One of the continuing mysteries in American business is how companies can be blindsided by overwhelming market trends. These companies employ squadrons of MBAs who analyze and research the market. They go through extensive strategic planning processes, and then they completely miss the titanic meteor that’s screaming in from outer space to crush them.
Although no company plans to fail, their failure usually starts with their planning process.
Usually, I have seen these failures of market analysis manifested in the Internet and computer businesses where revolutionary change is almost commonplace. Now, the newest and most compelling example is being painfully provided by one of America’s most beloved brands—Levi’s. In this article from Bloomberg Business, Chip Bergh, the CEO of Levi’s, admits that they were caught flat-footed by two rapidly emerging trends. The first, and more addressable, is that women began to prefer jeans that had more stretch and a more flattering fit. I must admit, that doesn’t sound like top secret information. Yet, Levi’s failed to bring product to market that served that need. Although this is problematic for the company, it’s also more easily addressable because it’s closer to Levi’s competence. They do know how to make and market jeans. In addition, the public associates their brand with jeans. So, pardon the pun, it’s not a stretch for them to add to their product line. This is more akin to the competitive challenge from mid-range fashion jeans such as Lucky and AG.
The trend that poses a greater existential threat to Levi’s is the boom in yoga pants. Levi’s has always assumed that jeans were America’s leisure wear. Their products have been synonymous with casual culture for several generations. Not surprisingly, their competitive focus has been on other denim suppliers such as Lee and Wrangler. But suddenly, out of the blue, Lululemon and others started offering comfortable and stylish yoga pants. And, voila, they’re not just for yoga anymore.
This is a bigger threat because yoga pants are far outside of the core competence of Levi’s. And, more importantly, the consumer doesn’t currently have room for Levi’s in their mental shopping mall for yoga pants from Levi’s.
To put these misses into context, Levi’s revenues have dropped from $7 billion to $4.8 billion over the years according to Bloomberg Business. A 30% drop in revenue is non-trivial in any business. Trying to get your costs in line with falling revenue is like trying to catch the proverbial falling knife.
In a fashion business, falling materially behind the trends puts a business into an accelerating downward spiral. Consumers don’t seek out your brand. Retailers stock less product. Sales fall further. Costs are cut deeper. It is hard to recover.
But no planning process starts with the goal of putting the company out of business. Nor does it wrap up with people knowingly committing themselves to a stupid strategy. Yet, time after time, the strategic plan that is so proudly presented is a roadmap to disaster. So how is this possible?
The reality is that road to irrelevance usually starts with seemingly sensible business truisms that sound smart and are actually deadly. A few of the most dangerous are: stick to your knitting; develop a strategy to beat your core competitors; focus on your best customers. Although these business bumper stickers sound good, they actually set a business up to fail in a changing market.
What could possibly be wrong with such common-sense aphorisms? The reality is that they all set the company up to fight the last war. They feed into a comfortable worldview where the customer’s needs and the competitor’s threats are all known and manageable. They assume that they game will be played on a level playing field.
The reality is the expected only wounds you. It’s the unexpected that kills you. Let’s look at a couple of other examples—one negative and the other positive.
Newspaper companies were historically focused on each other. As a result, they didn’t see Craig Newmark revolutionizing the classifieds business by creating a semi-socialist alternative on the web. A new business model in a new medium. A game played by different rules. For similar reasons, they missed much of the promise and the thread of the internet as a news delivery vehicle.
The positive example of a company not falling into the planning trap is Apple with the iPhone. If they had used conventional wisdom they would have never introduced the product that now pays a lot of bills in Cupertino.
If you want to see major upheaval in progress, keep an eye on the cable TV business. Although this has been forecast for several years and written about in the press, the scale of change is still being underestimated. We are on the verge a complete jailbreak.
So how can companies do a better job of strategic planning? One of the keys is reversing the trend toward greater and greater focus. Companies need to open their thinking up to a much broader spectrum of business models. The anchor needs to be the consumer and his or her needs. Is someone offering a better solution?
Thirty years ago, department stores and grocery chains scoffed at Costco. They comfortably assumed that they competitors were other big companies that looked and behaved like them. They were certain that their consumers would never push flat cars through a drafty warehouse or buy oversized packages of paper towels. But obviously, their consumers were more than happy to change their buying behavior to get a better deal.
One key to fixing the planning process is to start by really understanding the consumer’s needs and then thinking about all of the ways that they can satisfy them. By considering a broader range of solutions, you are more likely to see the meteor coming in from outer space to ruin your day.