Early in my business career I became obsessed with tennis, joined a club and hired a teaching professional. As my physical skills developed my pro wisely decided it was time to work on the mental game by discussing match strategy.
“There are only two positions to play from on the court, at the net and the baseline,” he said.
I quickly challenged his thinking because it occurred to me that from the service line (the middle of my half of the court); I would be in a better position to reach all shots. “Not true, it’s really no man’s land because you’re not in a position to defend anything well. He can lob, pass you or drop it at the net,” he replied. My pro helped me accurately evaluate my game. I was a quick player with great reflexes burdened by a weak first serve. My topspin forehand was good, but I played a cut backhand. For me the best chance of winning was to play at the net as often as possible.
As I look back on my career I’ve equated that experience to business strategy. I’ve always preferred high-margin small-volume models that scale. I like to think of it as playing at the net—fewer shots and quicker points. The opposite model is low-margin high-volume and requires the player to pound it out from the baseline. Both can be successful, but each come with an entirely different risk profile and require a unique set of competencies. Starbucks is an example of a high-margin low-volume model that scales to enormous size. They play at the net and they are really good. Amazon is the classic example of a large low-margin high-volume model pounding out millions of low margin transactions from the baseline.
When management explores channel strategy it’s important to accurately value its business skill set long before the first serve. If ego gets in the way or you fail to correctly evaluate your ability it’s easy to play the wrong game and lose.
A classic example is illustrated by the Maytag Company’s strategic failure, which ultimately led to its downfall.
For nearly 100 years, Maytag built a reputation for superior quality, long product life and exceptional service. Maytag owned the high-end laundry market and had developed a unique and powerful channel reaching the consumer through dedicated distributors with small retail locations throughout America. They played at the net and owned it. One day they awoke and realized they were sitting on too much cash. To avoid being acquired in a leveraged buy-out, they decided to put the money to work by purchasing other business units. This was their defining moment and the beginning of the end. Seduced by their dominating success at the net, they looked at the big box stores and became envious of the distribution game played by Whirlpool, GE and others. They longed to hit from the baseline and began acquiring businesses that played there, expanding into mid-level ranges, refrigerators and dishwashers. They elected to discontinue the hugely successful distributor network strategy and join the acquisitions at the big box baseline.
My Father was one of the people elected to travel the United States and inform his distributors that Maytag was changing channels and would no longer need their services. It was hard for my Dad because many of the business relationships were friendships that spanned generations. At the time he told me it was a big mistake. Maytag quickly learned competitors were much better at making less expensive appliances and connecting to the people that would buy them. They found themselves in no man’s land, stranded between the net and the baseline—compressed between rising manufacturing costs and smaller price points driven by their competitor’s efficiencies. It was a game they weren’t familiar with and there was no going back.
Maytag should have listened to Bear Bryant who said, “Dance with the one that brung ya.” Translated from Deep South vernacular this phrase means you should remain loyal to the process that brought you success, especially if it’s not broken. Maytag’s management failed to understand their competitive advantage was about the channel they created, the ability to produce superior quality products and market to consumers willing to pay higher prices. Needing growth, they should have stayed at the net and acquired other high-end and high-margin low-volume appliance brands appropriate for the established channel and skill set. Instead, Maytag threw the healthy channel baby out with the bath water. Congratulations Whirlpool, you won.
Today, many iconic high-margin brands are being seduced into playing the low margin ecommerce game. Like Maytag before them, they find themselves in no man’s land with a business model lacking the efficiency to compete at the baseline—trampled by the ecommerce elephant in the space. They struggle to find a match strategy to defeat this new opponent when the solution has always been to stay at the ecommerce net. Simply said, “go where the elephant isn’t.” For more ideas on transformational channel strategy that keeps you in the game, visit my website at shawstrategy.com