Strategy Planning Analogy #562: Bowlers Vs. Golfers

THE STORY
Last fall, when Jordan Spieth won the FedEx Cup of golfing, he earned $10 million. That’s a lot of money for a golfing match. It’s not typical. The winner of a typical game during the golfing season makes only about $1.5 million. In the 2014-15 golf season, Jordan Spieth won $22 million from all his playing in golf tournaments.

By contrast, professional bowlers earn a lot less. The winner of a major bowling event earns about $25,000 (one-sixtieth of a major golf tournament). Top money makers on the pro bowling tour only earn about $250,000 for the whole year. In the first 56 years of the PBA (Professional Bowler’s Association) history—through 2013—only 40 bowlers made more than $1 million during their entire career. When you get past the top ten bowlers, the average yearly earnings from professional bowling is only about $6,500. And you have to pay all your own travel and living expenses. (You can read more about the plight of bowlers here and here.)

What’s going on here? Pro golfers and pro bowlers are both athletes; they both play as individuals on a tour; they both try to get a ball to roll to a desired target; they both have to practice thousands of hours to master their craft; they both play games also played by millions of average Americans. So why do golfers make so much more than bowlers?

I thought there was a movement to promote equal pay for equal work. It seems to me that the work of professional bowlers and golfers is roughly equal. Shouldn’t the pay be the same?

THE ANALOGY
The problem is that tournaments can only pay out a percentage of what they earn, and bowling tournaments earn a lot less than golf tournaments. Golf has the advantage of appealing to affluent men, a category difficult to target by marketers. As a result, companies are willing to pay a fortune to sponsor or advertise on golf tournaments. By contrast, bowling fans are not a coveted group by marketers. In fact, the PBA was so debt-ridden that it was purchased in 2000 for only $5 million, less than the cost of a minor league baseball team.

The economics don’t favor the bowler. There isn’t enough money available to pay them any more. As a result, poor professional golfers can earn a lot more than the best professional bowlers.

This problem is very similar to what happens in any business. The amount of money a company can earn is based largely on the pool of money available in the industry in which the company operates. If you are operating in a great place (like an athlete in golf), your chances for success are high. If you are operating in a poor place (like an athlete in bowling), your chances for success are practically non-existent, even if you work as hard at bowling as a golfer does at golf.

At one time, the recorded music industry was like golf, earning huge amounts of money. Mediocre bands could still make a decent living off recorded music. Now, the pool of money available for recorded music has shrunk dramatically. Only the top performers can earn a decent living off of recorded music.

Therefore, one comes to the conclusion that it is more important for businesses to determine where to play than to determine how to get better at playing their game. And determining where to play is a key role for strategic planning.

THE PRINCIPLE
The principle here is that hard work only has a huge payout if you are working in a space that can afford to make huge payouts. The problem is that I see so many businesses focus all their effort on trying to “get better” rather than trying to be in the “right place”.

Their strategists focus on things like:

•      How do I lower costs?
•           How do I improve the business process to make it more efficient?
•          How do I speed up my output (or get to market faster)?
•           How do I use R&D to improve the features of my output?

They end up focusing on things like Lean or TQM or other such process improvement disciplines. This is like a professional bowler spending all his time trying to figure out how to become a better bowler.

The problem is that no matter how much a bowler improves his ability to bowl, he will never be making the big money. He would have been better off spending those thousands of hours of practice on golfing.

Similarly, no matter how much a company focuses on operational improvements, the odds of getting a great reward on that effort are minimal if you are operating in a business space that is not profitable. Doing the wrong thing more effectively is still doing the wrong thing.

This is why Michael Porter, in his seminal article in the Harvard Business Review called “What is Strategy?” (Nov.-Dec. 1996) said that operational effectiveness is not a strategy.

If you really want to do strategy, you have to focus on something else.

Ask the Right Questions

The first place to start is by asking the right questions. The first question is this: What business should I be in? The second question is this: How can I win in this business?

As a young athletic boy, one should first ask a similar question: What sport should I be in? How one answers that question can have a major impact on lifetime earnings. In fact, there may be no other decision a young athlete can make that will have a greater impact on success. If a lot of professional bowlers had seriously pondered this question in a rational way when they were young, they might have decided to focus on golf rather than bowling.

Similarly, the choice of where a business decides to play is critical. Your answer to that question can have a greater impact on future success than anything else you ever do.

For example, Textron and Berkshire Hathaway both started out in the textile industry in the US. They could have just stayed in that industry and tried to do the best that they could at operating in the US textiles industry. Their strategy could have focused on how to be faster, cheaper, better at playing there.

But they did not. Both companies stopped to ask that critical question: What business should I be in? As it turns out, the US textile industry was a relatively awful place to play. It was sort of like the “bowling” of the business world. There just wasn’t a lot of money to be made in that space.

As a result, Textron and Berkshire Hathaway diversified and moved into better business areas. Their portfolios include businesses in the “golfing” areas of the business world, far removed from textiles. Stopping to take time to ask the critical question allowed them to become large, successful entities. Had they not stopped to ask the question, and stayed in US textiles, neither company would probably exist today.

In an earlier blog, I referenced a study by McKinsey which said that the largest factor in a company’s success is determined by the nature of the industry the company decides to play in. So companies should spend time deciding where to play.

As critical as this question is, I find a lot of companies don’t stop to do this. They are so focused on getting better at where they are, they never stop to ask if they should be operating somewhere else. This error can ruin a company more than almost anything else they do.

This is not a one-time decision. Industries change; prospects change (as we saw in recorded music). You have to periodically reassess if it is time to shift the business portfolio. GE has been so successful for so long because they continually ask this question and periodically shift accordingly.

A successful choice in the past will not protect you forever. Analog photography was great for Kodak for years, but eventually the time came to switch businesses. By not doing so, Kodak’s doom was inevitable. There was no amount of operational improvement that could save them in analog photography.

Focus on the Right Efforts

This leads to the second issue—what strategists should focus on once the right business is chosen. Although operational improvements have an impact, strategists can make a greater impact if they focus on something else. Rather than focusing on how to do things better, they should focus on how to do things differently.

If you do things just like everyone else, there is no reason for someone prefer your offering. They will see you as pretty much the same thing, so they will pick whatever is cheaper. However, if you are doing things differently, you can create a point of differentiation, a reason to be preferred. If you are preferred, you can often charge a premium price.

Moving from an environment of extreme discounting to premium pricing may do far more for the bottom line than all those operational improvements put together. I speak more about the need for differentiation in a prior blog.

SUMMARY
Operational improvement is not a strategy. Strategy is about finding the right place to play and about how to win in that space by doing things differently. If your strategic planning efforts overlook these two areas and only focus on operational improvements, you may end up perfecting the obsolete.

FINAL THOUGHTS

Ask yourself: Is my business space more like bowling or more like golf? If it’s more like bowling, it may be time to change sports.

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.

Another New Book: Strategic Choices

I've just finished putting together another new book, with chapters based on this blog. The book is entitled "Strategic Choices." You can download a free copy of the book here.

The idea behind the book is that great strategies depend on making the right choices over a wide range of topics. Each chapter tries to shed light on some of those choices which need to be made.

I hope you enjoy it.