Category: Strategic Thinking

I spend a lot of time around motivational speakers. These people tend to be very positive, and always talk about how we should transcend our limits. This is a useful way of thinking, but the word “limit” can also mean something very real that should NOT be passed.

When you think of the limits your business has, both types probably come to mind.  Your business has limits that should be smashed through so you can go to the next level.  There may also be limits which simply need to be understood so you can adapt to them and – possibly – use them to increase your profitability.

The first type of limit is easy to spot.  I saw it recently in a company where certain activities had

slowed down to a near standstill because of bureaucratic paperwork.  In key strategic areas, the company simply was not moving forward because every step required three or four times as much effort as it was worth.  The key to spotting this issue is to watch for this type of statement:  “If we didn’t have to wait for requisition approval, we could have gotten this done a year ago.”  The phrase “if we didn’t” often carries the key concept – WE are slowing ourselves down, so this is a self-imposed limit.

The second type of limit is almost always systemic in nature.  To give a simple example, if you put a pair of fruit flies in a jar with a banana, there will shortly be many more fruit flies.  Wait a little longer, and the number of fruit flies will double…and so on.  The jar, however, will never become completely packed with fruit flies because there is a real limit on the number of fruit flies that can grow this way.  In this case, the limit is the food source – the weight of the fruit flies in the jar can’t exceed the weight of the banana, because all of the creatures in the jar grow from that food source (and use some of it up as energy).

How does this relate to your business?  Quite simply – in many, many ways.  Businesses use up all kinds of resources – suppliers, employees, raw materials, customers.  While some of these can grow over time (markets, for example), all of them will impose a limit on how much business you can do at any point.  If you sell cell phone parts, it is unlikely that you can sell a number of parts exceeding the human population of your markets.  That is a limit, and if your company is very successful, you might approach such a limit someday.

How does understanding limits help us in strategic thinking?  There are endless ways, but here are five critical ideas that you may want to apply:

1. Look for the self-imposed limits in your business and remove them
2. Find the hard external limits and look for ways around them
3. Unavoidable hard external limits will define the nature of competition
4. Understand how system dynamics may change your limits over time
5. Hard limits often cause cyclical fluctuations – anticipate these

Each of these ideas can be the basis for major undertakings in your business which will have incredible results.  If you are interested in any of these, please comment and I’ll cover it in more detail in my next article.  If you are interested in learning more about strategic thinking please listen to my webinar by clicking here.

One of the most useful tools for good strategy analysis is systems thinking.  Some people think this means you have to treat your business like a computer program, but really it’s simply a way to think through all of the connections that affect your business and how it both operates and competes in the marketplace.  It doesn’t hurt to understand computers, but systems thinking can be used by anyone.

The basic concept of systems thinking is that we can understand complicated systems by learning how the pieces of the system connect to each other and change the behavior of the system.  Let’s use a simple example.  If you go to a restaurant, sometimes they may be able to seat you right away and some

times you may have to wait for a table.  This is the result of a fairly simple system.  There is a finite pool of resources – tables – which can be used to convert customers from one state – “waiting for a table” – to a second state, “seated at a table”.  If all the tables are empty, this process takes very little time – you speak to the host or hostess and are seated at an empty table.  If all of the tables are full, it will take longer, as you wait for the current occupants of a table to finish their meal and leave, and then wait for the server to prepare the table for the next set of guests.

So what determines whether you have to wait for a table?  There are several variables and processes that will affect this system.  First, the number of tables is important.  If you have a thousand tables, it will take a lot of customers to fill your restaurant, while if you have just two tables, your restaurant will be full as soon as the second customer group arrives.  Clearly, the rate at which customers arrive is also important.  When customers arrive faster than existing customers can finish their meals, the restaurant will start to fill up.  When the restaurant is full, a line for tables will form, and it will increase in length as long as new customers are willing to wait in line.  Another key variable is the rate at which customers finish their meals and leave the restaurant.  For a restaurant owner, it’s very important for customers to finish and leave quickly during busy periods, because otherwise the restaurant fills up and a line forms.  Unfortunately for most restaurant owners, many customers like to sit around after a meal, especially if the restaurant environment is pleasant.  Benihana tackled this issue by making the meal a show with a clear beginning and end, which creates the expectation that guests will leave shortly after the chef finishes.  This clever approach allows Benihana to turn their tables more quickly, and has generated above average profits for the chain over the years.

It’s clear that a business situation like a restaurant can improve its efficiency and profitability by tuning the processes that fill up the restaurant and create lines for tables.  For example, one simple way most restaurants can reduce lines is by raising prices.  As a result, it makes sense for a popular restaurant to have a more expensive menu – especially during busy hours.  This has two beneficial effects:  it reduces the aggravation of waiting for tables for the customer, and it increases the profit of the restaurant.  Of course, if all of the customers disappear, it may be that prices have been raised too much, but this, too can be tuned by a smart, attentive manager.

Can you use this type of thinking in your own business?  I’ve seen many situations where customers ask a company to do difficult and sometimes expensive services to support customers.  If you don’t charge a premium for such services, you will, of course, tend to see an increasing demand for such services.   If, on the other hand, you charge for such services, you may put a damper on demand for those services.  If a product line, for example, is unprofitable because of expensive customer demands, pricing may be used to bring demand into line with your capacity to serve such customers.  At the same time, increased pricing will improve the profitability of sales to those customers who are willing to pay the higher price.

Naturally, we sometimes see a terrible situation where using pricing to manage demand is very difficult, because some competitors may not charge for the same service.  In such situations, the behavior of competitors may well drive down profitability for the entire market, and a different set of strategic responses may be in order.

In my next article, I’ll look a little more closely at some kinds of processes that we can think about when using systems thinking to assess our strategy.  If you would like to learn more about strategic thinking please listen to my webinar by clicking here.

As you may know from Simplified Strategic Planning, strategy is the course or direction of an enterprise.  In business, this revolves around three basic questions:

1.  What do we sell?
2. To whom do we sell it?
3. How do we beat – or better yet, avoid – competition?

Strategic thinking is a specific approach to thinking that relates directly to these questions.  While there are many different approaches to strategic thinking, here are some that we have seen to be productive in strategic planning:

1.  Systems Thinking

   

2. Understanding How People Think
3. Understanding the Nature of Your Assets

All three of these approaches present some difficulty to most managers because they require a mindset that is distinct from the mindset required for optimal tactical performance – that is, the way managers think about their business on a day-to-day basis.

The first approach, systems thinking, could be the subject of an entire book – or even series of books.  It basically involves conceptualizing your organization as a part of a larger system.  This is one of the most concrete approaches to what some call “big picture” thinking – seeing your organization as a consumer of inputs and a producer of outputs.  In strategic planning, it’s critical to understand that some inputs – such as demand for your product, or price sensitivity – will affect your organization in ways that are beyond your control.  It’s also important to recognize that some things you do (investments, training, supplier choices and so on) will have an effect on important inputs.  The thing that makes systems thinking difficult for many is the fact that – in a dynamic environment – your outputs will change your inputs, and over a long period of time this effect will have a dramatic impact on the success of your organization.

The second approach, understanding how people think, can be as important as systems thinking.  In Simplified Strategic Planning, we devote substantial bandwidth to the concept of specialty/commodity thinking, because it is one of the little-understood concepts, which can make or break an organization.  You might see this approach as a version of systems thinking that applies to specific groups in your system (i.e.… customers, suppliers), but it is also important to recognize that organizations and markets as systems are defined by the way the people in those systems think.  In other words, the way a group of customers thinks about their willingness to spend money will affect the functioning of the market system of which they are a part.

The third approach to strategic thinking, understanding assets, is one we have been exploring with clients extensively in the past ten years.  Again, some of the greatest benefit from good strategic thinking comes from penetrating analysis of one of the least understood facets of this approach, the strategic competency.  Unlike other assets, strategic competency clearly appreciates with greater use, meaning that a strategic plan based upon a well-defined strategic competency can yield increasing returns over time.

These are three of the most critical and conceptually difficult facets of strategic thinking we tackle on a daily basis with our clients.  How are you using these ideas in your organization?  What challenges do you see in their use?  If there is anything we might do to help in this area, please contact us.  If you are interested in learning more about how to have your employees think more strategically and align their actions with the corporate strategy please click here to listen to our webinar on strategic alignment.

By Denise Harrison, Executive Vice President & COO

Your new product makes the “nifty fifty” list of innovative new product introductions; you envision your picture on the cover of Fortune magazine; and then….you end up in legal battles and with little money.  Here are some lessons learned from one company as it tried to capitalize on its innovative new product.  For the sake of clarity and confidentiality we will call the company “Nifty”.

Nifty Fifty – Patent Protection

The product was an ingenious new way to make engines more efficient in the transportation industry.  The good news was that the new product included a revolutionary new technology and the Design Patent awarded was a strong one; so it was harder to develop “work arounds”.  If one is patenting just a “methodology”, it is easier to get around it by changing a step, but still getting to the same result.

Identify a Niche Market to Get Started

Nifty knew it did not have the wherewithal to gain traction in a large market, so it introduced its product in a smaller market, the aftermarket, a market that was not dominated by a few large players.  Good news – it was successful, but the company knew that it was only capitalizing on a small amount of its product’s potential.  Now that the company had some success, it looked for partners who could help it move into other larger markets.  The partners would:

1.       Have capital available for the infrastructure needed for larger scale production.

2.       Have a significant position in a specific market or markets.

The Tale of Three Partnerships

1.       The first partner saw the benefit of the new product to its market place, but when sales took off for its core product base, Nifty’s product sat on the shelf because their partner’s dealers had neither the time nor the financial incentive to push the new product.  Sales were lackluster with this partnership.

2.       The second partner was a large engine manufacturer, an industry leader, who desired an exclusive arrangement to keep their competitors from having this differentiating product.  The license negotiation process produced a high-level product champion within the partner and both companies prospered under the agreement.  Later, the product champion was reassigned and not replaced – this did not bode well for Nifty’s relationship. Next, the second partner decided that they no longer wanted to cut royalty checks. Nifty was stuck with no money and an exclusive arrangement.  What next?  You guessed it – a legal battle.

3.       The third partner was a competitor to the second partner and was more than willing to foot the bill for the ensuing legal battle.  Nifty, with the help of their (third) partner’s financial backing, won the suit. The good news was that there was a sizable financial settlement and the exclusivity agreement with the second partner was no longer in force.  A licensing agreement was then executed with this third partner.  Now, you would think the company was finally in partnership heaven.  But not so fast, this time the licensing negotiation was completed with no clear product champion in place.   As a result, the company did not get the financial and competency leverage that it had anticipated, and over time this third partner decided to stop paying the agreed upon royalties, believing that they were no longer necessary due to a loophole in the intellectual property licensing agreement.  Off to do battle again on the legal front.

Lessons Learned:

1.       Have a strong patent.  This legal protection is your first line of defense.  Without this, a strong market player can simply reverse engineer your product and take advantage of the opportunity, leveraging their infrastructure and market position.

2.       When selecting a partner make sure:

a.       You have a sense of how they do business. Do they have integrity when dealing with their other partners and suppliers or do they have a long history of legal battles?

b.       They assign a product champion who understands the value of what you bring to the table and how their company can benefit from its use.  This person needs to rank high on the integrity scale and have power within the company and, ideally, will have “skin in the game” by having been instrumental in making the licensing deal.

c.       You develop a tight intellectual property agreement.  Time to spend some money for an expert in the IP field, because you can bet that your partner is investing their money to ensure that their interests are protected – so make sure that you are using an expert who will protect your intellectual property because he/she knows IP and your product.

d.       If you decide to sign an exclusive arrangement, make sure there are designated time frames, minimum performance requirements and geographic and industry boundaries.

e.       You know where you stand in your partner’s priorities:  is your partner’s business growing like gangbusters causing its salespeople to focus on other high growth products?  Will your product get the time and attention it deserves?

3.       Stay in the market:  Nifty stayed in the aftermarket segment and this gave it a better position as its various partnerships faltered.  Nifty still had sales and it still had manufacturing capabilities.  These actions allowed them to have more leverage than if they had simply given up all their capabilities when they signed the various partnership agreements.

Having a great new idea is less than half the battle in launching a new product.  Developing a plan of how you will produce, distribute, generate demand for your product and finance the whole process is a key milestone to your success. Be sure you have your plan in place before you go to market.  Be sure it recognizes whether the potential market is “right-sized” for your resources.  Start documenting your steps early in your product development process to make the patent application easier to file in a timely manner and stronger by virtue of your proprietary “art.”  A partnership agreement may well provide you with the infrastructure and market access you need, but be sure to develop these agreements with your eyes open.  Then keep your eyes open even after the agreement has been implemented for signs that a powerful partner is becoming greedier.

If you have had experience with launching new products and would like to add other issues that should be considered, please comment on our blog.

If you would like to read more about new product ideas and where to find them please click here.

Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc.  She can be reached at  harrison@cssp.com.

© Copyright 2012 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

Watching companies respond to massive changes in the current strategic environment, I am struck by how much we tend to overemphasize the present when planning for the future.  In strategic planning, it is vital that you do the best job you can to anticipate future trends that will shape the strategic environment of your industry.  Unfortunately, this is impossible to do with 100 percent accuracy.  What we must do, however, is the best job we can, especially when dramatic changes will change the competitive structure of the industry. 

I can remember doing strategic planning with manufacturers in the 1980s, and hearing over and over again that Japanese companies were going to own the entire planet.  Now, some Japanese companies have done OK since then, but overall, the Japanese economy has been in a genuine slump for almost a decade now, and is even farther from recovery than the US economy is.  The key point of this example is that the present is NOT the future.  The present only has clues to what the future may bring, and sometimes we may mis-interpret those clues.

In strategic planning, it is vital to analyze WHY the future will be different – and why the current changes we see today may or may not continue into the future.  For example, many businesses today are concerned about China’s growth as a manufacturing power.  When thinking strategically about such an issue, we need to break it down into probable causes to be able to assess whether the current trend, growing Chinese economic influence, will continue in the long term.  Some possible causes such as less strict environmental and labor regulations, when compared with Europe and North America, seem to be fairly stable and likely to remain over the next five years.  Others like lower relative labor costs show signs of changing fairly quickly.  Recalling the rapid change in relative costs in Mexico around the time of the enactment of NAFTA, we can see that labor cost advantages can be temporary and subject to rapid change.  None of this is to say that China will not be a growing economic power in the next few years, but rather that there are reasons why that trend would continue, and reasons why it may slow down, or even (in the case of serious political upheaval) reverse.

In strategic planning it is far too easy to rest your assumptions about the future on a simple continuation of the present, the predictions of experts or the conventional wisdom of others in your industry.  None of these is a good substitute for clear-headed analysis, based on systems thinking, which will give you a much better picture of the future that is yet to come.  Make sure you allow the time to take a close look at such issues in your strategic planning, and consider having an outside resource with expertise in this type of strategic thinking challenge the assumptions upon which your plan for the future is built.

By Denise Harrison, Executive Vice President and COO

The location and severity of any specific natural disaster are difficult to predict – so you need to prepare for a disruption in your supply chain, given that a natural disaster could impact your business at some point in time.  Even Toyota, known for its superior management practices, was caught flat footed after the earthquake/tsunami, when its supply of a pearl luster pigment, Xirallic, was interrupted for several months. Was its supplier a small company?  No, it was the large chemical behemoth, Merck that supplied this product from its facility which was located in the region that was affected by the disaster.

Toyota and other car manufacturers scrambled to meet their production schedules without this important pigment.  What did they do?

• Some car manufacturers immediately stopped taking orders for cars requested in the colors that used Xirallic.
• Some manufacturers changed to an alternative supplier offering some colors with a similar pearl luster quality

How should you prepare?

First you need to know where your risks are:

• Identify your sole source suppliers (only one supplier is capable of producing this product/service)
• Identify your single source suppliers (you have a single source, but other suppliers are available)
• Answer the question: How fast does a disaster interrupt your production

Is it immediate?

Two weeks?

Two months?

Six months?

• The timeframe of the impact is important to how much focus you give to mitigating a specific risk

Sole source – mitigating risk 

• Does your supplier have multiple production sites?

For example, Merck is building another production site in Germany, ensuring supply in the event that a natural disaster impacts one region of the world and not another

• Are there substitutes for the product/service?  In a pinch what could you do?
• Do you build inventory on the “immediate risk” items so that your production is not shut down while you explore other options?
• Do you have a communication plan for notifying your customers concerning the impact of a disaster when such an event happens?  The faster you notify your customers of the impact and the expected timing, the faster they will be able to decide their course of action.  Merck was slow to notify its buyers concerning what impact the disaster had and the possible timing for resolution.  While this is not always easy to predict, a happy, but unrealistic forecast is not what your customers want – they want to understand, to the best of your ability, what the timing looks like so that they can take steps to mitigate the risk for their customer base.

Single source – mitigating risk 

• You can follow all of the steps in the sole source example, but you have some additional options as well.
• Have alternative suppliers pre-qualified, but make sure that you are qualifying suppliers that have a different risk profile.  Identifying an alternative supplier one mile down the road from your current supplier does not necessarily lower the risk by identifying and qualifying an alternative supplier.  This would help you if the production issue was a plant fire, but not help you if the whole area were flooded by a hurricane and production was impacted throughout the region.

 Develop Plans to Mitigate the Risk

Once you have developed a list of your sole source and single source suppliers, and assessed the risk associated with each supply disruption, you need to develop a plan to mitigate the risk for the suppliers that would have a high and quick impact on your business if a disaster occurred.  You will also need to develop the communication plan so that your customers are kept in the loop and are not blind-sided by the lack of availability of a product.  One company I worked with identified one item that was sole source and had immediate impact on their production.  They decided to keep a large inventory of this product on hand; while it was a minor cost item, without it, the product could not be produced.  When the supplier had a strike, this company had enough supply of this item on hand to continue production.  This foresight allowed them to gain market share while their competitors were shut down.

What about Service Industries – Are there any important supply issues? How about labor?

Yes, remember the Icelandic volcano that cut off travel to and from Europe?  Many firms, including service firms found that the volcano disrupted their supply of human capital.  As a service firm, it is important to understand where your risks are around human capital and ensure that you have back-up plans in place when travel logistics are interrupted for long periods of time.

Lessons Learned

Did Toyota learn its lesson quickly enough to prevent the next production glitch? No, the recent flooding in Thailand has put another monkey wrench in its production schedule. What about your company?  An earthquake/tsunami in Japan or a volcano in Iceland or floods in Thailand –no matter what your threat looks like, you should understand the impact that the threat has on your business and develop plans to mitigate your risk.  If you have questions about how to incorporate threat risk assessment into your strategic planning process please contact me at: harrison@cssp.com

For more on this subject please read: Turning Threats into Opportunities.

Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc.  She can be reached at  harrison@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

How are industries disrupted?  We have already identified the three most common causes:  technology, business practices, and law.  But if we want to do a good job anticipating disruption, we need to know exactly what kinds of changes are likely to lead to disruption.

As a general rule, disruption occurs because customer behavior changes radically – or the customer disappears altogether.  For example, the shift from land lines to cell phones (which is much more noticeable in younger generations today), is a radical change in customer behavior for telephone-oriented operations, and it may mark a complete disappearance for those whose markets depend on the existent of land-line service (companies that make RJ-11 jacks or pay phones, for example).

Some disruptions lead to very rapid change and disappearance of a market.  The rise of “smart phones”, for example, eliminated the consumers’ desire for a stand-alone personal digital assistant, making devices such as the Palm Pilot obsolete almost overnight.  Technological convergence has a tendency to eliminate discrete devices as they are combined into a single technology.

Other disruptions can take a longer time to play out.  The land line to cell phone migration is an example; so is the slow change from in-person to online banking, which started in the 1980s and is still playing out.

So what kinds of things cause changes in customer behavior?  Certainly, the three root causes we discussed earlier – technology,  business practices, and law, are at play here.  But to gain a more fundamental understanding of disruptive change, you need to think about how customers behave.  As a rule, customers make choices to seek pleasure or utility, and avoid pain.  This may be as simple as buying a candy bar – seeking the pleasure of sugar and chocolate – or as complex as buying insurance – avoiding the pain of an unanticipated financial loss.  In most business transactions, there is a delicate balance between the pleasure and utility of the product or service purchased, and the pain of paying for that product or service.  In other words, most purchases involve customers doing something they would prefer not to do, spending money.  Root cause changes, such as technology, may dramatically change a customer’s perception of pleasure, utility and pain in your market, because the change may change the fundamental experience of these three attributes.

Let’s examine an example of radical change.  Changes in telephone technology and business practices led to the rise of call centers as a customer contact point.  This change was largely driven by suppliers desire to reduce cost by centralizing customer contacts and also by using technology to increase efficiency (both time efficiency and global market efficiency, by moving operations to markets with lower costs).  So far – increased utility for suppliers, and reduced pain, which may or may not be passed on to customers in the way of reduced prices.

From the customer perspective, this shift looks different.  There is increased pain, as shifting responsibilities, reduced communications and technical abilities, and depersonalization of service came with the increasing use of call centers.  In some markets, this decreased value was accepted as a given, since all competitors essentially pursued the same change in business practices.  In others, the difference between the high pain and low pain offering led to unexpected changes in customer behavior.  For example, in the airline industry, the aggravation of low-cost call centers and long hold times led to accelerated adoption of online travel services.  This, in turn, enabled customers to quickly use technology to sort air travel options by price (and usually, by price alone), so that the market became increasingly commoditized.  One could argue that, by partially shifting the cost of the phone operation to the customer (in the form of longer hold times), airlines created a strong incentive to seek alternative ways of purchasing their product.  This dramatic shift essentially destroyed most of the travel agency industry in a very short time, and also – because of ticket price competition – led to the bankruptcy of several airlines.  Viewed from the perspective of the travel agents, this shift was extremely rapid and devastating.  When you look at how customer motivations interacted with shifts in business practices, it was entirely predictable (and, in fact, I did predict it when working with one airline in the early 1990’s).

While economists point out that customers do not always make rational choices, there are usually emotional balances driving customer behaviors.  Some consumers, for example, will spend 5 minutes driving out of their way to save 50 cents on a tank of gasoline for a car.  When you put it in price terms, this makes sense  – “I bought here to save 3 cents a gallon.” – but when you put the decision in relative terms, it is clearly irrational “I just spent time to be compensated at a rate of $6 an hour.”  So, when assessing how customers may dramatically shift their behavior, be sure to look for the emotional equations that are dominating people’s thinking, and not just the rational ones.  Here are the most common emotional decision drivers:

1.       Price – far too easy to focus on, because price is credible above most other claims.

2.      Status – customers will pay extra to be perceived as high status.

3.      Sex – customers will pay extra to think they are more attractive as romantic partners.

4.      Pampering/aggravation – customers will pay extra to feel they are treated well or to avoid the perception of mistreatment.

5.      Fear/hope – customers will pay extra to avoid things they fear or obtain a chance to achieve something they hope for (which is why lottery tickets sell).

When examining your markets, be sure to look at the effects that changing technology, business practices and laws have on all five of these things in the minds of your customers.  Whether your customers are consumers or companies, you will find that any of these can lead to significant disruption – and therefore both threat and opportunity – in your markets.

For an excellent discussion of strategic planning in uncertain times, click here.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

By Robert W. Bradford, President/CEO

As a rule, people don’t like to change.  People do change, however, and this happens for three basic reasons:

Changing behavior can eliminate a major source of pain

An example of this is the mass migration of airline ticket purchases to the internet in the 1980s and 1990s.  Two sources of pain were eliminated through this – the inconvenience of working through an intermediary (the travel agent), and the higher cost of maintaining the agent-based distribution system.

Changing behavior can create opportunities

As eBay became a deep and viable market for all kinds of goods, many people in specialty retail businesses, such as collectibles, changed their business model to include a substantial amount of online auction sales to take advantage of the more robust market opportunities.

Changing behavior may be required by changes in the environment

Physician practices, historically dominated by the small, one or two doctor practice, have begun consolidating into larger and more sophisticated practices as a result of increased regulation and payment practices in the industry.

In each of these types of change, there is potential for destruction or major reconfiguration of the industries involved.  The travel agent business has become oriented toward very specific types of travel – and the mainstay of air travel is almost completely gone.  The collectibles markets affected by eBay have largely transformed into a hybrid of online/offline dealers.  Suppliers to the health care industry have changed their selling practices to target larger and more savvy buyers.  These changes are not something we can fight – they are inevitable consequences of changes in laws, technology and business practices.

For strategic thinkers, the foresight that would enable us to adapt to disruptive changes before they occur is incredibly useful.  Without question, the players in an industry who anticipate and adapt to such changes are most likely to improve their competitive position.

What are the best ways to spot disruptive changes in your industry?  It helps to understand the most likely drivers – technology, law and business practices.  Using each of these as a lens, you can look at your industry and ask whether any of these factors have changed to a point where they present an opportunity for major change.  One very effective way to do this is to put yourself in the customers’ shoes.  I like to ask for the three or four most important behavior drivers for customers – such as price, convenience, product features, etc.  With this list, you can ask “How will technology change our ability to drive customer behavior in the future?” (and, of course, “How will legal changes…” and “How will changed business practices…”).  You can rest assured that someone in your industry WILL use the changing situation to drive customer behavior – generally by attempting to draw more customers by meeting their changing needs and preferences better than other competitors.

Armed with this analysis, you can begin to piece together the most likely scenarios for your market, and then develop a Winner’s Profile.

If technology, for example, is dramatically reducing certain costs in your industry, you can very effectively plan for an improved cost structure and, unfortunately, price competition.  The company who best anticipates future changes and positions itself to succeed is the one most likely to generate windfall profits – higher sales at a price that is not yet commoditized.  What you do with this windfall is strategically critical.  Smart strategists will invest much of the improved profit in building market share and reputation.  This is important – you CAN just let the increased margin flow to your bottom line, but it will make for a fairly weak longer term competitive position.

The best strategic choice is to look at how you can apply your strategic competency to the future disrupted market.  For example, if you are good at being a travel agent, and your business is about to decline because of the internet, you want to ask “What strategic competency makes me a successful travel agent?”  The answer to this question will lead you to ways you might catch the wave of change, instead of being wiped out by that wave.

Continue to Part II, click here.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.

Profit, many would say, is profit.  But in reality, profit comes from several different sources, and the type of profit you are getting in your business can be very important in thinking about your strategy.  Profit that comes from a temporary or threatened situation, for example, should be treated quite differently from profit that comes as the result of your brand reputation (assuming your reputation is solid, of course!).

Let’s look at the different types of profit that most companies get:

1.       Capital profit – profit you make as the result of owning capital assets, such as a building or equipment.

2.      Labor profit – profit you make as the result of employing people.

3.      Process profit – profit you make as the result of an action that you perform.

4.      Brand profit – profit you make because people pay more for your products or services as a result of your brand.

5.      Relationship profit – money you make because of a specific, unique relationship with another person or organization.

6.      Information profit – money you make because you know something that your customers or suppliers do not (for example, you have a customer list that allows you to sell products at a premium that your suppliers could sell directly).

This is not an exhaustive list, but it gives you a good sense that money can be made in a lot of different ways.  Most businesses make profit in more than one of these ways – it’s not unusual for a manufacturer to have capital, labor, process and brand profit, for example.

The reason flavors of profit can be important in strategic planning is that each creates a unique set of strategic issues as well as competitive dynamics in your industry.  For example, information profit has been eroding in many industries because the Internet has enabled buyers to research primary suppliers and cut past traditional intermediaries, such as distributors, in some markets.

Some sources of profit – labor, for example, and brand – can be problematic because they erode as they are used.  Relying on your brand for profit involves charging more money for your products or services – which changes the ratio between price and value delivered.  Unfortunately, while your brand can enable you to do this, doing too much of this will diminish your brand reputation and, as a result, your ability to use brand to increase profit.  So, while brand can be a great source of profit, relying on it too much can lead to killing the goose that laid the golden egg.

What kind of profit does your company make?  Are any of the types of profit you earn more or less stable – or are some continually fluctuating due to technological or competitive pressures?  When evaluating profitability in your strategic planning, you might find it useful to break down profitability into different types, so that you can think about different strategic responses and choices that will enhance your profit growth in the future.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.

© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.