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 #129: Time for a Change

THE STORY
One of the things I did while on vacation a week and a half ago was visit a local historical museum up near Haliburton, Ontario. Haliburton is located in some rugged rural country near the Algonquin Provincial Park.

There was an older man with a scraggly beard running the museum. He didn’t own a TV or seem too interested in modern times, but he knew the local history. He said that there were essentially three economic periods to the local history.

The first period was the agricultural era. During the 19th century, there were so many immigrants coming to Canada that the areas already developed for habitation were getting full. Most of these immigrants were farmers by trade, so the government looked for suitable farmland to open up. The Haliburton area had rich soil, because it had been untouched for thousands of years. The problem was that the soil was very shallow, with hard impenetrable rock just below the surface. There was a debate as to whether the land could support agriculture, but given the pressure, the government caved in and opened up the area for agricultural development.

For the first couple of years, the crops were good. However, the soil’s richness was soon depleted and became unprofitable to farm commercially. There were, however, lots of large trees in the area. So eventually, the farmers turned to the lumber industry. This became the second economic era.

Lumbering got the area through the remainder of the 19th century and about half of the 20th century. However, eventually the area became depleted of its large trees. Without the trees, lumbering no longer was economically viable.

About this time, wealthy people from southern Ontario started putting up vacation and retirement cottages along the many lakes in the area on the areas cleared of trees. Thus began the third economic era, the era of cottages. Now the key source of income for the area is taxation on all of those cottages and the tourism industry. In the summer it’s fishing and hiking. In the winter it’s skiing and snowmobiling.

THE ANALOGY
Sometimes business models cease to work. In the case of the Haliburton area, soil gave out and trees gave out, making those economic models no longer viable. It was no fault of the hard workers in the area. Circumstances just changed, making the model unprofitable.

The same situation can occur for a business firm. A successful business model may be in place, but over time it no longer becomes viable. The problem may have almost nothing to do with the quality of the management. I am reminded of the Three Mile Island nuclear power plant disaster of March 28th 1979. At the time General Electric has a large division dedicated to building new nuclear power plants. After that disaster, Jack Welch told the division that they needed a new business model that was not dependent on building a single new nuclear power plant. Jack was correct in assessing that the era of growth in new nuclear power plants in the US was over for a long, long time.

So what do you do when the economic viability of your business or industry or geographic region (like Haliburton) is no longer viable? The people of Haliburton fought back and looked for radically different ways to stay viable—from agriculture to lumber to tourism. Sometimes the changes need to be this radical for business firms as well.

THE PRINCIPLE
The principle here is “adapt or die.” Success requires more than just strong management and a dedicated work force. Even the best companies can see their viability vaporize due to changes in the environment. Consumers change; products become obsolete; technology reinvents consumer solutions. To survive over the long haul, a company must adapt to the change, like Haliburton did.

Better yet, a company should anticipate the change and get in front of it. This is one of the largest benefits to be gained from strategic planning. It allows a company to develop scenarios around what will cause the demise of its current business model. It also allows a company to see into the future about where new business opportunities may arise. By getting this advance knowledge early, a company can prepare for the times when radical change is called for. The first to successfully transition to the new business model tends to be the most successful. Strategic planning can help improve your chances in that transition.

There is a school of thought which says that businesses should stay close to their core and not stray very far from what they know. In general, this can be good advice. However, if the foundation of your core business model is changing too quickly, there may not be enough left to your core to remain viable. You could stick to the core of agriculture in Haliburton and never find a viable business model. Sometimes a radical change is required.

Take a look at Textron. Textron got its name from textiles, which was the core of its business in the first half of the 20th century. In 1923, it began in the basic yarn business. By the 1940s it had diversified into a number of synthetic fibers and then became the owner of a large number of textile mills. However, by the 1950s, Textron could see that there were risks to being so heavily invested in the US textile business. The textile business was moving overseas to where the labor was cheaper. The margins in the business were shrinking. Textiles no longer looked like the place to be in the US.

Therefore, Textron redefined their core. Instead of the core being seen as textiles, the core was defined as engineering and manufacturing. Textron looked for places where engineering and manufacturing skills could create a greater return. As a result, the portfolio began to change. Textile businesses were sold off and replaced with industries that provided a better future. By 1963, Textron was completely out of the textile business.

Today, some of the biggest divisions of Textron include Bell Helicopters, E-Z-Go golf carts, Cessna Aircraft, and military vehicles. This is a far cry from textiles, but Textron is still around and very successful, with revenues of around $11 billion and employs about 40,000 people. If Textron had stayed in textiles, I believe its fortunes would have been much worse.

Nokia is another company which has radically changed over the years. Started in 1865, Nokia began in the wood pulp industry. In the first half of the 20th century, it got into basic manufacturing of commodities like rubber products (boots) and telephone cable.

In the latter half of the 20th century, they could see that commodity manufacturing had its limits for a company located in Finland. Therefore, Nokia redefined their core from basic manufacturing to being more of a high tech participant in the telecommunications industry (trying to build up from their established base in telephone cable). Eventually, this lead them to the cell phone industry. Nokia is now the world’s largest producer of cell phones, with a global share of about 39%. That’s a long way from wood pulp.

GE is also legendary for redefining itself over the years—shedding business that have less of a future and adding businesses with more of a future. This has kept GE the company on top in spite of the viability of the individual parts.

Now some would argue that when a company gets in trouble, it should shut down, sell off, or harvest its business down and give the proceeds back to the shareholders. The logic is that if there are new opportunities, the shareholders can take their money out of the “losers” and invest in those new industries themselves.

However, success requires more than just money. New opportunities in the hands of incompetent businesses may be no opportunity at all, regardless of how much money you give them. It can be very difficult to start up a new independent business from scratch to attack a new business opportunity. Now you have two risks—the risk in the new industry and the risk in the new company. Established successful firms can diversify/morph into the new opportunity with potentially less risk.

In addition, there are other stakeholders than just the shareholders. What about the communities and the employees? Giving them the opportunity to participate in the new business opportunity can eliminate costly disruptions to society.

SUMMARY
Changes in the marketplace will inevitably make all business models obsolete. If you want your business to survive over the long haul, there will be times when significant change is required. Sometimes that change can appear to be a radical departure from the past. Yet, even in times of radical change, risk can be minimized if you can find a redefinition of your core which transcends your current business model.

For Textron, they redefined from an industry focus (textiles) to a competency focus (engineering and manufacturing). For Nokia, it was a broadening of the definition from telephone cables to telecommunications. For GE, it is a focus on sound business principles rather than individual businesses.

As long as you can find that thread to get from the past to the future, there is potential for continued success long after your former business model becomes obsolete. Strategic planning is useful in all of these phases: realizing when it is time to change, looking for the common thread, and transitioning to the proper new model.

FINAL THOUGHTS
Haliburton may soon need to look for a fourth economic model. They used to get more tourism from the nearby parts of the US, like Michigan, New York and Ohio, because it was within easy driving distance. However, now Americans in increasing numbers are flying to more exotic places with more things to do, so tourism in the area is down. Haliburton is looking for a way to revitalize the tourism or perhaps find their fourth economic era. One of the things they are looking at is making the area a haven for the artist community, taking advantage of the scenic inspiration and, in particular, the plentiful stock of rock which can be used for sculpture.