Marketing Management,
Fall/Winter 1998

Searching for Storms

by Robert Duboff

Predicting the future is difficult. Predicting the weather seems to be impossible. The gibes at weather forecasters are as frequent (and perhaps as justified) as those directed at economic forecasters. Yet, there is no doubt about the value of accurate predictions - particularly as they pertain to major disturbances.

If we turn to business forecasting, the track record is pretty gloomy. The list of missed opportunities is a long one. Perhaps the best evidence is that as recently as 5 years ago, everyone was talking about the "information highway," virtually ignoring the Internet. More quantitative proof lies in the failure of so many large businesses (over 1/3 of the then existent Fortune 500 disappear over any 10-year period) which had so many resources available to prepare for the future. While many of these companies disappeared by being acquired, this is rarely, if ever, the objective of any large company's management team. And, even among those who survive, few are able to perform consistently well even for as long as a decade. Mercer research has shown that only 8 percent of the largest 1000 public companies have successfully outperformed their industry counterparts in terms of profitable growth (i.e., growth in both revenues and bottom line) over the past two 5-year periods.

There are many business books that have addressed this failure. Most recently, The Fortune Sellers, by William A. Sherden, documents the poor record of prognostication. Conversely, two of the books best at analyzing business fatality and trying to guide companies to live longer are The Living Company (Arie deGeus) and Built to Last (James C. Collins and Jerry I. Porras). The former lists the four shared attributes of the handful of companies to survive for several centuries. It's as if the Fountain of Youth had been discovered: how to live nearly forever. One of the four keys is to be sensitive to the environment. Built to Last is replete with findings about the need to shift business designs in search of customers (if not excellence). And, yet, the advice and data go unheeded and large enterprises keep dying.

In fact, today, most corporations appear to have given up. Strategic planning has become a sterile annual exercise that is typically played as a "last year plus X%" game. Conversely, only a very few companies have invested in thinking about the future and the potential implications for the present. Even those who have (e.g., Xerox) often have been unable to capture the value of the fruits of their own thinking (e.g., Xerox's Parc's invention of the PC).

Thus, the problem that must be addressed is how can businesses better prepare for the future. The best framework for forward-looking companies is the discipline of Business Design-the entire system by which a company delivers utility to its customers and thereby generates sustained value growth for its shareholders. Business Design starts with customers-an understanding of their current priorities and the trajectory along which those priorities are likely to evolve-and works inward. Market-driven issues of customer selection, profit model choice, and the identification of strategic control points that prevent competitors and customers from siphoning off your profits serve as the basis for determining the required capabilities and organizational structure.

The hallmark of this framework is the need to determine your customers' future as well as current priorities, so that you can design your business to meet them. Consequently, being able to look into the future and anticipate those priorities is crucial to success.

As you read this article, examine your company. Is there a serious effort (e.g., at least 6 figures in out-of-pocket expenses per year and at least 3 full-time professionals) to understand what the future might bring so as to prepare yourself for maximum advantage?

Shell Oil does and has even publicized its efforts which, through scenario planning, allowed the company to profit from what looked to be unanticipated events such as the Arab oil embargo.

Intel does it, too, and has publicized its efforts (in Andrew Grove's book, Only the Paranoid Survive and elsewhere) to think about the implications of the Internet even though its CEO feels that it does not really present a threat to the core business.

However, the vast majority of companies do nothing about the future. When you ask, traditional CEO's will respond with words and behavior to this effect:

  • "Tomorrow probably will be pretty much like today"-- and if it isn't
  • "There's no real way to predict"-- and if there were
  • "There's not much we could do about it."
While these attitudes produce little coherent strategy for a future different from today, even the least innovative enterprises have new plans and initiatives for the future. When they do look to the future, most companies implicitly try to cope by developing products and services that they feel will perform so well that they will fuel future growth. This ignores several facts:
  • The best product does not always win
    • The McIntosh was (and maybe even "is") better than IBM's personal computer but the "PC" won the war
    • DEC's alpha chip is better than Intel's best on an objective basis, but that is irrelevant just as DEC's "mini-computer" VAX's superiority turned out to be.
  • Product improvements are equally uncertain
    • The better buggy whip lost to even the worst motor car
    • The better typewriter loses to even a bad computer
    • The better long distance telephone provider will likely lose to Internet providers
    • Etc.

A second "strategy" for the future is to build brand equity to protect against uncertainties. This is typically a better strategy than relying on products alone but it is an equally poor barrier against a wave of change if only because there are too many audiences to influence simultaneously: customers, targets, channels and, for public companies, stock analysts.

Positive brand equity is necessary for long term success but it is not sufficient. In fact, often a glowing reputation stymies effective alertness. Consider the number of years over which Howard Johnson's refused to budge and react to the cheap McDonald's - originally a laughable competitor. Similarly, Holiday Inn's higher-class image was eroded by competitors. Think of the similar fate of the high-class retail chains or the numerous local department stores revered in their markets for years but easily demolished by Wal-Mart.

Furthermore, those with strong brands have often given in to the temptation of stretching the brand by plastering it (often in slightly amended form) on all sorts of extensions. As Jack Trout and Al Ries have pointed out in their various books, this depletes the equity of the initial brand.

While change has always been a constant, its speed has increased. While we used to learn about change through word-of-mouth, we are barraged by information now. While once loyalty was an admirable trait, our culture has shifted to a free agent mentality both in sports and in employment. Consumers have been trained to be disloyal by bribes from a long distance company, for example. Where companies and brands seemed stable and sturdy in the past, the constant merger and acquisition cycle makes brands seem more mobile and reinforces the sense that smart consumers constantly shop. For example, DDB Needham research over the past two decades shows a sharp decline in Americans who try to stick to well-known brand names.

And, while smart companies are often able to combat these trends with effective, customized loyalty programs and approaches to build long-term franchises, even this strategy can fail in the face of an underlying change in what the customer is looking for.

Comparing 1998 with 1988, consider these seemingly stable, even commoditized industries/categories:

  • Coffee
  • Telephone service
  • Magazines
  • Book retailing
  • Accounting firms

The buyer values - what the customers want - have changed drastically in what my partner, Adrian Slywotzky, has labeled and written about: "Value Migration*." The challenge is to develop a long list of truly stable industries/categories in which the competitors and buyer values have not been changed. It's hard to do.

Thus, the traditional CEO's response can be challenged with these presumptions:

  • It is more likely that an industry will change dramatically in a decade than that it won't; in fact analyzing companies by their current industry is usually a good way to miss the real threats and opportunities
    • The real competition to banks has been first Merrill Lynch, then Fidelity, Schwab and the like
    • The real competition to department stores was a set of streamlined competitors in the suburbs.
    • The real competition to Maxwell House was Starbucks
    • The real competition to IBM was Microsoft and Intel
Mercer research indicates that an effective business design is unlikely to last more than a decade.
  • While difficult, it is possible to anticipate potential sources of discontinuity/inflection points that - like storms - may be looming in the path ahead
  • While difficult, it is possible - even likely - that a skilled company can predict what its chosen customers will need and want in the near future
  • In short, those that don't muse about the future (and its implications for them) are doomed to never replicate their current level of success.

The tools that provide my optimism are few in number but each is well-tested. More important than the tool, however, is the attitude of the user and a culture that accepts change as inevitable and has the self-confidence to try to exploit the change. (3M and Hewlett Packard are exemplars of this attitude with their encouragement of individual initiative and requirement that a high percentage of annual revenues come from new products and services that meet previously unmet needs that have been uncovered.)

Within this environment, the key imperative is a continuing process which:

  • Identifies current driver(s) of business success for the company
  • Assesses all the factors that could change these driver(s)
  • Analyzes each of the factors in a simple matrix with axis of likelihood and impact
  • Details for those with the highest likeliness/highest impact what the implications on the business would be
  • Determines how the business could exploit the opportunity and/or overcome the threat (e.g., a new business design if not new services or products or significant enhancements in current offerings)
  • Figures out potential milestones that will signal whether or not the factor is more of less likely to occur

This process becomes continual with 2-3 meetings a year devoted to monitoring and updating all of the steps. Companies often use scenario planning as an efficient way to combine the first 2-3 steps but they often neglect the equally important "so what" steps that transform this process from academic exercise to true "Strategic Anticipation®".

There are 2 critical analytic modes:

  • Looking at the implications across all the factors, businesses have to act when virtually all the high likely/high impact factors would suggest a similar action.
  • Secondly, all major initiatives (the big bets of the business) have to be analyzed against the high likely/high impact factors. These initiatives may need to be amended, stopped or sped up.

There are two major techniques that can be employed to provide your business with the time for strategic anticipation actions. Each has been around for decades but few companies have effectively employed either. Mercer studies indicate that less than 10% of businesses have ever conducted either a Delphi panel or lead-user analyses program.

The latter methodology has been associated with Dr. Eric von Hippel of MIT. The premise is a simple one: there are some users of every product or service who adapt it in use to meet their needs. To the extent they are typical, if not visionary and/or role models, their usage techniques can be profitably adapted by the marketer of the product/service itself to capture the value of this user innovation. Thus, as the battle emerged for beta vs. VHS formats in VCRs, the latter design was cognizant of user usage. The various blue jeans variations (pre-shrunk, pre-whitened, pre-ripped even) all were methods by which manufacturers built-in features that lead users ("cool kids") developed on their own and other kids wanted to follow.

There are several variations on the "follow-your lead user" theme, but all are based on a key premise: it is folly to study if not follow all your customers. You need to deaverage and focus only on those most likely to provide you with a profitable future. Focusing on the few (albeit even in a qualitative way) provides better guidance than the most elegant mass quantitative survey that by definition emphasizes the average.

Mercer typically recommends looking at users with high profitable lifetime value who are influencers of others. Understanding how they use your products and services combined with insight into their unmet needs connected to or surrounding the benefits for which they use your product and service is key. Von Hippel adds yet another wrinkle in suggesting an alternative focus on those with the most acute need for the product and service since they have the most incentive to successfully employ it. The point is to focus and study your core future customers.

The second technique also has a powerful core with many possible variations. The premise of the Delphi technique is that a group of informed participants can be used in an iterative panel to provide insight into the likelihood of alternative perspectives (i.e., scenarios) for the future.

The classic Delphi was designed by the Rand Corporation at the conclusion of World War II. The idea was to tap into the wisdom of a wide range of experts to assess what global trends might occur. The panel was asked to rate the likelihood of each trend and the results were tabulated and circulated. Then the participants were asked to vote again - in light of what their peers had responded in the first instance.

The conventional analysis is that if consensus grows, the sponsor can feel more certain about those trends; to the extent consensus ebbs, there is clearly less certainty about direction.

The keys to a successful panel are two-fold:

  • The richness of the scenarios or potential trends being assessed
    • Are they provocative?
    • Are they inclusive enough?
  • The power of the panel
    • Is it diffuse enough?
    • Is there depth of insight?

The best Delphi conducted by Mercer was a "3 ring circus" approach with three separate panels - one with "conventional" experts, another with lead user type of consumers and the third with a diverse group within the client organization. The research effort extended for about a year with three rounds of response.

The most value came from the consumer group. Their insight helped this client avoid a multi-million dollar investment. There was also real insight from a face-to-face group meeting held with the expert panel. While Delphi historically is a "pencil and paper" exercise conducted in isolation by panel members, pulling people together at the end provided a great way to learn even more about the issues and earlier answers.

At a minimum, every business should assess evidence and insight from multiple sources, each of which has independent value for a business. Beyond lead user and Delphi panel studies, companies should monitor:

  • Competitors, particularly new ones, striving to understand what they are planning and what their bets on the future are.
  • Admired companies to assess what they are worrying about
  • The environment - focusing on the business drivers, looking at futurists, academics, respected CEOs, etc.

The final requirement is to go beyond identification and use the strategic anticipation process to map out various economic scenarios (including how the underlying economics of the industry could be transformed) and the potential alignment and organization changes each factor could mandate.

The major conclusion of any of these efforts should be an attempt to prepare for the future by thinking about what might happen and how your business can best prepare for contingencies. It is impossible to predict the future (back to the weather analogy) but it is possible to predict the 3-4 futures that are most likely and to embed radar signal points along the way to understand which one(s) are approaching or not. It is also possible to develop your business designs to take advantage of the likeliest scenarios with flexibility to shift in the face of a strong new breeze. Not only is it possible, it is necessary if you want to be one of the reinventors who outlives your competitive set in yesterday and today's design.

In this manner, a company can optimize its chances of survival. It should be able to identify the clouds that could be bringing a storm and how best to steer to outperform other businesses. It can also anticipate what competitors might do in a dynamic fashion.

The storm analogy is an apt one. For example, the Internet can be viewed as an enormous storm. Even if it is not in the immediate vicinity of your business, if it is large enough (and it is) eventually it will impact you. The important lesson is to get the storm on your business radar screen and begin to prepare for the impact it could have by the time it reaches you.

As noted, thinking about these issues takes a strong culture; acting on them takes strong leadership - willing to jettison today's comfortable cruise ship for the craft best able to weather what the future may hold in store.

 

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