by Denise Harrison
Reprinted from October 2006
During the course of strategic planning your company will look at threats — outside forces that can severely impact your company’s success. Often the analysis of threats includes looking at how you mitigate them by:
- Preventing the threat from happening
- Reducing exposure to the threat
- Assuring early detection
- Developing contingency plans
- Hedging against the threat
In addition, you should ask the question: How can we turn this threat into an opportunity? Companies who successfully looked at threats as opportunities have significantly changed their competitive position. For example, in the early days of mutual funds most brokerage firms viewed the entrance of mutual funds as a threat. In contrast, Charles Schwab, only a regional broker at that time, looked at the entrance of mutual funds as an opportunity and partnered with many mutual fund families. This allowed his customers to buy mutual funds through Charles Schwab instead of having multiple accounts for brokerage and mutual funds. Other brokerage firms, who saw the mutual funds as a threat, chose not to work with them and instead developed their own mutual fund families. The Schwab strategy helped make the company the financial powerhouse that it is today.
BoatU.S. Turning a competitive threat into an opportunity
In 2002 BoatU.S.’ senior management team received a phone call from West Marine, a boating supply retailer, with an offer to buy BoatU.S.’ retail business. This call was one the BoatU.S. team had received in the past but should they respond with the usual ”no” or look at this seriously?
BoatU.S. is the premier membership organization for recreational boaters – for you non-boaters – this is the AAA for boaters. As a member of BoatU.S. you have the following services available to you:
- Boat Insurance
- Towing Services
- Boat Loans
- Trailering Club
- Boat Lettering
- Safety Courses
- Consumer Protection Bureau
- BoatU.S. Magazine
- Representation on Capitol Hill
- Marine Surveyor & Admiralty Referral Services
- Boat Buying/Selling Services
- Free Safety Course
- Affinity Credit Card
- Auto Insurance
- Rental Car Discounts, etc.
The original vision for BoatU.S. encompassed providing federal level representation, and discount products and services to the boating community. The early operation included a mail order business for the distribution of products. It expanded from mail order into retail at the request of its customers. The transition was a gradual one, first customers requested the ability to pick up products ordered by mail at BoatU.S. headquarters and as this became more popular it expanded into a warehouse, then the warehouse started displaying items for impulse purchases and finally the decision was made to develop retail locations. Over the years BoatU.S. struggled with the retail organization, but by 2003 the senior management team knew they had a top-notch team running the retail organization. Now, there were 62 stores that generated significant gross revenue and significant new membership, but produced less than significant dollars to the bottom line. In order to raise profitability BoatU.S. would either have to raise prices or gain leverage with suppliers through increased volume. In order to increase volume new locations would need to be built and each new retail location took significant capital investment. The return on this investment generated by additional retail locations was significantly less than the return in other segments of BoatU.S.’ business. The senior management team needed to evaluate whether this investment was the best use of resources — would it really optimize the association’s future potential?
West Marine, a boating supply retailer, had taken a different approach to expansion. In 1993, the company went public to generate capital to fund its expansion. With these funds West Marine embarked on an expansion campaign building its first stores on the East Coast. In 1996 West Marine merged with one of its East Coast competitors, E&B Marine, and became the dominant player in the boating supply industry — more than 3 times the number of retail locations of its nearest competitor. Expansion continued and by 2003 West Marine had over 360 stores and the volume that gave it purchasing power with its suppliers.
BoatU.S. faced an important strategic milestone: where should it invest its resources to optimize the organization’s future potential?
- Continue to invest in the retail operation
- Partner with West Marine
- Continue to invest in the retail operation
- Require significant capital
- Require time to gain market share to develop purchasing leverage similar to West Marine’s current capability (continue to compete with the market’s 800-pound gorilla)
- Divert investment from other, more profitable segments of the BoatU.S. business
- Partner with West Marine
- Grow from 62 to over 400 retail locations
- Provide increased accessibility to retail establishments for BoatU.S. members
- Increase membership sign-ups (increasing the revenue of more profitable segments of BoatU.S. business)
- Require a significant change in both companies’ mindset to go from competitors to partners
BoatU.S. realized that its limited access to capital would make the first option untenable, so partnering with West Marine was the best for both BoatU.S. and its membership. A difficult decision — yes, but the hard part was still to come. How did BoatU.S. and West Marine develop a partnership after so many years of competition? The important keys to success were:
- Making this partnership a priority in both companies
After some initial difficulty, the senior management teams from both companies held a joint meeting. As a result of the meeting, both teams realized they had shared values including a passion for excellence and a commitment to the boating community. With this recognition both teams moved to solidify the partnership to bring benefits to both organizations. Now, almost three years into the partnership what are some of the benefits?
- BoatU.S. members receive unique equipment value at West Marine/BoatU.S. retail establishments
- BoatU.S. — grew from 62 to 400 retail establishments to sign-up BoatU.S. members
- West Marine — BoatU.S. members spend more and shop more frequently than other customers
Most management teams look at competitors as threats. When BoatU.S. took a step a back and looked at West Marine as an opportunity, both companies and their respective customers won.
Disney Takes Pirates by Surprise
One would think that Disney and pirates would go hand-in-hand. We first met Captain Hook in Peter Pan and now we have Blackbeard in Pirates of the Caribbean. So why is Disney having a problem with pirates? Yes, you guessed it, the 21st century version of piracy, the pirates that enable counterfeiting of Disney products sold in China, are the culprits and no, this will not be a future feature film.
But can Disney make a game of capturing pirates? Yes, leave it up to Disney to make this a game that is fun and beneficial for both the consumer and Disney. The ”Disney Magical Promotion” developed for the Chinese market includes:
- Disney products that have a red hologram sticker attached to certify authenticity.
- A contest to enter by attaching these red hologram stickers to a form with some personal information. This form is then mailed to Disney for inclusion in a drawing for a variety of prizes including: TVs, trips, DVDs, etc.
- A campaign to publicize the contest using Disney’s ”Dragon Club”, a TV show which encourages children to find the hologram stickers. (I’ll bet the Chinese parents love this tactic.)
- Increased benefits for consumers who enter the contest and spend more than 88 Yuan (88 is a lucky number for the Chinese); these high-end consumers will receive additional coupons for Disney products.
- Consumers look for legitimate Disney products so they are eligible for the contest.
- Consumers report stores carrying counterfeit items. (This benefit was unexpected.)
- The forms enable Disney to develop a data base of consumers with an interest in Disney products.
By encouraging Chinese consumers to buy legitimate Disney products, the company turned this counterfeit threat into an opportunity to build a data base of loyal Disney consumers. This data base will enhance Disney’s ability to penetrate the Chinese market and build its brand identity. Could this be better than Blackbeard’s treasure? Yes, unlocking the enormous market potential in China will help ensure Disney’s growth in years to come.
Coke is Bottled Up or Things Go Better with Coke
Roberto Goizueta looked at the century old company he inherited from his predecessor and knew that the tried-and-true formulas of the past would not work in the future. The independent bottlers had been instrumental in gaining significant market share in the early days of the company. Now, however, the bottlers were in mature markets and were not investing to make their operations profitable. Additionally, Coke could not present a unified price to the consolidating grocery chains as the bottlers each represented different territories and had little incentive to agree on a national price for large customers. Goizueta could see that Coke was losing market share to its arch rival Pepsi due to its inability to manage its distribution channel. He had to turn this threat into an opportunity or Coke shareholders would suffer.
Goizueta knew that with the current arrangement with the bottlers, where Coca-Cola simply provided the syrup at a price to the bottlers, he had no leverage. He needed to change the relationship — but how? Great news from R&D — a new additive (high fructose corn syrup) served as a low-cost substitute for sugar. Goizueta knew he could use the 20% cost advantage as a way to change the current agreements with the bottlers. This increased Coke’s profit, but not its leverage with the bottlers. Next, Goizueta began buying part of a small bottler, and investing in the plant, increasing efficiency. He then acquired other bottlers, increasing their efficiency, but also increasing Coke’s control of the bottler marketing and pricing practices. Now the company was able to offer national pricing to large customers, particularly the grocery chains. The bottlers won as they became more efficient with the plant modernization and better able to compete in the increasingly cut-throat soft drink environment. Still this strategy came with a price; the balance sheet of the company was heavy with the bottler assets. In order to improve the financial ratios, specifically, asset intensity, Goizueta then spun 51% of the bottlers off to individual shareholders as Coca-Cola Enterprises and kept 49% for Coca-Cola, allowing for control, but taking the assets off the balance sheet. This sale raised over a billion dollars, further enabling Goizueta to buy more of the bottlers.
Important lessons learned from Coca-Cola:
- What may have been instrumental to success in the past may not be the key to future success. In fact, changing market conditions old practices may be a hindrance. Don’t get stuck with ”This is the way we have always done it! Thinking.”
- Look for ways to make the solutions win-win propositions. The bottlers received investment for modern facilities and Coke was better able to control the marketing of its product.
When you evaluate your threats, be sure to look for ways to turn your threats into opportunities rather than simply analyzing ways to mitigate the risk. Remember a glass half empty is also half full. And even an entirely empty glass has the capacity for a full glass of something better!
Denise Harrison is a consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at firstname.lastname@example.org.
© Copyright 2014 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.