The Circus, Funky Furniture & Wine

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Warren Buffet

Mmmmmmm…think about that for a minute. In a case study given to EOPers (Entrepreneurs, Owners and Presidents) at Harvard Business School, Cynthia Montgomery (Former Head of Strategy at Harvard Business School) helps her senior executive audience realize ignoring the way an industry is structured and the way it functions can be dangerous and expensive.Like the rest of the world, New Zealand has its share of economically challenged industries. They keep executives awake at night, politicians on their toes and give us all plenty to think about. New Zealand is a primary producing country. We earn our living from the land and sadly, many of our primary based industries have a reputation for bad economics. That means we aren’t earning what we would like to earn. Meat, wine and aquaculture all demonstrate a penchant for creating bruised egos, buffeted balance sheets and bankrupted dreams.

Making money over the long term in difficult industries isn’t about wishful thinking, mastering Feng Shui, or doing deals in the latest emerging market. We’ve done all that. We’ve done it for a hundred years. It hasn’t and isn’t working that well. History provides plenty of evidence to support this statement and it also supports that more of the same is unlikely to work now or in the future.Frighteningly, even the think tanks and frameworks being dreamed up and designed to help industry cope with the current poor performances are all starting to look vaguely familiar. That’s because they’re starting with the same assumptions and using the same strategic frameworks that most of our competitors are using. No wonder our approaches are so similar. For example, the red meat industry has similar problems and challenges worldwide and they are all using tools like branding, coopetition and “in-market” initiatives to attempt to repair stripped out balance sheets. Will these initiatives work? Time will tell. History is a clue though. A better place to to start the quest for improved performance according to the Montgomery’s and Mauborgne’s of this world is by thinking deeply and differently about strategy and targeting customers with surgical precision. This approach might sound familiar…but…it isn’t. Generating insights is very different to generating observations and great strategy requires first class insight.

Creating value by tapping into the willingness of customers to pay more would appear to make better sense and it certainly demonstrates a better return. Cirque du Soleil, IKEA and Yellowtail are three examples of companies that have produced outstanding results in structurally challenged and historically low margin industries. They have all achieved their results in very different ways…but…they all share the ability to generate real insights around their customers. They each deeply connect with and understand their customers, successfully transfer these insights into breakthrough, game changing strategies, which drive their business models.

In 2010 IKEA, turned over 23.1 Billion euro showing a net profit of 2.5 Billion produced with gross margins of 46%.

IKEA INSIGHT: CUSTOMERS HAVE TO BE ABLE TO BUY IKEA PRODUCTS. THERE IS A MAGIC PRICE POINT AND IKEA HAS TO HIT IT. THE SUPPLY CHAIN MUST DELIVER, NO IF’S, NO BUT’S. SUPER SUPPLY CHAIN EFFICIENCY MIXED UP WITH A BIG DASH OF SWEDISH QUIRKY AND CUSTOMER PASSION.

Thinking outside the box and reimagining the circus, Cirque du Soleil have generated revenues in just 20 years, which are equivalent to the total combined revenues of Ringling Bros. and Barnum and Bailey over the entire 20th century.

INSIGHT: GET RID OF THE ANIMALS AND FOCUS ON THE ADULTS.

In July 2001, Australia’s Casella Winery introduced Yellow tail into the highly competitive US market. Small and unknown, they had expected to sell 25,000 cases in their first year. In fact, they had sold nine times that amount. By the end of 2005, Yellow tail’s cumulative sales were tracking at 25 million cases. Yellow tail soon emerged as the overall best-selling 750ml red wine, outstripping Californian, French and Italian brands.

INSIGHT: MAKE WINE SIMPLE TO CHOOSE AND CUT THE JARGON AND BS.

Do Boards, Chief Executives, Entrepreneurs, Business Owners and Managers really take the time to dig deep and apply strategic thinking and strategic discipline to their business models? Do they put in the time to really get beneath and behind the industries they’re in? Do they look to innovate, to disrupt or to understand what’s really going on? Do they re-imagine? Do they reinvent? Do they seek to lead a revolution in thinking? Do they inspire creativity? Are they brave enough to take the road less travelled? Do they lead strategy? I’m not sure. Most of the strategy sessions I’ve witnessed look and feel like budget sessions. They’re not creative inspired strategy workshops that’s for sure.Sadly, in some industries we’re witnessing poor performances stretching across decades and we’re also getting to see the same mistakes repeated time and time again, and always with a “This time it’s different” mantra.

One thing is for sure though. Investing in strategy is one of the best investments you will ever make.