Strategy Planning Analogy #559: Don’t Blame the Racetrack

THE STORY

This past week I was at a large park. This park had a long jogging trail. I watched some of the joggers using the trail.

Some joggers were moving effortlessly along the trail. It was as if they were just gliding on air. They looked like they could go on merrily forever.

Other joggers were bent over and huffing & puffing. Their forward progress was almost non-existent. They looked like they were about to pass out.

Based on my observations, was this a good trail for jogging on or not?

THE ANALOGY

Actually, that’s the wrong question. This was the same jogging trail for all joggers—the ones gliding effortlessly and the ones about ready to pass out. The variation was not in the trail, but in the users of the trail. It wasn’t the trail that determined success or failure; it was the condition of the joggers using the trail.

Therefore, the better question would be: Are you (as a jogger) in the right condition to succeed on this trail?

This is similar to a question I have often heard in strategic planning: Is this a good strategy? Like the question about the trail, it is the wrong question to ask.

Name almost any reasonable strategy, and I will find winners (companies gliding along effortlessly) and losers (those about to pass out) among those implementing the same strategy. Since all of these companies were following the same strategy, it cannot be the strategy which determined success or failure.

No. It was the condition of the company which determined if they were succeeding or failing with that strategy.

Therefore, instead of asking if the strategy is good, we should be asking if our company is in the right condition to succeed with this strategy.

THE PRINCIPLE

The principle here is that strategy success is based in large part on whether there is strategic fit. The greater the fit between who you are as a company and the qualities needed for the strategy to work, the more likely you will succeed with that strategy.

If you want to succeed on that jogging trail, your physical conditioning must fit with the physical requirements of the trail. If there is no fit, you will fail. This is true for both jogging trails and business strategies.

It’s like going to a job interview. All the candidates who make it as far as the interview are smart and talented. But the one who eventually gets the job is usually the one with the personal qualities which best fit with the hiring organization.

Similarly, your company can be full of smart and talented people. But if the company’s culture and capabilities do not fit with the chosen strategy, you will fail with that strategy.

You may observe another company and say, “Look! They’re succeeding with this strategy. That means it’s a good strategy, so if I follow that strategy I should succeed as well.”

But that is faulty reasoning. That would be like the out-of-shape huffer & puffer looking at the physically fit glider on the jogging trail and saying, “Look! That person is succeeding on this jogging trail. That means it is a good trail and that I should succeed as well.”

That logic ignores the fact that the huffer & puffer is not fit for the trail and will never succeed on it, no matter how many others glide by.

When considering fit, here are some thoughts to keep in mind:

1) Most Runners in a Race Lose

In horse racing, only the top three finishers in the race matter—the ones who either win, place or show. The rest are losers. Similarly, in the race to succeed with a strategy, only a small handful really succeed with a given strategy. The rest are all losers.

Take technology. How many wildly successful (and profitable) computer companies are there? Other than Apple and Samsung, are there any other successful smartphone companies? How many companies are winning in the smart watch category?

The point is that one can pull out all sorts of statistics about the how wonderful a particular category is—how fast it is growing, how large it will become, how much money will be spent. It can make the strategy of entering that category look very desirable.

However, in the long run, only a very few companies actually earn meaningful profits in that category. The rest are losers.

Were all the losers bad companies with incompetent people? No. They just did not have as good a fit (culturally, image, competency and capability-wise) in the category as the winners.

Being a good operator is not enough if you want to win. There have been lots of good companies making good technology who lost. In fact, nearly all of them lost. If you want to win, you need a better fit than anyone else.

That requires one of two things. Either only select strategies where your current fit gives you competitive advantage, or change yourself to get in shape for the strategies you want, so that your fit is more in alignment than others.

In the latter case, your strategy becomes a two-step strategy. First, get in shape to have the best fit. Second, pursue the strategy where that new fit is most valuable.  

2) Strategy Choice is Both External and Internal

Strategic Fit means having alignment between what a strategy needs and what a company can offer. Therefore, when choosing a strategy, you have to look both externally (at what a strategy needs) and internally (at what I have to offer).

If we only look at the appeal of the strategy, we are missing half the analysis.

We also need to look at ourselves. And we have to be honest with ourselves and admit to our shortcomings. We have to look into the mirror and see ourselves as we really are.

If we are having trouble with objectivity, we can turn to asking customers and other industry players or consultants to help us see ourselves as we really are.

When former New York Mayor Michael Bloomberg was considering running as an independent candidate for President of the United States in 2016, he did some consumer research (I happened to get one of his surveys). The research convinced Bloomberg he did not have a good enough fit to win, so he decided not to run.

Your research may also show that you do not have the right fit to win at a particular strategy. If so, be like Bloomberg and don’t implement that strategy.  

3) Money Rarely Overcomes a Bad Fit

Some people think that if you have enough money, you can buy your way to success. The problem is that money is relatively easy to obtain. And the ones with the best strategic fit tend to be the companies that find it easiest to get the money.

Therefore, money rarely becomes a differentiating factor. If a lot of companies can get it, then having money does not get you an edge. Besides, the money will be most effective in the hands of the people with the best fit, so even if you have a little more money, it will probably not be enough to overcome a weaker fit.

Just ask the large, cumbersome, bureaucratic companies that had a lot of money but lost out to a small, nimble company that started out in a garage with little cash. Despite having more money, they lost out to the company in a garage because their culture and mindset was a poorer fit. Having more money was not enough to overcome this.

Example

I consulted with a company that was pursuing a broad-based leadership strategy in a particular industry. One of the requirements of that strategy was to aggressively consolidate the industry by rapidly buying up smaller operators. The problem was that this company’s culture was financially conservative and their core competency was not rapid, large consolidation.

As a result, other companies following a similar leadership strategy in this industry were doing a better job at consolidation, because they had a better fit. This meant that the company I was consulting with was falling behind and becoming less relevant as a leader.

Therefore, I recommended that the company shift from a leadership strategy to a niche strategy. The recommended niche was chosen by looking at where this company had a competitive advantage in terms of fit.

Now the company is confident they are on a path that is more likely to achieve success, because the strategy has a better fit with who they are.

SUMMARY

No strategy is universally good or bad for everyone. There will be winners and losers among people using the same strategy. The difference between the winners and losers is how strong the fit is between the strengths of the company and the requirements of the strategy. Therefore strategic planning cannot merely look externally for a good place to be, but it must look internally to ensure that you are the right company to be in that place.

FINAL THOUGHTS

Getting in shape never sounds like fun, but trust me, you will be much happier running the race if you are in shape. Make sure you are in the right shape shape for running the strategic race you have chosen. If you are out of shape for the race, don’t blame the racetrack when you lose.

Strategic Planning Analogy #500: Be Careful Who You Follow

THE STORY

In the wintertime, Minnesota can have some nasty snowstorms. If they come just before the rush hour commute, they can grind traffic on the highways to a stop for hours. When that would happen to me, I would get off the highway and try to make my way home via the back roads.

With everything covered in white (and even more coming down), it would be hard to see where you were driving. And if the back roads took you into unfamiliar territory, it would be even more difficult to know how to get home. Therefore, when I got onto the back roads under these conditions, I would try to find another driver who appeared to know what they were doing and then follow them.

On one of these evenings, I found a car that really seemed to know all the back road shortcuts, so I started to follow it. Everything was working out quite well until that car I was following suddenly turned up a driveway and went into its garage. It was home. I was not. And I really wasn’t very sure about where I was.

I just kept driving and luckily I soon came to a main road which I recognized. From there, I was able to find my own way home. If I hadn’t come across that familiar road, I might have been wandering aimlessly out in that winter storm for many additional hours.

THE ANALOGY

Following someone can make life a lot easier—so long as the person you are following is going to your destination. But if that person is going somewhere else, they can lead you in the wrong direction.

When that car I was following turned up its driveway, I was in big trouble because he had led me into a neighborhood I did not know and where I did not belong. He had reached his destination. Unfortunately, his destination was nowhere near my destination. I was left in a place where I was lost.

The same thing can happen in the business world. It is usually easier to follow someone else’s strategy than create one of your own. This seems easy to justify, especially if you are following the market leader. After all, that strategy made them a huge success. Won’t it do the same for me?

The problem is that they are the market leader and you are not. They have different capabilities and resources than you do. As a result, the right strategic destination for them is most likely not the right destination for you. Trying to win with a strategy designed to take advantage of someone else’s strengths (not your own) will lead you to a place where you do not belong.

But even if you are roughly similar businesses, it is usually a mistake to blindly follow the leader. After all, each strategic position can only be owned by one firm in the mind of the customer. If the leader already owns that position, then the customers will view you as an inferior version of that position, even if you do essentially the same strategic actions. Instead, it is usually better to find your own unique position (where you can win) than to be seen as an inferior copy of someone else’s position. In other words, you need to find your own home to drive to rather than follow the leader to their home and not be invited in.

A great example is Walmart versus Target. Walmart’s strategic destination was “lowest cost structure/lowest prices.” Target could have tried to follow Walmart with a similar approach, but it probably would have been a failure. Just look at the evidence. There used to be dozens of discount store chains in the US chasing Walmart which have all gone bankrupt. But Target is still going strong because it decided not to follow the Walmart strategy and went to a different destination.

Target’s heritage from its parent company was the more upscale, more fashionable department store business. This was an advantage they could leverage against Walmart. So Target chose the destination of “Cheap Chic,” the more upscale, more fashionable alternative to Walmart.

Being a desirable alternative to Walmart is much better than being an inferior Walmart clone. Both chains now could successfully coexist, because they were winning in their respective, differentiating positions. They had each chosen different strategic “homes” and took different paths to get to their homes.

THE PRINCIPLE

The principle here is that a strategy of following someone else is usually a mistake. Most of the time, it is better to develop a different strategy—one specifically suited to your unique situation (skillsets and market position).

Why Following is Usually a Mistake #1: Differences

We have already discussed many of the reasons why following is usually a mistake. First of all, every company is different. There are differences in capabilities, resources, corporate culture, geography, prior investments, product portfolio, patents, market perceptions, and so on. What works for one firm won’t work for another because of these differences. You need to choose your strategy based on what makes you unique, because it is your uniqueness which provides the competitive edge needed to win.

There is no single best strategy for everyone in an industry. If there were, we’d be in trouble, because then you would only need one company per industry—the one best at executing that single strategy. Fortunately, there are many different ways to win a segment of the industry. You can choose to win on a variety of attributes, like price, service, customization, quality, speed, or specialization to a particular segment (such as a particular customer segment, geographic segment, usage segment, or solution segment). Rather than imitate someone else, find the place among these options which is best for your unique situation.

Throughout history, there have been business leaders who have had a great reputation for success. At one time, it was Jack Welch at GE. More recently, it was Steve Jobs at Apple.  Each time one of these business superstars appears, I’ve seen many leaders trying to implement the identical leadership styles (and strategic approaches) of these superstars in their own businesses. They try to follow these leaders just like I followed that car in the Minnesota winter. And usually, the results are similar to my experience. They end up lost rather than having success similar to these superstars.

Why? Well, the personality style of these superstars may be different than the natural style of those trying to imitate them. That difference makes it hard to be genuine and effective with that unnatural style. In addition, you are placing that leadership style into a different context. That style may not be the best for that context. These differences can make following these superstars a mistake.

Consider the fact that even Steve Jobs was not incredibly successful everywhere he went (think about when he ran NeXT). And many of the people highly trained at GE in the Jack Welch style had unsatisfactory results when they left GE to run companies in a different context. If they couldn’t pull it off when the situation is different, why do you think you can?  Differences matter and can make imitation inappropriate.

Why Following is Usually a Mistake #2: Only One Leader at a Time

Another problem with following has to do with the laws of positioning. As Al Reis and Jack Trout pointed out in their works on positioning, consumers will mentally place only one firm as a leader in a particular position. Everyone else is seen as inferior. And once someone locks into that leadership position, it becomes extremely difficult to unseat them from that top position. As a result, Reis and Trout recommend that if you are not the leader in a particular position, go and find a different, uncontested position where you can win.

This is like when Target did not try to unseat Walmart from its position but found a different place where it could win. Another example would be social networking where anyone essentially trying to copy the success of Facebook (like Google+) is failing. However, Linkedin differentiated by going after a different customer segment (business professionals) and has done well.

There was a time, generations ago, when industries held more financially viable players for a given position. But due to consolidations, the power of networks, price wars, and greater transparency, the number of profitable players in a given position keeps shrinking. Often, only one player per a given position makes a respectable return on investment. If you are not the top player in your position, you will probably be a poor investment. So, instead of copying someone else’s position, find a different place where you can win.

Exceptions to the Rule

Does this mean that following is always a bad idea? No, there are a few situations where following is okay.  One such situation is when critical mass is needed to get an industry started. For example, when the next generation of DVDs was being developed, there were two competing technologies—Blu Ray versus HD-DVD. This created uncertainty in the marketplace. Customers were reluctant to purchase either one for fear that they would choose the wrong format. It wasn’t until the players in the supply chain (movie studios, media player manufacturers, retailers, etc.) started following each other in one direction (Blu Ray) that the critical mass was formed to get customers to buy.

Another example could be electric cars. Until consumers are comfortable that the right technology is found (and the compatible charging infrastructure for it is in place), they will hesitate to buy.  

This is similar to the Blue Ocean strategy which talks about abandoning the status quo to open up entirely new industries. Sometimes you need a critical mass of players following each other into the new blue ocean in order to make to new industry look real and viable.  If the new market is big enough, it may be worth following to get the market jump-started.

Another time to follow is when an industry is still developing and you have special leapfrogging skills. The idea hear is to let others test the waters of innovation and take all the risks of failure. Then, when they hit upon the rare success, be a fast follower and overtake them in the race for leadership. This has been the strategy of Coca Cola for decades. Coke lets other people invent markets (like diet cola, cola in cans, bottled water, sports drinks, energy drinks) and then they use their superior distribution skills to overtake the upstarts and dominate the new business. As long as an industry is still unsettled, the fast follower approach can work if you have the capabilities to outrun the innovator.

However, even in these two cases, the benefits of following are temporary. Eventually, the markets will mature, and following won’t work anymore.

SUMMARY

Although following someone successful may seem like a path to similar success, history would say otherwise. The followers usually lose because either:

a)     They are in a different situation than the leader which makes their strategy not applicable; or

b)     The leadership in that position is already owned by the leader and you cannot take that leadership advantage away from them.

Therefore, rather than follow someone else, find the unique path that is just right for you.  

FINAL THOUGHTS

Eventually, I mapped out my own back roads for when a storm hit in Minnesota. That way, when the storms came, I was following my own path, rather than the path of someone else. That worked out a lot better. You should do the same.

Strategic Planning Analogy #479: Playing to Win

THE STORY
Back in the very early days of personal computers (before the IBM PC), there were a lot of small upstart companies that wanted to get into the business.  Most of them said something like the following:

“We may not be big enough or strong enough to become the market leader, but we think we can get about a 15% market share.  And that should be large enough to make a good return on investment.”

The problem with this approach was that:

1)      The leaders would already have about 50% of the market share in personal computers.

2)      There were about a dozen firms who wanted to get about 15% share out of the remaining 50% of share available (that math doesn’t work).

As a result, most of these upstart companies only got about 5% share or less.  This was insufficient for profitability and they quickly went bankrupt.

Later, when IBM entered the market with the first “PC” (and the first software from Microsoft), even most of the market leaders, like Radio Shack and Commodore, had to give up the business.

 

THE ANALOGY
If you look at the strategy of most of the early entrants to personal computing, they were not playing to win.  Instead, they were playing to exist.  The idea was they did not need to aggressively pursue superiority in positioning or features.  Instead, these companies felt that all they needed to do was “show up”, and the rapidly growing market would have enough space to absorb them at about 15% market share.

That approach was a dismal failure.  By not playing to win, they ended up with nothing.  When IBM entered the market, it was aggressively playing to win—and it was the clear winner for quite awhile.

When designing a strategy, are you approaching the market more like those early entrants (just show up and hope to get sufficient share) or like IBM (go big and play to win)?

 

THE PRINCIPLE
The principle here is based on Law #12 of my 22 Laws of Strategy.  This is the Law of Winning, which says, “If you do not play to win, you will lose.”  Playing to win requires:

a)      Designing and Achieving a Winning Position (unique, desirable)

b)      Aggressively Pursuing that Position in the Marketplace

c)      Developing a business model so that you can have superiority in your position and still make money.

This is not what those early personal computer manufacturers did.  They built “me-too” products using similar business models and shipped them out to whomever would buy them.  And by not playing to win, they lost.

IBM played to win.  They developed a superior product.  They installed superior software (MS DOS).  They aggressively advertised the brand (to the point where PC became a generic name for the whole category).  They put the full force of IBM behind it.  And they became a winner.

The Rule of 1.5

If anything, the importance of playing to win is even stronger in today’s economy.  One reason why “playing to exist” no longer works well is due to the rule of 1.5.  Back in the 1980’s it was called the rule of three, which stated that most businesses had 3 strong players:  a leader, a close challenger, and a rebel/innovator.  The prime example used back then was US colas: Leader=Coke; Challenger=Pepsi; Rebel/Innovator=RC.

However, over time, this paradigm has mostly disappeared.  The reason can be found in a 1995 book called the Winner-Take-All Society, by Frank and Cook.  The book showed that in industry after industry, the advantages of leadership were getting stronger and stronger.  Challengers were at an ever greater disadvantage.  Brands were beginning to realize that it made more sense for a challenger to reposition itself as a leader in different market position than to go directly after a leader.

The net result is what I call the rule of 1.5.  Now most markets have a single strong leader with only minor challengers.  Think about US retailing.  Where it used to be Best Buy vs. Circuit City, it is now only Best Buy.  Where it used to be Bed Bath & Beyond and Linens-N-Things, it is now just Bed Bath & Beyond.  And who is the strong challenger to Walmart or Amazon?

Even in colas, Coke has increased its dominance over Pepsi to the point where its greatest challenger is now Diet Coke (which leads in a different position).  And RC cola barely exists anymore (and survives via association with Dr. Pepper, a leader in its own category of beverages).

That is why you need to play to win, because there is no guarantee that there will even be room for a profitable number 2 or 3 or 4.   Take it from me…when I was working at Best Buy and founder Dick Schulze was still running the show, there was no doubt that he was aggressively and passionately playing to win.  And win they did.

Metcalf’s Law

If anything, the digital economy with the internet and social media has accelerated this phenomenon.  It was first described as Metcalf’s law, which states that the value of a network is equal to the square of the number of connections to that network (or U=y²).

The new digital/social/mobile economy is all about building networks.  And the bigger your network, the more powerful you are.  Look at Facebook.  It did not get its high stock valuation due to current profits.  The high value was due to Metcalf’s Law and the millions upon millions upon millions of users in its network.  Linked in and others are also following this principle and building the largest networks of members in their space.

Once you build up a huge network, there are incentives for people to join your network and stay in your network.  It is referred to as “stickiness.” Hence, the networking leaders tend to become even stronger leaders and the challengers become weaker.  Who is the major challenger to Facebook?  Can a new competitor just “show up” and expect to gain a large following in Facebook’s space?

Part of the appeal of Apple is the network of partners and features it puts around its products.  The apps, the app store, the interface connections, the partnership deals and so on make the sum of the network greater than the parts, and makes it harder for any single player to challenge that network.

If you do not play to win in creating the network, you will ultimately lose in this economy.

 

SUMMARY
The disproportionate advantages to being the market leader are huge and getting even stronger.  It is getting to the point where if you are not the leader, you will be hard pressed to even make an adequate profit.  As a result, every business needs a strategy built around leadership—a winning position in desirable space.  In addition, you need to aggressively pursue gaining and maintaining that position.  Others are also out there fighting to win, so if you are not equally fighting to win, they will become the winner instead of you.

Just showing up with a me-too product and hoping that the market is large enough to get you sufficient market share is no longer a viable strategy (if it ever was in the first place).  Those “just showing up” market shares are never as large as you think they should be and rarely lead to a viable business model.  Be aggressive and play to win or don’t play at all.

 

FINAL THOUGHTS
They say that imitation is the sincerest form of flattery.  That may be true, but imitation is not a very good approach to strategy.  Following the leader positions you as a follower, not a leader.  If you do not have a business model and an aggressiveness to get to a place where you can lead (or win), then all you have is a blueprint for losing.  The world already has a Facebook, Amazon and Walmart.  It doesn’t need an imitation of them.  Instead the world needs new positions to be conquered.  Are you scaling the mountain of imitation or a mountain where you can be first to the top and win? 

 

Strategic Planning Analogy #402: Strategy is Like a Resume

THE STORY
Since I am currently looking for a job, I have been spending some time talking with resume-writing experts. One of those experts said something which caught my attention.

He said that when recruiters see a job title in a resume, they usually have a pretty good idea of the duties and responsibilities associated with that title. Therefore, if the only explanation on your resume is the duties and responsibilities associated with that job, you haven’t really told them much of anything they didn’t already know.

Worse yet, the expert said you are not telling the recruiters what they want to know. What they really want to know is how successful you would be if they hired you for the job they are trying to fill. By only telling them the duties and responsibilities, you are not explaining how you approached those duties and responsibilities and why you were successful.

The expert referred to these as “transferrable skills.” In other words, what skills do you have which could be transferred to the recruiter’s company to create success there? After hearing this, I modified my resume.

THE ANALOGY
There’s an old acronym called WIIFM (pronounced “wiffum”). It stands for “What’s in it for me?” In other words, I have no interest in what you’re saying unless you first tell me how it affects me.

My original resume did not pass the WIIFM test. I hadn’t explained how any of it was relevant to the recruiter. Therefore, they had no reason to be interested.

The same principle applies to business missions. They need to pass the WIIFM test. Business Missions need to explicitly explain why the marketplace should care that you exist. In other words, they need to explain what’s in it for the customer.

THE PRINCIPLE
The principle here has to do with having an orientation towards others. When writing a business mission, it should be like a good resume—oriented towards why the customer should be interested in me.

Unfortunately, many mission statements and plans are like bad resumes—nothing more than bragging about how great I am. Recruiters don’t care about how “great” YOU are. They want to know how great you will make their COMPANY. Similarly, a good mission statement shouldn’t just say how great YOU are, but explain how your business model is great for your CUSTOMERS.

You can see the difference when looking at Ends and Means.

1. Ends (What is my goal?)
One way to tell a good mission/plan from a bad one is to look at the goal of the company. A bad mission plan has a self-centered, bragging goal, something like:

1) A huge sales goal
2) A huge profit goal
3) A huge growth goal
4) A goal to be the biggest or best in the industry (a leader)

It’s not that any of these things are necessarily bad. It’s okay to be successful. The problem is that these goals are not very useful from a strategic point of view. They do not provide any strategic insight.

It would be like a coach in sports saying his goal is to win games. That’s a great thing to do, but saying it provides no direction as to how those games are to be won. If the coach just told the players “Our goal is to win” he has not given them any strategy as to how to win. Everyone on the team may interpret the goal differently. As a result, there is no teamwork, no coherent game plan to follow that would lead to a win.

The key weakness of a self-centered goal is that the linkage to success is weak. There are lots of things one can do in the name of becoming great, but it doesn’t always lead to greatness.

For example, let’s say I wanted to have great sales. Tactics which might come out of that could include things like:

1) Selling everything below cost (which in the long run destroys success)

2) Getting people to purchase sooner than they normally would (which only reduces sales later)

3) Reducing the quality so that you can afford to sell cheaper (which will hurt future sales when people figure out that it wasn’t such a good deal at that lower level of quality)

4) Diversifying into all sorts of added businesses which divert the company focus, put you in places where you have no competitive advantage, and/or confuse the customer about what you stand for. All of this will hurt the company long-term

5) Expanding the appeal beyond an exclusive niche to reach the masses. This can destroy a fashion brand, because the core customers want exclusivity. They will abandon it once the masses have it. And once the core customers abandon it, the masses won’t want it much longer, either.

In other words, the pursuit of near-term sales-building tactics can lead to long-term disaster. Ultimate, sustainable success is often not achieved. Long-term failure is very likely.

Now, let’s compare this to the opposite approach—having an “other-centered” goal. Instead of saying “What’s in it for me” you say “What’s in it for my customer”. The new goal would be about providing a benefit for the customer. It could be something like:

1) I will save the customer time;

2) I will make the customer’s life easier;

3) I will improve the customer’s standard of living;

4) I will reduce the customer’s down time;

The idea is to form a goal around improving a particular part of your customer’s life. If you truly have a way to improve the customer’s life, they will give you their business. The sales will come naturally, without having to resort to the tricks like I mentioned above. This creates a sustainable business where customers come back because they want to, not because you bribed them or tricked them into coming.

With my resume, I was told to take out phrases that implied “hire me because I’m wonderful” and replace them with phrases which implied “hire me because this is how I can make your company better.” Similarly, instead of saying “my goal is to be great” in your mission statement, say “my goal is to benefit from focusing on making my customers’ lives better.”

2. Means (How Does My Business Model Allow Me to Please the Customer?)
Bad resumes just say how great the person is and list the duties the person had at previous jobs. The experts say that instead of focusing on duties, focus on “transferrable skills.” These are the things I am able to do that would work well at the new company. These skills are the means by which I achieved success at the old firms and can also bring success at the new firms.

This also applies to mission statements. It’s one thing to say you are oriented towards helping your customers solve problems. It’s quite another to have a business plans which provides the means to accomplish this goal (profitably). It is the skills you use to satisfy the customers.

Therefore, a business mission should also outline the means by which your company will win at serving its customers. These are the company’s skills which allow it to do a better job than the competition.

For example, one could say that their business mission is to “save their customers time by bundling all their entertainment needs into one convenient package.” So the end is saving customers time and the means is though the ease of providing it all in one bundle.

There are many ways to save a customer time. If you don’t pick one, the company will lack focus and waste its effort by moving in too many directions. Pick the means where you have the best chance of winning.

SUMMARY
A good mission statement is like a good resume. It communicates two things: the ends (what I can do for my customers) and the means (the unique skill-set and business model which makes it possible to profitably deliver the ends better than the competition). The final statement would generically look something like this:

My mission is to provide “X” solution to my customers by doing “Y” better than anyone else.

That provides a lot more strategic direction than saying “my goal is to be great.”

FINAL THOUGHTS
Resumes are short. Business missions should be short at well.

Strategic Planning Analogy #366: Stats vs. Wins

THE STORY
I was reading a story recently about a quarterback in the US National Football League. It seems he had gotten very concerned about his individual stats when playing the game of football. Quarterback stats include things like percentage of completed passes (which you want to be high) and number of intercepted passes (which you want to be low).

This quarterback discovered that his desire to have great stats was affecting the way he was playing the game of football. For example, if you want a high % of completions and a low % of interceptions, you stop taking risks on where you throw the ball. Instead, you only throw short passes to receivers who are not being well defended.

Unfortunately, there is a negative consequence to this approach. First, if you only throw short passes, you reduce your ability to advance enough yards to score touchdowns. Second, there are rarely opportunities to throw a ball to an undefended receiver, because the opposition usually has a good defense. Therefore, if a quarterback waits until he finds an undefended receiver before throwing the ball, he will end up waiting too long. Eventually a defender will get to the quarterback and tackle him for a loss.

After realizing that his quest for great stats was hurting the team’s performance, the quarterback changed his ways. He started to play to win rather than play to get great stats. The result? His stats got a little bit worse. His completion percentage went down a little and his interceptions went up a little (although in both cases, the stats were still pretty good). However, at the same time, the passes he did complete went a lot further and he wasn’t tackled for a loss as often. The net outcome was that his new approach resulted in scoring more points and winning more games. And at the end of the day, he was happier winning games rather than having great stats.

THE ANALOGY
Like sports, businesses have a lot of performance stats to look at. Business stats often tend to be financial in nature, including things like earnings per share, return on investment, sales growth, and the like. Other stats include things like the percent of customer sales calls which result in a sale, or the number of defects.

Too much of a focus on these stats can cause the same problems for businesses that the focus on stats had for that quarterback. Often times, the best way to achieve these business stats is by taking fewer risks or delaying decisive action. The result may be great stats to put in your next quarterly report, but you could be placing your company in a position to lose your ability to compete and win over the longer term.

Strategic planning is about finding ways to win in the marketplace. Don’t let the quest for better stats get in the way of winning.

THE PRINCIPLE
The principle here is that the goal of businesses should be to win long-term in the marketplace rather than to achieve the highest short-term stats. Yes, there is usually a correlation between performance on stats and winning. For example, if all of your financial stats are horrible, your company is probably on a path to failure. And successful companies usually have pretty good stats.

However, there is usually a point at which a quest for further improvement of stats can be counter-productive. The reason is similar to the situation with the quarterback. The only way to ensure that bad performance NEVER occurs is to stop performing. And, as we all know, without taking risks, you will never achieve great rewards. We can see that in the examples below.

1. The Quest for Great Stats Can Lead to Behaviors which Hurt the Business
Let’s say you want the highest possible return on investment. One way to do that is by eliminating most of your investments. In the short term, earnings will continue to come in. And since your investments have dropped to next to nothing, your return on investment stats will look great. However, if you stop investing in the future, eventually your source of earnings will dry up as your old business model becomes obsolete and non-competitive. In the long run, you will have nothing.

Eliminating investments to achieve high returns on investment is like a quarterback trying to avoid dropped passes by never throwing the ball. The stat may look good, but you won’t win any games that way.

Instead, it is better to make a number of investments into your future, even if it drops your return on investment a little, because it will increase the likelihood of keeping your company relevant and successful long-term.

Another stat that can be counter-productive if taken too far is sales growth. There are many ways in which a quest for the highest possible sales can hurt a business. First, not all sales are profitable sales. Taking on too much unprofitable business can ruin a company. Second, taking on too much sales can clog up your operations and result in disappointing your core customers, who then take their business elsewhere. Studies have shown that in most cases, the vast majority of a business’ profits come from a small minority of their customers. If going after more business hurts your ability to serve that more profitable core, you can be far worse off, even if sales are much higher.

Third, if your business success is based on owning a niche, you may ruin that position if you try to stretch that appeal too far. Just think of all the high-end luxury brands which chased after mainstream market sales, which ruined the cache of their high-end prestige and eventually destroyed the brand.

Fourth, the attempt to increase sales appeal beyond a certain level can cause a company to try to make a product meet too many needs. As a result, instead of solidly owning one position in the marketplace, the product now confuses the customer and does not really stand for anything anymore. In other words, by attempting to not alienate anyone, the product now also doesn’t excite anyone. Most business successes happen at the performance extremes, not in the murky middle. Yes, extreme positions place a limit on one’s appeal, but those niches can be great places to be if you want to win long-term.

The goal to completely eliminate defects can also be counter-productive. A lot of the methods used to eliminate defects work by institutionalizing processes. You find a way to do things well and never deviate. Of course, when such a process is institutionalized, innovation is also eliminated. How can you get better than the status quo if you are prevented doing things differently from the status quo? Adding new products (or product improvements) will, by nature, make it harder to be defect-free, since there is a learning curve in innovation. If your product mix becomes obsolete due to a lack of innovation, it no longer matters that those obsolete products have 0% defects.

We can go on an on, but I think you get the idea. An extreme focus on statistical perfection can be counter-productive to winning.

2. Be Careful When Choosing What You Measure and What You Reward.
So how do we prevent this type of bad behavior? Well, first look at which stats are currently most measured and most talked about at your company. Then ask yourself these questions:

a) Are these the stats most associated with winning?
b) At what point does additional focus on these stats become counter-productive?
c) Are we moving into that counter-productive level of emphasis?

Then do the same thing for the way in which you reward people. This includes more than just bonuses. In addition, look at what types of performance leads to promotions and recognition. Are you rewarding people for counter-productive behavior. Have you set the goals so high that they can only be achieved by hurting one’s ability to win long term? If so, change the measurements.

3. Make Winning the Top Priority
Finally, if you want to win, you have to make winning a greater priority than just having great stats. As the quarterback learned, he won more games when he made winning a priority over having the best individual stats.

Often times, we like to measure individuals on their individual performance. But in the end, we don’t want people so focused on themselves that they forget to help the entire team win. How much of an individual’s rewards at your firm are based on team effort or on total company success? If none of their reward depends on the whole company winning, then why should you expect them to help you win?

SUMMARY
Strategic planning’s goal is to help a company win the long-term battle in the marketplace. Unfortunately, the ability to win long-term is often prevented due to placing too much emphasis on perfecting individual stats. Too much emphasis on stats can lead to actions which prevent doing something wrong, and unfortunately also prevent doing something exciting. Winning takes risks. Don’t let the stats eliminate your risks.

FINAL THOUGHTS
Brett Favre is one of the most successful quarterbacks to have played the game of American football. In his prime, he helped his teams become winners. He helped teams win by taking bold actions. As a result of these bold actions, Brett Favre also holds the record for having thrown the most interceptions. Although that is a terrible stat to own, it is a natural consequence of the type of bold actions he needed to win games. If Brett Favre had focused on eliminating those interceptions, he would not have taken those bold moves needed to win games. Don’t let a quest for statistical perfection eliminate the boldness you need to win.

Strategic Planning Analogy #310: Suggestion Vs. Command

THE STORY
Once there was a preacher who was upset that the people in the congregation were not living up to the standards of the Bible. Therefore, he decided to give a sermon on the subject.

At one point in the sermon, he got so frustrated that he just blurted out, “That list in the Bible is called ‘The Ten Commandments,’ but you treat it as if it were called ‘The Ten Suggestions.’”

THE ANALOGY
People tend to act based on what they believe. If you truly believe something is a commandment, you will act differently than if you believe it is merely a suggestion.

“Commandments” are unchanging absolutes. You are expected to follow the instructions to the letter. Your job is to obey.

“Suggestions” are optional. You can choose to follow them or go a different way. Your job is to decide whether you have a better approach than the one suggested.

One of the secrets to good strategy is accurately assessing when something is a commandment and when something is a suggestion. If you make the wrong assessment—have the wrong belief—then you will likely take the wrong action.

THE PRINCIPLE
The principle here is that many aspects of operating a business are not absolutes. There is not just a single way to succeed. That’s a good thing, because if there was only one right way to do things, then we would only need one business per industry.

My experience is that too many people view the business world as full of “commandments” when, in reality, most are merely “suggestions.” This is particularly true when it comes to business models.

Most industries tend to have a particular way in which business is expected to be conducted. Most of the companies follow the rules of that business model as if it were a commandment. They do not deviate much from these so-called orders.

However, consider this: nearly every wildly successful new upstart company began by breaking the old rules of the old business model. (And when an industry consolidates, most of the companies that go away are following standard industry practices.)

Take, for example, the DSW shoe stores, a very successful seller of fashionable shoes in the US. Before DSW, fashionable shoes were sold mostly by department stores who all used the same basic business model. Inventory was hidden in the back out of the sight of the customer. The customer would sit in a chair while a salesman would go in the back and find a pair of shoes he thought were appropriate for you. He would then put the shoes on your feet and try to pressure you into purchasing them. The price of the shoes would be very expensive, unless you were lucky enough to be there when a large sale was going on.

DSW ignored this business model and did something entirely different. They put all the shoe inventory on the sales floor. Customers were free to try on any shoes they wanted at whatever pace they wanted. There were everyday low prices instead of constant big fluctuations between regular and sale prices.

A lot of people prefer this new business model over the old business model, which is why DSW is so successful. If DSW had just imitated the business rules used by the department stores, they would not have brought anything new to the marketplace. They probably would have failed.

Amazon created a new way to buy books by adopting internet selling early. Today, most of the conventional book stores are either out of business or struggling to stay alive.

Apple’s success has also come by consistently re-writing the rules of an industry. In a world where computers were expected to be utilitarian boxes, Apple introduced elegant products with gorgeous type fonts and lots of artistic versatility. The ipod, combined with itunes, rewrote the rules of how music was consumed. The iphone and the apps store redefined the business model for mobile communication.

In an earlier blog, I talked about how there are lots of distinctively different ways to sell pizza. If you can find a dozen distinctively different successful business models for pizza, there are probably many viable business models in your industry as well.

Suggestion Implications
So what can we learn from this?

1) Don’t automatically treat the standard rules in your industry as commandments. Treat them as suggestions. Feel free to question why things are done that way and look for alternatives.

2) “Me Too” strategies rarely create outstanding businesses. When you follow the leader, you are by definition a follower, not a leader. If you want to lead, then you need to strike out in a new direction or do things in a new way.

3) Strategic planning is about finding a spot in the marketplace where you can win. It is much easier to become the winner in a new position than in one where there is already a heavily entrenched leader. Why would a customer prefer your brand if the brand is perceived as doing things just like everyone else? At that point, one tends to get into a death spiral of lowering prices (since price is all that is left to create a preference). Instead, win by making changes to the business model so that you can create a sustainable competitive advantage in some area.

4) Benchmarking is of only a limited benefit. Knowing how someone else is winning rarely tells you how you should win.

5) Encourage discussions around the underlying assumptions to your business model. I’ve been in many businesses where the business model is never specifically talked about or debated. It is assumed to be written in stone like the Ten Commandments and unalterable. It is just “the way things are done”—never to be questioned. Don’t fall into the trap of “But Nobody’s Ever Done It That Way Before.” We’ve talked about this in greater detail in another blog.

Commandment Implications
Of course, this is not to imply that everything in business is a suggestion. There are still some commandments to live by. Here is just one of those commandments to remember:

1. It can be good to break away from convention when building your unique business model. However, once you choose a particular model, your choice of actions should no longer be optional. Your strategy should mandate the proper tradeoffs so that everyone is moving in the direction of your chosen model.

For example, if your model is based on low prices, your strategy should create obedience around activities which make lower prices possible. Actions which go significantly counter to your chosen direction (even if others in the industry are doing them) are not to be tolerated. One of the main reasons why Wal-Mart has gotten so active in the sustainability movement is because it helps lower costs, which reinforces their low price position.

SUMMARY
Strategic success often has more to do with how you act differently from the competition than in how you act the same. Therefore, when designing your individual business model, be willing to break the conventional rules. Treat them as suggestions. Then, once your particular business model is in place, command that company actions reinforce your business model. Build superiority at your point of differentiation through compliance.

FINAL THOUGHTS
Eventually, if your newfangled approach to business is successful, you will become the new leader. People will start following you. Before you know it, your newfangledness becomes the new conventional approach to the industry. At that point, it may be necessary to reinvent your model again.

Analogy #207: Eight Questions

THE STORY
When I was watching the Olympics, I saw a lot of relatively obscure sports. And of course, they only televise the more popular events. There were many more not shown on TV that were even more obscure. It made me ask the question, how great is it to win a gold medal in a sport that very few people care about and very few people compete in? I’m sure the person’s mother is impressed, but who else? Virtually no fame, no glory and no money.

It is one thing to be rated the best in an athletic endeavor which many hundreds of thousands of people participate. It is quite another thing to be rated the best when only a few dozen others are trying to do the same thing.

Since the Olympics, I’ve heard about a sport called Mountain Unicycling, or MUni, for short. This “sport” consists of the riding of a unicycle up and down steep, rocky hills and mountains. It reminded me of someone I knew in college who liked to ride his unicycle up and down the steps in a stairwell at the dorms. I’m sure it takes lots of practice and great athleticism to become great at MUni, but being the best at something very few care about doesn’t get you much, career-wise. Nice hobby, but keep your day job.

THE ANALOGY
One of the most important elements in strategic planning is choosing your strategic position. Where do you want to stake your claim? Where do you want to win?

It is a lot like an athlete deciding which sport they want to excel in. Some athletes pick obscure sports to excel in. It may create inner joy at excelling in the sport, but it doesn’t provide much of a financially fulfilling career path.

The same is true in business. You can position your firm or brand to win at something which is so obscure that it never provides an adequate return on investment (the market is too small). Or you can win at something in business where the business model does not lead to profits. For example, Facebook may be a great social networking site, and I think there are a lot of people who have worked very hard at Facebook, but I doubt it will ever be a good return on investment. Facebook may have more in common with MUni—fun for the participants, but no pot of money for the investors.

Some entire industries are bad choices. NYU professor Aswath Damodaran has a web site with lots of statistics, including annual rankings of industries by their return on capital. These statistics show that there are many industries which consistently have terrible returns on capital, often less than the cost of capital, year after year (Property & Casualty Insurance, Home Construction, and Airlines come to mind). Winning in these industries is like winning an obscure sport. It may feel good to be the best, but there isn’t usually much of a financial reward.

To have a successful athletic career, you not only have to be very good at your sport, but you have to pick a sport that can support successful careers. The same is true for businesses. Winning in business has to be more than just being the best at what you do. It has to be doing well at something worth doing (from a financial point of view).

THE PRINCIPLE
The principle here is that success is most predicated on choosing the right position. All other strategic issues pale in importance. Choose the right position and it is hard to mess up execution enough to not have a measure of financial success. Choose the wrong position and even exceptionally superior effort may not yield much of a benefit.

There is no universally right position for everyone or every business. Just as certain physical builds lead one to be better at certain sports (such as tallness and basketball), individual business characteristics will help dictate which position is right for your particular situation. To help find out whether a position is right for you, I suggest asking yourself the following eight questions.

1) Is the position Desirable?
At the end of the day, a successful position needs customers who desire someone holding that position. In short, do people want what you are trying to sell? Sure, people desire cars, but if you pick a position like Yugo (cars so cheap that they are unreliable and unsafe) you have chosen an undesirable position within the automobile industry. Make sure there is a market for what you want to stand for (sounds obvious, but this rule is broken quite frequently).

2) Is the position Sizeable?
To make a profit, you need enough sales to cover all your costs plus a little bit more. You may have found a position that several people find very desirable, but if there are not enough of them, you will fail. Going back to the sports analogy, the profits come from ticket sales and TV revenues. If not enough people desire your sport, you will not get enough ticket sales or TV revenues to make a profit. Therefore, make sure you have chosen a position that is desired by enough people (big enough size) to make the business model work.

3) Is the position Ownable?
Often times, positions which are highly desirable by large numbers of people are already taken. For example, being known for “selling everyday essentials for the lowest prices” is a great position. Unfortunately, Wal-Mart already owns the position. I doubt you would be able to take that position away from them. You will lose and they will win.

Position ownership takes place in the mind of the consumers. Once they conclude that a position is strongly owned by someone else, it is nearly impossible to get them to change their minds. It is a losing battle.

The better approach is to create a position (desirable, sizable) which is not already taken. Then, you have the potential to own that position. Don’t follow the leader and copy their position. Then you will just be inferior at what the leader does. Instead, find a desirable point of differentiation. A place you can call your own.

4) Is the position Preferable?
The most frequent question I ask when critiquing positions is this: Why should a customer prefer your position versus what the competition is offering? People may like your position, but if they like the competitor’s position more, you’ve lost. For at least some sizable segment of the population, your position needs to be their favorite position.

Decisions are not made in a vacuum. Your position is being compared by consumers to other options. People make trade-offs and chose the position that most closely matches their preferred trade-off. Choose your position in light of the alternatives.

5) Is the position Achievable?
Just because a position looks great on paper (desirable, sizable, ownable, preferrable) does not mean that you will be able to pull it off in reality. For example, I may want to have the position of selling an automobile which is not only the best quality sports car in the world, but the lowest priced automobile in the world. Since it is probably impossible to achieve such a position, it is not very useful.

It’s okay to aim high with your positioning goals, but don’t aim for the impossible.

6) Is the position Believable?
Even if you could make the best quality sports car and sell it as the lowest priced automobile, customers might have trouble believing your claims. Any car priced that low could not possibly have that much quality, they would say, so they would not buy it. This is similar to the problem Wal-Mart faces whenever they try to get a piece of the higher-end quality/fashion apparel business. People do not believe that Wal-Mart’s apparel will have a high fashion image, no matter what they do.

7) Is the position Understandable?
The key here is simplicity. If you cannot explain your position in just a few words, then the customer will give up on trying to understand it. I knew someone who worked on one of the final positioning attempts for the now-defunct Montgomery Ward department store. It took several paragraphs of gobbledy-gook to try to explain how it fit into the marketplace. No consumer would ever be able to figure out that position. It didn’t stand a chance. All successful positioning share the idea of simplicity.

8) Is the position Profitable?
In the end, this is capitalism. We want to get a financial return on investment. Pick a position where winning will bring in lots of cash. How much are people willing to pay to get what you are trying to offer? During the dotcom boom, a lot of positions seemed to neglect this question.

SUMMARY
Achieving a winning position takes more than just working hard. One has to work hard on the right choice of position. That right position must be one which is desirable, sizable, ownable, preferable, achievable, believable, understandable, and profitable.

FINAL THOUGHTS
I knew someone in college who was finishing up getting her Ph.D. in Music History. She wrote a doctoral paper on a very obscure composer that almost no one has heard about, let alone cares about. This woman worked long and hard on getting that Ph.D. and enjoyed the subject matter. However, a few months before finishing her Ph. D., she started thinking about what came next.

At this point, she suddenly realized that her Ph.D. prepared her for absolutely nothing. She had no intention of teaching music history and could think of no other value in having the degree. She started to panic about what she was going to do with herself—how she would earn a living. All that time and effort to get that Ph.D. was starting to look to her like a total waste of time.

If she had years earlier asked herself questions like the ones posed in this blog, she would have realized that she had chosen the wrong career position. Then she could have taken all of that great effort and gotten to a far better career position.

Rule of 1.5

THE STORY
Having spent ten years living in Green Bay, Wisconsin, you get to hear a lot of Vince Lombardi stories. Vince Lombardi was the famous coach of the Green Bay Packers football team back in the 1960s. In Green Bay, Vince Lombardi is treated almost like a Saint.

It seems like almost every word he ever said is memorialized somewhere in Green Bay. For today’s blog, one particular quote comes to mind:

“Winning isn’t everything…it’s the only thing.”

THE ANALOGY
Over time, nearly all industries consolidate. During this phase, the number of surviving players in an industry rapidly shrinks, as weaker players are no longer able to survive the financial squeeze of consolidation.

Eventually there is virtually no one left in the industry. It is no longer a question of how close you came to winning, or where you placed in the rankings. In this “Winner Takes All” world we live in, if your business does not win, then you most likely cease to exist.

Therefore, the ultimate goal is not to place well as you strive to win. Coming in third is not an option, because there may not even be three financially viable survivors. The winner may be the only viable financial survivor producing an adequate return on investment. Hence, the importance of the saying above: It isn’t just about winning being everything, but it is about the fact that the winners may be the only thing, because it is likely that only the winner comes out thriving after the consolidation phase is over.

THE PRINCIPLE
There used to be a principle in business called the rule of three. This rule said that after an industry consolidates, there are usually three survivors—a leader, a follower, and an innovator. The leader is most profitable, the follower does fine, and the innovator keeps innovating in order to get just enough of an edge to survive.

This was a fine principle a generation ago. However, it seems that these days the survivors are limited to only two. And often, the number two is so much weaker than the number one, that there is no real contest. Therefore, I now refer to the rule of three as the rule of one and a half.

You can see this in the industry I am most familiar with, retailing:

Two surviving consumer electronics chains (one strong, one weak):
Best Buy and Circuit City

Two surviving Housewares/Domestics superstores (one strong, one weak):
Bed Bath and Beyond and Linens ‘N Things

Two surviving Dollar Store formats (One fine, one starting to struggle):
Family Dollar and Dollar General

Two surviving Home Improvement Centers (They are both doing fine only because the industry is so huge):
Home Depot and Lowes

Two surviving Discount Department Store (both are doing fine only because the industry is so huge):
Wal-Mart and Target

Two Warehouse Clubs (one strong, one much weaker)
Costco and Sam’s Club

And the list goes on and on. This does not just apply to retail. Take a look at the airplane industry—a strong Boeing and a weak Airbus. Just about all of your major consumer goods categories are down to about two big players—Coke & Pepsi, Unilever and Proctor & Gamble, General Mills and Kellogg.

It is inevitable. So what should you do about it? Here are some thoughts.

1) Remember the words of Jack Welch: If you cannot be #1 or #2, get out. It’s better to get out early when more people are still deluded into thinking they have a chance to win and the mix of buyers will bid up the process. Take a look at Target Corp. (Formerly Dayton Hudson). Early on, they saw the handwriting on the wall and sold off a big chunk of their southern and western department stores at a great price back in the 1980s. May Company, who waited until the end when there was only one player left to buy them (Federated Stores) did not get as good of a deal.

2) Think like a guerrilla fighter. Since there will only be a couple of positions at the top, most companies will be left fighting for the crumbs that fall of the table. Quit acting like a leader if you have no real shot at being one. Instead, use strategic principles designed for guerrilla fighting.

3) If you cannot be a leader in any of the business spaces already defined, create a brand new category for which you have an opportunity to lead. For example, cable network TNN was not doing well in its former format, so it reinvented itself as “Spike TV”, the #1 network designed for men.

4) If you cannot become #1 on your own, join forces with a network of businesses that are building the #1 network to solve a problem. It’s better to be a small part of a winning team than to be on your own with nothing.

SUMMARY
As industries mature, they go through a period of consolidation. Eventually, only a small handful of major players remain. Sometimes only one or two of the major players makes a decent return on investment. Therefore, when the industry reaches this point, it is important to play to win. And if you cannot win, then play a different game.

FINAL THOUGHTS
I’ve often been asked what is the perfect strategy for a given situation. My answer is that there is no single ideal strategy. No matter what strategic option you look at in a particular industry, you usually find both winners and losers using that same strategy. Stop looking for the ideal strategy and start looking for your ideal strategy. For a select few, the strategy of winners is their ideal strategy. For the rest of us, we need to do something else.