Wednesday, February 28, 2007

Scoreboards Vs. Clipboards

Before becoming the head coach of the Detroit Pistons basketball team, Flip Saunders was the head coach of the Minnesota Timberwolves. Flip coached in Minnesota for a long time—long enough to have been there through the lean years of the Timberwolves franchise.

There were many times in those early years, when the Minnesota Timberwolves could hardly ever win a game. The seasons become very long and very tiring when your team is losing the vast majority of its games. It doesn’t make it any easier when you have to suffer all of those losses while also suffering through the bitter cold Minnesota winters.

One time, when the winter weather outside was as bleak as were the prospects for winning that night’s game, a reporter thrust a microphone in front of Flip Saunders and asked him, “Coach, what does the team have to do tonight in order to win?”

An obviously tired and frustrated Flip Saunders replied, “Well…unless they’ve changed the rules, we have to score more points than the opposition.”

Coach Saunders was absolutely correct in his assessment. It would be impossible for his team to win if they let the opposition score more points than the Timberwolves. However, making a correct assessment of the situation and making a useful assessment of the situation can often be two very different things. Although Flip Saunders made a correct assessment, it was a worthless assessment, because it did not provide any insights into how to correct the situation.

Let’s imagine for a moment that Flip Saunders is still coaching one of those awful Minnesota Timberwolves teams of the past. It’s getting near the end of the game and the Timberwolves are behind in points. Flip calls a time out to huddle his team together. When he gets in the huddle, what would happen if he told the players,

“We’re behind in points. We can only win if we have more points than they do. Now go out there and get me more points than them!”

If that happened, I’m sure the players would give him a blank stare and have no idea what to do. It’s not as if they didn’t already know that scoring more points is a good thing. And I’m sure that they were trying to score points throughout the game. Just telling them to get more points is not helpful. Flip’s comments do not tell the team:

• What it is that they are doing wrong that is allowing the opposition to outscore them.
• What changes they could make to improve on their ability to score.
• What each player should be concentrating on for the rest of the game in order to improve their chances of winning.
• It doesn’t even tell the team which five players should go back on the floor to play when the time out is over.

Worse yet, what if Flip Saunders decided to stop paying attention to the game and only concentrated on the scoreboard? What if he started yelling at the scoreboard, saying things like,

“What’s the matter with you, scoreboard? Don’t you know that we need more points? Why aren’t you putting more points on there for us? Come on, scoreboard! Quit putting up all those points for the opposition! Give them to us!”

Sounds pretty silly, doesn’t it? No rational person would do things like this, would they?

Unfortunately, I have seen far too many otherwise rational people act just like this in the business world. How many of you have ever been in a business meeting when the boss has said something like this:

“Listen up. The problem with this division is that it does not have enough sales. Unless we get more sales, we cannot win on the bottom line. So go on out there and get me some more sales!”

Don’t you think the employees already recognize the importance of getting sales? Is there anything in this speech that is going to help them do a better job of getting sales than what they did before? This is as useless as the imaginary speech above when the coach called time out. As mentioned before, speeches like this do not tell the employee:

• What it is that they are doing wrong that is keeping them from getting sales.
• What changes they could make to improve on their ability to get sales.
• What each person should be concentrating on in order to improve the business’ chances of getting more sales.

Similarly, how many of you have been in a situation where the boss just got a financial report, and the boss started pointing at the numbers and yelling out something like this:

“Look at these numbers! They’re awful! Why can’t I get better sales numbers on these reports? The next time I look at one of these reports, I want to see bigger numbers!”

It sounds a lot like yelling at the scoreboard to me.

The principle here is understanding the difference between a scoreboard and a clipboard. When coaches call a time out, they do not bring a scoreboard into the huddle. Instead, they bring a clipboard into the huddle. They use the clipboard to diagram plays. The coaches use it to show the players what they are doing wrong and what they should be doing differently once the time out is over. The clipboard is a tool to help diagnose problems and prescribe solutions.

A scoreboard can do none of these things. Watching a scoreboard is like reading a thermometer. It can tell you the temperature (i.e., the “score”), but it cannot diagnose the cause of the fever nor prescribe a cure for the fever. The same thing is true when a business narrow-mindedly focuses only on the financial reporting. It can tell you the level of sales, but not why the sales are bad or how to make the sales better. Staring at the numbers does not make them any better. Yelling at them may make you feel better for a moment, but it really doesn’t help, either.

Business leaders need to come to business meetings with a clipboard. There needs to be time spent diagramming how the company got into the current predicament. There needs to be hypotheses of what can be done differently to improve the situation. There need to be specific assignments of what each person is supposed to do to help increase sales. In other words, one needs to spend time developing a STRATEGY.

Correctly identifying the problem (e.g., not enough sales) is an important first step. But it is only the first step. If you stop after only one step, you have not moved very far. One needs to also develop a strategy for solving the problem.

This is not to imply that financial measures are worthless. There is a reason why they keep score at sporting events. That’s how you know whether or not you are winning. There is a reason why doctors take your temperature. That’s helps them know how you stand in fighting the disease.

Financial reports are a great tool in monitoring one’s progress towards your goal. They let you know if you are winning. But do not confuse monitoring a problem with fixing a problem. Fixing a problem takes more than just observation. It requires active intervention in creating a better way to complete the task at hand.

The irony is that the more you focus on the results, the less time you have to focus on what it takes to get good results. Good outputs come from focusing on the inputs.

Finally, keep in mind that financial measurements are telling you what you have already accomplished. They are looking backwards. To win, you have to look forwards to what you plan to do once your “time out” meeting is over.

There is a difference between scoreboards and clipboards. Scoreboards tell you about how much progress you are making towards your goal, but they cannot tell you how to improve your performance. Conversely, clipboards can help you diagram a better strategy, but they cannot measure how well you are executing that strategy. Both are important. Too often, executives fall into the trap of thinking that just because they are paying attention to the score, they have completed the task. Unless someone is making diagrams on the clipboard, all you are measuring is chaos…and that probably means you will not like your score.

I’ll bet Flip Saunders had a lot more fun coaching a champion like the Detroit Pistons than he did coaching those losing seasons back in Minnesota. If you want to have more fun, focus on building a great team rather than on just yelling at the scoreboard.

Tuesday, February 27, 2007

You're Getting Warmer

The Story
There is an old children’s game where a person hides something and then all of the other children have to find it. The only clues given to the children looking for the item are comments made by the person who hid the item. For example, if the seekers are moving in a direction that is getting closer to the location where the object is hidden, the one who hid the item says, “You’re getting warmer.” If the seeker is moving in a direction further away from the object, the one who hid the item says, “You’re getting colder.”

When the seekers are really close the hidden object, they hear the words, “Your’re getting hot!” If they continue to get even closer, they may hear the words, “Now, you’re really hot!!…You’re boiling hot!!!” Eventually, these clues will allow someone to find where the object is hidden and the game is over.

The Analogy
Unfortunately, the annual planning process at many companies is played very similarly to the game mentioned above. It goes something like this…

First, the business units are asked to submit their strategic plans to the corporate headquarters. They are not given much guidance other than to “do the best they can.” The people at corporate then look at the numbers submitted and do not like what they see. They tell the business unit that they are not close to submitting what they need to and they must try again. The would be the equivalent to telling the business units “You are getting colder.”

So the business unit submits a revised plan. It’s still not what the corporate planners want to see, so they tell the business unit “Nice try, but not good enough. You’re getting warmer, though. Try again.”

This process repeats itself over and over again until the corporate planners tell the business unit, “You’re very hot!! You’re boiling hot!!!” At last, the business unit has found the hidden numbers that the planners had been looking for since the beginning. The game ends until next year.

Although this might make for an entertaining game, it is not a very good way to run a business.

The Principle
It shouldn’t surprise people that the process mentioned above quite often leads to strategic plans that never come to pass. After all, the business unit ended up submitting a plan that it did not believe in. The goal was not to come up with the best plan, nor the most believable plan, but with the “acceptable” plan. Second, the corporate level leadership did not provide any meaningful assistance to help the business unit to meet the plan. It was just a game.

The game fails, because it is based on three of faulty assumptions:
1. Declarations are the same as plans
2. A corporate plan is the sum of individual and unrelated business unit plans
3. All goals must be met by current units

Each of these faulty assumptions will now be elaborated upon.

Faulty Assumption #1: Declarations are the Same as Plans.
Just because somebody makes a declaration does not make it so. Putting in a plan the words “My division will move from a market share of 15% to 40% in three years” does not guarantee that this will happen. Words are nothing more than promises. If there is no reasonable plan for making the event happen, the promises are nothing more than unsubstantiated hopes.

Unless the planning process does the hard work of developing realistic goals with detailed steps of how the goals will be attained, you have nothing but the wishes of dreamers. When the corporate office is successful in forcing a business unit to raise the projections in its plan without a reason for making it so, it does not automatically make the business unit any more capable of meeting those higher projections.

Now sometimes stretch goals are good, because they can help a business unit to work harder at what they do best. However, if the goal is a stretch too far, it will force the business unit to either:

• Give up on the plan (because it sees no way to make it happen); or
• Do something in the near-term to meet the goals that compromises the long-term prospects of the division (like meeting a profit goal by cutting out all maintenance and repair expenses this year, which leads to a complete shutdown when everything breaks the following year).

Saying it is so does not make it so. The details of how to accomplish the goals are more important than the goals themselves. For without the details, there is no way of knowing how realistic the goals are or how to achieve them.

Faulty Assumption #2: A Corporate Plan is the Sum of Individual and Unrelated Business Unit Plans
There is only so much that an individual business unit can do on its own. Often times, the only way that a business unit can meet its full potential is through the synergies of working with corporate resources or by cooperating in joint ventures with other business units. When strategic plans are built independently by the business units, it is difficult to achieve these cross-unit synergies.

Transfers of competencies and the efficiencies of sharing resources between business units require cooperative planning between the units. Just adding up the individual plans for each business unit built in isolation will miss all of these benefits.

The role of a corporation is to add value to its operating business units. If the corporation does not add any value to managing the business units, then it is needless overhead. In that case, the business unit would be better off as a freestanding business, because it is not getting any additional value from belonging to the corporation. Business plans need to proactively seek out the synergies that can be gained from having the pieces of the corporation work together.

Faulty Assumption #3: All Goals Must Be Met by Current Units
In a typical top-down approach to the annual planning process, the corporation determines what its overall financial and strategic goals are. For example, the overall goal may be to grow corporate earnings by 15% per year, or to grow the market cap by 20% per year, or to grow its share of the market by 12% per year. Then, the corporation takes the goal and divides it up by business unit, telling each unit what its expected share of the whole is.

It may make the corporation feel good about having all the pieces of its goals allocated to the business units. However, this could be a false sense of security. Often times, the sum of all of what the business units can realistically do falls well short of the aggressive overall corporate goal. There is a gap between what the corporation wants and what the business units can provide. Usually, the only way to fill the gap is to do more than what the current business units are capable of doing. Filling the gap may require the development of totally new competencies or the development of additional business units.

By allocating all of the goal to the current business units, the corporation might mistakenly lull itself into believing that it does not have to develop those additional competencies or new business units. As a result, the company will suffer two disappointments. First, there will be the disappointment of the current business units not being able to fill the entire gap. Second, there will be the disappointment of not having any new competencies or new business built to fill the gap. Without these new competencies and businesses to build on, the gap will only get larger and larger in the outlying years of the plan.

It is better to realistically understand the magnitude of the gap and deal with it through planning for growth beyond the current business units than it is to hide the gap in allocations of expectations to business units that cannot be met. Hiding the gap does not make the problem go away. It only makes the process for successfully filling the gap go away.

Games are for children. Planning is for mature adults. The annual strategic planning process should not be a guessing game for business units. Instead, successful annual planning processes need to take into account the following rigorous activities:

• The business unit goals need to be realistic and accompanied by a realistic stepwise plan to get there (no wishful dreaming).
• The plans need to take into account the potential synergies between corporate and the business units as well as synergies between business units (no isolated planning).
• The plans must realistically determine what gaps cannot be delivered by the current divisions and provide a plan outside of the current business units to fill the gap.

Just playing the game of “You’re getting warmer” will not get the job done.

Final Thoughts
In the former Soviet Union, there was an old saying among the factory workers:

“We pretend to put in a full day of labor, and in return, the government pretends to pay us in real money.”

If the process is not taken seriously by corporate management, then the process will not be taken seriously by the business units. To quote an old friend of mine, “A job not worth doing, is not worth doing well.”

Make sure your annual planning process is a job worth doing well.

Monday, February 26, 2007

Henry the Hammer

Once there was a hammer named Henry. Henry the Hammer loved to fix things around the house. There was nothing he didn’t feel capable of fixing.

Today, Henry the Hammer was looking around the house for something to fix when he heard a squeek. “Aha,” said Henry. “One of the floorboards is loose. I can fix that.” So Henry took a nail to the floorboard and BAM! BAM! BAM! He nailed the floorboard back down so it would not squeek.

Then Henry the Hammer saw a picture which needed to be hung. Resourceful Henry found a stud in the wall, took a nail, and BAM! BAM! BAM! He made a hook out of the nail so that the picture could be hung.

Then Henry noticed that the television set was not working. Henry examined the situation and said, “I can fix that.” So BAM! BAM! BAM! CRASH! After examining the debris from hammering the TV, Henry said, “Hmmm…it’s still not working. It looks like this problem is going to need additional hammering.” But before he could get to it, he noticed that all of the windows were dirty.

“I’d better get to those windows right away,” thought Henry. “The TV can wait.” As a result, Henry went to all of the windows around the house with a BAM! BAM! CRASH! BAM! BAM! CRASH! BAM! BAM! CRASH!

Moral of the Story: To a Hammer, every problem looks like a nail.

Strategy is about solving problems. Great strategy is about getting in front of a situation and making it better before the problem has a chance to get too large.

Just like strategists, Henry the Hammer liked to solve problems, too. Unfortunately, Henry—being a hammer—knew of only one way to solve problems: He would hammer them like a nail. BAM! BAM! BAM! Sometimes that was a very appropriate action, as in the case of the floorboard and the picture. Sometimes, it was a very inappropriate action, as in the case of the television and the windows.

But since Henry knew only one way to solve problems, he used that method to try to solve every problem. Even when it didn’t work, as in the case of the Television, he did not blame his methods. Instead, he felt that maybe he just didn’t hammer enough.

We can sometimes be like Henry the Hammer. We know a way to fix some problems, so we think this method is appropriate to fix every problem. And it may work often enough to make us believe that when it doesn’t work, the problem lies somewhere else. Unfortunately, along the way we break a lot of windows, causing more harm than good.

The principle here is to embrace diversity. It is general human nature to want to surround ourselves with people who are similar to us. However, to quote former US Secretary of State Colin Powell, “If you surround yourself with people who think like you, then some of you are redundant.” We need to surround ourselves with people of different backgrounds and perspectives, so that we have more options on how to solve a problem. Having diversity is like having an entire toolkit rather than just a hammer. With an entire toolkit, you can find the right tool for each problem.

For example, people with a financial background tend to see problems from a financial perspective and, if working alone, will try to find a financial solution. Marketers tend to see problems from a marketing perspective and, if unchecked, will tend to look for a marketing solution. People from an operations perspective look for a solution via changing the operations. And so on…

Sometimes the problem actually is a financial one best served with a financial solution. Sometimes the problem really is about marketing. However, never are all problems just financial or all just marketing or all just operations. One approach cannot effectively solve every problem. In fact, quite often the problems are larger and more complex than any one discipline and require a multi-discipline solution. This requires getting people of diverse backgrounds working together.

From my experience, if you always take the same narrow focus to all problems, the result is like breaking windows. Even good individual solutions, if narrowly repeated too often in the same direction, can have unintended negative consequences from the cumulative impact. For example, one-dimensional financial approaches tend to avoid risk, hoard cash, minimize reinvestment and over the long haul can starve a company to death. One-dimensional marketing approaches try to buy their way out of a problem—which may be the right approach sometimes—but if done all the time tends to overspend a company to death.

One dimensional operational approaches look at trying to find a better way to do what works today. Eventually, however what works today may not work tomorrow, so the operators eventually end up working at trying to make an obsolete approach more efficient, causing death through becoming irrelevant. One dimensional technology approaches place the company in a perpetual cycle of waiting too long for something that costs too much and is too cumbersome, while someone else more nimble gets to the future sooner.

A glass of water is refreshing. A tsunami of water is destructive. Too much of one thing—although good in small doses—can destroy a company. Multiple approaches can help keep a better balance.

Even though we are smart and successful, we all have blind spots. The very disciplines that have helped us become successful cause those blind spots. Left to ourselves, those blind spots can start taking us down some of these paths of death before we realize what is going on.

Effective strategies are built upon a broad analysis of the situation. A broad analysis requires looking at the problem through different lenses—the lens of finance, the lens of the consumer, the lens of production, the lens of suppliers, the lens of human capacity, the international lens, the regulatory lens, and so on. Some people have better eyes to see through some of these lenses than others. Get the best eyes on your team.

Solving the mess in front of you is important. But wouldn’t it be better to get out in front of a situation and prepare a path to avoid future problems? Or even better, instead of getting bogged down in problem avoidance, work on how to take your company to the next great business opportunity before others get there? Then, instead of always trying to get out of a mess, you are moving towards greater success. This is where strategy is most effective, and diversity is important here as well.

When seeking the best future, one not only needs functional diversity, but also perspective diversity. Strategist Gary Hamel referred to this as “listening to new voices.” You need people on your team who are more in tune with leading edge thinking. These people tend to be younger, and also tend not to always look or act the part of a corporate executive. They may make you a bit uncomfortable, but they have a perspective you may need to hear.

Don’t surround yourself with just hammers. Get a whole toolkit.

Past successes can give a false sense of security. It can get us to believe that because we have had he right answers in the past, we will always have the right answers in the future. Unfortunately, not all problems are the same. Different problems may require different answers. To ensure that we make the right decisions, it is a good idea to get multiple perspectives on the problem from a diverse group of individuals. If one is looking towards finding future strategies, it is often even more critical to bring into the discussion a diversity of new voices that may be more in tune with the leading edge.

Otherwise, you may end up like Henry the Hammer, whose intentions are good and who has a good solution for some problems, but can cause a mess if left alone to do what he is comfortable doing. Remember, not all problems are a nail, even if they sometimes look like it to a hammer.

Even the idea of embracing diversity, if taken to an extreme, can cause problems. It can lead to endless discussions which go nowhere, because the diverse group cannot reach a consensus. Just because you bring in a diversity of ideas, does not mean that the diverse group has to make the decision. At the end of the day, a leader needs to lead by making a timely decision.

Sunday, February 25, 2007

Pride of Bag

Bag Story #1:

Back in the late 1980s, on my commute to work I would drive past a bus stop for high school students. At the bus stop, there was this one girl who always carried her books in a shopping bag from the Limited. By the end of the year, that bag was getting pretty worn out. It was no longer strong enough to hold the weight of her books. Yet she still put her books in the bag, holding the bag from the bottom so the books wouldn’t fall out.

Bag Story #2:
Much more recently, I worked at this company where there was this administrative assistant who always came to work carrying a small shopping bag from Macy’s. I could tell it was always the same bag, since it was starting to show some wear and tear (although not nearly as much as the wear and tear I saw on the Limited bag). I was curious as to what was in the Macy’s bag, so one day when I got to the office door at the same time she did, I peeked in the bag. Inside was another small bag with breakfast from McDonald’s.

Sometimes, we can get caught up in the notion that we are in business to sell “stuff.” The problem in selling “stuff” is that there are usually lots of places where you can get similar “stuff”. For the most part, everybody’s stuff can be found from other sources having stuff with relatively the same quality at relatively the same value. “Stuff” does not serve to differentiate you from others. In our modern society, stuff is little more than a commodity. If you focus on the notion that you are just selling “stuff”, then you are commoditizing yourself. In the end, that does not usually lead to a profitable business model.

If you want a strong strategy which causes customers to choose you over the alternative, you have to stop thinking of yourself as a seller of “stuff” and start thinking of yourself as a seller of brand identity. This is what will make you stand out from the crowd and cause your business to become the chosen one.

In retailing, it is often more important to get customers to prefer your shopping bag than it is to get them to prefer your “stuff” that you put in the bag. I call it the “pride of bag” phenomenon. The bag represents the store and what it stands for. If what the brand stands for is something that the customer wants to be associated with, then the customer will be proud to carry the bag. If the brand does not reflect well on the customer, then they will be embarrassed to be associated with the bag.

So here’s the definition of success: If there are enough people who so want to be associated with your brand that they proudly enjoy being seen by their peers carrying your bag, then you have won. If people are embarrassed to be seen by their peers carrying your bag, then you have lost.

It really doesn’t even matter what is in the bag. It could be school books or a McDonald’s breakfast. These are things that the Limited and Macy’s do not sell. For all I know, the stuff that originally came in those bags was thrown away a long time ago. What remains is the bag.

There was something so special about the image of the Limited to this high school girl that it made her feel good to be associated with that brand in a very public way. This wasn’t about practicality. A Limited shopping bag is a lousy book bag. It cannot support the weight of the books for an entire year. No, this was about image. The image of the brand on the bag caused the girl to feel better about her own image (although today, it would probably have been a Hollister bag rather than a Limited bag). This image association turned the original shopping trip from being just a trip to buy “commodity/stuff” into being a trip to buy a commodity associated with a brand that makes her feel better about herself. And I bet she was willing to pay more, just to have the pride of getting the bag.

A similar situation existed for the administrative assistant and her Macy’s bag. There was nothing wrong in bringing a McDonald’s breakfast bag to work. It did not require being smuggled in via a Macy’s bag. However, the public image of being seen carrying a Macy’s bag apparently was superior to being seen with a McDonald’s bag.

The principle here is about building strategies around maximizing consumer self worth rather than around selling “stuff”. People like to feel good about themselves. They want to have a sense that they are a good person—that they are a person of worth. How people choose to define “good” varies. But whatever measure people choose to define "good" helps define how they will act.

In the past, I have done a lot of consumer research. What I found was that even in the simplest tasks, like choosing a store to buy toothpaste, store choice will depend in part on how the person defines the goodness in their self-image.

As an example, let’s compare the self-image of the loyal Target shopper to that of the loyal Wal-Mart shopper. When I talked to loyal Wal-Mart shoppers, they were very proud to shop at Wal-Mart. These people typically defined their sense of self worth around being a good provider for their family. They knew that if they shopped at Wal-Mart, they would get the most for their money. That meant that shopping at Wal-Mart allowed them to provide more to their family. Consequently, shopping at Wal-Mart maximized their sense of self worth.

These same people felt that shopping at Target was silly. They believed that when you shopped Target, you end up paying more for essentially the same thing you would find at Wal-Mart. They thought Target customers were making a poor choice in going to Target because you had to pay more for a tiny bit more of some in-store “niceties” which you cannot take home. In the end, you just have less stuff for your family if you shop Target. They would not be proud to be Target shoppers. They would much rather be seen with a Wal-Mart bag in their hands than a Target bag.

Conversely, the loyal Target shopper would be extremely embarrassed to be associated in any way with a Wal-Mart. They had an image of the typical Wal-Mart shopper as being at the lowest end of the socio-economic ladder. They had a picture in their mind of the typical Wal-Mart shopper as being dirty, uneducated and poor. This is not something they wanted to be associated with. These Target loyalists achieved their sense of self worth more from being viewed by others as a little more hip and fashionable. Since Target’s store image is viewed as more hip and fashionable than Wal-Mart, the reasoning was that the shopper of Target would be seen as more hip and fashionable than the shopper of Wal-Mart. Hence, their self worth was optimized by shopping at Target. They would much rather be seen with a Target bag in their hands than a Wal-Mart bag.

Pity poor K Mart. I interviewed a teenage girl one time about her K Mart experience. She said that when her parents took her to K Mart, she refused to get out of the car. While her parents were in the store shopping, she huddled under the dashboard to be as unnoticeable as possible and said she prayed the whole time that none of her friends would see her in the K Mart parking lot. If that attitude is common, you won’t see K Mart winning many “pride of bag” battles.

Just this past week, the CEO of Starbucks openly commented on his fear that the company had gotten so concerned over being efficient that they had destroyed some of the unique elements of the coffee-drinking experience that enriched people’s emotions. Deep down, he realized that if they only became known for the stuff they sold (coffee), then they would be more vulnerable to anyone else who sold the same stuff. But if they were known for enriching people’s lifestyles, then they had a safer strategy.

If you can get that much emotion around self worth just talking about discount stores and cups of coffee, you can just imagine all of the ramifications this has department and fashion specialty stores. And this applies to other industries as well. I was talking to an old IT guy once, and he said there used to be a saying when it came time to buy mainframe computers that “Nobody ever lost their job recommending IBM.” In other words, if your self image was based on others having a good impression of you, there was the least risk of hurting their impression of you if you recommended IBM. Even if it wasn’t exactly the best rational choice, it was the least risky for one’s image. It was the “safe” choice (for your image).

The good news is that different people use different measuring sticks to determine their self worth. That means that if one position is already owned by a competitor, you can just choose a different position, based on a different path to gaining self worth. For example, some people feel better about themselves if they choose what the majority chooses. Others feel better about themselves if they go their own path and avoid the majority. Both can work. Just pick which type of self worth you are going to supply and then find the people who achieve their self worth in the same way.

…and by the way, you might even want to sell them some “stuff” to go with that self worth.

People act in ways that reinforce their sense of self worth. This not only applies to big decisions, but also to the more mundane. Self worth can have a far greater impact on choice than the attributes of the product they are purchasing. Therefore, instead of building a strategy around the stuff you sell, try building your strategy around the way it enhances the self worth of a particular customer segment.

I was working with a retailer once whose customer image was so poor that I joked they should sell the competitor’s bags at the checkout, so that the customers would be less embarrassed when taking their purchases home.

Saturday, February 24, 2007

Introducing the NANDEX

In order to get more dialogue amongst all of my readers, I am now introducing the Planninga from Nanninga Retail Index, or the Nandex for short.

Every weekend, I will place a two-part questionnaire on the blog about a particular retailer. You will be asked to vote on whether you think that particular retailer is the “toast of the town” (a winner of a retailer) or whether that retailer is just “toast” (a loser who is on the way to extinction).

The way this works is as follows:

On the right is an opportunity to vote on how you feel about a particular retailer. You get to vote based on two criteria:

1) Is their strategy a winner?
2) Is their management a winner?

I will leave the voting for an entire week. Then, each Friday, I will comment on the results and set up another Nandex.

This is your chance to tell off a retailer if you think they have missed the mark (or congratulate them if you think they are on the right track.).

This week's survey is aout the GAP. Are they the toast of the town or are they just toast?

Thursday, February 22, 2007

Art AND Science

About a year ago, I got a phone call from a headhunter. She wanted to know if I would be interested in a position at one of the world’s largest retailers. I’m always polite to headhunters and told her I would be interested if there was a good fit between myself and the company.

The headhunter started to ask me some questions. Eventually, she asked me a hypothetical question about what I would do if the environment had changed and I needed to change the strategy of the company. I basically told her two things:

1) First, in a retail chain that large, I would always have a handful of stores experimenting with new ideas and tactics, so that one can constantly learn about what can and cannot work for the company. Then, when there is the need to change, you already have gathered some data through these experiments to help you decide how to change.

2) Second, I would take some decisive action, but I would remain alert and flexible about how the consumer is reacting to the change. I would monitor consumer reaction through research and creatively improve and modify “on the run” as I rolled out the change throughout the chain.

At this point the headhunter stopped me and said that I was definitely not the type of person the company was looking for. I asked why not and she said it was because of the way I answered that question. She said this company definitely did not want somebody who experimented or creatively modified their approach. They were looking for someone who already knew exactly what to do in every future situation and would just order the troops to quickly carry out the program. She explained how the company’s culture was very militaristic and how there were looking for people who would bark out clear orders like a general and expect the employees to obey the clear orders like good soldiers.

After hearing that, I agreed that there was not a good fit for me as an employee at this company. I did, however, offer to solve their problems as an independent consultant. The headhunter, admitting how difficult it was to find the type of candidate the firm was looking for, said “You’d be amazed how many people made the same offer you did.”

A dear friend of mine likes to say that “business is an art that uses scientific tools.” To stay ahead in business, one needs to creatively think outside the box and move in new directions. This is the art of business. No amount of pure science can get you there. At the same time, however, scientific research is needed to provide a fundamental baseline of knowledge. Without this scientific knowledge, the creativity becomes random and can lead you astray. Therefore, you need both art AND science to effectively build the strategies of success.

In the story above, the company trying to hire someone apparently did not have the patience for either art or science. They did not like the idea of scientific experimentation or consumer research. To them, this was a sign of weakness that you were not already smart enough to know the answers. So science was out at this company.

In addition, they didn’t like the artistic approach of evaluating the situation at hand and coming up with a uniquely creative solution for that particular problem. They also didn’t like someone who was flexible in implementation, creatively adapting as new data came in. Again, they saw this as a sign of weakness that you didn’t already have a one-size-fits all solution that could easily be mandated to the troops. So art was out at this company as well.

This may help to explain why investors were losing confidence in this company and why the CEO of this company recently left the firm. The investors realized that without art and science, this company would have significant difficulty dealing with the problems that inevitably arise from the changing environment. Strategies are more than just barking out orders. They are creative, artistic approaches based on the knowledge from scientific learnings.

The principle here is one of balance—a balance between artistic creativity and scientific research. If you get out of balance, your strategies could easily lead you astray. Here are some of the risks when you get out of balance.

1) All Science, No Art: The Risk of Moving Backwards
I had a boss once who only believed in “fact-based” decision making. He wouldn’t do anything unless all the facts were in. He lived by the flaw of embracing science, but ignoring art. There are three flaws to this imbalance:

  • You cannot scientifically measure that which does not yet exist. Trying to create the strategy of the future requires moving in new directions. Studying the past may not tell you the whole story of how the future could unfold. It is like driving forward while only looking in the rear view mirror. Eventually you drive into a tree.
  • Studying what is working today is like benchmarking the best-in-class competition. It may help you become almost as good as what the current leader is doing, but it won’t help you find a unique point of differentiation. You will only be seen as a close, but inferior version of the leader.
  • If you wait to move until all the facts are in, it may be too late to stake a claim in that future. Others will jump in with less than full science and own the position before you begin. All you end up doing is chronicling someone else’s success.

Nearly all great innovations have come from inspiration, and they were not something that customers were clamoring for in research. People have a hard time articulating that for which they have no experience. Your job is often to find what people desire before they realize it.

2) All Art, No Science: The Risk of Moving Sideways
Some people have great intuition and artistically guess very well (or so it seems). Therefore, you may think you have the “golden gut” as well, and when your get tells you to move in a certain way, you do so—without any scientific investigation. What usually results is randomness, rather than effectiveness. What we often do not realize is that usually the people we admire as great artists are actually also great observers of human nature. Although their studies may not be formalized science, it is scientific observation none-the-less.

Art alone can be easily swayed by emotions and fads. You may end up chasing every fad and end up nowhere in particular. Science is needed to divide the fads from the true trends. Studies have shown that the TV advertisements which win the most awards for creativity are often among the commercials least effective at moving products. Science is needed to focus the artistic energy in a successful direction.

3) No Art, No Science: The Risk of Perfecting the Obsolete
This is the example of the company in our story. These are the people who think there is a “one-size-fits-all” trick that works in every situation. That trick could be:

  • Cutting Costs
  • Six-Sigma
  • Balanced Scorecard
  • Decentralize the Centralized (or Centralize the Decentralized)
  • Etc.

No need for scientific scrutiny. No need for creative thinking. Just pull out your favorite trick and put it into action. Granted, these types of activities can have some impact and may make you more efficient or more effective at what you do. Unfortunately, if your basic go-to-market strategy is wrong or inappropriate for the times, all you have done is perfect the obsolete. At some point, enough change will take place in the marketplace to cause your underlying strategy to fail. These tricks don’t help you find the next strategy.

Effective strategy is all about getting the proper balance. You need some scientific insights to ground your decision making, but you don’t want to get so bogged down in research that you never get around to taking a leap forward in a distinctive direction. Artistic inspiration is also an essential element, but in isolation, inspiration may run you down the rabbit trails of every fad. Productivity tricks are also useful, but they only make good strategic decisions better. They do not create the good strategy. Remember, business is an art that uses scientific tools.

The only way to get an effective balance of art and science is by creating a culture which encourages both. I never could have brought that balance to the company mentioned in the story, because their military culture would not allow it. Culture must change first. Let’s hope the new CEO of that company can effectively change the culture.

Wednesday, February 21, 2007

Name That Tune!

The Story
Back in the early days of radio, there was a game show called “Name that Tune!” It was so popular, that when television came about, the show moved to television. The object of the game was to name the title of as many tunes as you could before your opponent could name them, by listening to the melodies being played by a band.

One segment of the show was called “Bid a Note.” In this segment, the contestants would bid against each other for the right to be the first to have an opportunity to guess the name of a tune. The bidding was based on how many notes you were to hear before you had to guess the name of the tune. Unlike auctions, where the bidding increases, here the bidding decreases.

For example, contestant #1 might start out the bidding by saying, “I can name that tune in five notes.”

Contestant #2 would continue the bidding by saying, “I can name that tune in four notes.”

Contestant #1 could then continue the bidding by saying, “I can name that tune in three notes.”

Contestant #2 could continue the bidding process by saying, “I can name that tune in two notes.”

The bidding would continue until neither contestant wanted to bid a lower number. Then, the contestant who won the bidding would hear only as many notes as they bid and have to guess the tune. I was always amazed at how many contestants would bid only two notes. I was even more amazed at how many guessed correctly based on only two notes.

The Analogy
Let’s suppose, for a moment, that your business decided to run its own game show. The name of the show would be “Name that Vision!” Contestants would be picked at random from your employee base. The game would have rules that were similar to Name That Tune, except that instead of using notes, your game would use words. The contestant who could name your business’ vision statement in the fewest number of words would win.

How many of your employees could correctly name your business’ vision in only a handful of words? How many would need an entire page full of words in order to describe your business vision? How many are so confused about what your vision is that they could not recognize it no matter how many words you used?

If you had ten different employee-contestants playing your game, how many different statements would your hear from them as they try to name your vision? Would their statements be in agreement or in disagreement with each other? How much chaos and disfunctionality would there be in your organization if all ten of these contestants tried to implement their own understandings of your vision at the same time?

If your game show had a segment called “Bid a Word,” how many of your employees would be willing to say, “I can name our vision in two words”? Three words?

Unfortunately, the business world is not a game. It is serious work. If the work is to be successful, then everyone must be working to achieve the same vision. If the vision is confusing or difficult to articulate, there is a good chance the work will not be focused. Then, you will not just be faced with losing a game show, but in losing the battle for the customer.

The Principle
There is a difference between a strategy and a vision. A strategy is a detailed long-range plan that explains topics like:

  • The position to be owned by the business in the marketplace.
  • Why that position is winnable and desirable in the future environment.
  • How that position will be held and defended from competition.
  • Who the business is serving and why they will prefer that business.
  • What needs to be done to achieve these goals, how they will be achieved, in what order they will be sequenced, and who is held responsible for achieving each part.
  • The financial implications of the plan.
  • How to fill the gaps between current state and desired future state in terms of competencies, business outcomes, and profits.
  • Contingency Plans.
  • Key Indicators of Success

As such, the strategy serves as the rational guidebook to answer all of the Who’s, What’s, When’s, Where’s, Why’s and How’s of what needs to happen between today and the end of the plan as well as how it will be accomplished.

By contrast, the vision of a company is much shorter and more emotional. It is an inspirational rallying cry intended to get everyone in your business excited about what the business is trying to accomplish. Sometimes a vision is used to embrace a short-term goal that changes every year; other times it may be an aspirational goal that lasts for several generations. In either case, the vision motivates right behavior by giving employees a sense that they are doing more than just a job—they are part of a bigger, and very important, mission.

Another common characteristic of a vision is that it is directional. It points in the direction of which types of activities are within scope and which are not.

A vision is something that all of your employees should be able to articulate with only a handful of words. Often times, it only takes two words to “Name that Vision”—typically a verb and an object of that verb. Examples of the types of two-word visions available would include:

  • “Build” a “Competency"
  • “Change” a “Structure”
  • “Beat” a “Competitor”
  • “Win” a “Space”
  • “Create” a “Better World”

These are all described in more detail below.

“Create” a “Better World”
This type of vision tends to have the longest life and may last several generations. The idea is to tie the work of the business to highly noble causes. Examples may include “eliminate hunger”, “improve lives”, “create fun”, “extend life”, “improve environment” or “enrich life”. Typically, these long-term two-word aspirations are connected to the current strategic means by which they will be accomplished, like “eliminate hunger via bio-engineering” or “improve lives by making technology affordable”. This type of vision works best with people who want their job to be more than just a way to earn a living, but rather a way to make a difference in society. It can give a sense of pride to having a small part in a larger cause.

“Beat” a “Competitor”
This type of vision is typically used by newer or smaller companies that want to become larger and greater than the established leader. The general format is “Beat Company X”, where Company X is the market leader. This type of vision appeals to people with more of a militaristic or athletic mindset, where in order for you to win, someone has to lose. This is typically focused around market share, where the targeted enemy/opponent is the one you are taking share away from. This was popular in the 1960s and 1970s in Japan when Japanese firms were trying to overtake the larger American companies. Now, the younger Asian economies are using it against Japanese firms.

“Win” a “Space”
This type of vision tends to focus on the position that the business wants to own in the minds of their customers. It is what the company wants to be known for, the leverage point for success. It could be centered around an attribute (like “own price”, “win on service” or “best quality”) or it could be centered around a category or business ecosystem (like “own farm equipment”, “win appliances”, “dominate sports news”, or “home security leader”). This vision tends to be measured more with top of mind awareness or preference. It tends to be a vision that works well with market leaders who want to expand the market space, expand their reach in the market space, or defend their position.

“Change” a “Structure”
This type of vision is typically used when trying to change how people think of internal processes. Examples include “reduce bureaucracy”, “eliminate silos”, “build efficiency”, “customer driven”, or “rapid response”. This is a common vision approach when a company is in transition or trying to get out of a financial slump.

“Build” a “Competency”
This tends to be one of the shorter term rallying cries. It is designed to help fill a gap in a strategy by adding a new capability to the organization. Examples would include “go online”, “launch prototype”, “quality first” or “ISO ready”. This type of vision tends to work well with smaller, temporary teams designed for a particular purpose.

In some ways, it doesn’t matter which of these two-word phrase categories you pick. They tend to be linked. For example, it is difficult to “beat a competitor” without doing a better job of “winning the space” the two firms are competing in. “Winning a space” often requires doing something different, like “changing a structure” or “building a capability. In the end, it is hard to “beat a competitor” without providing superior value to the customer, which is often wrapped up in “creating a better world.” The idea is to pick whatever works best to motivate and bring clarity to your organization.

Strategic planning doesn’t end once a position is chosen and the general path to get there is known. The next step is to communicate that strategy to the entire organization in a simple way that motivates behavior leading towards the desired strategic outcome. This is called the vision statement. By boiling the strategy down to a vision statement consisting of a single sentence—or even as few as two words—you can make it as memorable as the name of your teams’ favorite songs. Then, if your company had to compete at “Name That Vision” you would not only win the contest, but win the ultimate prize of success in reaching your vision.

Final Thoughts
Albert Einstein is often quoted as saying, “Make everything as simple as possible, but not simpler.” Good strategic plans are typically comprehensive and involve the coordination of a large number of tactical initiatives. There is a risk of oversimplifying the complexity to the point where the strategy loses its power. Do not fall into the temptation of boiling down the strategy into something that is so simple that it fails to encompass all of the key elements necessary for success.

However, when creating the annual communication of the vision to the business employees who have to implement the strategy, make the vision statement as simple as possible—perhaps even as simple as two words. If people need further clarity, they can always refer back to the greater strategy.

Tuesday, February 20, 2007

Fire Your Owner

My finance teacher in college was a brand new professor. He had just finished his PhD and made the transition from being the student directly to being the teacher. He had no meaningful real-life experience in finance (nor any meaningful real-life experience at teaching for that matter, either).

This professor was not much older than I was at the time, which was relatively young. Yet when he taught, he spoke as if he had generations of experience and seemed to enjoy telling his students how most everyone in the business world was misguided.

He hated it when a company would introduce a new product, or diversify into new lines of business (to mitigate risk), or change a strategy to adapt to a changing world. In his mind, every business should be required to sell only one product, and sell it in only one way…forever.

What was his reasoning behind this? He believed that the investing shareholders should have ultimate power. If investors like the one product and the one way it is sold, then they can support it by buying shares in the company. If they don’t like the product or the way it is sold, then they can sell their shares in the company (or never invest in it in the first place). The good would get rewarded and the bad would get punished—by the investors.

Whenever a company changed its portfolio or its strategy, he felt it was interfering with his ability to control the company with his ownership. After all, what if the company came up with two products—one he liked and one he didn’t? Now he could no longer support one with his shares and deny the other by not buying shares. This made him very angry.

And if a company had the wrong strategy, he didn’t want it to change, because then the company would be doing something he couldn’t control. Instead, he would prefer that the company kept the bad strategy, so he could sell his shares in that firm and re-invest them into a company that already had the better strategy.

He did not care if a company lived or died. He would just continue to move his money and invest it in the best location at that particular moment

By contrast, Warren Buffet seems to have taken an opposite approach to investment and done quite well with it. I suspect that Mr. Buffet has done much better in investing than my college professor did.

Although most investors are not as blunt as this professor, many act as if they believe what he is saying is true. They have no sense of loyalty or desire to help a business thrive over the long haul. They just want to move their money around to wherever the success is at the moment. What motivates their personal success often is at odds with what is in the best interests of an individual company’s long term success. For them to win, the company often has to fail.

When devising strategies, it is important to consider the desires of your owner. After all, these are the people who pay your salaries and can get you fired. But sometimes you have to take a stand and not do exactly as they desire. Giving them exactly what they desire may end up not giving them what they really need…an economic engine that produces cash flow for a long time.

Warren Buffet understands the big picture and realizes that the best returns usually come from long-term investing in companies that know how to adapt and survive. When the investor’s success depends on the company having long-term success, then usually both sides win. But if the investor’s best interests are not the same as the company’s, then one or both sides tends to lose.

Over the past couple of blogs we have been talking about the concept of “who is my customer”. We have seen that you can use different strategic approaches to choose which type of customer you want to serve. You can serve the people who pay the money, the people who use the service, the people who influence the people who use the service, and even the people that may eventually buy your company.

There is another type of customer we haven’t talked about much. That would be the current owner, be it a corporate headquarters (if you work in a division), a board of directors, an active shareholder, or a venture capitalist (if you are a start up), or something similar.

In general, it is a good idea to make this “customer” happy. They are the boss. At the very least, you cannot ignore them. However, sometimes the best path to making them happy is to do something other than they want. It can be a tricky business to disobey a boss, so we must be careful when doing so. The following are a few principles to help determine when to do so.

1) Move in the Direction of the Greater Good
Sometimes a division of a corporation is asked to embark on a strategy which sub-optimizes the individual division, but optimizes the good of the greater corporation. In this case, the path would not be to disobey and try to maximize your individual business, but to act for the greater good of the entire corporation. To ensure that this happens, the division should be rewarded based on its impact on the greater good.

2) Don’t Move in the Direction of Illegal or Immoral Activity
The phrase, “But my boss made me do it,” does not stand up well in court. You always have the option of quitting.

3) The Owner is the Tie-breaker in differences of Opinion
Sometimes people just come to different conclusions. It’s okay to express your differences to the boss, but in the end, their opinion is the one that matters.

4) When the Owner’s goal is clearly not in the best interest of the company, consider firing the owner as your customer.
If a shareholder is making unreasonable demands that will line their pockets with money but bankrupt the company, perhaps you need to look for ways to “fire” your owner. In other words, try to change the profile of the type of investors that invest in you. Try to cultivate more Warren Buffet type of owners, rather than owners like my old college professor. If you stand your ground and fight for the long-term health of your company, you should naturally attract the investors who are looking for that type of business and discourage the investment by other types of investors.

As a general rule, if you manage for the long-run, you tend to build a strong track record of growing cash flow, which leads to a successful stock price. However, if you just focus on short-term tricks to inflate today’s stock price, you may end up being a poor investment over time. So to make owners happy with growing stock prices, you sometimes have to ignore the stock price and focus on the business. Hence the irony that in order to make an owner happy, you sometimes have to focus on something other than trying to make the owner happy. Their happiness is a byproduct of good strategy, rather than making their happiness become the strategy.

Although it is important to make the owners happy, sometimes the best way to do so is to focus on something else—namely making the business strong. If the owners do not see the wisdom in this, either try to get a different type of owner or go work somewhere else.

The world is a lot more complicated than what I can describe in a short blog. I don’t want to come off sounding as na├»ve as my old professor. But at the same time, I think leaders need to do some genuine leading every once in awhile and not just be a puppet of the owners.

Monday, February 19, 2007

We Can All Act Like Sports Franchise Owners

Back in 2001, Howard Schultz and 57 partners bought the Seattle Sonics professional basketball franchise for $200 million. During the time that Howard Schultz owned the Seattle Sonics, the team suffered annual losses. It is claimed that while Schultz owned the team, the combined operating losses were $60 million.

Yet, in spite of being a business that showed no signs of making a profit, Schultz and his partners sold the Seattle Sonic team in 2006 for $350 million. That is $150 million more than what they paid for the team and $90 more than they paid if you subtract the annual losses. In fact, they supposedly turned down an offer of $425 million (more than twice what they paid for the team) from Larry Ellison, CEO of Oracle, because he wanted to move the team away from Seattle.

This is not a fluke price. In 2004, the New Jersey Nets basketball franchise sold for $300 million and the Cleveland Cavaliers basketball team (and its arena) were sold in 2005 for $375 million.

Willamette Management Associates is an expert in the area of sports franchise valuation. One of their representatives says that it is very difficult to use income flows as a means of evaluating sports franchises. To quote a 2002 paper they wrote on the topic,

“The discounted cash flow method is often used in the valuation of sports franchise intangible assets. However, it may be difficult to use this method in the valuation of the sports business enterprise. This is because many sports franchises either earn negative income or do not generate sufficient income to support the prices paid in actual team sales.”

So it appears that even though the business itself can be a perpetual money loser, in the world of sports franchises that does not mean it is a bad investment. According to the Seattle Times, the annual rate of return on the investment of Howard Schultz and his partners, when you consider the selling price and other factors, was probably around 10.6%. That’s a pretty good return for investing in something that loses money.

At the end of the day, the basic goal of capitalism is to find good returns on investment. As the story above illustrates, it is possible to get very good returns on investment on businesses that provide little to no profitability on an annual basis. The return on investment for the Seattle Sonics did not come from the operating earnings, but rather from the selling price.

Now you may be thinking that such opportunities occur only in the world of sports. However, recent trends seem to be indicating that this trend is creeping ever more into the rest of the business world. Just look at some of the prices that hedge funds have been paying recently for businesses that are not very prosperous. Even businesses that lose money are being snapped up at relatively high prices by these hedge funds.

When devising business strategies, there appears to be a strategic option to consider running a business not to necessarily make money through earnings, but rather to gain virtually all of the profits at the point when the property is sold. This is called the “build to flip” strategy.

The build to flip strategy takes a different perspective on the question “who is my customer.” Instead of seeing the customer as being the person who pays you for your goods or services, this strategic alternative sees the customer as the person you eventually sell the business to. Taking the adage “please the customer” to heart, the build to flip companies run their business more to make an eventual buyer of the firm happy rather than to make the business operation’s customers happy.

For example, during the dot com bubble of the 1990s, many start-ups had as their strategy the goal of eventually selling the business to Cisco Systems. Cisco had a policy that they would only buy firms located in one of three areas—Silicon Valley, Austin Texas, or the Research Triangle in North Carolina. The reason was that it was too difficult to manage the Cisco empire if all the subsidiaries were scattered all over the place.

Start-up companies knew this policy, so if their goal was to eventually be bought out by Cisco, they knew that they had to locate the business in one of these three areas, even if it was inconvenient to them or to their operating customers. After all, they saw Cisco as their ultimate customer, and if that is what Cisco wanted, then that is what they did.

I personally saw this principle in action when I was in the grocery business. A number of independent grocers, when they got near retirement age, wanted to sell their businesses. These grocers knew how the large supermarket chains thought when considering the purchase of an independent grocer. Large grocery chains believed that it was easier to take a store with high volumes and leverage the volume into higher profitability than it was to take a low volume store and increase its volume. In fact, these chains would prefer to purchase a high volume store that lost money over a low volume store with modest profits, because they believed the high volume store had more upside potential.

Knowing this, the independent grocer thinking of retiring would for a year or two abandon the idea of making a profit and focus all of the strategic effort on doing whatever it took to increase sales volume. They would do this even if the tactic made little economic sense in the long run or even if the tactic was unsustainable in the long run. After all, the eventual buyer of the business wanted to buy sales volume and typically set its purchase price on a multiple of sales. So to give the “customer” what they wanted, the independent grocer would raise the sales volume, regardless of the consequences.

Once the sales volume from these tactics started to peak, the independent grocer would sell the company to the supermarket chain. This strategy would make the independent grocer wealthier than if they had run the business as normal prior to the sale. So as you can see, the idea of getting a good return when losing money is not just a principle for sports franchises.

Even on a smaller level, I have seen this policy used in the real estate business. It is not uncommon for someone to own property on the far outskirts of a city. The owner of the property knows that if they wait a few years, the city will grow out to where his land is. At that time, it will become very profitable to sell the land to a developer. To sell now would bring a lesser return. So what do you do with the property in the mean time, while waiting for the city to grow in this direction?

Well, you don’t want to put a lot of capital into the land, because you are going to only hold it a short time. Since you do not know how the eventual new owner will want to use the property, you don’t want to use the property in such a way that would limit the flexibility of the new owner to do what they want. So what do many of them do?

They put a miniature golf course on the property. The cost to do so is very low, and it leaves a lot of flexibility for the next owner, since a miniature golf course can be easily removed, leaving the land ready for just about any use. The golf course does not have to make a lot of money. Even if it helps cover just a portion of the interest on the real estate, it is beneficial. After all, the goal is to make most of the return on the sale of the land, not the operation of the miniature golf course.

If you are trying to sell a company, there are many decisions that you might make differently if you look at a potential buyer of the firm as the true customer. For example, if you know that potential buyers of the company prefer to operate on particular computer platforms, you may want to run your business on that platform as well, even if it is not your personal preference.

Instead of spending a lot of time making calls on operating business prospects, you may want to divert more energy to speaking at seminars or in getting articles published in places where potential buyers of the company will get exposed to you in a favorable light. The idea is to make it a priority to think about ways to make your company appear more valuable to a potential buyer of the company.

There is something to be learned from running your business as if it were a sports franchise.

There is more than one way to get a good return on your investment. One way is to focus on getting nearly all of your return at the point in which you sell the company (the build to flip strategy). This tends to be the way that sports franchises have worked for decades and it appears to be an increasingly viable strategy outside the sports world. This is especially true given all of the hedge fund money out there looking for companies to buy. In this strategy, the idea is to look at the eventual buyer of the firm as your true customer and to make decisions based on how it would please this eventual buyer.

If it is true that the majority of the profits of a business strategy could come at the point at which the company is sold, then it must also be true that a lot of the value in the acquiring company could be destroyed if it purchases companies unwisely. Making most of your value by purchasing properly (rather than selling properly) is another way to build a strategy.

Sunday, February 18, 2007

Who is My Customer

Pity the poor woman who just took a marketing management job at a medical device company. She had never worked in the industry before. She was given the project of working with their latest product—a device that used an entirely new way to cure a disease. After a meeting to demonstrate the device to her, the closing words of her boss to her was “Now go out and market this thing.”

At first, she walked away from the meeting rather confident, since she had been in marketing for some time. But then she started the think, “Go out and market this to whom? Who is my customer?”

Her first thought was that the customer is the patient using the device. Therefore, her marketing should focus on how painless and how quickly the device works.

Then she thought that perhaps the customer is the doctor who prescribes the procedure. If the doctor doesn’t want to prescribe it, then in many ways it really doesn’t matter what the customer wants. If the doctor is the primary customer, then the marketing focus would have to also address issues such as whether insurance companies will readily pay for the procedure and whether it increases the risk of malpractice.

Most of these devices will end up in hospitals, so maybe the focus should be on hospital procurement executives. They will want a marketing presentation that looks at the financial cash flows and revenue streams.

Then she considered whether the insurance company is the primary customer. After all, they are the ones paying the money once the device is used. If they don’t want to pay, the device won’t get used. If they are the primary customer, then the key marketing issue must focus on cost effectiveness relative to other treatment options.

And what about the government? They get to approve the diseases for which this device can be used as treatment. They impact how Medicare will treat this device. There are powerful political lobbies from the companies who sell the products currently used to treat this disease who will use the government to help protect their status quo. Therefore, perhaps the marketing needs to focus on lobbying.

At this point, the marketing executive was very confused and wondering if she could still get her old job back.

There are many different types of decisions that go into getting a product sold. As we saw in the story above, the decision-makers who affected sales of the device included:

· Product Users (Patient)
· Product Prescribers/Advisors (Doctors)
· Product Investors/Determine Access (Hospitals)
· Product Usage Payers (Insurance Companies)
· Product Regulators/Inluencers (Government)

For some products, those decisions are made by a small handful of people who are in charge of multiple roles. Sometimes, as in the story above, there are a great number of constituents who all play separate roles in the decision-making.

This complexity provides opportunities to create strategic advantage via the types of strategic approaches one takes to these various constituents or the type of decisions you want constituents to make.

There are two basic ways to gain strategic advantage in the complexities associated with how a product is purchased:

1) Focus on a different aspect of the complexity than the competition; or
2) Redefine the roles of the players in the decision-making process.

Allow me to give a simple example of how this works. Let’s say you sell children’s breakfast cereal. The child is the user and an influencer in the purchase, but the parent is the advisor/prescriber and the person who pays for it. Principle #1—focus on a different aspect of the complexity—would work something like this: If all of the competition is focusing their efforts on getting the child to demand the product from the parent, perhaps you can create a strategic advantage by focusing on getting the parent to override the child’s demands and buy the product for reasons that please the parent, such as nutrition. A third approach could be that instead of spending most of the marketing money on the child or the parent, the money is spent on buying better shelf space and pricing promotions with the supermarket company (who influence access and pricing).

The second principle—redefine the roles—could work something like this: You repackage the cereal into individual snack sizes and put them into vending machines where the children hang out. Now, the parent is no longer defined as the purchaser, but the child is, who buys the snacks on his or her own out of the vending machine. The access is no longer defined as the store, but as a machine.

You can also see this taking place in the world of broadcast entertainment. Looking at principle #1, you can focus on either trying to get content pleasing to the audience (the users) or content pleasing to the advertisers (the payers). In many cases, the same strategic move can please both: if you draw a large audience (such as the Superbowl) you can have many willing to pay large sums for the right to advertise.

This, however, is not always the case. Sometimes one can draw a large audience with controversy, and many advertisers do not want to be connected with controversy. Take, for example, Fox television’s attempt in November to broadcast the OJ Simpson story “If I did it, Here’s How it Happened.” No matter how popular, no advertiser wanted to be associated with the story, so the network did not air it.

Other times, advertisers can demand that they not only get advertising via commercials, but product placements into the show’s content. Take, for example, the ever-present coke beverages located by the judges of American Idol. This is all about pleasing the advertising customer rather than the viewing customer. So depending on which customer you want to focus on, one can come up with different strategic approaches for the types of entertainment one broadcasts.

Looking at principle #2, broadcast entertainers can also redefine the roles. For example, many entertainment programs now ask the audience to vote with their cell phone. This is a huge money-making opportunity, which now makes the viewer also a payer. A new trend is to make the audience also the creator of some of the content, such as with YouTube, or some of the commercials on Superbowl XLI. In the case of controversy, if the audience demand is large enough, one can use pay-per-view to get the audience to pay for things that advertisers shy away from.

In the new digital economy, business models are starting to look more like the broadcast entertainment model, where users get content for free and advertisers pay for space on the screen. But again, there may be opportunities for a strategic advantage based on how one focuses on the complexities of the business model. One can take limited resources and focus on getting the absolute best content or one can take limited resources and focus on building the most efficient online advertising model. One can redefine roles and get the users to pay for the content. And I’m sure that there will be many new models to evolve that we haven’t seen yet.

In retailing, some firms are redefining their role from being influencers and access points to becoming the manufacturer of the products they sell. Similarly, manufacturers are starting to go direct to the user with their own stores. In other words, instead of focusing on the store as their customer, the manufacturer is going direct to the user as their customer.

The beauty is that because there is no one single best way to go to market, there are opportunities to gain an advantage by taking a new strategic approach. The problem is that if you do not think more open-mindedly about different ways to define customers and the other stakeholders, you will always be left behind and copying others.

Answering the question “Who is my customer?” is not as obvious as it first appears. Often, there are many stakeholders involved in completing a purchase, including users, influencers, access points, payers, regulators, etc. In a sense, they are all your customer. Yet given one’s constraints of money and time, one cannot always give high attention to all of them. By thinking outside the conventional box, one can redesign the business model amongst these players, either by:

1) Altering who gets focused on (i.e, who becomes the primary customer)
2) Altering the roles played by the various stakeholders, which might even lead to adding new players or eliminating some of the former players from the decision-making process.

How you manage these decisions can have a major influence on how you design your business model and how you design your marketing program.

Another stakeholder or constituent whom we did not address is the firm that you may eventually intend to sell your company to. That’s the big cash buyer. A little focus on them as your customer could go a long way to getting the deal to happen. But this topic will be covered in more depth in another blog.

Friday, February 16, 2007

If You Can Open the Door, So Can Others

The Story
There is a situation I have seen repeated over and over again in the business world, especially in the airlines industry. To protect the people who have fallen into this trap over the years, I will tell a generic version of the story.

Bob sees himself as an entrepreneur skilled at finding opportunities in relatively mature businesses, by getting aggressive and shaking up the status quo. Bob looks at the airline industry and says to himself, “Here is an industry I can shake up in my favor.”

Bob leases some airplanes and starts his bold plan. He notices that some routes are more profitable for the established airlines than others—routes where airlines charge abnormally higher than average fees. Bob puts his planes on these routes and charges ticket prices significantly below the established airlines. This plan gives Bob two strategic benefits:

1. Consumer Benefit: He is making a low price statement to the consumers on the routes where he can get the largest price savings impact with the least impact to his bottom line.

2. Competitive Benefit: He is disproportionately taking away the routes with the greatest source of income from the established airlines, making it hardest for them to finance a retaliation.

Sure, Bob will lose large sums of money at first with his plan. In the long run, though, Bob is confident that he will knock some of the weaker airlines out of business and have the market restabilize with his company having a meaningful market share. At that point, Bob will be able to raise prices and start reaping a respectable return on his investment. Bob thinks he’s a strategic genius.

For awhile, Bob’s plan works very well. He disrupts the status quo and gains market share. Bob continues to add routes and gain public favor with his “too good to be true” low prices. Weaker airlines are in retreat. The losses pile up at Bob’s company, but Bob assures himself that a new stability is just around the corner. Soon, he will have achieved his desired market strength, allowing him the power to raise fares to a profitable level.

Just as Bob predicted, that time of new stability arises. Weaker players have left the industry. Bob’s market share is strong. Bob raises his prices. Then he puts his feet up on his desk, relaxes, and says, “My job is done. I have won the game.”

What Bob doesn’t know is that on the other side of town there is an entrepreneur named Jane who also likes to make money by shaking up established industries. At about the same time Bob is putting his feet up on the desk, Jane is looking at the newly stabilized airlines industry and says, “Here is an industry I can shake up in my favor.”

Jane utilizes a strategy similar to Bob’s and upsets the pricing stability with her “too good to be true” low prices. Bob has to respond by putting his prices back to the old unprofitable levels. Eventually Bob goes out of business and Jane survives. Then Jane takes advantage of the new restabilization of the industry by raising her prices.

At about this time, Lee is looking at the airlines industry, saying, “Here is an industry I can shake up in my favor.” And the cycle repeats itself yet again.

The Analogy
Strategies are based on assumptions. If you choose the wrong assumptions, your strategy will likely fail. There is a failed assumption I like to call “The Last One Through the Door” assumption. This assumption rarely leads to long-term strategic success. With “The Last One Through the Door” assumption, businesses assume that they can enter an industry, buy market share by offering prices or features below cost, and then get their profits later when the market restabilizes and they can raise prices.

The problem with this approach is that it only works if nobody comes behind you and destabilizes all over again. In other words, for this strategy to succeed, the path you took to enter the industry must be a door that you can lock behind you, so that nobody else can enter in the same way you did. You have to be “the last one through the door.”

Unfortunately, if you are able to find a way to open the door, others will often find a way to open that door as well. This is what happened to Bob, whose strategy failed because he could not keep Jane from later entering through the same door that Bob used. Jane fell to the same fate when Lee opened the door behind her.

Bob made a terrible error in his strategic planning. His plan’s success was based on his ability to achieve long-term stability in the airlines industry, long enough to recoup his early losses and provide a respectable return on his investments. This was a bad assumption, because it was based on the false assumption that he would be the last one through the door.

Bob may not have even realized that his strategy depended on being able to lock the door behind him. He probably thought that once he restabilized the market, the war was over. Bob believed that he was the final victor and his enemies were vanquished. If indeed the war is over, there is no need to look back at the door behind you.

However, in business, the war is never entirely over. You may win battles, like Bob did, but new battles are always on the horizon. New enemies crop up where you least expect them. The peace of market stability may never be achieved. All because Bob couldn’t lock the door behind himself.

The Principle
The first rule of strategy, according to Harvard Professor Michael Porter, is to make sure you are competing in an industry that has profits. Some industries are inherently less profitable than others. In some industries, none of the companies make an acceptable return on investment. What good is it to build a strategy to win in an industry where even the winners cannot make a good return on their investment?

What makes an entire industry relatively unprofitable? Usually, it is a result of low barriers to entry. In other words, it is easy for new players to enter the industry. If new players can continually enter an industry, then it will be under constant churn and never achieve the kind of stability required for profitability. These are typically industries to avoid.

For example, the trucking industry is a relatively unprofitable industry. This is because it is easy for an independent to lease a few trucks and start upsetting the industry. By comparison, look at how profitable Microsoft is. That is because there are high barriers to creating a new operating system for PCs that could successfully compete against Microsoft. The best strategies are those where you can get into an industry early, like Microsoft, and then be able to lock the door behind you with high barriers to entry.

Therefore, when building your strategy, keep the following principals in mind:

1. Never forget the fact that if it is relatively easy for you to enter an industry, then it is probably relatively easy for others to enter that same industry. This could be an indication that the industry may never stabilize at a level of adequate profitability. It is usually better to find an industry where it is difficult for you to enter and impossible for others to enter, than to find an industry that is easy for you and anyone else to enter.

2. Once you enter an industry, try to find ways to lock the door behind you. Look for ways to redefine the industry so that others can no longer take the path you did. Find ways to increase the barriers to entry.

3. Don’t ever assume that permanent stability can be reached in an industry. There is always enough change in the external environment to eventually make it possible for another company to find a new way to disrupt it, either through new technology, new processes, or by taking advantage of changes in customer needs and desires. Even if you can effectively lock the door that got you in, others may find new doors to get in. There is never a time when you can say “the war is over,” put your feet up on the desk, and stop having to compete.

4. If temporary advantages are what made you initially successful, don’t assume that you will continue to be as successful once those temporary advantages disappear. When customer loyalty is tied to a tactic your company cannot sustain, like unusually low introductory prices that are below cost, don’t expect your customers to automatically remain loyal to you when that tactic is abandoned. If they are only loyal because of your ridiculously low prices, they may leave when you raise them to more normal levels. Make sure you are providing enough consumer benefits so that once the temporary tactics are lifted, you are still providing a superior value in some form.

The first rule in strategy is to make sure the industries you participate in make money. Otherwise, winning may lead to an unprofitable prize. Industry profits are usually linked to high barriers to entry. If the barriers to entry are too low, there will be constant competitive churning and instability, which typically leads to unprofitable price wars. Therefore, when building a strategy based upon entering a new industry, keep the following principles in mind:

  1. Never forget the fact that if it is relatively easy for you to enter an industry, then it is probably relatively easy for others to enter that same industry and create instability.
  2. Once you enter an industry, try to find ways to lock the door behind you.
  3. Don’t ever assume that permanent stability can be reached in an industry.
  4. If temporary advantages are what made you initially successful in entering an industry, don’t assume that you will continue to be as successful once those temporary advantages disappear.

Final Thoughts
In your quest for growth, you may find yourself looking for ways to enter new industries. Keep in mind that while you are doing that, other firms looking for growth may be trying to find ways to enter your industry. While you are keeping one eye looking out to find new doors to enter, keep your other eye looking in to make sure your doors are locked.

Thursday, February 15, 2007

Going in Circles

There once was an important executive at an amusement park. He needed to get an urgent message to someone at the other end of the park, so he gave the letter to one of his subordinates and said, “Quick, get on this horse and hand deliver the message to the man at the other end of the amusement park.”

So the man got on the horse that the man pointed to, just as he was ordered to do. Unfortunately, this was a wooden horse on the park’s merry-go-round. The merry-go-round went around in circles a couple of times and dropped of the subordinate at the same location as where he started. This made the important executive furious. He yelled, “What’s the matter with you? I thought I told you to deliver this letter to the other end of the park. Give me back the letter.”

So then the executive gave the letter to another one of his subordinates and gave her the same message—get on a particular horse and hand deliver the message to the man at the other end of the amusement park. So the second subordinate got on the merry-go-round horse, went around in circles a couple of times and she ended up where she started, still holding the letter.

Again, the executive was furious, so he gave the letter to a third associate and gave him the same message. He got on the merry-go-round and had the same result. This lead the executive to give the same orders to a succession of other subordinates—all leading to the same disappointing result.

Finally, a thought occurred to the executive as to why he was having so many problems delivering the letter. “I finally know what’s wrong,” said the executive. “The problem is that nobody knows how to ride horses any more.”

Over time, businesses will hit periods of difficulty. The old ways suddenly seem less effective. The business is no longer appears to be going anywhere, just like the merry-go-round horses don’t seem to be going anywhere. There is lots of activity, but no forward progress. All that activity just seems to make you go in unproductive circles, like the merry-go-round. Just as in the story, your difficulties prevent you from completing your business's mission.

In times of trouble, many executives resort to changing the person in charge of the mission. The thinking is that the reason the mission is failing is because the person in charge of the mission is incapable or unqualified for the task. Therefore, if you put someone new in charge, the problem will get fixed. This was the thought pattern of the man in the story. He kept thinking that if he could just put the right subordinate in charge of the mission, he or she would succeed.

Unfortunately, the problem was not the person in charge, but rather the business model chosen for the mission. No matter who was put in charge, no one was going to get to the other side of the park by using a merry-go-round horse. Rather than changing leaders, the executive should have been changing horses…finding a different kind of horse that is capable of getting to the other side of the park.

The same is true in business. Quite often the only path to success is not in changing leaders, but in changing the business model. That is where strategy comes in—to tell you when to change horses and which type of horse to change to. The sad part of the story was that the executive never caught on to this truth. He kept thinking that if he switched leaders long enough, he would eventually find one that could ride the merry-go-round horse to the other side of the park.

The principle here revolves around degrees of control. Typically, the more control you have over your destiny, the more successful your future will be. Studies have shown that in most cases, strategic decisions impact your destiny than more than the person in currently in charge of the strategy. The leaders have less control of their destiny than most people think. They’re freedom to act is constrained by the strategy they inherit.

Years ago, I went to a retailing seminar where the professor said that the ultimate success of companies (and particularly retailers) can only be affected about 20 to 30% by the leader. The other 70 to 80% is determined by major strategic decisions made long ago. You can see this when you replace a bad store manager with a good store manager. Yes, the store will have better performance under the better store manager, but rarely will the results move by more than 20%. Earlier strategic decisions account for the rest of the performance:
  • How you’ve managed the brand image.
  • Your particular business model (price, product, service levels, etc.)
  • How you’ve positioned yourself versus competition

If the brand reputation is terrible and your business model is uncompetitive, there is not much that a new leader can do in the near term to make a huge difference. He or she has inherited a wooden horse strategy that won’t make it to the other end of the park. Even a good manager can do only so much when given a mission based on an obsolete business model.

Often times you will see someone leave a successful company and go to lead a less successful company. The person frequently brings others from the more successful company to help him or her. Yet, despite their past success, they do not turn around the less successful company. The reason is because people alone are not enough. There is a reason why that company was less successful in the first place. Frequently, it is because it has an inferior strategy. Until the strategy is changed, there is only so much the new management can do. Making the merry-go-round go faster will not get you any closer to the other end of the park. Similarly, working harder at executing an obsolete or inferior strategy will not lead to great success.

Yes, sometimes current management has done such a poor job of executing a good strategy that new management can make a meaningful difference by just improving the execution. However, if you’ve changed the management two or three times and things are still looking bad, it may be time to concentrate on changing horses rather than changing riders.

February seems to be the time when you see a lot of changes in retail management. Financial results for the year are coming in, and if they are bad, there is often a change in management. Just yesterday I saw seven press releases announcing top level management changes at large retail companies.

The buzz in retail circles in recent months has been that the strategy of the Gap stores is so obsolete that it didn’t really matter who they chose to run the company. Some even speculated that the Gap would have a hard time finding qualified new executives, because no one would want it. In an article in the Wall Street Journal entitled “Gap Needs a CEO, and Many Qualify; Will Any Apply?” dated January 24th, 2007, it says:

“The job pays well and has plenty of perks. There's just one hitch: You have to be the next chief executive officer of Gap Inc. The successor to former Gap CEO Paul Pressler, who resigned Monday, must contend with unpopular products, falling sales and profits, anxious investors, problematic store leases, fleeing executives, and rivals gobbling market share. There's also an influential founding family that might balk at a restructuring the CEO might favor -- all or any of which might give a contender pause. No simple solutions are at hand.”

That sounds a bit like a wooden merry-go-round horse to me.

New management can do only so much to change a troubled company if the trouble is due to having an obsolete or inferior strategy. Until the strategy is changed, the impact of having a succession of new management every year or two will do little to improve the circumstances. Management can only impact about 20-30% of performance. The rest comes from strategic decisions. Doesn’t it make sense to concentrate more on areas which impact 75% of performance than on areas that impact only 25% of performance?

There’s an old saying that the definition of an insane person is someone who keeps repeating the same bad behavior over and over again in hopes of getting a different result. Dare I say more?