Playing To Win
Strategy & Sunshine
Beware of the Shadow
I have called many business initiatives to be doomed from inception and I have done so in advance or contemporaneously, not later when the results manifested themselves. I often get asked how I knew. So, I thought I would write about the answer as my 50th Year II Playing to Win/Practitioner Insights piece, Strategy & Sunshine: Beware of the Shadow. You can find the previous 102 PTW/PI here.
Examples of the Phenomenon
In 2000, AOL and Time Warner merged in a $350 billion deal to join Internet access with media content. Massive enthusiasm greeted the deal. I said it would be a debacle. Sure enough, it now is considered the biggest corporate disaster of all time.
In 2001, Pringles, the reconstituted stacked potato chip leader, entered the most profitable salted snack category, corn chips, with Torengos to battle Doritos, Frito Lay’s near monopoly brand. I was mortified when I heard about it and begged Pringles leadership to reverse course. But it was too late. Bagged chip leader, Frito-Lay, decided to enter the stacked chips category with Stax to show that if Pringles attacked the heart of Frito Lay’s business, it would attack the heart of the Pringles business. It was an expensive disaster for Pringles.
In 2011, the ‘genius’ investor Bill Ackman installed Ron Johnson as the CEO of venerable retailer JC Penney (JCP), a company his hedge fund controlled. Johnson immediately announced a plan to revitalize JCP by transforming 10% of each store into his vision of the future — the New JCP. That would demonstrate that the whole JCP could be transformed into a successful version of its former self. I knew it would fail — and indeed it did. Overall same-store sales declined at approximately 25% in the first year of this experiment. That disaster was too much to overcome. Johnson was out 18 months after his appointment and the genius investor Ackman exited with a big loss.
For decades, telecom services providers promoted switching by giving new customers a much better deal than existing customers. But they don’t do it anymore — because existing customers recognized that becoming ex-customers and taking up the competitors’ new customer offers made compelling sense. I tried to get clients to stop doing it — but lost that battle on more than one occasion.
The Sunshine on Your Face & the Dark Shadow Behind You
None of these things should have happened. After the fact, they look like obviously stupid ideas. But at the time, very smart people, with lots of very smart advisors made very big investments behind these ideas. What did they all miss and why did they miss it? There is a thread that connects them all, which I will explain with a metaphor.
It is a pleasant and warm feeling to have a bright sun shining on your face — especially on a chilly or windy day. It is far superior to a cloudy day that blocks the warm rays of the sun. Our inclination is to focus intently on the sunshine on our face because it is so pleasant and welcome. In contrast, it is easy to forget that because the sun is shining brightly on your face, there will be a shadow behind you. The very force that creates the warmth on your face also creates the shadow behind you. No sunshine; no shadow. More sunshine; deeper, darker shadow.
Let’s use JCP to illustrate. The sunshine on the face was the transformational investment in the 10% of each store that was the New JCP. Johnson was right. Sales per square foot in that space doubled in the first year. It is easy to focus on the warmth of that sunlight — a signal that the whole of JCP could be transformed into the New JCP.
But the focus on the warmth of the sun distracted focus from the inexorably linked dark shadow. To get to that 10% of New JCP space, JCP customers had to wander through the 90% of ‘old JCP.’ While the customers that frequented JCP were used to the look and feel of the ‘old JCP,’ when they experienced the side-to-side comparison with the ‘New JCP’ space, ‘normal’ now looked a lot worse. That dark shadow was the direct result of the sunlight on the face of the New JCP space.
Doubling its sales per square foot in 10% of the space combined with a 25% drop in overall same-store sales means that sales per square foot in the remaining 90% of the store dropped 40% — a dark, dark shadow that ended this transformational experiment that cost Ackman half of his investment, or about $500 million. That is the cost of forgetting to consider the dark shadow produced by the sunshine in which you are luxuriating.
It plays out over and over again. Telecom services and insurance providers give extremely attractive deals to new customers. Their faces are awash in warm sunshine because it is an awesome way to acquire new customers. The sunshine, in fact, is so strong that it is impossible for the competitors, who are losing those customers to the new customer offers, not to notice. They have no choice but to offer their own new customer offers of similar if not greater attractiveness. And those are equally successful. The result is that each competitors sees existing customer churn rise dramatically, while exchanging existing customers for new customers at dramatically lower pricing. Again, the same force that created the warm sun also creates the unanticipated dark shadow — in this case a dark shadow that hurt much more than the sunlight helped.
In the Pringles case, the bright sunshine was the ‘white space’ sales in a brand new category. The dark shadow that was inextricably linked to that sunshine was Frito-Lay’s reaction. It wasn’t any sort of counterattack in the business in question: corn chips. It was a counterattack in Pringles (until the Torengos launch) only business. Frito-Lay had smartly stayed in the bagged whole potato chips business and allowed Pringles to have a monopoly in the stacked reconstituted potato chip business. They didn’t invade each other’s businesses. Instead, they let consumers decide which of these two substitute products they favored. But when Pringles entered Frito-Lay’s (then) most profitable business, it had to send a signal that the gloves were coming off and the biggest, most powerful, and most successful salted snack company on the planet entered Pringles’ core business. Torengos was a dumb idea in the first place and only lasted five years before being pulled for the market. But Stax is still on the shelves today, reminding anyone still at Pringles that it is dangerous to let the sunshine on your face stop you from thinking about the shadow behind your back.
The AOL/Time Warner merger was based on the dumb idea that having Time Warner content would enable AOL to beat up on its competitors (per the silly owner economics argument discussed last week). The sky for this idea was perpetually cloudy. But let’s imagine a sunshine scenario in which the combination would have given AOL a decisive advantage over its Internet access competitors. Time Warner’s content creation business is a highly-scale sensitive business. When it invests in a piece of content — a movie for example — it wants to get as broad distribution as possible to cover the fixed costs of creating it. At the time, AOL had a market share of approximately 15%, meaning 85% was in the hands of competitors. Had a world emerged in which content was critical to the success of Internet access providers, all of AOL’s competitors would have stopped buying Time Warner content and wrecked the economics of Time Warner’s business — the dark shadow. In this case, there was no sunshine so no dark shadow took shape — but the merger would have been doomed either way.
Managing Shadows, or Not
Sometimes the shadow is manageable. Apple famously launched the iPhone in 2007 with a two-year exclusive distribution deal (later extended to five years) with AT&T, at the time one of the two dominant mobile services players in the US, by far the world’s most lucrative mobile market at the time. The sunshine on Apple’s face was blinding! However, the dark shadow was that it forced the co-leader (and since clear leader) Verizon to throw its weight behind the Android OS, which guaranteed that Android would succeed and in due course it became the dominant mobile OS in the world. Apple has been able to withstand the dark shadow and iPhone is still the most profitable mobile phone franchise in the world. But it would be interesting to ask whether Apple could have avoided creating that dark shadow and succeeded to even a greater extent?
A dark shadow that has been more problematic is the one created by Microsoft’s PC OS — near-monopoly Windows. It has produced sunshine galore to be sure and Microsoft has milked it for every possible dollar, with little evident care about customers other than the dollar signs on their backs. I still view Windows 95 as the most recent Windows upgrade that about which users were enthused — and that was a quarter-century ago. That notwithstanding, Microsoft has managed to maintain a nearly 80% share of PC operating systems. But the sunshine produced a very dark shadow. Users have switched screens. If you go back to 2000, the only smart screen on which users worked was a computer screen, so Microsoft’s OS share equaled its share of hours utilizing a smart screen. Now your smart screen is likely to be a smartphone or a tablet and on both of those screens, Microsoft’s share is below 1%. And there is really robust competition among OS for those screens (iOS and Android) causing the user experience to accelerate rather than stagnate as with Windows. As a result, Microsoft’s share of hours using a smart screen has plummeted and will continue to fall for the foreseeable future. Windows is slowly but surely being eroded by the dark shadow.
Another dark shadow has yet to be played out. As of today, no company in the world has more sunshine on its face than Tesla, as it has proven to the world that electric vehicles (EV) is a viable business — and it is the undisputed leader in the business. Until Tesla generated this massive, blinding sunshine on its face, the global auto OEMs invested minimally in EV. But now the dark shadow has taken shape as a result of the brilliant sunshine. Globally, auto OEMs are predicted to spend over half a trillion dollars on EV in the next 5–10 years. The world has never before seen such an investment in anything. Don’t get me wrong: Tesla is an awesome company. But I don’t believe that the dark shadow that it has caused with its success is factored into its current market value, even if that is 46% off its all-time high.
To continue the metaphor, the core purpose of strategy is to produce sunshine on your face.
Your strategy isn’t worth a lick, as with AOL/Time Warner, if all it produces is cloudy weather. There won’t be a dark shadow with no sun, but you have a bigger problem to worry about: the lack of a useful strategy.
But if your strategy produces sunshine on your face, you have to consider the dark shadow thoroughly and proactively. The first job is to identify the darkest shadow. Assume your strategy will produce sunshine: what is the nature of the shadow it will produce? Who will take the problematic actions? If it is a competitor, as with the new customer discounts case? Or is it is a competitor of a customer, as with Apple/AT&T?
Then think about how you can tweak your strategy to mitigate the competitive pain of the shadow. If you can’t, then assess whether the sunshine prize warrants incurring the shadow. If not, don’t wait for the shadow to overwhelm your strategy. Stop and fundamentally rethink it.