The Future of Retail

A Look Into the Future of Retail

The future of exactly how retail trade will evolve is not completely certain.  It definitely will change, but the exact way that will occur is unclear.  However, one certainty is that it will involve the use of emerging technologies.  And the question for retailers is how willingly they will adopt these technologies.  In the past, reluctance to adopt new technologies has shuffled the deck of successful retailers.  One thing is certain, how technologies are implemented will be critical to the emerging strategies of retailers of all sizes.  

There are many technological influences that will affect interactions of people with retail establishments.  While the following scenario may seem like a far-fetched vision of the future, the convergence of technology, consumer preferences, and the need to reduce costs will lead to implementing a mix of technologies in new ways that have been previously unseen.  The question for retail establishments will be whether they will embrace or resist the changes.  Many embraced the concept of e-commerce in the early years of the 21st century, but many were also resistant.  The onset of the Internet led to some companies going away into obscurity and other companies emerging as new power players.  The coming years will result in similar shifts in the market.

One example of the continual shift in retail involves the plight of malls.  Malls emerged in past decades as a popular way for shoppers to find specific items they were seeking.  The ability to shop many outlets in a short time led to large and successful marketplaces. However, that model has declined in the last decade.  A list of failed malls can be found at the website Dead Malls.  Certainly the proliferation of online shopping has caused the slide in demand for malls.  Even long-term staples of malls like Sears have not been able to avoid the decline and are closing stores in large numbers.  This is just one symptom of the shift in demand for this type of historical outlet.  And Macy’s is not far behind Sears’ exodus. These large outlets are called mall anchors, and without them the future of malls in their current format looks bleak.

If you look closely, you can see the shift occurring in real-time.  While some technologies are not mature enough today to complete the shift from the brick-and-mortar format to an effective online format, all of the technologies needed for the future of retail exist today.  The key will be how the technologies are mixed to determine the exact experience.  As the quote by Roy Amara stated, “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”  This will certainly be true in how people shop for goods.

The following scenario depicts how the shift may occur.  It outlines the experience using current technology tools (as of 2016).  While it is unlikely these are the exact tools that will be used in the future, this is intended to show that today a retailer could implement this exact scenario in at least a rudimentary format.  The question is how a retailer today can prepare for this eventuality and position itself strategically to take advantage of the future market.  

The Future Retail Experience

The year is 2025.  You need a pack of sandpaper for that do-it-yourself drywall job at home.  The thought of running to the store crosses your mind, but it is overpowered by the desire to finish the job.  So, you throw on the Internet visor (current technologies: Google Glasses, Google Cardboard, View-Master® Virtual Reality) and take a trip to the virtual store (current technology: Second Life).  You think about going to Amazon, but decide on Wal-Mart.  

As you walk through the door, the virtual greeter says hello and asks if they can help you (current technologies: Siri, Cortana).   You reply with a simple “no” as you walk by, but you are amazed at how life-like those greeters have become ever since the retailers implemented their newly updated human-like interface for “employees”.  Ever since then, you really forget that the greeters and cashiers are really not human.  They even have human quirkiness, and every “individual” truly seems unique.  “The artificial intelligence has really evolved in the past few years”, you think.

You head to your favorite part of the store – the hardware section.  As you navigate the aisles you see a few things that you forgot you needed.  You grab a two-pack of paper towels and toss them into the automated cart following just behind you to your right.  And as you enter the destination aisle you realize you also need paint brushes.  You grab them and toss them into the virtual cart.  As you get halfway through the aisle you see a flashing sign that sandpaper is out of stock.  It’s hard to believe that with all this technology anything is ever out of stock.  How frustrating!  Maybe going to Amazon would have been better.  That’s the next stop.

This will take a little longer than you intended.  You head to the front of the store to the register section and press your eye to the scanner and your account is debited (current technology: EyeLock®).  You walk out of the Wal-Mart and next door to the Amazon.  As you walk to the hardware section you pick a few items out and toss them into your automated cart.  You get into the hardware aisle and hit the jackpot.  There is the package you need.  You pick it up just to make sure it is the correct coarseness. Yep, that’s it.  And they have twelve packages in stock.  You toss two into the cart.  

Time to go home.  Fortunately, Amazon recently had a huge breakthrough in retail transactions.  They added that Immedi-Checkout capability to their stores and now you can check out right from the isle you are standing in.  No more “suggestive selling” as you head out of the store.  You check out and head for home.  

You remove your Internet visor and get back to work.  You check the time with your personal assistant Jarvis (current technologies: Siri, Cortana) and ask him to remind you when your orders will be arriving.  “Yes, sir”, he responds dryly.  You ask yourself again why you chose a butler-esque assistant.  He updates you that your orders will be arriving in about twenty minutes, and you intend to get sanding as soon as your packages arrive.  The Amazon drone (current technologies: Amazon / DHL) should be arriving in 35 minutes and the Wal-Mart drone will be arriving in 40 minutes.   
What Will You Do?

A key point to developing a business strategy is to develop approaches and responses to the marketplace.  While this vision of the future is only a possibility, your strategy must take into account foreseen and unforeseen threats.  So, imagine you are a retail establishment competing in this environment.  What will your response be to competitors who have the benefit of a virtual existence and very little brick and mortar costs?  

This scenario was built on technologies that are real today.  They are not evolved enough today to support the actual activity outlined in this scenario, but they are also not far from this possibility.  Google Cardboard is a very simplistic virtual reality product, but this underscores how easy it will be to mass produce virtual reality tools.  Second Life is not exactly the most realistic lifelike experience, but it is improving quickly.  Drone technology is not currently permitted for air delivery in the United States, but it is unlikely to think that will not change in the next decade.  If it is not these players fulfilling these capabilities, then it will be other competitors who bust through the barriers.

As an example, Second Life is very “boxy” in its look and feel, but in theory Wal-Mart could set up a store today that would mirror a real-life store in a virtual reality environment.  Now, put together slightly better virtual reality tools with a better Second Life experience, and the idea of walking through a three dimensional proxy of a real Wal-Mart store is not impossible.  And why would a person want to make a trip to the store for a mundane item.  Who would not want these conveniences?  

Obviously some competitors will not change when technological breakthroughs occur and likely will not survive.  Today, we have three large brick-and-mortar general retail giants (Wal-Mart, Target, and Kmart), many specialty retail giants (Home Depot, Lowes, Office Depot, Best Buy), and scores of smaller specialty retail competitors behind them.  But at some point Amazon will be intruding into their space, just as the competitors will want to make inroads into Amazon’s space.  Amazon will be approaching this world from a technology-expertise perspective.  Wal-Mart would approach this world from a retail-expertise perspective.   Where the two meet we could see this evolution occur.  Others will likely be lacking in their ability to adapt to the fabricated world discussed here and will become extinct.  

So, if you are a smaller retailer then how will you compete?  Will you depend on some third party to develop the software that will let you go online and compete in a Second Life fashion?  And who will provide your drone fleet to fulfill the delivery?  Surely, those that provide the easiest shopping experience will have the greatest upside opportunity.  But if Amazon ends up owning that technology, will they really want to share it with a competitor?

These problems highlight the challenges of owning a business and attempting to determine future trends, especially in retail.  If you cannot compete on price or technology, then is there another way to compete?  Perhaps one could compete through experience.  This would be a differentiation strategy when looking at the generic strategies.  Not everyone will want to do business via high technology on every purchase.  Plus, humans are social creatures, so some level of contact is innately desirable in the retail experience.  Perhaps larger regional malls might exist in urban areas.  

For those that will want a different experience, there will also be huge opportunities.  Some people like to feel the fabric before buying their clothing.  Some want to see the unhindered look of the color of the product through their own eyes or to feel the smoothness of the fabric in their new purchase.  For those creating an environment of differentiation, such as a Starbucks, Nordstrom, Wegmans, and local antique and collectible shops, there will be the upside of a declining number of competitors offering such experience.  These may become more of a destination for shoppers than they are today.

The Overall Impact

By the way, it is not just businesses that will be impacted in this world of new commerce.  It will also be people affected in the jobs that are available.  Note that all of the technologies had a common theme: minimal human interaction.  So, if drones are delivering, then humans are not.  Drones are less expensive, even if they have a high breakdown rate.  They are traceable, cheap to operate, cheap to repair, fairly inexpensive to replace, and do not result in workers compensation claims when they are damaged (unlike humans).

So, it is not just businesses that need to continually improve themselves, humans will be required to update or face obsolescence as well.  If you are an individual, how will you survive this environment? As companies employ more and more technology to automate basic human tasks, it will be increasingly important to continually improve one’s own skills.  It will not just be the large or small business who is singled out in the onslaught of disruptive technologies.  People will be affected as well and will have to continually develop their own strategy for survival in an automated world.

 

The Importance of Consumer Surplus

Why is the Happy Meal such a popular product?  Why do elite brands rise to thei top of their markets?  How does iPhone excel in meeting customer demand?  Why do companies focus on value added initiatives?  Why is proper pricing a critical but under-emphasized exercise?  The answers to these questions are tied to a concept found in economics called consumer surplus.  Consumer surplus is the benefit that a person derives from a product in relation to what they pay.  It is a concept that when applied to pricing methodology helps a company position what they are selling.  Because economics is a social science, consumer surplus is a social science tool to help companies project the value of their product through pricing .  Despite its effectiveness, it is often not considered when companies are developing their pricing methodology.

Consumer surplus is a concept that was originally solidified by economist Alfred Marshall over a hundred years ago.  It delivers a framework for how companies should think about their product pricing.  Consumer surplus also provides key insight into understanding how Porter’s Generic Strategies work.  Understanding consumer surplus will help a business unlock how they want to implement the Generic Strategies because the strategy is actualized in the company’s pricing model.  Remember, broadly speaking a company pursues a cost leadership strategy or a differentiation strategy.  Ultimately, understanding the perceived consumer surplus of a product leads to the pricing methodology, which is a component in choosing a generic strategy.

Understanding how people think and feel is integral to how a company prices its products.  Pricing methodology is often a mystical process, especially to small businesses.  However, if a company understands the concept of consumer surplus, then it delivers a tool that adds valuable insight into product pricing.  The key is to understand how consumer surplus works so that it can be used as a tool to fully optimize a company’s pricing.  When pricing is optimized, this leads to a greater likelihood that profitability will be optimized.

Understanding Consumer Surplus

Consumer surplus deals with the perception that a customers has about the value of the product they are purchasing.  Basically, consumer surplus is the additional benefit that a consumer receives above the cost of the product (thus the surplus component of the name).  In other words, it is the perceived benefit and value that a person receives less the actual price of the product.  Using a bottle of water as an example, if it costs $1 to purchase the bottle of water, but the customer receives $2 of perceived value from the purchase, then the consumer surplus for that purchase is one dollar.  Ultimately, the more that a person pays, the less perceived consumer surplus they will enjoy, ultimately potentially reducing their desire to purchase the product.

Here are two examples that show how consumer surplus works.  Assume that the two examples are the same product that is purchased at two different locations for two different prices, but by the same customer on the same day.  Look at how consumer surplus is reduced in Example 2.  In this case, the consumer had less perceived benefit from the purchase at Location 2.

LOCATION 1:   $2.00 Perceived Value –> $1.00 Product Purchase Cost = $1.00 of Consumer Surplus

LOCATION 2:   $2.00 Perceived Value –> $1.50 Product Purchase Cost = $0.50 of Consumer Surplus

Looking at the two examples above, the customer would likely purchase in either scenario, because they had excess consumer surplus in both purchases.  If these two outlets were next to each other, the customer would gravitate to Location 1, but if it is not convenient, then the price at Location 2 is still a purchase scenario for the customer.

So, how can a company use this concept to maximize the pricing?  It is easy to determine the value that customers have for a product by doing market research or a simple survey.  Using a survey,  you can look at a product from the perspective of the consumer to determine how your product is perceived in terms of value.  Sampling a large enough group will enable a company to determine how much their product is worth to the consumer.  Very large companies have the resources to do this and are always optimizing their prices, often by individual location.

Applying the Concept

As an example, consider the iPhone and the amount of consumer surplus the company creates for its customers.  In research that was published in 2012, iPhone users were polled and valued their phone at $313.27.  In comparing this to the actual pricing, Apple was charging $199 for their model at the time (with two year contract through the telephone provider).  That means that there was approximately $114 of consumer surplus for the iPhone user at the time, assuming they were paying $199.  For those paying less, the amount of consumer surplus increased.  The research did not break down the details by model in the published results.

Additionally, in the aforementioned survey the next closest competitor was Android (a fragmented market from the manufacturer standpoint) and the average value those users assigned to their phone was a $219.99, almost $100 less in value.  This article compares the iPhone 4 and the Motorola Droid X pricing and prices both at $199.99.  If the prices of both are equal, but consumers view more value in the iPhone, so that means there is more consumer surplus in general for iPhone owners.  When there is more consumer surplus – meaning more perceived value – then that item will outsell its competitors most of the time.

Some reports indicate iPhone sales are declining and price is generally cited as the reason. However, this is the phone in the market that every other manufacturer strives to emulate.  Originally, the iPhone had a rich feature set.  It is the owner’s primary phone, camera, portable computer, and iPod music player.  Additionally, there are some other benefits that defy definition.  Consider status as an example, especially among the early adopters.  The lifestyle for those that value the brand (longtime Apply and Mac buyers); and the vast availability of accessories available for this brand.  All of these items add to perceived value, which in turn increases consumer surplus.

Sometimes, odd scenarios arise that allow companies to charge more because of the lack of prior success in a product.  Apple found this out also, as its iPhone 5C sales were far short of expectations.  Where most companies would have found failure in the release of a new product, Apple found it could actually get away with charging more for subsequent models because of the lack of sales of a less expensive model.

This may be the reason that Apple outsells the Droid competitors on the United States, but the Droids win internationally.  The varied perceptions will change the amount that a company can charge from region to region, and country to country.  Because the iPhone is a product with one of the largest price tags, but also one of the most successful products in history in terms of sales, it is important to look at this product when studying pricing methodologies.

It Is Truly Mental Arithmetic

So, while no one consciously adds the benefits of a product in their mind at the time of purchase, they are subconsciously doing the math and at some point prior to purchase to establish a value for the product.  Think of a time when you mulled over a purchase.  As you went back and forth over the purchase on a conscious level, you were doing arithmetic subconsciously in your head.  In that type of a scenario, you only purchase when the value you perceive is more than the cost.  There must be consumer surplus to execute the purchase.  The greater the surplus, the harder it is for the consumer to walk away from the purchase.  And when devoid of surplus, people generally walk away UNLESS some other force is altering their decision-making process.

When looking at your product, think about the subconscious list that the prospective customer is adding up in their mind at purchase.  Can you get the value of the perceived features and benefits above the price tag, and more importantly can you convey that message.  If you can not convince the buyer, and reinforce that message continually, then you will fail to accumulate sales.  Remember, it is not just making the product or service available, it is continually reinforcing the value to the customer.

Back to the generic strategies.  Now that there is an understanding of why people make the purchase, let’s apply that to a chosen strategy.  If you do not show value to your product, then that diminishes the consumer surplus that customers will derive, minimizing your ability to operate where you want to within the generic strategies.  Consumer surplus shows us that we must continually look for ways – preferable in an inexpensive way – to increase the value of the product or service we sell.

Adding Value to Increase Consumer Surplus

The easiest way to boost the perceived value of a product is to increase the value of the product to the customer.  Oftentimes, manufacturers want to reduce the quality of the product by reducing the cost of inputs.  This may mean decreasing the size of the product or the packaging of the product.  However, when the rest of the market is moving to decrease the perceived quality of a product, this may be the exact time that a manufacturer should be increasing the perceived value of their own product.  This may allow one to improve their position and alter their generic strategy.  And of course, the opposite is true.  If everyone else is improving their product and moving to a differentiated strategy, then you may want to move in the opposite direction to satisfy a need.

Some believe that adding value requires someone to “sell” the features and benefits.  However, no one has to “sell” individuals on the value of an Apple product.  Just picking up the product sells the individual on the product.  It was designed with simplicity in mind.  While this might be hard to relate to food or cars, both can be drawn back to the experience.  What is the experience of the restaurant?  What is the experience of the service aspect of the dealership?  This is what Steve Jobs hammered his company to strive to perfect.  Make the experience more than just about a transaction.  This will add to consumer surplus.

It is not uncommon for higher end automobile dealerships to pick up their customer’s vehicle for service.  This makes more sense than making the person wait in a stale waiting room with old coffee and daytime television as the entertainment.  With a pick-up service, a person does not have to take a day off of work to get their vehicle serviced.  But, isn’t that a service that ANY auto service company could provide?  Why does that have to belong to the high-end automotive market?

This is one example in one industry.  The key to improving consumer surplus is to find ways in the industry the the company operates within to improve on the perceived value that the customer has of the company, and to do it in a way that is inexpensive.  To fend off competitors and grow in a market, the company has to maximize the perceived value that a customer has about the product or service.  The key for any company must be to maximize the perceived value of the product, which means that the customer will have more consumer surplus than the competitor can provide.

The following are some low cost ideas on how a company can maximize consumer surplus

• Free Consulting – People are generally indecisive when they are unfamiliar with a scenario.  Free consulting can remove doubts the customer may have about the product and increase consumer surplus.

• Free Samples – Educate customers on other products within the company and giving extra product is a great way to increase consumer surplus.

• Scheduling Service Visitations – unprompted service visitations are an excellent way to maximize consumer surplus.

• Leveraging Technology – Technology does not always mean computerization and that one has to be impersonal.  But it can increase productivity and minimize cost.

• Availability Outside of Normal Business Hours – Service providers that are available outside normal business hours generally get to charge more.  Call a plumber at midnight and you will see a differentiated rate.

• Giving Out Your Cell Phone Number – The act of giving out your cell phone number is an extremely low cost for the business but large gain for the customer.  Customers feel good when they have “special” access to resources.

• Increase the Portion Size – Movie theaters often give a free refill on the large, but this article calls the purchase one of the most overpriced products.  But hearing “free refill” gets people to spend more on an already overpriced product.

So, why do these small upgrades matter?  The answer is that all of these things maximize the perceived value of a product.  When you increase the perceived value of a product, you increase the consumer surplus.  Consumers will only purchase a product when the amount of surplus (meaning additional benefit) they perceive exceeds the cost of the product.  And the more consumer surplus a company can project, the more likely a buyer is to purchase the product.

The objective for every company is to maximize the consumer surplus that a customer perceives in their purchase.  The happy meal, as mentioned at the beginning of the article, maximizes consumer surplus for two people:  the parent and the child.  The parent feels like they have done something to make their child happy, the one person they will do anything to make happy.  And the child is legitimately happy at the time of purchase.  Think about the additional benefit – or consumer surplus – that is generated in the sale of a happy meal.  Few products can generate consumer surplus for two people simultaneously in the way that a happy meal can.

Marvel-ous Planning

A business’s strategy should take a long view of the general direction that the company is moving. The plan should have a strong general direction but at the same time be flexible enough to adapt for changes that can not be known at the inception of the plan.  You have likely heard the analogy to an airplane flight used in terms of planning.   An airplane is off course most of the flight.  A plane is not on the exact path that it should be travelling as much as 50 percent of the flight.  Despite that, planes almost always land in close approximation to the correct time and at the correct airport.  It is the rare problem that causes some great variance from the standard landing.  Ultimately, the destination is the plan.  The success frequency is due to a strong plan and regular course corrections during the trip.

This is no different than a business executing its plan.  It is generally off course and it is up to the owners, executives, managers, and employees to make sure it is regularly nudged safely back on course.  In this respect, a company is just like that plane ride and constant corrections can result in impressive results.  The plan is the plotted course, and the plan will identify the general direction the company should be moving toward.

One shining example of such planning today is that of Marvel Entertainment (formerly Marvel Comics), a subsidiary of The Walt Disney Company.  Marvel Comics was founded in 1939 as Timely Publications and became Marvel Comics in 1961.  And while most people older than 20 will know the company as a comic book publisher, future generations will know them primarily as a movie studio.  The company has successfully transformed itself into a movie making machine and their approach is actually changing the industry.  This is due to their vision and strategy.  These have propelled them to the height of success today, and the company has not even scratched the surface of what it may accomplish.

Specifically, Marvel has a long-view plan of how they intend to build their movie schedule and it is really an excellent example of how long-term business planning should be done.  Because of Marvel’s history as a comic book company it has a stable of characters that is rich with opportunity.  Though the days of paper-based comic book sales are largely in the past, the intrinsic value of these character-driven properties has never been greater.  With thousands of well-developed characters, the company began years ago moving from a print-based business into other ventures and the eventually into a movie manufacturing machine.  Several years ago, Marvel began developing a plan on how to maximize the value of these characters on the big screen and with that plan hitting full stride today they continue to develop the plan to the point that they have a rough draft of what they want to develop far into the future.  .

Most people and organizations have a difficult time planning more than a few days in advance.  But the entertainment company has a plan to produce movies that currently stretches through 2028.  Like that airplane flight, they have release dates scheduled three years in advance and generally know the mix of movies they will be releasing five years into the future.  Thus, they have effectively announced their destination.  The plane took off in 2008 with the release of Iron Man, so as it stands now Marvel is in the midst of a twenty year flight.

To date, the company has produced nine interconnecting movies in five different character franchises with a tenth movie featuring a sixth franchise to be released in the summer of 2014.  Thus far, these movies have tied together in the Avengers franchise, but also stand alone in their own series.  This has been a slow progression for the company, but now that the company has had successes, they are able to take risks with lesser known properties like the upcoming Guardians of the Galaxy.  They slowly fight to gain ground, spend a little time settling on a plateau, and then thrust forward with a new venture.  A truly valuable lesson for any business.

The Marvel experiment has forever changed how companies think about movies.  Its parent Disney hopes to recreate this “magic” with another of its recent acquisitions:  Star Wars.  And now Warner Brothers, Fox, and Sony are planning the same tactic with their licensed lines.  It is not often that a single player can change the whole dynamic of an industry, especially one so complex as the movie entertainment industry.

The Importance of a Vision

Announcing plans to release movies over the next fourteen years may not seem like a major commitment to the casual observer, but consider that each movie unto itself is a huge undertaking and the magnitude of what Marvel has pulled off thus far comes into focus.   Consider the resources required to make one movie, and then sprinkle in the need to retain valuable talent like Robert Downey, Jr.  While this may not seem like a big deal from a planning standpoint, small hiccups can become big problems when you are concerned about the consistency of the product.  Getting an actor to replace some like Downey just would not do.  This is where the plan must have a strong vision and be ready for course corrections.

The plan is much bigger than any individual piece, but the plan is strong because of the individual pieces.  With strong planning, Marvel has already started developing concepts that will allow them to fill in the gaps when major stars leave their respective franchises.

The planning aspect is critical when thinking about tackling monumental problems like retaining key actors.  How can the actions of Marvel be relevant to another business?  The “best practice” is simple.  It is the vision.  The vision that Marvel has for its movies is to create a universe of interconnected movies that creates a self-propagating means of growth.  Kevin Feige, the president of Marvel Studios, is largely regarded as the architect of Marvel’s grand strategy.

One article points out Disney’s acquisition of Marvel in 2009 was considered less than stellar because of Marvel’s previous lack of planning.  Marvel had sold the rights to some of its marquee characters to other studios like Fox and Sony many years earlier, and thus could not control how those other studios managed the creative process.  The pain experienced in the 1990s and the early 2000s would serve as Marvel’s basis for creating its own studio in the mid-2000s and thus retaining the creative control of the characters it owned.  Disney recognized opportunity in this planning redesign and pursued Marvel.   The vision was born for Marvel to control the quality of the way the characters would be presented on screen.

Marvel under Feige had decided to very purposefully and intricately “link” their movies together.  They teased future movie endeavors by offering a teaser scene at the end of each movie that links it in some way to another part of the Marvel Movie Universe.  Fans wait for these nuggets and sometimes look with as much anticipation to these future hints as they do for the movie they came to see.  The end of every movie has had a small link to another one of the movies.  The plan is always moving forward.

In other cases, there are large instances of characters crossing over between movies.  Two characters have had significant roles in Iron Man 2, Avengers, and Captain America 2.  As the overarching story progresses, more and more links are created.  Captain America 2 had several such links to future events and other franchises revealed in the movie.  This is part of the slow-simmer growth that creates texture to the overall body of work the company is building.

The planning involved in Marvel’s undertaking is monumental, but so is the payoff.  Currently, the studio is producing two to three movies per year and may increase that rate in the future.  At that pace, the studio will have produced somewhere between forty and fifty movies by 2028.  And of course by that time, the plan will be extended out to 2050 and beyond.  The three Iron Man movies have grossed over $1 billion.  The first Avengers movie grossed over $600 million.  If this trend continues and Marvel can manage to average $500 million per movie, that will constitute a valuation that could approach $1 trillion in movie receipts from the inception of the plan in 2008 with the release of Iron Man to its currently planned 2028 releases.  And that does not account for income coming from other merchandising sources.

Applying the Vision

While it may seem difficult to relate the Marvel movie scenario to another business, it really is quite simple.  The ultimate takeaway from the way Marvel has structured their movie universe is that the vision is a rough draft of the next fourteen years.  While no one outside the studio knows the intimate details, Marvel has created a breakdown of their vision called “phases”.  They are currently in the midst of Phase 2 and have Phase 3 largely fleshed out.  That takes them out through approximately 2016.  Each phase is roughly connected and contains a small cell of activity consisting of several movies.  Generally, Marvel is executing in one phase and planning ahead one phase.

Another key takeaway from Marvel’s vision is that success does not occur overnight.  It takes a long time to get all of the pieces in place that will lead to success in any phase of the plan and often there are failures along the way.  Long before developing its current plan Marvel sold away its rights to characters considered among its best and most popular.  The Spider-Man and X-Men franchises are controlled by Sony and Fox respectively.  In retrospect that was an error, but Marvel persevered and through intricate planning turned some of their less popular characters into household names.

Additionally, no matter how much planning a company does, at some point they must acquiesce that some products are not meant to be successful.  Prior to implementing the plan a Hulk movie was released in 2003 that was not a box office success.  After the implementation of the plan a second Hulk movie was released (the second of the current nine movies) which also resulted in a lackluster result.  For now, Marvel realizes that a Hulk movie is not a good bet.  For now they have to accept that character as a complementary piece in other movies.

The primary lesson in looking at Marvel is that first and foremost you must have a plan, but equally important is that every activity, whether small or large, should be building for the future.  They must “click” into the overall vision.  This is absolutely applicable in every business.  Actions today, however small, should be building for a larger future.  They should be adding texture to what the business already is and also at the same time what the business strives to become.  Activities not related, should be corrected, much like what Marvel does when necessary.

A final lesson concerns how a business addresses the loss of key players?  Generally they do not.  But Marvel does prepare for the that.  They have it covered as part of the overarching plan.  The actors playing their two arguably most popular characters – Iron Man and Captain America – have already declared they will leave after a few more movies.  Early indications are that Marvel will not replace them with other actors.  They appear to have a more realistic plan which seems to be to retire those characters which they can do easily because they will continue to introduce new characters and have less reliance on the earlier introductions. How many businesses tackle the problem of lost personnel years in advance of their departure?

Changing the Landscape

A well developed vision leads to success.  Success breeds competition.  Competition fires up entrepreneurialism.  And the landscape changes.  As the Marvel machine builds steam it has become willing to take gambles in the cinematic arena. As an example, the Captain America 2 release in April 2014 changed a long standing paradigm on the part of movie makers.  As the largest ever grossing movie ever with an April release, movie makers will now consider placing their new releases in April.  April has never been a popular month for releasing movies, but Marvel’s success will have other studios rethink that tactic.  Why face continual competition in the summer when you can stand atop the market alone in April?

Additionally, the effectiveness of a good plan is very evident when comparing the success of Marvel’s approach with that of its key rival DC Comics, a Warner Brothers owned subsidiary.  Warner Brothers / DC has a similar stable of characters that they can mimic this strategy with.  However, Disney / Marvel have pulled it off so well that few think Warner Brothers with its DC Comics characters can pull it off.  DC offers huge superhero names like Batman, Superman, and Wonder Woman.  But Marvel has been so efficient that DC has already once postponed their next Batman & Superman movie, a sequel to Man of Steel in 2013.  Marvel is so good that DC has to act cautiously so as not to destroy customer and market confidence.

DC claims a similar strategy, but their activities are not so clear.  The vision clearly is lacking the crispness of the Marvel strategy, which it should since Marvel has an almost decade head start and countless victories to showcase.  Until this point, DC hero movies have been standalone in nature.  The last successful outing was the Christian Bale Batman trilogy which was successful in its own right, but has now been discontinued.  Because of a lack of strategy DC has to “reboot” their characters with each iteration.  There was a Superman movie in 2006, but not tied to the 2013 series.

DC in comparison to Marvel looks to be in disarray.  There is no doubt that Warner Brothers has the resources to duplicate the Marvel strategy, and the success is almost guaranteed to be similar if the quality is even just “good”.  The point is that with a well developed vision, refined by the rigors of time, experience, past failure and success, Marvel will be able to execute much more smoothly than DC in the coming years.  Eventually, if DC creates a clear vision and sticks to it by aligning their activities and character properties, they should prove to be successful as well.

And of course successful breakthroughs result in emulation not just from outside an organization, but sometimes from within as well.  DC following Marvel’s lead is a no-brainer.  But another interesting trend has developed.  Sony, who released the first X-Men movie in 2000 (remember, another set of Marvel characters), has now mapped out the next few years’ of X-Men movies with several spinoffs in the works.  Sony is doing the same with Spider-Man (again, another of those Marvel characters).  And finally, Marvel parent Disney purchased the Star Wars franchise in 2012 for $4 billion.  Some initially thought this was an overpayment, but looking at the potential return of the Marvel Universe movies, Disney may recoup this investment in a handful of movies in this well established universe.  Not only will the market win from Marvel’s vision due to increased and improved competition, but Disney will win over and over through those successful movie releases of the characters it controls directly and those it licenses to other production companies.  Disney stands to gain significantly from a Marvel-ous plan.

 

The Two Aspects of Disruptive Innovation

Sensing disruptive innovation in the marketplace is critical to the strategy of any business.   Disruptive innovation is the result of either a new technology or the mixing of previously unrelated technologies that create a shift in demand, generally in a movement away from the existing product or service.  Recognizing that some disruptive innovation – most likely the result of a new technology – will eventually change the market is critical to the long-term survival of every business, and thus should be considered in the overall business strategy.  There are two aspects that every business must be cognizant about when planning around disruptive innovation: the internal aspect and the external aspect.

The External Aspect of Disruptive Innovation

In looking at the external aspect of disruptive innovation, companies like Kodak and Motorola are prime examples of companies significantly impacted by the external aspect of disruptive innovation.  They were both premier companies in their respective markets when the demand within their product categories shifted.  Even with household names and relatively limitless resources, neither could sense the coming wave of change that would wash over the marketplace rendering their products undesirable.  What is critical to understand in both scenarios is that they each attempted to compensate for the changes and did not necessarily make illogical choices on how to appease their individual markets.  However, they ultimately chose incorrect responses for their specific scenarios. In the end, each of those companies failed to a significant extent, but for different reasons.

Kodak’s failure was due to the rise of a very efficient substitute product – digital photography.  But it wasn’t just digital photography in general, it was the camera phone specifically.  Digital photography made Kodak’s core products – film and photo paper – obsolete, even though the company did try to keep pace.  Slowly digital photography was eating into Kodak’s market in the form of quickly evolving digital camera models.  They responded by investing heavily into several technologies that should have placed them properly into the shifting demand.  They released a series of digital cameras, photo printers, and scanners.  All internal signs were that this would enable the company to survive.  Then along came the camera-enabled cell phone, causing yet another shift that was almost impossible to previously perceive.

In a time gone by, people liked having photos of their family, friends, pets, and travels on paper, often displayed in frames on walls and desktops.  Most often these photos were taken on Kodak film and printed on Kodak paper.  However, after several demand shifts, most people were simply content to let those photos sit on their most trusty companion, their cell phone.  Spurred by another technological advance, cheap digital storage, people were content to just keep all of these photos on their phone with a backup of them on their computer.  And eventually these would end up stored on the cloud.  The need for paper-based photos simply ceased.

In fairness, looking retrospectively at the situation there were only a handful of choices available that really would have made Kodak viable in the long run.  One: go into the cell phone manufacturing business, which at the time would have made no sense.  Two: license their deep and protected knowledge to a prominent cell phone manufacturer early in the process.  This too made no sense, as camera phones were ubiquitous in just a small number of years, after which Kodak was no longer needed  Ultimately, they did sell their intellectual properties off, but it was so late in the process that it did not provide for the long-term viability of the company.  While decisions about what they should have done may be clear now, such options would have made little sense at the time.  This is a key lesson for businesses when new and foreign challenges arise.

Kodak was a staple on the Dow Jones Industrial Average from 1930 to 2004. Consider all of the technological changes that came and went, as well as all of the cycles of boom and bust that they lived through, only to be undone by new technology.   Throughout their life, they stayed a very well respected company.

Motorola had a different problem.  Where the demise of Kodak involved many difficult factors, some of which were outside their industry, Motorola’s problem was more internal to the industry itself.  It had overwhelming success with a product called the Razr. Early on, the phone had tremendous sales and became one of the most recognizable and best selling cell phone models of all time. However, due to some fast changes in the industry, demand for that product waned.

Near the height of their success in the cell phone industry, an upstart called the iPhone showed up on the scene and completely changed the expectations for cell phone users.  People wanted the richer experience of a smartphone.  And customers began to migrate from Motorola to the iPhone.  One report indicated in 2008 the over twenty percent of iPhones were purchased by former Motorola Razr users.  And despite this, Motorola could not seem to developed a proper response.  In the long run the company could not keep pace inside the cell phone industry.

The cell phone manufacturing arm of the company began losing money for the overall organization, so Motorola smartly decided to split into two companies:  Motorola Solutions and Motorola Mobility.  Motorola Solutions was making money, whereas Motorola Mobility was losing money and slowly killing the whole organism.  By cutting off the cell phone division, Motorola Solutions was left with a solid portfolio that garnered healthy profit.  As proof, its stock price has had healthy growth since the divestiture.

Meanwhile, Motorola Mobility has meandered through the tech world since that time.  It was initially purchased by Google in 2012, who then sold it to Lenovo in 2014.  There may be more than meets the eye as to why Google originally purchased Motorola Mobility, but regardless the reason, there was not enough upside for Google to keep the manufacturer in its portfolio of holdings.  Now Lenovo will give it a shot in the cell phone arena under the Motorola Mobility banner.

Those two examples of the external aspect of disruptive innovation are specific to a single industry.  However, there are interesting examples of disruptive innovation in other industries and business models.  In the automobile insurance industry, disruptive innovation altered the agent-delivered model that the historical heavy players utilized.  Failing to recognize the impact of innovative advertising, a call-center-driven sales force, and online sales capabilities, opened the door for relative upstarts like Progressive, Geico, and Safe Auto to master those markets and gain a significant foothold.

Geico is a shining model of disruptive innovation.  It has been around since 1936, but it was not until it used a new delivery methodology that it was able to grow in the insurance market after its acquisition by Berkshire Hathaway in 1996.  When everyone else of significance was sitting on their tried and true distribution model, Geico was streamlining operations and dumping the savings from an efficient operation into advertising.  This has catapulted Geico into the top few insurers in the United States auto market and been one of the single largest reasons for the success of the Berkshire Hathaway portfolio over the past years.

Meanwhile, the largest insurers have not necessarily gone away, but in some cases they have lost market share.  Had they sensed the winds of change earlier in the marketplace, they might have afforded themselves a better chance of maintaining their market share by developing a proper response to how Geico was changing the expectations of the market. However, that would ultimately mean changing the way they do business previous to having to do so.  The industry giants might have to destroy their own philosophy or culture continue their success.  These are frightful thoughts when you are on top.  One response was that Allstate eventually responded by purchasing Esurance to change how they operate in the market.  But even that move had some turbulence associated with it.

Even academia is not immune.  Inside the industry, university have faced several new threats over the past two decades.  First, community colleges began to pose a threat with their inexpensive offerings for traditional students.  Next, universities faced an onslaught from online offerings, to the point that most colleges now offer online programs.  Finally, the industry is now impacted by the massively open online course, also known as the MOOC.  MOOCs are a source for free education.  In this scenario, schools offer topical courses that are free and open to anyone who wants to join.  In just two years MOOCs have grown tremendously in popularity.  Premier institutions have smartly decided to participate and offer MOOCs for fear that ignoring this trend may lead to an exposure.

The Internal Aspect of Disruptive Innovation

These scenarios offer a lesson for every business: foresee the shifting demand prior to it taking foothold.  In all of these cases of disruptive innovation large organizations were surprised by new threats.  Threats can be internal to the industry (like Geico to the auto insurance industry) with a different way of doing business.  Threats can be external from the industry (like Apple’s iPhone to the film industry) that changes the customer’s taste and expectations surrounding a long-standing product like photographs.  In either case, disruptive innovation alters the demand for the product to a point that the market starts to become unrecognizable.  Once the tipping point is reached, all of the players must change or die.  The question is how a company can strategically prepare, which leads to the internal aspect of disruptive innovation.

The internal aspect deals with the preparations that a business takes to impact changes in its market.  There must be an attempt to create or have some control over the shifting demand.  In a Harvard Business Review article written by Joseph L. Bower and Clayton M. Christensen, they mention that “Managers must beware of ignoring new technologies that don’t initially meet the needs of their mainstream customers.”

Imagine being a Kodak executive previous to cameras being integrated into cell phones.  You are in the position that your company is the premier provider in camera product and technology and have been so for nearly a century.   At this point you could never have known that the industry-foreign cell phone would bring your company to its knees.  And even if you were such a prognosticator, could you have convinced anyone that Kodak might want to enter the cell phone industry?  This would have depended on the current company culture.  Would the company properly be scanning for opportunities and threats inside and outside their industry?

The simple answer is that would have made no sense at the time to the existing company management.  But if Kodak, with its near limitless resources prior to digital photography prominence, had considered how to be a player in consumer electronics, they might have detected the desire for cameras to be integrated into cell phones early on in the shifting demand and injected themselves into the market.  To think like this, they would had to have thought like disruptive innovators.

As an example, when thinking about Apple no one considered that the company would be the premier manufacturer of telephones in 1980.  Nor did they think this is 1990.  Nor in 2000.  Nor in 2005.  But Steve Jobs had a vision, and together that vision plus the resources at Apple’s disposal created a very important product.  But it took a visionary with many successes and near unlimited resources to create the iPhone because the innovation was driven from the top of the company.  Steve Jobs was thinking like a disruptive innovator.  That is generally not the thinking of long-standing companies, especially those who have to answer to their shareholders.

To be effective innovation disruptors, the strategic “secret” is a drive for innovation from the top of the company.  Tech companies are naturally predetermined to be innovative from the top of the company.  This is likely due in part to the nature of their business and in part to their relatively youthful time in existence.  Companies like Apple, Microsoft, Google, Oracle and Facebook tend to be scanning for opportunities in markets.  They must be alert for technological changes that could pose a threat, and so they are always looking for threats and opportunities.  In many cases they are not always in those markets initially, but they see an opportunity to move and do so.

Microsoft’s entry into the game console market is a good example.  Though they had no history in that market, it represented a fairly safe market to enter, as there was a duopoly of Nintendo and Sony in a market that was continually expanding.  They had deep resources in terms of money and knowledge, and the market had relatively low expectations.  They planned that this console could be a home entertainment hub for the household and detected the need for this before it really existed.  Apple’s iPod was a similar gamble.  Both end up as game changers.  A key to both is that neither would have bankrupted their respective company.

Another example of the strategic drive to be a disruptive innovator is in Google’s willingness to jump into and out of different markets. There is a graveyard of products that they have abandoned over the years.  They do not seem to suffer from escalation of commitment.  They collect what they can from their experience and move on.  This is part of the lesson for disruptive innovation as a strategic tool.  Know exactly what you want to “gamble” on the initiative and be prepared to move into new opportunities to capitalize on a changing market, but do not over-commit.  Scan, but do not get trapped, and do not overcommit, especially early on.

In the future, 3D printers will surely impact manufacturers.  Retailers and grocers will be impacted by innovative home delivery techniques.  Social media will likely evolve within the realm of virtual reality.  All technological equipment will become smaller.  Cars will drive themselves.  Every industry needs to prepare for the coming disruptive innovation.  The keys to successfully participating in disruptive innovation are to not be too tied to your business model; take small and measured gambles; avoid overcommitting when a new endeavor does not work; and simultaneously be resistant to responding to every conceivable ripple that is called a new idea.

Many individuals in organizations today think superstitiously that if they do nothing, everything is going to be okay in their business arena.  However, everyone must acknowledge that A CHANGE IS COMING THAT WILL DESTROY YOUR CURRENT BUSINESS MODEL.  It is not a matter of “if”, but instead a matter of “when”.  Because of the pace of innovation, it is almost impossible to detect the faint ripples of a disruptive innovation earthquake until everyone is engulfed.  It is time to make disruptive innovation part of the strategic plan.  Ultimately, the companies that successfully embrace disruptive innovation as a philosophy begin with small steps to test new ways of doing things.

For a point of reference, review Wikipedia’s list of Google’s acquisitions to see how they have slowly built their portfolio over time. Individually it can be hard to determine the significance of the acquisitions.  However, while the 2012 acquisition of Motorola Mobility for $12.5 billion is questionable based on the outcome, the 2006 acquisition of YouTube for $1.6 billion is an absolute winner for the company.  Many of their acquisitions do not make sense individually, but grouped by technology begin to paint pictures.  Google has a vision of how they will disruptively innovate far in the future and begin putting pieces together to build capabilities.

Think of these portfolio of acquisitions as tools being added to a tool belt.  This could be as simple as implementing a new level of service in an existing business or adopting a new technology or process to give give a company an edge that can not easily be copied.  The concept of creating disruptive innovations is scalable to any type of business.  In thinking strategically, any organization must start putting pieces together that give it a competitive advantage, whether disruptive or not in the short run.  Those pieces are used to build capabilities that are disruptively innovating as compared to the competition in the long run.   Relatively small changes can become a large lead when refined over time.

A final key to the internal aspect of disruptive innovation is that like Google’s long-term plans, there must be a vision of what those changes will lead to in terms of a competitive advantage.  In the end, complacency prevents companies like Kodak from straying too far from what which has always worked.  But the slow-baked disruptive innovation that arises from the likes of Google and Apple are not overnight developments.  Generally, they have been years in the making.  Disruptive innovation requires long-term planning, vision, and dedication of resources without an immediate payoff guaranteed.  This is why considering the external aspect of disruptive innovation and planning for the internal aspect of disruptive innovation must be part of every strategic plan.

The Ten Point Plan

Now that January is over, it is time to really start thinking about your plan for the year.  Unfortunately, the residual effects of December linger into January, and in a rush to amend for the sins of the annual wind-down including the holiday season itself, people often try to overcompensate in January by getting aggressive about their business (both personal and professional).  However, a period of excessive activity after a period of inactivity is always a psychological challenge.  Thus, a different approach is to implement your plans for the year in February instead of January.  One such approach is the Ten Point Plan.

The Ten Point Plan is an approach for the year that changes the standard array of techniques for annual planning.  It takes into account the false starts in January and builds momentum by taking small steps month-by-month.  It is a methodical way to move a business, division, or product forward continually and methodically throughout the year.  It involves a small but significant endeavor to be undertaken every month for ten months starting in February and ending in November.  It is more like the slow build-up training for a marathon than the usual sprint-type activity of January that leads to burnout.  And you can use those false starts in January as the warm-up so they were not in vain.

The Ten Point Plan is effective because it uses month end dates as a key driver of the plan.  Month end dates create a temporal landmark for people.  Temporal landmarks are significant points in time that stand out to people, such as those created by the start or end of a month.  It is a significant boundary in most people’s minds, especially to those in organizations that set monthly goals for their company.  It is a logical start and stop point that is universally recognized.

A personal example of a temporal landmark is a birthday.  Often, people say that they want to accomplish a “specific objective” by X birthday or age.  That is a temporal landmark with power, and the closer that birthday comes, the stronger the desire to accomplish the objective.  A study by Michael S. Shum in 1998 that outlines temporal landmarks in more detail can be found here.   And a recent study about temporal landmarks and their impact on motivation and effectiveness can be found here.  

In the Ten Point Plan you are using temporal landmarks to create a scenario in which you use a series of individual activities that further your overall business strategy.  You identify ten initiatives that further your overall strategy for the year.  These are habits, operational activities, and tactics that work toward furthering the overall strategy (professional or personal).  By creating ten achievable initiatives, you are creating an environment in which you are not overwhelmed by one significant change, but instead motivated for a new small challenge each month by leveraging the power of goal setting and temporal landmarks.  

After identifying the ten initiatives, rank them in order from easiest to most difficult to complete.  This is the ideal order to approach the endeavors, provided one does not have a dependency on the completion of another that is later in the order.  If so, then a more difficult undertaking may be moved to earlier in the year.  

Because these are ten individual endeavors you are assured some level of furthering your strategy even if you completely miss one of the ten challenges.  You do not necessarily hurt the overall plan itself if you fail on a single initiative.  This is partly because the temporal landmark “resets” you emotionally for a new challenge each month.

Next, identify three to ten action items necessary to complete each initiative and the completion timeline by assigning it to a month, effectively giving each a month-end deadline.  The plan is not concerned with the fine details at this point, rather it sets a general direction based on the composition of the ten initiatives themselves.  It should not get mired in details at this point.  This is where detailed business plans often fail for businesses.  They are too detailed, too intricate, and they slightest misstep sets the plan into a tailspin that puts it on the back burner for good.  The key is simplicity in the Ten Point Plan.  Further detail for each can be added closer to the start of their individual month.

Thus, there are some benefits to working on your strategy through a series of slow-stepping initiatives.  By focusing on one thing each month, you are not overwhelming your staff or yourself.  By ranking from easiest to most difficult and then working them in that order, the Ten Point Plan assures early victory.  This is a psychological necessity for any initiative, especially one involving change.  Most people give up prematurely on their large endeavors when they do not see early success.  If you are not able to get over the first two or three points in this specific plan, then the plan probably requires resources not currently at your disposal, which means there is a necessity to consider the plausibility of your overall strategy.  

Another problem avoided in this planning format is buy-in from staff.  A common problem that employees face today is that so many changes are undertaken that people can not keep up.  By slowly implementing paced change, it methodically alters the culture and improves the applied activity permanently, but not in an overwhelming way to the participants.  This is important, as this is an aggressive plan disguised as an easy plan because the initiatives are paced, not simultaneous.  The plan is purposely phased in slowly so that the change is not overwhelming to the participants or the leadership.  

The key to success in using the Ten Point Plan as it pertains to the business strategy is to ensure that you do not backtrack on any of the prior successes in the plan.  If you are going back to revisit the first objective in the seventh month of the plan, then the first objective was not successfully met, and subsequent objectives may be compromised, depending on the amount of dependency among the individual endeavors.  Forward motion is the measure of success in the Ten Point Plan.  

Most experts agree that a new habit takes 20 to 80 days to develop.  The first new initiative has thirty days to gel before you move to the second.  Giving people thirty days to become ingrained in a new set of tactics and habits ensures that there is time to get to a new level and build new stamina so that backslide does not occur.  Backslides wipe out progress.  By the time the second initiative is completed, staff have been working on the first initiative for almost sixty days.  At this point the new habit should be permanent and need just minor oversight.      

The plan is purposely active from February through November.  People are very preoccupied in December, and generally very tired in January.  By avoiding those months, you are avoiding the weakest psychological  months for your staff.  Imagine trying to implement a new endeavor on December 15th.  The balance of December is riddled with time out of the office.  And even for those who are working over that period, they are likely preoccupied with covering for those who are out.  Why even consider using this time to implement a new plan?

The Ten Point Plan may seem overly simplistic.  However, consider the effectiveness of an organization that can make ten impactful changes to its operating environment within a year.  By purposely not over-engineering the plan, it takes the hesitation away from the planner.  By developing a few action items and a very easily defined timeline, the plan designer does not have to get caught up in endless detail when developing the plan.  The approach prevents analysis paralysis.  And it uses the temporal landmark, a natural time barrier, as a motivator and means of measurement.  There are not complex tools involved.  You do not even need a calendar.  The key to success is avoiding an overly complex plan, yet still making regular progress throughout the year.

Porter’s Generic Strategies – Simplified

In his 1980 book Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter developed a methodology for analyzing an individual company’s strategy.  In this analysis, the industry is irrelevant, which is why the strategies are called generic strategies.   In the original format, Porter originally laid out three generic strategies that a business could pursue.  Over time, those strategies have been enhanced and refined.  It is his original work and subsequent enhancements that offer an excellent approach to how business owners can look at their competitors in a market, and also glean tactics from players in other markets to carry out their own strategy.

Over time, as Porter’s concepts have been updated and appended, the strategies have largely evolved to five general strategies.  It is this look at Porter’s concept that has value for a start-up business – or any business for that matter – to determine how they should approach the marketplace.  Generally, this model is utilized in academic circles and large corporations.  However, this model provides invaluable insight specifically for small business owners when thinking about how to approach a market.  

Most businesses inherently know who they want to be in the marketplace, but they have a hard time approaching the market with specific tactics that support who they want to be.  The value to performing the exercise of analyzing the generic strategies is to strengthen the approach that a business should take to fulfill how they are perceived.  As an example, inexperienced businesses often believe they need to compete on price, but this is not always so and a look at the generic strategies may indicate the need for a different approach.

Below is a simplified look at the five strategies  The following depicts the model in a linear format.

____________________________________________________

Linear View of Generic Business Strategies

<——1—————2——————-3——————–4————–5——>

<——Cost                                            Differentiation——>

1. Focus Cost
2. Cost Leadership
3. Hybrid
4. Differentiation
5. Focus Differentiation
____________________________________________________

Reading from left to right, businesses can focus on an extreme low-cost strategy at one end of the spectrum.  This means the business is competing solely on price.  Price competition is an easy concept and unfortunately one that small business owners often think they must choose.  Businesses that start by competing strictly on price should slowly move to the right and evolve into more of a cost/differentiation hybrid strategy in the middle of the spectrum.  

When thinking about companies with a focus on cost, consider retailers that focus strictly on cost.  Some low cost providers do not even furnish their shoppers with bags.  Additionally, dollar discount stores sell a lot of items, but the options are limited.  Thus, characteristics of an extreme cost approach means there are no frills attached.

The opposite approach is to start with a differentiation strategy.  A business can choose to start at the right end of the spectrum, focusing on a extreme differentiation strategy and moving to the left toward a differentiation/cost hybrid strategy.  Luxury items are differentiated items.  One-of-a-kind products with above average costs are differentiated products.  

Generally, the more individual or superior the product, the more that differentiation is involved.  With extremely differentiated products, price is of little concern.  The smallest details are well-thought-out.  And subsequently, the price reflects the greater attention to detail.

When initially thinking about this model, a business can boil the model down to two approaches, and must consider whether it is going to start with a price strategy or a differentiation strategy.  The differentiation approach is more complex, but it is the sweet spot for many successful businesses, as competing purely on price can create profitability problems.  

Price wars rarely result in a winner for the businesses involved.  Generally the competitor with the greater access to resources (money) wins a price war in the long run.  Nonetheless, companies often must enter the market as a cost competitor.  If this is the case, they should have a plan for moving away from solely relying on price tactics and moving toward more differentiation techniques.

While the generic strategies may seem confusing at first, they become easier to identify with practice.  When directly interacting with products and businesses, it is quickly evident as to which generic strategy they are utilizing.  Looking at the details of how a business operates and the culture of the business will generally make their generic strategy evident.  

See if you can identify which strategy each of the following brands use.  When you look at them, do you automatically think “low cost” or “differentiation”?

• Apple

• Amazon

• McDonald’s

• Ruth’s Chris Steak House

• Safe Auto

• Lloyd’s of London

• Maserati

• Kia

• Wal-Mart (“Save Money, Live Better” slogan)

• Macy’s

• Econo Lodge

• Ritz-Carlton

Some of these examples were not so easy to answer, but most were evident immediately.  In some cases, businesses such as Amazon utilize different strategies for different product lines.  Amazon will sometimes use a cost strategy to enter the market, and slowly move the product over to a differentiated product.  In their case, Amazon is masterful at altering their strategy to first gain market share, and then move to a more profitable model for a particular business.

For any business, the point is that in a specific product or service that they are involved in, they should be able to identify exactly which generic strategy each of their competitors is employing.  By identifying their competitors’ implemented strategies, an organization should be able to approach the market in a way that positions itself to target its ideal audience with consistent activity and simultaneously exploit weaknesses in the way their competitors approach the market.

What Is Business Strategy?

Business strategy is a nebulous business concept. Especially for small businesses.  Few small businesses can identify their strategy, let alone understand whether they are discussing strategy, tactical, or operational concepts.  Few understand their vision and mission, and how those relate to their strategy.  Then, when it comes down to performing daily tasks, they may perform duties that are the antithesis of their strategy.  So, it is no wonder that so many businesses fail.  Even giants like General Motors and Kmart are not immune from losing sight of their strategy, and ultimately losing themselves.

Without a clear strategy, the reality is that in the midst of the dogfight called daily life it is easy for a business to get off track.  It is easy when customers are continually pounding you with complaints and problems to get off track.  Some even learn to dislike the very people they have vowed to serve.  Truly, sometimes customers don’t know what is best for them, and it is your strategy that will prevent you from being susceptible to their whims.  Successful businesses know the direction in which they are headed.

That does not mean that a business should not be flexible, but it does mean that it should be principled.  The truth is that brand gets built over time.  For those that recognize their strategy, every action rolls up into that objective.  There is no shortcut to that concept.

In thinking about a business strategy,there are some steps that a business can take to lay out its strategy.

1. Lay Out the Vision and Mission:  So, where should a business begin.  Well, an easy way is with a vision and mission.  A vision is a simple statement that lays out what the organization thinks it is.  The mission is what the business is doing right now to accomplish that vision.  The mission is susceptible to change as a results of market realities.  However, the vision should stand steady across time.

2. Determine Your Generic Strategy:  Identify if you are going to compete on price or quality, also known as generic business strategies.  In the lifespan of a company, organizations typically start by competing on price, and slowly move to a model based on quality.  Truly, until a reputation is established, you may have to compete on price.  But what is the long-term objective?  Identify if in the long run you will be a price or quality competitor.  At heart, those a counter objectives.

3. Choose Measurements:  Identify some simple things you can measure.  In the long run, you should be able to measure some key items that identify how you are performing.  It could be as simple as profitability initially, but in the long run it may be tied to customer performance.   Younger and smaller companies rarely identify metrics that they can use to manage the business.

4. Look for Strategy-to-Activity Gaps:  Preventing gaps is critical to executing strategy.   If a business identifies strong customer service as a core value, but chooses to use an automated system to greet the world, then that is a strategy-to-activity gap.  In essence, preventing gaps means walking the walk.

5. Understand the Competition:  Why should a plumber care about his competitors?  Simply, understanding the enemy: 1. helps identify opportunities, 2. solidifies the mission, and 3. helps identify gaps.  Most businesses believe they do not want competition.  All businesses need competition.  Without competition, there is no incentive to innovate.  Understanding that the competition does and what you do enables you to look for opportunities.

While these may seem like fairly advanced concepts, they really are not.  In honesty, businesses are already doing some mix of these activities.  However, it is about thinking top-down to be what you want to be, but then working from the bottom-up to properly execute.

Also, these activities do not have to involve highly technical methodologies.  With measurements as an example, a company does not have to depend on highly sophisticated software to track key metrics and information.  In some cases, financial software such as Quicken or QuickBooks may provide the needed information, but in other cases Microsoft Excel can be setup to track information.  In fact, Excel can be fairly extensive in capturing information.  And the assistance of a local college student may enable a less technical business owner to become more intricate in data collection.

Ultimately, the key is to identify the gaps.  Only the visionary – the business owner – can know what the vision is.  Until that is established, no one can know the gaps.  You can see, each of the five steps above is tightly integrated with the others.  However, one must take the initial step of identifying why the business exists.  It is all about The Vision.