The Waterbed Effect: what goes up hen the tide goes down?

Feb 17, 2009 Growth in Market Decline

I love the food industry. It teaches the basic meat and potatoes of consumer demand, even without performing fancy calculations. At its very core, the food industry demonstrates to any business leader some of the most important lessons of the market, partly because people eat three times a day, so there are frequent checks on strategy, and partly because people choose where to eat or how to eat based on how they’re feeling that day or that week. Which makes the entire industry, from high-end restaurants to casual dining to fast food to grocery stores a great litmus test for the mood of the market.

There’s one classic way to read the food industry that applies to many industries if we stop to think about it very simply. I call it The Waterbed Effect, the phenomenon where you can see where your customers have gone after they’ve left.

The Waterbed Effect is based on the fact that if you push down on one corner of the waterbed, the water shifts to another corner; it generally doesn’t leak out. In math, it’s a closed set.

With certain exceptions, you can look at people’s eating habits and make some observations that describe this type of closed set:

1. On average, people eat approximately the same amount of calories per week (despite the supersizing and 4th meal trends.)
2. If money gets tight, they will trade one option for another. A high end restaurant might lose customers during tight times; restaurants might lose customers to grocery stores over time. However, except in dire times, the customers have not stopped eating.

Therefore, if you are in the food business, it is safe to assume that you don’t have far to look to see where your market has shifted and to interpret the clues about what’s happening with consumer demand and consumer preferences.

Of course, if you’re a restaurant chain, it’s not that easy to turn on a dime and respond immediately to the changing market. However, whether you’re in the food business or any other business, it’s important to read the Signs of the Waterbed Effect to learn about what matters most to your bread and butter customers and change as quickly as you can.

Many times we don’t realize that we’re living in a waterbed. We can blame slumps in sales on a softening economy; we sometimes even make the leap (in non-food industries) directly from “people have stopped buying certificates of deposit” to “people have stopped saving money.” But, it’s critical to look at the closed set of options and see which other players are benefitting when we’re at a loss.

Looking at the clues, we can uncover what is really happening, and we can adapt to the market shifts.

In this dreadful economy, it’s sometimes too depressing to study the details of where dollars are being spent and what’s being traded for what. Common sense tells us what we see in the numbers at first glance: during tough times, people trade food away from home for food at home.

But, digging deeper into food trends, there are some clues about what goes up when the tide goes down. For example, the American Italian Pasta Co reported a 5 percent rise in sales last year:

It’s like a certain number of people rediscovered pasta, according to the CEO of New World Pasta, maker of Ronzoni, American Beauty and Creamette. They reported that this rise in pasta sales reversed the former downward trend, caused partly by the high-protein diets.

Or, in Waterbed terms, push down on beef; push up on pasta.

How would the Waterbed predict chocolate sales? Staples up? Luxuries like chocolate down? Not so. Market Watch reported, Hershey’s fourth-quarter net income rose by 50%, as sales edged up and its chocolate business weathered the economic downturn better than many.

So, what lessons to learn from those results? Dig deeper and discover what went down as Hershey’s was riding high.

Market Watch explained: “Pressure in the high-end chocolate market may benefit Hershey, which sells more less-expensive sweets.”

It’s easy to jump to the wrong conclusions, or to forget to read the simple signs of change in a Waterbed world. But, training yourself to watch the water shift and interpret the implications will provide valuable lessons about how to tap into the trends and regain customer loyalty.

Darwin-ners and Dar-losers: How to Adapt, Anticipate, and Avoid Extinction

Feb 10, 2009 Strategic Planning

This week marks the 200^th anniversary of the birth of Charles Darwin, and I just attended the 2009 TED conference (Technology, Entertainment, and Design www.ted.com) where there was a lot of discussion about evolution and other biological and scientific themes juxtaposed with presentations on the economy and the future of business.

Which brings to mind an important theme about the differences between business ideas that make it versus business ideas that go extinct.

At the TED conference, Nina Jablonski, author of Skin: A Natural History, presented evidence that skin offers valuable clues to adaptation. For example, when people with high levels of melanin, designed to protect from the sun, suddenly relocated to places with radically different climates, melanin, the very thing that allowed people to thrive in the tropics set the stage for vitamin D deficiencies and other ailments because tropical skin was not well-adapted for colder, less sunny climates.

How do the forces of adaptation and evolution apply to the world of business? Which attributes separate the winners from the losers as shifts in business climate occur? And, is there a trait that keeps business ideas and even companies ahead in the evolutionary cycle?

It’s easy to point to signs of extinction in business, where the equivalent of the horse and buggy yields to the equivalent of automobiles. Many a business concept hit the cutting room floor because it did not keep up with changing times.

But, we can learn even more valuable lessons from companies that adapted nimbly to changing times.

In December 2008, Ravi Mehrotra, chief scientist and co-founder of IDeaS, a revenue optimization software company with a focus on the hotel industry, explained how they avoided extinction when the hotel industry shifted dramatically post-9/11. “With the firm on the verge of extinction IDeaS decided to sell its software over the Internet. That model, now called software-as-service, enabled IDeaS to quickly and cheaply distribute its technology to big and small hotels alike.” (www.startribune.com)

According to the Minneapolis Star Tribune, IDeaS’ approach not only helped IDeaS avoid extinction, but led to their acquisition by SAS Institute, Inc. Today, IDeaS software calculates most hotel prices in the United States and is expanding into car parks in London, bus service in Mexico and sports arenas in the United States.

By contrast, a recent report describes the threat of disappearance of the garment industry in New York’s Garment District, whose manufacturers produce roughly one-third of all clothing sold within the United States. According to statistics from the NYCEDC, the fashion industry in Big Apple employs about 169,000 people, but rising rents and reduced demand put that industry at risk of disappearance. Nanette Lepore, a fashion designer whose entire collection was designed and sewn in the Garment District, brought the economic issues for the industry to light when she was quoted in a recent article in a college newspaper (www.loyolagreyhound.com): “Here in the fashion capital of our country, the factories, trim and fabric shops, design studios and showroom are on the verge of extinction.”

The differences between a company or an industry that faces a chilling turn in the business climate and is nimble enough to survive versus those where the forces are too overwhelming ultimately separate those that adapt and thrive from those that disappear.

Businesses are luckier than the biological species described by Dr. Jablonski. It can take an entire generation or longer for animals to change their skin. But, business leaders can see a shift in climate and react much more quickly. For business, the ability to see the signs quickly and change course becomes the most important attribute in the survival of the fittest.

Tags: Evolution in business

The Heritage of the Business Genome

Feb 2, 2009 The Business Genome Project

The time has come, the Walrus said

First, came the Human Genome Project in 1991, designed to analyze the components of DNA and trace the information that we humans have inherited from our parents and their parents. It was a huge project that started with mapping of genes and led to new medical insights and innovations.

Then, came Pandora, an internet-based music service based on the Music Genome Project, sparked by the imagination of Tim Westergren, who in 1999 decided that the time had come to organize music based on new categories that freed us from the notion that our taste in what to listen to would be limited to the old music industry categories of “Rock”, “Classical”, “Heavy Metal”, “Rap”, “Country”, “Rhythm and Blues”.

The Pandora model started with a lot of people with trained musical ears sitting in a room and developing 600+ categories of how they would describe a piece of music. From there, Pandora.com launched as an internet radio station that combines the elements of music’s DNA with a thumbs-up/thumbs-down user voting that teaches the station how to refine its next selection for you. A personal profile develops and two things occur: #1: you find yourself exposed to new ideas (as in, “I never realized that Cat Stevens’ Hard Headed Woman sounds like Guns N’ Roses Patience) and #2 you discover that your taste can’t be categorized as only “Rock”, and your taste evolves, letting in new genres, new styles, new possibilities.

In 2006, Netflix, the company that transformed movie rental and created a unique online community of film fans, created the Netflix Prize, with a grand prize of $1,000,000 to any team that could beat the Netflix calculation engine designed to predict film ratings and selections. (That competition starts with 100 million ratings done by 480,000 viewers of 18,000 films.) When you’re trying to develop an inventory of films, it makes a lot of sense to be able to predict, but what is more interesting to this discussion is: what are the subcomponents of something like a song or a film? What is it that makes something a “category” in music or film? Is it “woman singing with sexy voice” or “black and white silent film with happy ending” that makes something a category?

Which leads us to the Business Genome project. It’s based on the idea that the possibilities for a business leader about what to do next have to come from somewhere other than simply what they’ve done before. Especially if what they’ve done before is leading to flat sales results or decreasing market share. Or if a corporate team finds themselves in a tight squeeze: What should our next product be? How can we capture a new market? How can we learn from another industry, another company that has addressed this type of question? What is the secret sauce that will drive growth for our company?

How can you mine information from a lot of other people who have been in the same boat or who are wrestling with similar issues?

Unlike the Netflix Prize approach, the Business Genome isn’t designed to be predictive—even an infinite number of monkeys at a googolplex number of calculators couldn’t earn a million dollars predicting with certainty which combination of business options will be the perfect idea for your business. Like Pandora, there is a lot of human element involved in the categories of what to look at. What can a cereal company learn about a clothing designer’s experiences with teen purchasing trends? How can a manufacturer benefit from a defense contractor’s insights into “applications of hydraulics?” What can a medical equipment distributor learn from FedEx about “global logistics innovations?”

So, that’s the invitation of the Business Genome project starting in 2009: to create a sense of possibility for decision makers in the world of business who are stumped about where to head next, who want to scan through ideas about what’s worked and what other people in business are thinking about. The Business Genome approach sparks new insights for translating the DNA of one business to the growth challenges of another. Welcome to the Business Genome Era.

Tags: business genome