planning to debate the whole path upfront once, you save a lot of wasted time debating what to do at every single intersection.

7) Without the context and the map, you are always reacting to what is going on around you. You are a follower, not a leader. Followers have to keep adjusting to all the changes in the rules set by the leaders. By contrast, if you are the leader setting the rules, then you are less subjected to the world around you. Instead of wasting time adjusting to the world, the world is wasting time trying to adjust to you.

As Peter Drucker put it, “The best way to predict the future is to create the future.” Building a strategy to create the future allows you to move forward quickly because you don’t waste as much time predicting or reacting.

Example: Apple
Apple has moved very quickly in a very fast paced part of the economy. My contention is that their success in moving quickly has a lot to do with their having a solid context and roadmap.

Everyone at Apple understands the context. They are to develop cool, elegant, intuitive, seamless systems in the consumer electronics space. By understanding that context, decision making could be made easier and faster. Whenever a decision needed to be made, the answer was to move in the direction which made things cooler, more elegant, more intuitive, or more seamless. And these decisions applied to the whole system—the hardware, the software, the content, the partners, the selling environment.

This context became the non-negotiable winning position for Apple. The time for debate was over. Now all the energy could be focused on moving forward to bring it alive.

The roadmap was also fairly clear. The idea was to build closed systems around aspects of a cool lifestyle. As time passed, the complexity of those systems would increase, but the intuitive elegance would remain. First music, then mobile, then pads, then clouds. Ever more useful, ever more portable, ever more powerful.

By knowing the roadmap, Apple could focus on great execution (instead of endless arguing on what to execute). They were able to take the lead and set the rules everyone else had to follow. By making the rules, they were not victims of the rules. They could move quickly by acting, rather than reacting.

Building Expressways
If strategic planners help companies develop their context and roadmaps, then they are actually eliminating stop signs. The road filled with stop signs is replaced by an expressway which has no stop signs. All of those little time-consuming decisions at each intersection can be sped by, because you already have the big decisions made (through strategic planning). The big decisions help to quickly point out the way to resolve the little decisions (go in the direction of the big decision).

If you can convince management that doing strategic planning actually saves time by getting you off the back roads an onto an expressway, then you will be able to positively influence a company and help steer them away from strategic accidents.

SUMMARY
In a rapidly changing world, strategic planning does not become obsolete. Instead, it becomes even more critical. It provides the context and the roadmap, so that you can more easily and more quickly determine which path to take amongst all that change.

FINAL THOUGHTS
Are you focusing your efforts on things which make it easier to deal with change or harder to deal with change? The answer to this question will help determine your status and power within the organization.

Strategic Planning Analogy #429: Musical Chairs

THE STORY
When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

THE ANALOGY
The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

THE PRINCIPLE
The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

SUMMARY
Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

FINAL THOUGHTS
Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Bad Strategic Planning Doesn’t Always Work

ARTICLE IN WSJ
Today’s Wall Street Journal (Jan. 25, 2010) ran an article entitled “Strategic Plans Lose Favor.” In the opening paragraph, the authors claimed that “executives discovered that strategic planning doesn’t always work.” The article then goes on to explain some of the “strategic planning” that didn’t work. After reading the article, I would like to rephrase that quote to read “executives discovered that bad strategic planning doesn’t always work.”

Strategic Planning has an image problem. If I understand this article correctly, many executives have a vision of strategic planning as being like a rigid straightjacket—something that cannot be taken off or readjusted for one to five years. The straightjacket tends to consist primarily of a set of financial assumptions and other numeric data which get frozen in time and only get reassessed at on an annual basis.

The article uses words like “distant calendars,” “rigid forecasts”, “inflexible method,” and “static five-year strategic plans.”

Naturally, if this is one’s view of strategic planning, then I can understand why you might say that strategic planning did not work during the recession. Who wants to be strapped into a straightjacket when they are drowning in the depths of a recession? Even Houdini knew that if you want to escape the drowning, you have to get out of the straightjacket.

As long as strategic planning is viewed as a straightjacket, executives will be weary of putting it on. That image needs to be changed. Instead, we need to portray strategic planning as being more like putting on running shoes that help us outrun the competition in the race to the future.

The emphasis has to shift from focusing on numbers, books and annual meetings. This is an obsolete mindset. Instead, the focus needs to be on positions, paths, points on a compass, and points of inflection.

1. Position
Just because a straightjacket is too confining does not mean that we should abandon all restrictions on movement. Random motion never leads to forward progress. Moving in all directions at once is about the same as moving in no direction at all.

Therefore, one needs to choose a basic direction for the company—which I call a position. A position explains why your business has a right to exist in the marketplace and why a certain customer segment would prefer it. It is the place where you win.

It may be a position based in price, or service, or quality, or durability, or fun, or rebellion, or convenience, or variety, or personalization, or taste, or status, or coolness, or whatever. The point is that trying to be all things to all people at all times will fail. You need to find your position in the world and make the proper trade-offs so that you can be the best and win there.

Sure, the environment ebbs and flows over time. But unless you anchor yourself to a position, that ebb and flow will toss you about until you are totally adrift and lost at sea (or at least your consumers will be lost regarding what you stand for). If you are a status brand like Gucci, you cannot suddenly become a leading low price bargain brand in the recession and then try to regain the status image again when the recession is over. Sure, you may bob a bit and adjust to more of the starting price points in your mix during a recession, but a luxury status brand needs to stay true to its position or it will destroy its reason for existence.

Positioning not only tells you who you are, but who you are not. This narrowing of options allows you to be faster and more adaptive to a changing environment, because you do not have to totally reinvent the wheel with every decision. It becomes your running shoes, helping you to move faster, because the decision-making becomes more obvious—go in the direction which is consistent with your position.

Strategic planning’s new role is to help get everyone on board as to what your position is (or should become) and what it means for everyday decision-making. It needs to be there at the decision making table every day—not just once a year—so that the tyranny of the immediate crisis does not lead to random decisions which set a company adrift.

If you want to learn more on positioning, I’ve written quite a few blogs on the topic. Just search the blog for positioning, or click on “positioning” on the topic list to the right of my blog.

2. Points on a Compass
If you want to win a race, it helps to know where the finish line is. Your position will help determine where your finish line should be (not all companies have the same finish line as we discussed in an earlier blog). For example, if your position is based on superior innovation, then your finish line is in the direction of creativity, R&D and any other way to accelerate innovation. That is the direction on the compass you follow. You would not follow the direction of excessive cost-cutting and imitating the competition. That is a totally different compass point that will probably destroy your position.

So strategic planning helps you find your direction on the compass—“Go West!”—where the direction is defined as the path that gets you more strongly positioned to win.

Now in the past, strategic plans may have tried to dictate the exact route of that path, with minute detail on precisely what gets done at what time (that straightjacket idea). However, the new approach is to focus on the general direction on the compass (go West) rather than the exact path.

This new approach improves your speed and agility. For example, if the path you are on runs into an obstacle, like a tree or a mountain, the old approach might have been to stop and cut down the tree or dig a tunnel through the mountain (got to stay true to the path of master plan, even if the tree wasn’t in the plan). However, under the new approach, the idea is to just push west. If a tree or a mountain is in your way, look for an easy way around it. As long as you are generally still moving west, you are okay.

Therefore, the role of strategic planning is to be there for everyday decisions to ensure that these little detours due to the obstacles in the current environment don’t derail the strategy and that they are generally still pointing the company in the right compass direction (or to get it back on track after the detour).

3. Points of Inflection
Every once in awhile, the environment changes so dramatically that “all bets are off” on the old strategy. For example, the rise of the internet and firms like Expedia and Orbitz necessitated new strategies for travel agents. The move from analog to digital made many strategies for analog companies obsolete. The big recession has made some lasting changes in attitude for some people and how the buy.

These mammoth changes to the status quo are called inflection points. An inflection point is when a curved line changes its trajectory. “Destiny” has taken a new direction, and it is highly likely that your strategy needs a new direction as well.

These typically don’t happen all that frequently. However, when they happen, you need to be prepared to act quickly to take advantage of the change (rather than be defeated by it).

One of the key roles of strategic planning is to monitor trends to find those early warning signs (trigger points) that an inflection point is near. In addition, strategic planning has a role in preparing the company for the change, so they can act quickly and decisively when the time is right. Again, this process helps the company move faster when times change, like putting on those running shoes.

For more information on inflection points, see my earlier blog.

SUMMARY
If you think of strategic planning as a rigid straightjacket, then you have an outdated and not very useful tool. However, if you think of it more like running shoes, then it will be a very relevant and useful tool. Running shoes focus on positioning, compass direction, and inflection points.

FINAL THOUGHTS
The race is not always won by the fastest runner, but the runner who knows the fastest path to the finish line. Don’t abandon all planning to run wildly in all directions. Take a little planning time first to orient yourself towards the finish line.

Analogy #194: A Bigger Better

THE STORY

Once upon a time, there were two small neighboring kingdoms: the Kingdom of Lin and the Kingdom of Bath. Because they were small, both kingdoms were afraid that a larger kingdom would invade each of their territories and take them over. The King of Lin and the King of Bath got together to discuss the issue. They decided that the best thing to do would be for each kingdom to build a giant monster to scare away their larger enemies. So each king went back to his kingdom to build a monster.

The King of Lin wanted to get a monster built as quickly as possible, so that he could scare the enemy right away. Therefore, in only a few days, the kingdom of Lin had built a huge monster-like puppet out of cloth and paper mache. The monster came with stilts. A man would climb into the puppet and parade around the castle in it by walking on the stilts. From a distance, it looked pretty scary.

The King of Bath took a different approach. Rather than just building a monster that looked scary, he wanted a monster that was scary. Therefore, he decided to build a huge, mechanized iron robot, complete with weapons. It took a lot more time and effort and resources to build this robot. As a result, the kingdom of Bath had no monster for awhile, leaving them vulnerable to attack. However, once the mechanized iron robot was completed, he was a frighteningly effective weapon. The iron robot was not as large as the paper mache puppet, but much more powerful.

When the larger kingdoms came to attack Lin and Bath, they were at first frightened by Lin’s giant paper mache puppet and stayed away. The people of Lin were so confident in their puppet that they got lazy and failed to prepare for war. Eventually, however, the enemy figured out that this puppet was not a real threat, so they attacked the kingdom of Lin and easily took it over.

By contrast, the efforts in building the iron robot taught the people of Bath much about weapon design. And because they had to go a long time without their monster, they always kept alert and prepared for war. As a result, the invading armies could not defeat the people of Bath. In fact, the kingdom of Bath became so strong that it started invading other kingdoms and enlarged its territory, including taking over the area formerly held by the King of Lin.

THE ANALOGY

In the business world, a lot of emphasis is placed on speed and size. The general consensus is that good planning should help you become big, and do it as quickly as possible. Bigness is desired to create economies of scale and momentum with the consumer so that you can survive any industry shakeout. Speed is needed to get “first-mover-advantage” and keep ahead of the competition in a rapidly changing world.

Although size and speed can be good things, it is not always the case that the biggest and the fastest wins.

If you want to become “big quickly” in the worst way, you may find the worst way to become big quickly. This is what happened at the Kingdom of Lin. Yes, they were faster and yes, their monster was bigger, but the Lin creation was not a real monster. It was just a phony puppet.
The puppet gave the kingdom of Lin a false sense of security. Once reality was known, the kingdom was overrun by invaders who were not afraid of paper mache.

The output from the kingdom of Bath was not as big, and it took a lot longer to create. However, in the end it was a very powerful weapon, capable of beating its foes.

Therefore, in businesses, we must not always just rush head-first into a blind mad dash for size and speed. Not everything big is powerful. Sometimes all one builds is a big pile of junk.
Quality and sustainability must also be considered. Therefore, it is better to take the path of Bath than of Lin. We shall see a specific business example of this below.

THE PRICIPLE

The principle here is that size and speed are only relevant if the outcome is strong and powerful. Not all paths to quick size create this type of outcome. For example, one way to get big quickly is to go on an acquisition binge, buying every business in sight. Unfortunately, most acquisitions are not cost effective and the process of trying to integrate a lot of different businesses quickly can lead to a real mess. In most cases, this path may get you big quickly, but it usually collapses under its own weight and leads to self-destruction.

Another way to get big quickly is to try to buy market share at any cost. This is what happened at the height of the original dotcom bubble. The idea was that being big and being first would eventually pay off in the long run, even if the tactics looked foolish and expensive in the short run. Unfortunately, many of these business models were as phony as that paper mache puppet. It didn’t matter how big or how fast they grew. They were based on models too weak to survive, and eventually collapsed. Had more time been spent on the quality of the model, rather than the size, more would have survived.

Sometimes, however, the principle can be more subtle. Let’s look in detail at a comparison of two US retailers—Linens N Things versus Bed Bath and Beyond. If one went back to the years 1993 and 1994, the two companies would look rather similar. Their size in terms of sales were very similar—both having sales of around $375 million. They were both the big leaders in their industry. Their net profits back around 1993 and 1994 were also similar, at about $25 million (a fairly healthy 6-7% of sales.

On the surface, it would have appeared in 1993/1994 that the two firms were very similar…same basic store format with similar sales and profits. Both appeared to have gotten big quickly and both looked like they had a bright future. Some might have argued that Linens N Things had a slight edge. It was slightly bigger in sales than Bed Bath & Beyond and it had the strong backing of its owner, the Melville/CVS organization. Hence, it was bigger on its own, as well as the advantage of being a part of a big retail conglomerate.

However, if one moves forward to today, one would see a much different picture. Linens N Things recently declared bankruptcy and is rapidly shutting down a large number of its stores. By contrast, Bed Bath and Beyond is even more profitable now as a % of sales than it was back in 1994.

Even before the bankruptcy, one could see the vast differences in their fate. If you average the performance for 2005 to 2007, Bed Bath and Beyond had sales of about $6.5 billion, which was 2.3x the sales of Linens N Things. The gap was even larger when it comes to net profits. Bed Bath and Beyond had net profits of 8.8% of sales while Linens N Things had a loss of 3.8% of sales.

How could two companies which looked so similar in 1994 look so different in 2007? As it turns out, although both firms were similarly big in size 2004, the quality of that bigness differed significantly.

Linens N Things had built their bigness like the kingdom of Lin, out of paper mache. By contrast, Bed Bath and Beyond built its bigness like the kingdom of Bath, out of strong iron (notice the similarity in the kingdom and company names?).

Let’s look at the income statement in more detail. Although both companies had similar profitability in 1994, they got there by different paths. Linens N Things at the time had a cost structure (Selling, General and Administrative Costs) that was 14% higher than Bed Bath and Beyond. It’s sales per store were less than 40% those of Bed Bath and Beyond.

In essence, Linens N Things had terribly unproductive stores (in terms of both sales and costs). In contrast, Bed Bath and Beyond had strong and productive stores. The only reason why Linens N Things could match up with Bed Bath & Beyond back in 1994 was because:

a) Linens N Things had a lot more stores than Bed Bath and Beyond (143 vs. 61). Thus, although the stores were less productive, there were a lot more of them.

b) Linens N Things had the backing of Melville Corp., so it was able to avoid long term debt (and interest expense). Linens N Things had no long term debt at the time, while Bed Bath & Beyond did.

However, over time, the added productivity at Bed Bath and Beyond gave them the cash flow to eventually build more stores than Linens N Things (by 2007 Bed Bath and Beyond had 1.5x the store count of Linens N Things). Also, the productivity allowed Bed Bath and Beyond to get completely out of long-term debt. By contrast, the financial troubles at Linens N Things forced it into a highly leveraged privatization.

In other words, the monster of Linens N Things in 1994 was paper mache. It was a weak and ineffective business model. It only looked strong back then because they got a lot more stores open earlier (like the kingdom of Lin who got their monster built earlier).

By contrast, Bed Bath and Beyond took longer to develop a stronger business model. But when developed, it was as strong as iron (like at the kingdom of Bath). Eventually, the iron wins out over the paper mache.

SUMMARY

Size and speed are not enough. If what you are building is weak, it will not stand—no matter how large. In the end, quality of the business model is most important. You can be a little slower, if you are ultimately better. This is not to say that superiority wins if you remain slow and small. But superiority creates a better environment for building size quickly which is sustainable over the long haul.

FINAL THOUGHTS

In planning meetings, I’ve witnessed a lot more time being spent on looking for growth than in looking for superiority. Lots of talk on tactics to improve sales or talk on expansion but much less time on molding a better business model. The irony is that if the business model is superior enough, you won’t need to spend so much time working on sales and expansion—it will come almost on its own.