Tuesday, March 20, 2007

Don't Confuse Coasting With Driving

The Story
There’s a frequently told story about the founder of Wrigley’s Chewing Gum that goes something like this:

Mr. Wrigley was on a business trip to California on the Super Chief express train, which at the time was the fastest way to move across the United States. Even so, it was a long trip, taking several days. After awhile, you run out of small talk to pass the time.

There was a traveling companion on board—a young accountant—that was bothered by one of Mr. Wrigley’s business practices. He had been afraid to mention it at the office for fear of being booted out. However, he felt relatively safe mentioning it here, since he figured that Mr. Wrigley wouldn’t throw him off the train. Besides, he had run out of other intelligent things to say. Heck, this might even impress the old man.

“Mr. Wrigley, sir,” he said, “Wrigley’s Gum is known and sold all over the world. We have a larger share of market than all of our competitors combined. Why don’t you save the millions of dollars you are spending on advertising and use it to increase our profits?”

Mr. Wrigley thought about this for a moment. Then he asked the accountant this question: “Young man, how fast do you think this train is going?”

“About 60 miles an hour,” replied the young accountant.

“Well then,” said Mr. Wrigley, “Why don’t we ask the railroad to unhitch the engine and let the train travel on its own momentum?”

The Analogy
Companies are like trains, moving down the tracks to their future. It takes investments in engines and fuel to keep that train moving down the track. Similarly, it takes investments in the engines of your company’s growth in order to continue moving down the track to a prosperous future.

Once a train gets up to a high speed, it could probably coast for quite awhile before you would notice that the engine had been unhitched. In the same way, your company could probably coast for a long time on the investments of the past, before you would notice that you are unhitched from any investments in future growth. You might even be enjoying the ride more, because of the money you are saving on fuel.

By the time you become aware that you are coasting, the train has already slowed quite a bit. It will take a long time to find another engine and gain back your momentum. During this time, your competition will have caught up with you and even passed by you on a neighboring track. You might never catch up again.
Strategic Planning serves two goals to help prevent this situation:

1. It watches the current conditions to make sure you have an engine still creating value and are not coasting off old investments that are slowing down.

2. It looks ahead to help make sure you are hitched to the proper engine of future growth and that you are properly providing the right amount of fuel for that engine.

The Principle
Strategic planning assumes that the environment is always changing. As a result, any strategic initiative—no matter how excellent—that remains unaltered will eventually fall out of favor or become less effective. There are many environmental factors that can change, causing a strategic initiative to fall out of favor:

1. Changing Customer Needs or Desires
2. Technological Innovation
3. New Competition
4. Changing Economy
5. New Government Regulations
6. Strategy Copied by Competition, Eliminating its Uniqueness
7. Patent Expires
8. Competition Finds a Better Way to Counter Your Strategy by Adjusting their Position
9. Changing Market Demographics
10. Customers Become More Experienced With Product
11. Product or Service is Commoditized
12. Product or Service Goes out of Fashion

Because of these changes, a company can only coast so long on a particular strategic initiative created in the past. Eventually, the initiative needs to be modified or replaced. As a result, those who think strategically are always looking for how to invest resources in new engines in order to stay in front of the change and take advantage of it, rather than fall victim to it.

Unfortunately, it is easy to get comfortable living off the investments of the past. Coasting feels a lot like driving, and it costs less because you don’t use any fuel. However, coasting is not the same thing as driving, even if you are sitting in the driver’s seat.

Similarly, just because someone is sitting in the leader’s chair does not mean they are truly leading. That person may just be watching the forward momentum left over from the leadership of the predecessor. Instead of leading the company into the future, that person is coasting off the efforts of the prior leader, who is already unhitched from your train. Eventually the coasting will come to a stop.

True leadership requires three elements:

1. The wisdom to discern which new destination to drive the company towards (Where am I leading towards?).

2. The ability to entice people to follow and help accomplish the journey (Who I am leading?).

3. The strength to invest in engines and tracks that will take you towards your destination (How I will get there?).

Strategic planning is a useful tool in turning mangers into true leaders, because it focuses thinking on these very issues.

Without strategic thinking, instead of becoming a leader, one typically becomes a liquidator. That is because without strategic thinking, one tends to assume that what is happening today will continue to happen for a long, long time. The annual cash flows from old investments are considered to be a constant over the planning horizon. If the cash flows are a constant, than why spend additional money? We can coast off the momentum of the old investments. If the train starts slowing down, we can always get rid of excess weight by selling off the engine and excess train cars. Unfortunately, before you know it, to keep moving, you’ve sold off the entire train.

This type of person thinks like Mr. Wrigley’s accountant. He believed that the advertising investments of the past were good enough to keep Wrigley’s gum in a leadership position forever. Hence, it made sense to him to cut out all future advertising expenditures.

A company that stops spending on building the future is like a railroad that sells off all of its engines. In the near term, it will be more profitable and it will continue to coast for awhile. Eventually, though, the train will stop, because you have liquidated its most important asset—the engine. The mistaken assumption that a train will coast forever without an engine will lead to ultimate failure.

Now most people might agree that you cannot coast forever, but what about coasting for a little while? Two times are often brought up as good for coasting—very, very good financial times and very, very bad times. During the good times, the thought is that serious threats are not near, so one can afford to coast on current successes. During the bad times, the thought is that one cannot afford to invest in the future, because all of the money is needed to save today.

While it’s true that the amount invested in the future can vary depending on the situation, it is dangerous to turn it off completely. For example, during bad times, investments in the future tend to be the least expensive. Studies by several consulting firms have found that companies that invest during economic downturns are best positioned to take advantage of the next economic up-cycle.

Similarly, it is easiest to strengthen one’s position when you are already starting from a position of strength. If you wait until your current business model starts to fail before you begin, you have two problems:

• You have to overcome the weaknesses that are already entering your brand position;

• It takes time to determine where to invest in the future and time for those investments to pay off. By the time all of that is done, your brand will have eroded even more. Competitors may have the time to pass you by.

There is a difference between managing a business and leading a business. True leaders understand that all strategic initiatives eventually fail, so they keep spending on building engines for future growth so that the profit train never stops.

Final Thoughts
I used to live in a city that had a severe shortage of doctors. Most doctors were not accepting new patients. It took me years to find a doctor that would take me as on as a patient. I asked this doctor why he was not like the others and was willing to take on new patients. His answer was, “People die. You have to replace them.”

Strategic initiatives die as well. Invest in the process to replace them before the current initiative coasts to a stop.

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