Don’t Tell Me What’s Impossible!

 There was a time when the only people who ever wondered if comic book technology would be possible in the real world were dyed-in-the-wool science fiction geeks, like me and my friends, and in fairness we also wondered if super powers were possible, if psychic powers were possible, if faster-than-light travel was possible, if magic was possible, if cloaking devices were possible, if artificial intelligence was possible, if cloning was possible, if time travel was possible, if alien life forms actually existed, if Big Foot really existed, if any of the cryptozoology critters you read about really existed, if adult women who actually like geeks (like us) really existed, and if it was actually possible to talk with one without spontaneously combusting…

Fortunately for all of us – including that significant portion of the world’s population that had never considered any of those questions until now – some of us geeks grew up with the talents, education, wealth, or simple chutzpah to investigate these questions. Consequently, computers more powerful than anything NASA owned when we went to the Moon fit into the back of your cell phone, robots are now exploring the surface of Mars (and building all manner of consumer products right here in Michigan), there has been an honest-to-Buck-Rodgers space station orbiting the Earth for the past twenty-two years (as of 2021), and a team of brilliant lunatics have not only build 3-D printers that can print things made out of titanium, they also allowed Adam Savage from Myth Busters to build a flying version of the Iron Man armor with it…

I found the video on YouTube, but you can probably get more information off the Science Channel website, since the project was part of Adam’s new series airing on that network. Although, according to the linked file, producing this particular episode seems to have consisted of asking Adam if there was any project he felt like doing and then getting out of his way, since he already knew the people who had invented the titanium 3-D printer and the jet pack system necessary to make the suit fly. The result is every bit as amazing as you would probably expect, especially when you consider that in addition to taking off and flying around the hangar complex under its own power, the suit also turns out to really be bullet-proof and capable of shrugging off an explosion from three feet away…

Now, by this point I’m pretty sure that anyone reading this post (assuming I have readers) is asking why I’m geeking out over mad science and/or bewildering technology instead of just making notes on a business page. And I have to admit it’s a fair question; I have no idea what the commercial possibilities of a flying suit of bullet-proof and bomb-proof armor might be, or even what the business implications of being able to 3-D print materials as hard and rigid as titanium might turn out to be. What I do know is that when I was a kid both the 3-D printer and the Internet itself would have been considered comic-book fantasy, no more realistic than transparent airplanes, super-powered aliens who grew up in Kansas, or the Norse God of Thunder fighting crime in New York City…

For as long as I can remember, one of my pet peeves has been people telling me that things about which they know absolutely nothing are impossible, particularly when some of those things were already happening. When I grew up and realized that people were destroying perfectly good companies the same way, with all of the ill effects for the world and all of humanity that such destruction implies, it became more than just a simple irritant. Finding out why people do these things, and getting them to stop, has been the focus of my life for most of the past two decades, and the motivation for my misadventures in academia in the first place. Because the truth is, I have no more idea what weird, wonderful, and completely insane technological developments will pop up the next time I go wandering around on the Internet than anyone else, let alone what the commercial implications of those achievements might be…

But I’m quite certain that we all need to be more careful about saying things like “That’s Impossible!” Before more of us end up having to eat our words…

Those Darn Activists!

If I told you about a group that claims to support individual small investors against the power of large-scale Wall Street investment firms, you could be forgiven for asking what the catch was. There was a time when cynics like me were a relatively small minority in the United States, but that time seems increasingly remote these days, and regardless of your political leanings you’re probably questioning everything that people tell you. The sad part here is that if I told you that said group is a front for the very same large companies from which it claims to be protecting small investors, you’d probably just ask if I had a point…

You can imagine my complete lack of surprise, then, upon reading a piece in the New York Times this week about the organization calling itself the Main Street Investors Coalition. Ostensibly formed to protect individual investors from the effects of activist groups putting pressure on large corporations in support of environmental, social, or financial reform causes, the Coalition claims to be in favor of profit maximization above all other motivations. They insist that the fact that this allows said large corporations to continue doing business in financially, socially, or environmentally irresponsible ways (just as they have always done) is merely a happy coincidence…

What they are failing to acknowledge is that the Main Street Investors Coalition is getting its financial backing from the National Association of Manufacturers – an industrial lobby group that includes executives from companies like Exxon Mobil, Goodyear, Dow Chemical, Cargill, Toyota and Pfizer. The main thrust of their argument is that as large investment groups like BlackRock and Vanguard are supporting causes on issues like climate change, gun control and employee diversity, they are not as focused on maximizing profits, which should be the primary concern of their customers. The Coalition has been lobbying the Federal government to increase regulation of what investment groups can put their clients’ money into, in order to limit their support for more activist firms at the expense of their members…

It probably also won’t surprise any of my readers (assuming I have readers) to learn that the Securities and Exchange Commission has opened an investigation into the Coalition’s activities, or that the Coalition leadership (and that of its supporting companies) are claiming to have done nothing wrong in the first place, either. But even if we ignore the absurdity of an industry organization pretending that legislation that shields its members from having to consider the wishes of their shareholders - who, let us remember, are the actual owners of a publicly-held company - the whole idea of restricting companies to the most profitable courses of action is asinine from a strategic position as well...

Sometimes the most profitable course of action in the short term is not the best option overall, and sometimes the actions that will profit the company directly will cause it greater indirect harm in terms of community relations, customer relations, vendor relations, health and longevity of its customers, or health of the environment in which it does business. The concept of considering the Triple Bottom Line when developing a strategy isn't exactly a new one. Moreover, it's difficult to imagine how not being able to use any strategy except "make the most money you can" would benefit anyone. Strategy is primarily about gaining a competitive advantage, and anything that interferes with that would be stupid even if it wasn't already just a ploy to protect organizations that don't want to bother about any of that pesky "political correctness" they keep hearing about...

Back to Basics

Back in 2013 I brought you the story about United Airlines reconfiguring its CRJ regional aircraft to include more – but lighter and smaller – seats. At the time, I commented that travel on a CRJ is already a miserably cramped experience, and I couldn’t imagine that trying to cram more people on to one was going to help. Since then, all of the airlines have been experimenting with new seating arrangements and equipment, ranging from things that look like a saddle to a kind of standing-room-only system that provides just enough support to keep the FAA from shutting it down. It’s enough to make you wonder if anyone running an airline is even thinking about passenger comfort anymore…

Well, apparently they aren’t. Some recent interviews with the leadership at United and arch-rival American Airlines reveal that they have been working on smaller and lighter seats, and planning to fit extra rows – and possibly even an extra seat per row – onto every type of airliner currently in service. This will enable the airlines to increase their revenue per flight considerably, as I noted in the 2013 post, but it completely ignores passenger comfort and potentially safety (in the case where you’re trying to get more people off of a more cramped airplane during an emergency). Push-back from some consumer advocate groups has helped prevent the worst of these plans from going through, although we should note that the public relations and customer service staff at some of the major carriers have also complained about the concept…

Now, as I noted five years ago, the management team of any company has a responsibility to its shareholders, and to a lesser extent, all of the other stakeholders, to maximize revenue. In the case of airlines, getting more paying customers aboard every airplane is one of the only ways to do that, but the problem with doing so is that you are also making the experience less and less enjoyable, which lowers the value you are providing to the customer. Carry this process too far and you will reduce the perceived value of the service you are providing to the point where no one will be willing to buy it…

This is a perennial problem for any company utilizing a low-cost strategy. If a given product’s perceived value drops below a certain level no one is going to purchase the product, no matter how cheap it becomes. The example I use in class is the 1980s-era imported car known as a Yugo, which cost about one-quarter of most basic cars, but was so poorly regarded that no one wanted one. If you care, I can name any number of other companies that have failed for the same reason, but given that there are only three kinds of business strategy (cost leadership, differentiation, and focus), and every business school in the world teaches its graduates to watch out for a lack of parity of quality when using the cost leadership strategy, it’s hard to understand how anybody could get to be CEO of a major airline without learning this lesson…

Even worse, in some ways, it the fact that several of the same senior managers have openly admitted that the only thing driving their decisions is how much additional revenue they can create, regardless of passenger comfort, and the only thing that has prevented some of the bone-headed ideas from going into service was that the personnel who have to care for the passengers (and deal with customer complaints) kicked up a fuss. It’s enough to make you wonder if any of these CEOs were paying attention in Strategy and Policy class…

Difference of Opinion

I regret the amount of political commentary that keeps landing on this page in recent weeks. I try to stay out of those issues because, as previously noted, I don’t usually feel I have anything to add to most political discourse. I’ve been jumping in lately in places where I feel that politics is intruding into management and/or strategy, which do lie within my area of expertise. In too many cases lately, the problems we have been seeing are coming from politicians who like to pretend that they know more about business than I do about politics – and one in particular who likes to claim that he knows more about business than anybody despite having had to declare bankruptcy on at least five different occasions. This sort of thing becomes particularly dangerous when the political leaders involved turn out to be bad at math…

Consider, if you will, the situation with Foxconn in Wisconsin. The company has promised to build a factory in Racine County, if they were given about $3 billion US in various subsidies. Foxconn initially claimed that the factory would bring 13,000 jobs to Wisconsin, although they have been scaling back that claim while raising the amount of money they want from the state and Federal governments even before the deal was signed. The most recent estimates on the project go as high as $4 billion in subsidies and as low as 3,000 jobs, depending on whom you ask. Even worse, though, is the fact that relatively low unemployment in Wisconsin means that the company will almost certainly need to relocate workers from other parts of the country or the world – and there’s no word on how much money they’re going to demand for that purpose…

Now, one could reasonably argue that increasing the population of Wisconsin by the number of employees Foxconn is going to need will increase the tax base and generally improve the economy of the state, since all of those people will need house to live in, groceries to eat, and so on. The problem is that with over $4 billion in subsidies and under 3,000 workers it would take decades for the project to break even. Independent studies cited by CNN and other sources are projecting that no one other than Foxconn itself is going to see any net benefit from this project until around 2043. All of which assumes that the factory is still in operation in twenty-five years and that the company hasn’t shifted production somewhere else…

Opponents of the deal like to point out that for the kind of money under discussion we could just pay the 3,000 people the salaries they are supposed to be getting every year for the next twenty-five years and not bother building the factory at all. Think about how much infrastructure we could rebuild with 75,000 person-years of work (that’s 156,000,000 person-hours, if you’re keeping track at home). Or, if fixing crumbling roads and bridges isn’t you issue, think about how many teachers, nurses, daycare workers, police officers, firefighters, paramedics, social workers, park rangers, and lifeguards we could employ for that kind of money…

The people who are currently running this country, and in particular the state of Wisconsin, are effectively saying that rather than spend $4 billion of public funds employing people to do things we need done, build things we need built, and take care of our own citizens, that it makes more sense to spend that money in order to enable a Chinese company to send even more money home to their own oligarchs. As reluctant as I am to comment on public-sector projects, this really is a matter of business strategy - and I have a difference of opinion about whether this is really a good idea...

Born to Fail

It must have been twenty years since I last heard about the short-lived Coke product called Tab Clear, and probably longer since I’ve seen any. Most people knew of the product, if they became aware of it at all, as one of the wave of clear beverage products that appeared, briefly, in the early 1990s, along with Zima, Crystal Pepsi, and a number of others. What was not widely recognized at the time, but has since been confirmed, was that the Coca-Cola Company had never intended for Tab Clear to become a viable brand, and had accordingly spent almost no funds to test, launch, advertise or promote the new line extension. On the contrary; Coke wanted Tab Clear to fail spectacularly enough to take a competitor’s product with it…

I found the story on the Mental Floss site last week, and it immediately took me back to my first time in graduate school, when one of my MBA classes discussed what was then known about the product and the category. Pepsi had been the first company to try to take over the clear cola market, or create it if there wasn’t one, with Crystal Pepsi. The development and launch of the product had been a major expense for the company, but Pepsi was expecting to appropriate enough market share from various Coke products to recover the cost and then gain on the competition in overall sales. Coke might decide to create their own clear cola, or even reverse-engineer Crystal Pepsi and knock off their own version, but either way Pepsi would gain the coveted “first mover” position in the “clear cola” segment – if there was going to be one…

Instead, what the Coca-Cola people actually did was create a clear version of their legacy Tab cola. With the rise of Diet Pepsi over the previous decade, the Tab brand had become increasingly redundant, and any risk the company might incur from changing its formulation (e.g. alienating any remaining Tab customers) was less significant than the threat of losing share to Crystal Pepsi. What made the move so interesting was that Crystal Pepsi wasn’t a diet beverage, but since Tab was, consumers became confused and started expecting both products to be low-calorie. I have no evidence to suggest that Coca-Cola intentionally made Tab Clear taste bad (and neither do the people at Mental Floss, apparently), but they knew it couldn’t stand up to a full-sugar cola on taste alone – and with the products becoming conflated in the public’s imagination, anyone who was appalled by Tab Clear would also assume that Crystal Pepsi tasted terrible…

None of this was apparent in 1992-1993, of course, but even then people tended to place orders for “any generic diet cola” by just saying “Diet Coke.” Over the years since it has become increasingly clear that except for unusually brand loyal consumers the two products are, if not exactly interchangeable, then at least acceptable substitutes for each other, but the Coca-Cola people seem to have picked up on this phenomenon before anyone else did. I would suggest that the company’s experience with the New Coke debacle in 1985 may have given them some insights about the difference between perception and actual flavor, given that some of the most vocal opponents of the “new” formula were unable to distinguish it from the original Coke in repeated blind taste tests…

In the event, the strategy worked perfectly. People who had never tried either beverage became convinced that all clear cola products were terrible, and attempts to debunk these (baseless) opinions were no more effective than the ones regarding New Coke had been. Pepsi was never able to develop a large enough market for Crystal Pepsi, and they ended up withdrawing the product two years later without recovering most of the development costs. I’m not aware of any exact parallel cases in history, but I call the Tab Clear story to your attention anyway because it demonstrates two of the principles I try to teach my own students. First, always assume that your competition, whoever and whatever they may be, are as smart and as capable as you are – and that they will be watching you just as closely as you are watching them. And second, remember that no matter how bad the strategic picture seems to be, things can always get worse…

Blade Wars

For some time now we’ve been seeing ads on television and various other media for new companies that are selling razors and shaving products over the Internet. I’ve been watching them with some interest, both because I use such products myself and also because this is a product category that has suffered from artificially inflated prices for as long as I’ve been old enough to shave. Whether this is an isolated case or if it turns out to have relevance to other product categories remains to be seen, but at the very least it would appear that the traditional strategic advantages are no longer quite as sustainable as you might think…

Fox Business is reporting that Gillette’s share of the men’s shaving market has been dropping for at least the last six years – from nearly 70% in 2010 to 54% in 2016, and possibly still dropping. To the best of my knowledge, there has never been any reason why other companies could not have challenged Gillette’s domination of the industry, any more than other companies could have challenged Frito-Lay for control of the potato chip and corn chip industry. But as in the case of salty snacks, it can be very difficult for a new competitor to break into an industry that already has an entrenched competitor with vendors, distributors, retailers, and the majority of the end users already its control. The purchase of Gillette by Proctor and Gamble in 2005 only made things that much harder for anyone else who might have thought to break into the market…

As a result, Gillette has been selling razor cartridges for as much as $6 each, and is in the middle of testing and introducing new extensions to the product line that might go even higher. It has become something of a running joke in recent years that the company keeps adding blades and jacking up the price. And while exactly how much of the price was made up of profit margin remains in dispute, it has not been much of a surprise to learn that the well-known Schick competing products run for as little as 50% of the Gillette equivalent’s price. Finding out that the cheapest Dollar Shave Club refill cartridge goes for as little as 20 cents was rather more surprising, to be sure, but what was really amazing was seeing the full-page ad in the newspapers responding to the new competition…

You can see one of the examples at Campaign Outsider if you’d like to. Gillette was already planning to answer the shave clubs delivery/convenience advantage by launching their own subscription service, but apparently the threat posed by the price advantage has caught their attention as well, and they are now publicly announcing upcoming price reductions across their product line. If the Fox Business story is correct, this should amount to an average reduction of about 12% on Gillette shaving products. Whether this will be enough to counter the 90% price advantage offered by the new online competition remains to be seen, of course…

Now, I’m not saying that the new price reductions won’t work, or that the success of the new shave clubs will bring additional competition into the market. I don’t begin to have enough data to make any such predictions, and I’m not sure anybody else does, either. For all that the situation is a classic example of a previously dominant company having to deal with an unexpected entrant crashing their market, the use of an Internet-based campaign and a direct-billed subscription model, not to mention home delivery, is almost literally unprecedented in this industry and product category. I can’t see any reason it shouldn’t work, and I’m not sure there’s anything Gillette or P&G can do about it – except compete with the newcomers on their own terms, that is…

Gillette is still entrenched in the market; their product is available in virtually every supermarket, drug store, convenience story, and general merchandise retailer in this country. They’ve got the technology and knowledge-base to create superior products, the distribution channels to get them into any customer’s hands, and the capital to run better ads and set whatever price points they can get away with. It seems possible for them to compete in this market and win, especially with the support of their corporate parent. What they can’t do is ignore the threat that these new competitors represent. The way they have been doing until now…

Strategic Failure: Profit

There’s a common Internet meme that has been around for some years now in which includes three step-by-step directions, to wit: 1. Buy Products; 2. Sell Products; 3. Profit! As far as I can tell it started out as a sarcastic comment on people doing things that shouldn’t normally gain a profit, either because one or two of the steps involve criminal/unethical behavior, or because at least one of the steps involves something for which no sane person would pay money. What may not be clear, especially now that the meme has become something of a cliché, is that this faulty strategic approach is responsible for a very large number of business failures every year, especially in the case of online businesses and websites that are intended to make a profit…

With the rapid expansion of online businesses in the late 1990s and early 2000s, a lot of people with brilliant technical and programming skills but limited business experience began creating websites that they believed would be an effective license to print money. I got to work with some of these folks during my time with the Small Business Development Centers program from the SBA, and almost inevitably, the founders of the company had created an amazing product or service, but had never considered how they would get paid for their work. Most net citizens at the time would not pay for content, and selling advertising on the site was difficult unless you could prove that the advertisers would be able to generate actual sales off those specific ads…

Even today, it remains difficult to get people to pay for online content unless it serves some function they can’t get in the real world or just steal off of any of the various pirate sites. Selling advertising is still a possibility, of course, if you have millions of visitors each day, but the presence of sites like YouTube and Facebook make that harder for a small business to achieve, not easier. Most internet advertisers today will only pay on the basis of verifiable “click-throughs” – people who saw their ad on your site and clicked on it – and some won’t even pay for that traffic unless it results in a verifiable sale. This has led to some to some desperate and often far-fetched approaches…

Consider, if you will, any of the Internet businesses that will allow you to use their basic services for free, and then attempt to get you to purchase an upgraded version or add-on features for the free version (or occasionally both) – the so-called “freemium” services. Pandora is probably the best-known example, but I can list dozens of others; one could actually see any of the media sites with a “paywall” arrangement as using the same tactics (e.g. newspapers that will allow you to read 10 articles a month off their online site, after which you have to pay). Some of these have met with limited success, but even something like Pandora, which provides a service to recording artists and music holding companies as well as consumers, has struggled to stay operational, and with the appearance of the App Store it’s increasingly difficult for anyone else to sell software…

My experience is hardly universal, and even the published research isn’t entirely clear on this point, but it has always seemed to me that this particular strategic failure comes about because people immersed in the challenge of building a new product or service aren’t usually thinking about the strategic aspects of the new business that their invention will create. Even within the business community itself, the kind of long-term strategic planning that is one of the staples of the management function is not widely appreciated by our colleagues from other disciplines. After all, why would anyone want to spend their time working on a musty old business plan, articulating the strategy that will make their business a success, when they could be coding, drawing, animating, welding, soldering, polishing or shipping their products? Or, for that matter, tracking sales, balancing the books, paying the vendors, managing the other stakeholders, or investing the proceeds? But unless there is some method by which people will give us money for doing whatever it is we are doing, the whole thing is a hobby, not a business – and it won’t last any longer than our hobby budget does…

Of course, failure to create an adequate business plan is a strategic failure in its own right – but that’s a discussion for another day…

Strategic Failures: I Am Not The World

In this space I have often mentioned the common strategic failure commonly called the “I am the World” fallacy; it’s the belief that some people have that everyone in the world likes the same foods, colors, clothing, cars, movies, books, television programs, furniture, vacation activities, appliances, climates, landscaping, sports, drinks, weather, building designs, sports teams, cities, states, nations, or many other things, just because they do. But in recent years I’ve started noticing a related problem that I think might be almost as disastrous, and potentially even more insidious. Until somebody comes up with a better name for it (or tells me that they already did), I’m going to refer to this as the “I am not the World” syndrome…

During my time working with entrepreneurs and some of their more problematic new business concepts I saw this kind of fallacy far more often than simple logic would suggest. To many of these people, the fact that dozens (or thousands) of other firms had attempted to launch the same exact business, possibly even on the same exact site, and ultimately failed, was irrelevant to their own plans and would be casually brushed aside. Obviously, those previous failures had been attempted by people far less clever, hard-working, likable, determined or knowledgeable than themselves, and all of the previous attempts to launch such a venture had only needed their input in order to achieve utter triumph. Well, their own input and a six-figure low-interest loan secured by your tax dollars, that is…

The odd part of this concept is that if you look around you there are examples all though our modern world. I don’t mean the people who believe that they can get a million-dollar job right out of college with a B.A. in English, or even the students who seem to believe that they can write a term paper at 4:00 AM for a deadline of 8:30 AM the same day and still receive an A for the assignment. Both of those behaviors are traditionally, really, and can ultimately be solved without more than a somewhat regrettable loss of time or money. The really bad examples are things like people who ignore all of the evidence about texting while driving (or drinking and driving, for that matter) and wind up causing inexcusable harm to others, as well as themselves, because obviously THEY can do these things safely. Evidence to the contrary doesn’t apply to them; only to people who are somehow less special…

Now, I would be the last person to tell anyone that they can’t change the rules of the game, find a different path, or try a more oblique approach to a traditional problem – but then, that’s kind of the point. I’m not saying that all of the previous attempts are irrelevant, nor would I advocate dismissing anyone else’s difficulties or failures. On the contrary, I began studying ineffective strategies and analyzing failed companies precisely because I believe that the best way to avoid making mistakes is to avoid the ones other people have already made. By the same token, I’m not going to tell anyone that their new service, product or strategy will not work just because similar ventures have failed, but I will ask them to explain why they believe their approach is superior – and if their reply comes out to “Because it’s ME!” I’m going to assume that they are suffering from the aforementioned strategic fallacy…

It’s a widely-known, often repeated statistic that nine out of every ten entrepreneurial projects fails – and it’s also true that nearly all successful entrepreneurs have had multiple failures for every project that succeeds. The fact is, creating a new company, let alone a new industry, starting with only a good idea and a lot of hard work really is extremely hard, and even the people who are exceptionally good at it will fail nine times for every time they succeed. The last thing anybody can afford to do is ignore all of the examples of the people who have already tried something and failed. Because if they do, they’re probably going to end up the same way…

Where’s the Strategy?

I’ve always tried to stay away from politics in this blog, partly because along with religion it’s one of the two things you should never discuss in public, but mostly because I don’t feel qualified to talk about it. I’m just as business instructor, albeit at a top business school, and none of my degrees are in Political Science, Social Psychology, Economics or Law. More to the point, perhaps, the Internet is already overflowing with opinionated idiots who believe that their personal confirmation bias makes them the only one who truly understands the situation at hand, whatever that might be. But one of the things I teach is Strategy, and one of the things that has been bugging me lately is people who really should know better displaying no understanding of a very basic strategic concept…

You may have heard the saying “Plan for an enemy’s capabilities, not his intentions” at some point, especially if you study strategy, tactics, or military history. Or, I suppose, if you eat out a lot, you might have seen these sentiments in a fortune cookie somewhere. Regardless of its origin, the phrase has relevance in a number of situations. It isn’t possible to know whether an adversary is really going to attack you; even if they say they will (or will not) you can’t be sure of their intentions short of the event. What a lot of otherwise very shrewd people seem to be losing track of these days is the fact that if your intelligence regarding an adversary’s capabilities is sufficiently accurate you may be able to determine that they will not be able to attack you regardless of what their intentions may be…

Suppose, for example, that a small group of ordinary citizens decide that the Dell organization has offended them for the last time, and they are going to acquire controlling interest in the company by purchasing 51% of its common stock, and then institute some changes. This is improbable for several reasons – notably including the fact that the company has an annual revenue reported to be on the order of $55 billion per year, which would put such a takeover beyond the resources of most average people, even in large numbers. It is, however, also impossible, because Dell is a privately-held company, and therefore has no publicly-traded stock to acquire…

By the same token, members of the Executive Branch of the Federal government can’t pass legislation, no matter how much they may want to do so. It is possible for the President to veto legislation, but since Congress can override a veto, even that isn’t certain if a measure has sufficient support. The President also cannot declare war on anybody, approve or vacate treaties with other countries, or randomly imprison people – these are not powers given to that office. It also is not possible for Congress to pass laws that violate the Constitution or any of its Amendments. They can vote to amend the Constitution again, but passing such an Amendment requires ratification by the states. And while the Supreme Court can strike down existing laws as Unconstitutional, they can’t create new laws of their own…

Now, I’m not going to suggest that there isn’t any point in planning for an opponent’s capabilities – I’m a planner by nature, as well as occasionally by trade, and I believe in planning for all the foreseeable contingencies. I also believe in employing a team of pessimists, assuming you can afford them, to consider every possible way in which things could go wrong and what would happen to your organization if they did. People will dismiss planners and strategic planning in general by claiming that you can’t, by definition, plan for the unexpected – which is perfectly correct, of course. It’s also the whole point of developing plans in the first place, however. After all, if you have already planned for a possible event, it’s no longer unexpected…

I’m not saying that this new year isn’t going to bring with it disasters, unpleasant changes and difficult decisions; most new years do, after all. I’m just suggesting that the problems we’ve already got, and the new ones that we will not be able to avoid, are going to be quite sufficient without worrying about the things that can’t happen – no matter how many times a politician claims they are going to…

And Now From the Chicken Wars…

After last week’s post on the Burger Wars I wasn’t really planning an update on anything else – but then the Internet intervened (as the Internet is wont to do) and I found a similar article about the two leading quick-serve restaurants that focus on chicken. This article is far less specific in terms of cause and effect, and I can’t help wondering if the practical aspects of the case are getting lost in all of the political controversy surrounding at least one of the companies involved…

According to a second article off of the Bloomberg/BusinessWeek site, Chick-fil-A is now outperforming KFC to become the most successful company in their segment of the quick-serve industry. Despite having only about 40% of the stores (1,775 compared to 4,491), Chick-fil-A sales for 2013 exceeded KFC ($5 billion versus $4.22 billion). Given the relative sizes of the chains, that means that the average Chick-fil-A location is making over three times what the average KFC location brings in (about $3.2 million per year versus $938,000 per year). And while I do not have current figures for marketing expenditures, the last set of numbers I saw indicated that KFC was spending considerably more on advertising, both per store and aggregate, than the competition…

Why exactly this should be is not explained in the Bloomberg article, and industry sources are not clear either. Most of the ink about Chick-fil-A in the last few years has been political, not business-related, and has focused on the CEO’s support for right-wing and fundamentalist organizations, notably those opposed to same-sex marriage. I had noted in a previous post that this did not make sense as a business strategy – a given customer’s money has exactly the same value regardless of his or her position on any political issue, and intentionally alienating what appears to be about half of the people in this country seems unwise at best. However, I also speculated about the value of such moves in terms of free advertising, increased support from customers of similar (e.g. highly conservative or reactionary) political leanings and increased brand awareness – all of which seems much less comical given this information…

Now, it is certainly possible that the relative sales data indicates a decline in the fortunes of KFC as much as it does the rise of their competition. Certainly, the public perception of KFC’s product and service quality has dropped in recent years, and at the same time perception of the brand has become less prestigious and more associated with lower-income demographics. There have also been issues with some of the recent product offerings from KFC, including the bowl-based meals (which are considered some of the least healthy options available in the industry), “Value Menu” combinations that do not offer any particular value or utility, and repeated reports of chicken heads, feet and other generally inedible items being served to customers…

Part of the problem would appear to be that while KFC have become more and more committed to a low-cost leadership strategy, Chick-fil-A has been pursuing a differentiation strategy based on the quality of both their food and service and positioning itself as a slightly more prestigious product. Chick-fil-A has also been more successful in introducing an expanded product line, notably including a surprisingly successful breakfast menu. If you consider it from a strategic standpoint, it seems as though Chick-fil-A has intentionally attacked KFC in all of the areas where the competing firm was the weakest – and unless I am badly mistaken, that’s probably what they set out to do…

As noted in last week’s Burger Wars post, none of these effects is anything short of predictable. Once KFC began to favor low cost over product quality or brand development they became vulnerable to an opponent who would be perceived as offering a better product, and their virtual abandonment of the breakfast market effective gave that share away to anyone else in their market who could take it. What I find even more remarkable is that if these statistics are accurate, the comparatively tiny number of Chick-fil-A locations are also outperforming the McDonald’s locations on a revenue-per-store basis. And since Chick-fil-A has little or no presence in almost half of the United States, things will almost certainly get worse as they progress with their current expansion plans…

It's enough to make you wonder how well the company would be doing if it hadn't decided to intentionally alienate half of the country...

Dispatches from the Burger Wars

In my travels around the US and occasionally outside of it I have encountered a number of quick-serve restaurants, mainly burger stands, that are attempting to knock off McDonald’s as the top company in that industry, and I have noticed one element they all appear to have in common: they are all failing miserably. This is not to suggest that the competition isn’t successful in its own right, or that all of the other companies in this industry are poorly run or unprofitable, because clearly this is not the case. But a recent article on the Bloomberg/Business Week site points out that in 2012 (the last year for which there is complete data) the average McDonald’s location made $2.6 million in revenue, while the second-best company, Burger King, averaged only $1.2 million per location. And despite the website’s attempt to make the reasons behind this seem dark, complex or arcane, they are for the most part depressingly predictable…

First off, there’s the difference in advertising budgets. If this story is accurate, McDonald’s is spending about $16.30 in advertising for each dollar Burger King spends, and that doesn’t even consider any of the other expenses involved in the Marketing function. Based on the relative success of the advertising and promotional programs alone, we can say with some confidence that McDonald’s has a superior understanding of their primary customer demographics and better forward planning for future products and programs. But even assuming that all of the other functions have parity in terms of budget, it does not seem far-fetched that a company outspending its largest competitor by a factor of 16.3 to 1 in advertising budget would be more successful in selling consumer products. Unfortunately, things just go downhill from there…

According to Bloomberg, McDonald’s is outselling the competition in off-peak times, such as breakfast and mid-afternoon snacks, because of its superior product mix. Industry efforts to duplicate the famous McDonald’s breakfast menu have not been completely successful, and the introduction of viable snack foods (like the successful wrap products) and a competitive line of coffee products (good enough to cause trouble even for Starbucks in some markets) has made the company far more profitable. Even worse, the attempts by industry competitors to duplicate the success of the infamous Happy Meal ™ have met with indifferent results, which not only increases the number of families doing business with McDonald’s but helps the company develop life-long customers beginning at preschool age. At this point the popularity of the product has made it the premiere choice for movie tie-in promotions, which is just reinforcing the success of what was already the leading program in the industry…

Now, it should be obvious that none of these products would work nearly so well if the company offering them was not able to execute the programs correctly, and the same article goes on to point out that in addition to the well-known food quality and consistency measures, McDonald’s also surpasses the competition in terms of operational efficiency. This may not seem like a big issue, but consider the difference that a faster drive-through operation can make to the over-all profitability of a quick-serve restaurant, given that some locations will obtain upwards of 65% of their sales through the drive-through window. Now consider that McDonald’s averages almost 5% faster on drive-through orders over the competition. I don’t have current numbers on walk-up speeds, but the last time I looked the company’s edge was even higher there, given the efficiency of their kitchen designs and the high degree of automation in use in many of the restaurants…

I call this to your attention because most of the competitors I have studied tend to attribute their lower performance, or inability to compete with the industry leader on equal terms, to one or more of the advantages an entrenched opponent who already occupies the top spot will enjoy. And, in fairness, there are any number of ways in which McDonald’s does command specific advantages that derive from their market position, from improved name recognition to better negotiating terms when obtaining movie-tie in promotions. But if these statistics are correct, then the key factors that explain the firm’s dominance are simple enough to explain on a single web page – or a 732-word blog post…

Overcoming those advantages would be another matter entirely. But that’s a post for another day…

The Ethics of Spite

In yesterday’s post I noted that it appears McDonald’s has allowed its collective animosity for rival company Burger King goad it into severing ties with a supplier with whom it has done business for over four decades – Heinz company, which once supplied McDonald’s locations with ketchup. It isn’t clear from the news stories, or from the other information about this action that are available online, whether there is some larger strategic move in play, whether McDonald’s strategic planning staff had already identified opportunities available in changing ketchup suppliers before the new CEO of Heinz was appointed, or if this really is just a spiteful reaction right out of a schoolyard squabble. What matters from our standpoint is whether an ethical company could countenance such a decision in the first place. I thought we should take a closer look…

We should begin by noting that procurement decisions like this one are usually made on the basis of complex calculations dealing not only with current conditions, but also with projected conditions in the future and assumptions regarding the most profitable choices available. If the decision to drop Heinz in favor of other suppliers turns out to be incorrect that is a matter for the usual mechanisms of corporate governance to handle, and if the decision turns out to be a truly incompetent move that creates actual financial damage to the stockholders there are a variety of legal remedies already in place. We should also note that if such a move were to be made for nefarious reasons there are already laws in place under which the perpetrators could and probably would be charged. For our purposes, we can assume that the decision we are discussing isn’t being driven by incompetence or malfeasance; what we must ask is what motives are actually driving it…

If, for example, members of the management team have reason to believe that their supplier’s new CEO is incompetent, irresponsible, negligent, or otherwise likely to commit acts that will threaten their own operations, then refusing to do business with that supplier would be entirely in keeping with their responsibility to their own shareholders. In the case of an executive who has for some years served as the CEO of a rival firm, the suspicion that such an individual would retain feelings of animosity from his previous position and thus not deal honestly or equitably with the company is probably baroque, but certainly understandable. If previous direct dealings with that executive, either as the CEO of the rival company or in some other capacity, have led management to have doubts about that individual, that concern would also be appropriate. Nor can we completely discount the possibility of animosity based on personality conflicts, interpersonal relationships or social interactions between this new CEO and members of the management team; however unfortunate this might be…

The truth is that however much we might prefer to believe that companies are run on a scientific basis by professionals trained in the finer points of both management science and also in the finer points of their specific industries, companies are still run by human beings, with all of the intellectual and emotional frailty that implies. It is quite possible that business dealings with someone with whom our company has been directly competing for an extended period will carry additional risks, either because that person does in fact harbor animosity towards us, or because we may be unable to suppress such feelings on our side. But absent some concrete evidence of that risk, can we reasonably act on that possibility, knowing that if we do so we run the risk of depriving our shareholders of the best return on their investment, costing employees of our existing supplier their jobs, and potentially damaging the economy of the states or countries where those companies do business?

Or, to put it another way, can we accept the possibility of causing all of this harm in order to protect ourselves from a threat that may or may not even exist? Alternately, can we accept the consequences of failing to take precautions if the threat does exist? How do we determine the course of action that will do the most good for the most people over the longest time while maintaining our primary mission of running our own company to the benefit of the shareholders who own it?

It’s worth thinking about…

Decisions, Decisions

One of the cases I discuss with my students is about Southwest Airlines, and since this is a strategy class what we mostly discuss, both in class and in their written assignments, is changes the company could make in its strategy in light of the changing conditions within their industry. I get students from all of the various majors in the business school in my class, so I try to select cases that can be looked at from a variety of different angles and from the perspective of different disciplines. For example, the Southwest case was written just as the company had acquired Air Tran, and our Finance majors can analyze the deal and discuss the implications for the company’s future equity and capitalization, while the Human Resources students can talk about the difficulty in merging the two (very) different corporate cultures. It isn’t easy coming up with assignments that are interesting and fun (or at least, not boring) for this many different interests, and I’m sure I don’t always succeed. But the Southwest case is popular, and discussions of the anti-bag-fees policy are almost always spirited…

If you don’t fly commercial, you may not be aware that some years ago all of the major airlines started charging an extra fee for every piece of checked baggage, starting at around $25 and escalating rapidly from there. Some carriers have kept the fee structure basic, some have jacked the price up to see how high it can go, and others have tied it into other promotions, offering free bags for their frequent flier customers, people who sign up for their branded credit cards, or whatever. Only Southwest, out of the major carriers, has persisted in allowing customers to check two bags per person without charging extra – despite the fact that the airline industry as a whole is making roughly $3.5 billion on bag fees each year, according to an article this week in the Wall Street Journal. Many of my undergraduates have suggested that Southwest consider adding such a fee, given that these charges are now the industry standard and appear to be gradually gaining acceptance. But it’s never the Marketing majors who make that suggestion…

In the same article, the CEO of Southwest is quoted as saying that adding bag fees could end up costing the company in excess of $1 billion per year in lost revenue, as customers abandon Southwest in reaction to the change. On the face of it this seems alarmist – the company still has a number of other strategic advantages, such as lower fares and convenience of travel, not to mention overall customer satisfaction in most other areas of its operations. But there is no denying that the “Bags Fly Free” slogan is an important part of Southwest’s brand image, both in terms of the actual savings (at $35 or $50 per bag it doesn’t take long before we’re talking a significant expense) and also in terms of the company’s image as different from all of the other large airlines; a maverick organization that takes care of its loyal customers. And therein lies the question of strategy…

Southwest has spent most of its corporate existence working on a low-cost strategy – minimizing all possible costs in order to offer the lowest price to the customer while still earning a greater profit on each ticket than any competitor. But to continue on as they have, both of those things must remain true. If they depart from that strategy they may lose customers, as they will almost certainly lose their price advantage over the other airlines. But if they continue to pass up a major revenue stream like the checked baggage fees they run the risk of becoming less profitable than the other airlines, becoming a less attractive investment than other airlines, and losing the support of investors, which will impact their stock price and eventually their cost of capital. Not to mention earning less money in absolute terms…

Sooner or later, Southwest is going to have to decide if they believe they can make more money flying more people (and more people per flight, as well) without baggage fees than they could make by implementing them. Their traditional strategy has served them well so far, but can they continue with it if the add-on fees the competition is charging become the industry standard? Stay tuned, folks…

The Trouble with Outsourcing

In my class on Management strategy and policy, one of the subjects we cover at some length is Outsourcing, and specifically the positive and negative effects it can have when employed at various levels of business. The concept has gotten a lot of bad press in recent years, given that the term is usually used to refer to outsourcing production to other countries, which means a loss of jobs in whatever country, state or city the speaker is from. And, in fairness, it is sometimes possible to shift production or other activities to some place where labor is cheaper, required resources are more readily available, or various regulatory laws are less problematic, all of which remains wildly popular with the people responsible for containing costs. But unfortunately, the loss of job opportunity in the home country is really only the beginning…

Consider the case put forward by Nobel Economics Laureate Robert Mundell in a Forbes interview from earlier this month. One of President Regan’s economic advisors, and one of the key people behind “Reaganomics,” Mundell is now warning that the deterioration of the American manufacturing sector that has resulted from excessive outsourcing has left the U.S. without the technical or intellectual base needed to remain competitive – or even to maintain economic or military assets without foreign assistance. The article also cites Dominic Gates of the Seattle Times, and his description of the issues with the new Boeing 787 Dreamliner: apparently, Boeing outsourced the plane’s electronics to a French company, which then sub-contracted most of the work to a series of Japanese companies. This undoubtedly saved Boeing a great deal of money over having the work done in Washington State, but when the Dreamliner’s batteries began to over-heat and catch fire Boeing’s own engineers did not have the technical expertise to address the problem…

Now, as any MSU undergraduate (or, at least, any of the ones who have been subjected to Management 409 with me) can tell you, this issue happens all of the time and is considered to be one of the most common drawbacks of outsourcing production. In fact, even in cases where production activities are outsourced to other domestic companies and never leave the home country there remains an excellent chance that the original designer will lose the ability to create or service their own products. At best this is annoying; at worst it could negatively impact both the economy and the security of the home country. The real question is what to do about it…

Most Protectionist/Isolationist pundits would just tell you not to outsource anything – keep all of your production domestic, and if this results in higher final prices reaching the consumer, too bad! All true patriots will understand the need to keep your industry at home, and willingly make up the difference in cost! And, in fairness, “American Made” is a powerful selling point in the U.S., and might work for companies from other nations in their home countries as well. But if nationalism always won over price it would probably still be possible to purchase a television set manufactured entirely in U.S. territory (which it hasn’t been for over 20 years at this juncture). And with any commodity product there’s really no point in even asking…

Some companies will attempt to counter this problem by retaining part of the manufacturing process under their direct control, either by moving the final assembly of the product to a domestic facility, or by purchasing the offshore facilities where production takes place instead of outsourcing production to another company. But purchasing foreign companies – or even just their major production assets – can be risky, especially in uncooperative countries, whereas Boeing does perform final assembly of the Dreamliner at their facility in Seattle, and that does not appear to have helped them. Up until now the risk of losing control (or even understanding) of your own technology was just something companies had to accept in order to gain lower prices and higher margins, but if this trend continues that risk is going to become less and less attractive…

Burger Wars III: Escalation

When I was younger a “guilty pleasure” was going to McDonald’s and eating five or six cheeseburgers at a sitting – or, if you like, one and a half of the “Double Big Mac” products you sometimes see on the Value Menu nowadays. I’ve never been a particular fan of the company, and the regular cheeseburger isn’t even my favorite product on their menu – it hasn’t been more than a light snack for me since 1975 or so, or at least a single one hasn’t been. But there’s something wonderfully decadent about just eating as much of something as you want to, especially if it’s something that was originally supposed to be an entree. And with cheeseburgers and double cheeseburgers now some of the cheapest products in fast food, thanks to the infamous Value Menu, this custom seems to have become widely popular – to the point where it is interfering with healthier fare…

According to an article from the Associated Press by way of the ABC News site, McDonald’s has announced that it is dropping several of its high-end products from the current menu, including the line of Angus burgers, the line of Chicken Select sandwiches, and something called the Fruit & Walnut salad. Although the company hasn’t explicitly said why they are taking this step, the industry expects cited in the article note that sales of the Angus line and other top-end products have been soft for some time, in large part due to the availability of cheaper products off the Value Menu program. By itself this probably isn’t terribly significant – McDonald’s has been experimenting with various new products since the 1960s, and has rotated things in and out of their menu as purchasing trends developed, just like any other food service company. What makes is event interesting from a strategic point of view is that the trend does not appear to be limited to McDonald’s…

I had written in this space a couple of years ago about the deteriorating relationship between many of the Burger King franchise holders and the parent company over control issues such as selection of advertising campaigns and menu selection. One of the key areas of contention, in fact, was Burger King Corporate demanding that all of the franchisees offer a value menu that was cheaper than the competition (primarily McDonalds) at prices too low to include any profit. This was great for the company – it allowed them to claim (correctly) that their outlets offered more product for less money than the competition – but problematic for the franchisees, who were having to bear all of the attendant costs. If this campaign had merely been a loss-leader strategy – using the unprofitably low prices to increase customer traffic and develop sales for other products – it might have worked, and the franchise holders might have accepted it. But with the rise of customers eating nothing but low-margin Value Menu products this idea no longer made any sense…

It’s still too early to say if there will be any long-term fallout from these maneuvers. Fast-food and quick-service customers are still changing their buying patterns, and there is no way to tell if healthier or cheaper product offerings will gain the lead, let alone hold onto one. But as any undergraduate business student can tell you, price wars rarely end well for any of the combatants, and sometimes they end badly for the customers as well. If all of the major fast-food chains end up offering nothing but low-cost products (a dollar or so) and “healthy” products like the “Snack Wraps” it is possible that they will end up fighting over a smaller and smaller set of customers, while the people who like sandwiches that actually taste like hamburgers (or real food in general) gravitate to other parts of the industry or out of the quick-serve sector altogether…

Strategic Failure

I thought I should share an email I wrote earlier today to the Speaker of Michigan’s House of Representatives regarding a package of bills currently under consideration in the Legislature. Normally I don’t discuss politics in this space, because as I’ve mentioned, I don’t consider it within my expertise; none of my degrees are in Political Science, History or Law, and the Internet is already overflowing with would-be pundits holding forth on every conceivable political position. But in this particular instance, it struck me that the strategy being employed by the Republican leadership in Michigan is inherently flawed, and that a case could be made for abandoning the legislation in question regardless of what your political orientation happens to be. So I decided to see if I could make it in the letter that follows…

Sent via email:

TO: The Honorable James “Jase” Bolger, Speaker of the Michigan House of Representatives

Dear Mr. Speaker:

I am writing to urge you and your colleagues to abandon the current drive to place additional limits on abortion rights in the State of Michigan. While I understand the importance of reaching out to your support base during an election year, this sort of political grandstanding has no place and no purpose in the current climate. No one who isn't already a firm supporter of the Pro-Life movement is going to extend any additional support to any politician supporting these measures, whereas moderates and those who support limited government will very likely take offense at such measures and may withdraw their support. Meanwhile, the very existence of such legislation is galvanizing voters on the left, energizing the campaigns of any political candidate who opposes such measures and increasing voter turnout among their supporters.

Even worse, in my opinion, is that expending effort on this legislation is taking your time, and that of your colleagues, away from the substantive issues of the day. Limiting access to abortion or other medical services will not decrease unemployment, will not lower taxes or decrease the deficit, will not improve education, will not alleviate poverty, will not lower the crime rate, will not create new jobs, will not improve homeland security or our national defense, and will not provide for any additional infrastructure improvement or healthcare reform. All it will do, in fact, is increase the popularity of conservative politicians with a modest segment of the electorate that would never have supported liberal candidates in the first place. Or, if you prefer, there is absolutely no benefit to pursuing this legislation, for its supporters or for the people of Michigan, but there is the potential for wasted effort, wasted opportunity, political gridlock, and additional partisan animosity and distrust.

As a businessman and a business teacher, as well as a taxpayer and registered voter, I would like to suggest that there are better uses for your time and our money, and urge you to abandon this initiative as soon as possible.

Thank you for listening; I appreciate your time.

Sincerely,

Max P. Belin, MS, MBA

It’s probably worth noting that the legislation in the package will not survive the inevitable court challenges, even if passes in the first place; it goes against the Roe v. Wade precedent so blatantly that even bloggers who have never been to law school can recognize the principles involved. Nor will the attempt to frame the legislation as “protection of women” be of much use; the proposed laws would make abortion after 20 weeks a felony, regardless of the health of the mother, and with no exceptions for rape or incest. They would also raise the costs of reproductive healthcare for all women in Michigan (even those who are merely seeking prenatal vitamins and parenting classes), and throw up huge rafts of red tape – very good for discouraging women from seeking an abortion, but not very palatable to a political party that claims to want smaller and less intrusive government…

The more I looked at the situation, the more this appeared to be blatant political grandstanding; acts intended to please the “Base” audience, but one which even moderate Republicans – and those who actually believe in small government and limited government interference – would find distasteful, if not actually insulting. Bismarck called politics “The art of the possible,” but enacting these laws isn’t possible, and even if it was, it would accomplish nothing that Michigan needs right now – and might result in any number of outcomes that would make things even worse. And while I imagine that the Speaker already knows all of this, I expect that a lot of the emails and letters he is getting that oppose this legislation are from various Liberals all demanding that he and his colleagues cease and desist, if not actually admit the error of their ways. I thought there should be at least one from a middle-aged business teacher, with two Master’s degrees in business and no agenda at all, to point out that even if these measures are politically adroit, they’re strategically unsound…

I’ll let you know if I get a reply…

The Game Goes On

A decade or so ago, when I was still a management consultant, a call came in to our office one afternoon from a social service agency we had done some work for in central California. The Executive Director was very excited about the potential for qualifying for grant money under Proposition 10, the California Anti-Smoking initiative. Fund development – and specifically grant writing – was a major part of our practice at the time, and the opportunity to develop a grant application for a client would generally have been a very welcome thing – except that the agency in question didn’t do that. They didn’t run smoking prevention programs, or even help people to stop smoking; they were a teen pregnancy prevention and education agency…

When we told the Executive Director (as gently as possible) that his agency didn’t do anything that could be paid for under Prop 10, and therefore would not be considered for grants under that budget, it didn’t seem to faze him in the slightest. “Oh, that’s all right!” he exclaimed. “We’ll just make something up!”

I’m still not sure what kind of spurious logic they would have come up with to qualify for such a grant (smoking during pregnancy is extremely unhealthy, of course, but the agency was already trying to prevent their clients from becoming pregnant); we managed to explain to the Executive Director that applying for funding that is not appropriate to your agency/program is a waste of time and money, and in this case they’d still have to pay us for writing the application if the grant wasn’t awarded. What makes this story worth repeating is that this specific strategic error (we used to call it “chasing the money” in our practice) is probably the single most common mistake you will see in the nonprofit sector, where agencies all too often waste their time and resources applying for grant funds they have no chance of receiving. Well, that and the fact that half of the States appear to be making the same mistake with the national foreclosure settlement funds…

You can pick up the original story on the Huffington Post Business page if you want to, but the basic idea is that a portion of the settlement reached on the foreclosure crisis is discretionary, meaning that the different states will be sharing $2.7 billion in funds that they don’t, technically, have to spend on foreclosure-related costs. Since this money is arriving at a time when a number of state and local governments are trying to deal with massive budget deficits (and possible bankruptcy), a number of them are considering using these funds for more immediate needs – much as they did with the tobacco company settlement funds a decade or so ago…

Now, I’m not suggesting that the states shouldn’t be given the discretion to spend their discretionary funds however they want. And I’m not claiming to be an expert on public policy, especially state-level fiscal policy. But if history tells us anything about economic crises, it’s that you can’t save your way out of them. Using those funds to help people who are being foreclosed out of their homes (their actual residences, not investment properties or vacation homes) should, in theory, return several times that many dollars into the state’s economy, whereas spending the same amount of money to reduce your budget deficit will get people writing unkind stories about you on news sites and convince your constituents that you don’t care about them – and it won’t fix your state’s economy anyway…

I can’t really fault the governors – or other local officials – for wanting to spend any available discretionary funds on balancing their budgets; in an economic crisis the natural response is to concentrate funds on the immediate expenses. But if two unknown management consultants in a small office in Santa Monica can tell you why this is a bad idea, it’s hard to believe that no one in any of the applicable state capitals has brought this up. Let’s just hope somebody is listening…

Writing a Business Plan: External Analysis

In a perfect world, you could just work out the business you wanted to create, identify the amount of productivity required to make a good profit, and set things in motion. In this world, however, there’s quite a bit more than that involved, and most of the problems that remain at this point in the project are going to be coming from outside the company itself. An external analysis (also known as an environmental analysis) considers all of the factors beyond your immediate control; some of these may be positive, many of them will be negative, and some are just the nature of your business. But as with all of the other sections that make up the business plan, the key here is explaining all of the different people and things that have the potential to impact your new company – and how you plan to deal with them…

If you completed a Five Forces analysis during the research phase this would be an excellent time to pull out those issues and the answers you came up with. First of all, how will you manage the competition from other firms that do what you do? If you’re introducing a completely new product or service there may not be any direct competition when you begin operations, but you can generally assume that there will be some as soon as you have your first profitable quarter. How do you expect to gain market share over the companies already in your field, and how will you hold onto that share in the face of direct competition? Even if your potential investors didn’t want to know about that (and they probably will) you still need to work that out before you begin operations…

You should also have some idea of how you intend to manage your interactions with vendors and suppliers. If you are unusually fortunate all of your interactions may be fair and friendly, but it’s much more likely that your vendors will have some amount of influence on you, depending on how much you need each one of them, and how many possible sources you have for each need. It’s also possible (although much less common) that you will be one of a very small number of customers some of your suppliers can count on, and that you will be able to exert leverage on them. Of course, similar comments apply to your relationships with your own customers; your external analysis should map out how you plan to manage these issues – or eliminate them where possible…

Then you should consider how new forces could your business model from outside your immediate environment. The obvious one is new competitors, and here again, even if no investor ever asks you to account for how you intend to deal with them, you need to work out in advance what will happen if somebody opens a new business in your industry (or geographic area) and starts competing with you. Almost as important, however, is the question of what you intend to do if some new technology, process or legislation makes it possible for someone to create a substitute for your product or service – something completely different that can be used for whatever your customers expect to gain by doing business with you. If that happens, how are you going to deal with it?

You should round out your external analysis by covering anything else external to your company, such as local taxes and permit costs, size and composition of the workforce from which you will draw your employees, climate, customer demographics, cultural traditions, and anything else that might impact your operations. Keep in mind that no one has ever been able to account for everything that might fit into this category, and you probably won’t be the first, but if you’ve done your homework you should already know all about the industry you are breaking into, the geographic area in which you will operate, the legal systems, monetary systems, governmental systems, demographics of your workers and your customers, and a thousand other details. You probably don’t have to cover all of the minutiae, but take a moment and think about all of the things you’d want to know if it was your money that would be going to finance this venture – because very shortly now, it will be…

Writing a Business Plan: Choose Your Path

By now you’ve got a pretty good idea of what your new business is trying to do; you’ve also got a good picture of who the competition is, and what business you’re actually in. Before you can move on to setting up your operational parameters, however, you’re going to have to figure out what strategy you intend to follow. All of the other aspects of a business, from the location to the décor, are going to depend on the strategy you have elected to use – or else you will invariably end up spending money on the wrong things. But while this might sound daunting, it really isn’t; despite what you may have heard, there are only three generic business strategies, and none of them are that hard to understand…

First, there’s the Low Cost strategy, which is exactly what it sounds like. You attempt to minimize all of the costs associated with running your business, which allows you to compete on the basis of price with everyone else in your industry – at least in theory. Where people go wrong with this is usually in thinking that this strategy is low price, not low cost. To make the Low Cost strategy work, you can’t just do whatever you were planning to do anyway and then put a lower price on the price sticker. By doing that, you’ve lowered your profit margin (the amount you have left over after paying all of your expenses) and made your business less effective; there’s also a hard limit to how far you can lower the price before you’re spending more to make the product than your customers are paying for it. At the point, your business is dead, even if you haven’t realized it yet…

To make a Low Cost strategy work, you need to find all of the places in your operations where it is possible to save money and do so, thus lowering the costs associated with that aspect of the business. Some of these will be obvious – such as getting the best prices from your suppliers, or spending a little on shipping as you can while still meeting delivery commitments – while others won’t be, but the principle is going to be the same throughout. Every amount of money you can save through these lower costs will enable you to lower your final price while maintaining the same profit margin. If you can do more of these things than the competition is doing, you can offer the lowest price on the market while still making the same amount of money. At that point it’s just a matter of cashing the checks…

The second generic strategy is called Differentiation, and it’s even simpler than the Low Cost approach. Under a differentiation strategy, you’re attempting to create something about your product or service that adds value for your customer. This can mean literally anything – more features, better quality, greater convenience, greater status associated with it, better looking, safer, and so on – but it will only work if the difference in your product or service adds value for the customer. Offering an equivalent product with a greater choice of colors will only work if color choice is something your customers would value; it’s likely to help you in selling clothing or cars, but not so much in electronic components or auto parts. If you’ve ever seen a luxury brand crash and burn because potential customers didn’t feel that their additional efforts in design or expenses for superior materials were worth the price increase, you already understand how this strategy works…

The final strategy is what’s called a Focus, or Niche strategy. As you might expect from the name, it’s an approach that focuses on a very specific part of the market and attempts to serve the needs of that limited segment, either by offering more specialized features (Differentiation) or by offering the best price for products that serve the specialized needs of that segment (Low Cost). Some people insist that this is really two strategies: Low Cost Focus and Differentiated Focus, but for our purposes it doesn’t make a lot of difference; in either case you’re setting out to fulfill the needs of a specific group within a larger market. The thing to remember in all three cases is that while you can’t pursue one strategy to the point of ignoring the others (no one will care how cheap your product is if it’s so poorly made that no one can use it, and no one will care how great your product is if no one can afford it) trying to follow both strategies almost never works. This is called getting “stuck in the middle,” and even if the rest of your strategy is sound, this can still sink your company…

Who Needs Philosophy?

Sometimes I’ll come across a story in which a person or an organization is behaving in a way that I find personally repugnant – one which deeply offends the philosophy I hold on that subject, or my sense of ethics – but which is legally permissible. The fact is, you can’t legislate moral behavior, and any individual person is going to be offended by something that others in their society might find inoffensive. I don’t write about philosophy, moral or otherwise; I prefer to leave that to people who are qualified for it, and none of my degrees or experiences are in philosophy. But every once in a while I will find a story where even if the person with whom I disagree is correct (in either legal or moral terms), their position is still stupid in terms of business, management, or even logic, and therefore farcical. Such, I believe, is the case with Shorter University, and their new policy of requiring all of their employees to sign a “Personal Lifestyle Statement” rejecting homosexuality…

You can find the Atlanta Journal-Constitution story about it here if you want to, but the basic facts are simple enough. Shorter University, a Christian private university in Georgia, is requiring all of the people who work for it to sign a statement saying they reject all behavior that isn’t approved of in the Bible or by their governing board, including premarital sex, adultery, drinking or promoting the use of alcohol when there are any students watching, and homosexuality in any form. I’m not sure this is legal in the first place; there may or may not be an exemption that the school can invoke as a religious organization. But that’s a case for the courts (and possibly the legislature) to decide anyway; I’m just talking about business – and from that standpoint, this is a farce…

First, and most obvious, how does the administration expect to enforce these restrictions? I suppose if someone comes into the office and starts passing around pictures of themselves engaging in premarital sex or committing adultery you could fire them, but there are already laws about that. A much more likely scenario is that employees will go ahead and sign whatever statement the school insists on, and then continue with whatever their lifestyle was to begin with while avoiding the institution and anyone from it who is likely to report them. Unless, of course, someone within the school has a grudge against one or more of his/her co-workers and decides to denounce him or her as an adulterer (or, one supposes, a homosexual) in order to get him or her fired…

Then there’s the issue of suitability of personnel. It’s possible, of course, that an educational institution that is more concerned with the adherence of its personnel to a conservative Christian code of behavior than it is to the ability or quality of those personnel will also not care if any of its instructors are worth their weight in wet garbage, but eventually their students will – and if the university is accredited by any oversight organization in the world, it soon won’t be. It’s also worth noting that under such a policy the school would have no problems hiring violent criminals, foreign terrorists, racists, ageists, sexists, fascists, convicted felons or sex offenders – provided, of course, that they promise not to engage in adultery or same-sex relationships while employed…

I can’t comment on what is required of someone to be a good Christian fundamentalist (assuming that isn’t an oxymoron in itself), but I’ve picked up a few things about management and education over the years, and I don’t care what sort of organization you’re running or what your agenda might be. If you are selecting personnel on any basis other than merit and retaining them on any basis other than performance, you will eventually employ only those people who agree with your agenda, even if they are completely incompetent by any other possible criteria. Frankly, it’s not a strategy I should care to employ, myself…

But then, I don’t really know much about philosophy…