Monday, April 30, 2007

Sometimes the Best Path is Behind You

The Story
Over the years, I have had the privilege of enjoying dinners with a good number of top level executives. The conversations can often drift to cover a great many topics. Here are two examples.

One time, I was at a dinner where there was an executive who was getting tired of the hectic business life. He was too young to retire and had not been in the executive ranks long enough to build up a sizable cash reserve to live off of. Therefore, he was considering simplifying his life down to the bare minimum, in order to afford no longer being a business executive.

He came up with an annual income figure in his mind that he felt was the absolute lowest a person could live on. The idea was that if he could figure out a way to create an income stream that low, he might consider getting out of the “rat race” of the business world.

The annual figure he came up with, in today’s dollars, would probably be in the low $100,000s. I was quickly working the numbers in my head, and the number he had chosen was about twice the average family income at that time in the United States. Approximately 75% of the people in the U.S. were living at a level below which he thought to be the absolute bare minimum a person could live on.

This executive could see the puzzled look on my face as I was contemplating these statistics in my head, so he responded, “That’s a very low number. Why, I can’t think of anybody I know who makes less than that.” Of course, virtually every one of the hundreds of people who worked for him made less than that. But I guess they don’t count. Otherwise, how could he live with the fact that he was paying people less than what he though was the bare minimum a person in the U.S. could live on?

At another dinner, about 15 year ago, I was sitting at a table with a number of top executives. During the conversation, one of them started talking about Wal-Mart. He said, “I don’t know why anyone would shop at Wal-Mart. My wife tried it once and she hated it.”

Then, all of the other executives started agreeing with him, saying that their wives also hated the store. Their consensus was that Wal-Mart wouldn’t last, because nobody likes the store. Finally, I couldn’t take it any longer, and I said, “The average family in the United States makes under $30,000 per year. They do not shop Wal-Mart because they want to; they shop it because they have to. They cannot afford to shop elsewhere like your wives.”

The top executives responded to my comment with silence and then shifted the conversation to talk about their favorite French wines. Oh, by the way, these executives were in the retail industry.

This leads me to my third story. Whenever you fly on an airplane, before you take off, the flight attendant tells you about the safety precautions. At some point in that speech, the flight attendant usually says something like this, “In case of an accident, please proceed quickly and orderly to the nearest exit. Keep in mind that the nearest exit may be located behind you.”

At this point, a few of passengers will try to turn around to see if their nearest exit is behind them. It is a very uncomfortable thing to do, because the seats were not designed for looking backwards, especially if you have your seat belt on.

The Analogy
Businesses will only survive if they satisfy the needs of their customers. Since most top executives have incomes higher than 99.5% of the developed world, it is highly likely that the customers these executives are trying to serve (or, if you are in an OEM business, the customers of your customers) make far, far less income than they do.

Unless top executives make a conscious effort to stay close to their customers, it is easy for these executives to mentally get out-of-touch with their customers. They will project upon their customers the same type of lifestyle that they themselves live. As a result, they may start designing products or services that are only appropriate for the top 5% of society, rather than their true customers.

As we saw in the first story above, the wealthy executive who was considering leaving the business world lived in a neighborhood of other wealthy people and all of his friends were equally wealthy. As a result, he had a very distorted view of what it meant to be average. He could no longer imagine how a person could live on a truly average income because he had no exposure to these types of people. That was a shame, because he was in a business that catered to average, to slightly above average, income people.

In the second story, executives were relying on their wives as their gage of what the “typical” woman would do. Of course, their wives were not typical. They had access to far more money than the average woman. They typically did not work outside the home as most women now do. Some of these executive wives had servants to help them around the house, something the typical woman does not have, either. Because their wives are not in the targeted customer segment of Wal-Mart, it is no wonder that they did not like the store. However, to assume that because executive wives do not like Wal-Mart, nobody will like Wal-Mart is to be blind to the realities of the marketplace.

This situation is like the airline story. If you are in first class, it is almost impossible to see what is happening behind you in coach class. First, the seats and seatbelts are not designed for looking back. Second, the flight attendants typically close a curtain or door between first class and the rest of the passengers.

Those in first class live in a world far better than those in coach:

    • Wider Seats
    • More Leg Room
    • Better food with real dinnerware (these days, coach often does not even get a meal, even if first class does)
    • Better, more personalized service

If you ever counted the seats in a typical airplane, you’d find that there are probably at least ten times more seats allocated to coach than to first class. That’s because the majority of the people flying cannot afford the luxury of first class. The first class passengers may only be able to see each other, but that does not negate the fact that they are in the minority on that plane.

The flight attendants say that the best exit path for you may be behind you. Similarly, the best path for finding your business strategy may be by looking behind you at people who are not living the life of “first class.”

The Principle
Before one can create a great strategic plan, one must first understand the environment in which the plan will exist. If you make the wrong assumptions about the environment, your strategy will probably have bad assumptions as well. One of the most important goals of the environmental analysis is to deeply understand your customers:

    • How do they live?
    • How do they think?
    • What are the fears and anxieties in their lives?
    • What brings them joy?
    • What motivates them to act?
    • Why do they purchase the things they purchase, in the way they purchase?

Granted, one can get some of this information out of consumer research. But typical consumer research can tell only part of the story, especially if the reader of that research has no personal connection to that customer, and thus, no context for understanding the deeper meaning behind the numbers.

True strategic insight comes when one understands the nuances behind the thoughts and emotions of their customers. This can typically only come from spending time in direct contact with the customer.

There are many ways to help build a deeper connection to your customers:

• Get out of the office and go hang out in the neighborhoods where your customer lives. Go into their homes and watch them interact with your product or service.

• Have your company conduct focus groups with your customers and go out and watch them in person behind the two-way mirror. If you feel comfortable with it, perhaps you could do the interviewing yourself.

• Cultivate friendships with people who are less like you and more like your typical customer.

• Join clubs, associations, or organizations like churches, which have a more diverse membership than you would find in your normal business day. This does not include belonging to the local country club. The typical country club is still too exclusive to show you what “average” is all about. It’s like thinking the executive wife is an “average” housewife. Free advice from your country club friends about what the customer wants is typically worth what you paid for it and nothing more.

• Go on sales calls with your sales force to see first hand how your customers interact. Better yet, do some of the sales calls on your own.

• Spend time listening in to the complaints coming into your call center. Better yet, spend time answering some of the calls yourself.

The more contact you have with the customer, the more the consumer research will come alive, because you will have a greater context for understanding it. Your environmental analysis will be more meaningful, resulting in the ability to create strategies that are more relevant.

The best strategies are those that find a profitable way to serve a particular customer segment better than anyone else. Because top executives are so well compensated, they are typically living a lifestyle very different from most of the customers they are selling to (or the customers of their customers, if they are OEM manufacturers). As a result, it is easy for these executives to get out of touch with their customers. When that happens, these executives may make poor assumptions about their customers, leading to poor strategies which would only work if the majority of the population was as wealthy as they were.

Therefore, executives need to find ways to keep in touch with their customers though direct personal contact.

Final Thoughts
One time I was having dinner with a wealthy CEO who made more money from his job in two weeks than the average family would make in an entire year. That would put him well into the top 1% in income, not to mention the money he made from investments and serving on the boards of other companies. Yet he considered himself to be middle class. At this dinner, he was complaining about those whom he called the “rich people”—people who made even more money than he did. At one point in the conversation, he said, “Rich people are out of touch and they don’t get it.”

I looked him straight in the eye and replied, “You’re right. Rich people don’t get it.”

Saturday, April 28, 2007

Too Many Clocks

The Story
My first job out of college was as Assistant to the President of a furniture retailer. This retailer sold a fair amount of grandfather clocks—enough so that there was a separate selling room in the store just for displaying a large number of these clocks.

On one of my first weeks on the job, I noticed that the grandfather clocks were all set at different, and seemingly random, times. I thought I would do everyone a favor and set all of the grandfather clocks to the same time that was on my watch. There were many clocks, so this took a bit of time.

After I finished, the president of the company saw what I had done and told me to go back and reset all of the clocks to different random times. I was a little upset because of all the time it took to set the clocks to the time on my watch, so the president explained why he wanted them switched back. This is basically what he said…

Grandfather clocks are relatively expensive timepieces. As a result, customers want to make sure the clocks keep accurate time. Since the potential customer is not going to stare at the clock all day long to check how well the clock keeps time, the typical customer uses a short-cut. The short-cut is to compare the time on the clock to a reference point to see if the both have the same exact time.

For example, the customer may compare the time on the grandfather clock to the time on his or her watch. The likelihood that I set that clock to exactly the same time as that customer’s watch is highly unlikely. Since the watch and the clock are not exactly identical in time, one must conclude that at least one of them—if not both—are inaccurate. If the clock is not accurate in displaying the correct time, then there is a feeling that the clock may not be accurate in keeping time.

Another reference point would be to compare all of the grandfather clocks in the room to each other. The likelihood that I was able to set all of the clocks to exactly the same time is also highly unlikely. Since all of the clocks would be slightly different from each other in the time they are displaying, the customer could not have confidence that any of the clocks are accurate. The customer would wonder how all these clocks could be accurate if they are all showing slightly different times. In fact, the more clocks in the room, the more likely they would convince the customer that they were inaccurate.

By contrast, if all of the clocks are set at different and random times that are nowhere near the current time, then there is no reference point. The customer then has no reason to assume that the clocks are inaccurate, because there is no known variance. If fact, given the high price the clocks were being sold for, the customer might assume that the clock is built well enough to keep accurate time.

The irony is that the further away the clocks are from the current time, the more accurate they will appear to the customer. I quickly caught on to what the president was saying and immediately changed the clocks back to random and different times.

The Analogy
Strategic planning and clocks both have something in common. Both are used to better understand the time. Clocks are used to help us understand the current time. Strategic planning is used to help us better understand time in the future. Rather than looking at a clock to tell the time, strategic planners look at research. Strategic planning is all about trying to build a more successful future. Research helps planners understand what kind of future they are trying to build that success in. The better one understands the future environment, the more likely one can design the proper plan for that future.

There is an odd relationship between clocks and the perception of their accuracy. If you have only one clock, when you want to know the time, you just look at it and assume it is accurate, without even thinking about it. However, if you want to know what time it is and you have two clocks to check, your feeling of confidence in their accuracy goes down because they will not be exactly the same. Since you do not know which of the two clocks is accurate, a bit of doubt fills your mind. You are less confident that you know the real time, since you now have more options to choose from—the first clock, the second clock or something in-between. If you add a third clock the confidence goes down even more, because there is even more variability in the times being displayed.

The irony is that the more clocks you check, the more uncertainty you have regarding your confidence in knowing what the exact time is. If you have an entire room of clocks, like the store in the story above, there is a feeling that you will never know the exact time. There are too many different options to choose from. By looking at all of the clocks in the room you may feel reasonably confident that the time is, say, approximately two o’clock in the afternoon. However, you will never know when it is exactly two o’clock.

Adding more clocks will not help the situation. Two rooms of clocks will not give you any more of a sense of the accurate time than one room of clocks. You will know no more than you did before—that the approximate time is around two o’clock.

A similar situation occurs when gathering research for strategic planning. After a certain point, the amount of research you have gathered may start pointing to a rough approximation of where the future may evolve. However, it will never give you an exact knowledge of what the future will look like. There is too much variability in the research—they never say exactly the same thing about the future.

Further research in that area will not increase your accuracy. You will know no more than you did before—the same approximation of what the future may look like. Two rooms full of research will not get you any closer to accuracy than one room of research.

The Principle
There is a phenomenon that often occurs in strategic planning referred to as the “paralysis of analysis.” The phenomenon occurs with people who are afraid to take action until they have a certainty of information. Since there is never certainty about the future, these people procrastinate about taking any action. Instead of implementing a plan, they decide to find additional research. The reasoning is that, if one gets additional information, one can make a make a better decision later. Therefore, the person waits for more research.

However, as we saw above, after a certain point, additional research does not increase the accuracy of your prediction. The additional research just keeps roughly circulating around the same approximate direction. If your plan is to continue searching for research until you reach certainty, you will be researching forever, because certainty will never be found. Hence the term “paralysis of analysis.” The person is paralyzed and unable to take any action towards building a better future because he or she is lost in an endless cycle of gathering and analyzing research. While this person is paralyzed, a competitor may not be, which gives the competitor the opportunity to win a better position in the future than the paralyzed one.

Planning is not an exact science. There is always a little bit of uncertainty. Action will need to be taken with less than perfect information.

Going back to the clock story, most people are able to function and take appropriate action in the current moment even if they know that the clocks in their life are not 100% accurate. As long as one knows that it is approximately two o’clock, then that is good enough to take action. This same attitude needs to be applied to thinking about the future. One needs to be able to take appropriate actions towards the future even if one knows that the research possessed about the future is not 100% accurate.

There are three reasons why any additional research beyond a base level will never achieve greater clarity about knowing the future:

1. Consumers are Unreliable in Predicting What they will do in the Future
2. The Future is Not Destiny
3. By the Time Something is Completely Knowable, it is Too Late to Make a Meaningful Strategic Impact.

These are all discussed below.

1. Consumers are Unreliable in Predicting What they will do in the Future. History has shown that consumers are terrible at predicting what they will do in the future, especially as it relates to activities surrounding situations they have not yet encountered. As a result, research that asks your consumers about what they will do in the future has significant limitations. Sony is proud to point out that no consumer has ever asked for any of the myriad of successful inventions they have introduced. If Sony had waited for research to tell them what to invent, none of those items would have been invented. Rather than doing rooms full of specific consumer research, one needs to rely more on generalized research about the basic needs and desires of your consumers and then make inferences about how your plan would play to those basic needs and desires. Consumer research about the future will never give you the specific answer about what to do. At best, it will tell you what general areas or qualities to focus on.

2. The Future is not Destiny. Because I have spent decades studying the retail industry, I am often asked my opinion regarding future trends in retailing. When asked about a particular retail trend, I often respond by saying, “I will not answer your question until you answer a question for me. How aggressively do you think Wal-Mart will be in adopting this trend or in trying to block this trend?” The point I am trying to make is that the future is not written in stone. The future is not an unalterable destiny to be discovered. Instead, the future is changeable. Wal-Mart is so big and powerful, that the decisions it makes can significantly alter the way a retail trend evolves. If Wal-Mart decides to go after a particular business with a particular format, then the trends surrounding that format will be larger and occur faster than what would have occurred if Wal-Mart had not participated.

The same principle applies to you. Since the actions of you and others can alter how the future unfolds, no amount of research alone will ever be able to accurately predict the future. Rather than spending all of your time analyzing two rooms of research, it is better to have spent some of that time considering how you can use your influence to alter the future. Rather than only looking for ways to discover the future, look for ways to create the future.

If the future were 100% certain, then there would be no way to alter it. If one could not alter the future, then one could not alter his or her level of success in that future. If that is the case, then there is no point in planning. It is precisely because the future is not destiny that makes planning so important. Your strategic plans can alter the course of the future. The better your plans, the better your future.

3. By the Time Something is Completely Knowable, it is Too Late to Make a Meaningful Strategic Impact. Often times, the most successful plans are ones in which your company is the first to make a meaningful impact in a new space. If you wait until the space is completely defined and understood before entering, it is often too late. Starbucks rapidly expanded into the new space it created well before it was completely understood. There were no books describing in detail the types of coffee shops that Starbucks invented. In fact, the conventional wisdom based on the research of the time was that consumers wanted their coffee to be inexpensive and convenient. Starbucks was expensive and time consuming.

If you are waiting for all of the research to be written down in complete detail in a book before taking any action, you will be too late. The only way to get research in that much detail is to wait until the market is already fully developed. By the time it is fully developed, your ability to enter and win in that space is severely limited. It is better to get into a new space early and learn via experimentation rather than wait for all of the facts before taking any action.

With all of that said, this is not an excuse to avoid doing any research. Research is still an important part of any strategic planning process. However, the goal should not be to gather rooms full of data in search of exact information. The goal is to gather enough information to get a general impression of how the future may evolve and then start crafting your actions.

Strategic planning deals with the future. Just as clocks help us understand the current time, research helps planners understand future time. Gathering rooms full of clocks will not give you certainty of the current time. Neither will rooms full of research give you certainty of the future. There are diminishing returns to time spent getting and analyzing research. Just as you can have too many clocks, you can have too much analysis. Gather enough to get a feeling for the general trends and then supplement the research with activities and experiments. Otherwise, you may fall into the trap of “paralysis of analysis.”

Final Thoughts
General George S. Patton is famous for saying that “A good plan violently executed now is better than a perfect plan executed next week.” The goal of strategic planning is not to create a perfect plan. The goal is to create a better future. This requires more than just planning. It requires doing. Good research and good planning can help you reduce the risk of doing the wrong thing. But if you never get around to doing anything because of the search for the perfect plan, the plans do you no good.

Wednesday, April 25, 2007

Talk it Up

If someone tells you that they work in marketing, they really haven’t told you much. There are too many different types of careers which fall under the title of marketing.

For example, the person may be in personal selling or in a sales department and call that marketing. Or the person could be in advertising and call that marketing. Perhaps their position is in the field of brand management. That is often called marketing as well.

There are many other distinctly different job activities which often get classified as marketing as well. It can get very confusing. Are these people apprehensive or ashamed about telling people what they do? Does “marketing” make their job sound more glamorous?

When someone tells me they are a CMO, I’m sure to them it means Chief Marketing Officer. To me, it means Chief Mystery Officer—at least until I get to know them.

There’s something about marketing that draws people to it, like bugs to a light. Not only do many people like to describe their job in terms of marketing, an even greater number like to talk about marketing and advertising, even if their job has nothing to do with it.

I don’t think I’ve ever worked for a company where there wasn’t a majority of executives who thought of themselves as “a bit of an expert” in advertising. And even if they didn’t think of themselves as experts, they always seemed to have an opinion about the quality of the company’s advertising and were willing to tell you all about it (even if you didn’t want to hear it).

Developing and implementing strategy tends to require a lot of talking across multiple areas of the business. Unfortunately, it is common these days for people to not be nearly as eager to talk about strategy as they are to talk about marketing and advertising. So if talking is a key part of strategic planning, and people would much rather talk about marketing/advertising than talk about strategy, then perhaps one should take advantage of the willingness of people to talk marketing and use that as a hook to begin a conversation which you can eventually steer to strategic issues.

This is the second in an occasional series of blogs on “Stealth Strategy” (For the first blog, see "Minutes Last Forever"). The principle here is that many firms no longer show an interest in doing a formalized strategic planning process. They would rather spend time talking about and doing other things. If you overtly try to direct their attention to strategic issues, their radars will pick up on that and they will try to shut you down. Therefore, if you want to get a strategic dialogue going, you have to come in under the radar and get the discussion going in a stealthy manner. Advertising can be a tool to get in under the radar.

Since people love to talk about marketing and advertising, one can use that interest to strike up a conversation. Then, though a series of questions, one can turn a critique of advertising into an effective critique of the company’s strategy (without ever mentioning the word “strategy”). Although these discussions might not directly lead to a formalized change in strategy, they may lead to a change in the advertising message.

If you do your job properly, you may get the advertising message changed to talk about your product or company in a way that is more strategically sound. Then, once you’ve announced to the world this strategically sound message through advertising, it pretty much commits the company to delivering on that message. Therefore the company is compelled to operate the company around the strategic promise in the advertising. The end result is that people are acting on delivering an improved strategy, even though no formalized strategic planning process was used.

This is not that far-fetched. Most of marketing involves some form of communication with the customer in order to influence behavior which results in sales. Much of strategy involves developing a position for your firm/product which is desirable, unique and differentiating, followed by:

1) Building an infrastructure to deliver that position; and

2) Getting customers to believe that you own that position.

The goals of marketing and strategy are not that dissimilar. The most effective marketing message in the long run is a message based on a solid positioning in the marketplace. Good positioning is the best way to create profitable sales. Without a strong position, marketing must resort to deep price concessions or extra “goodies” to induce sales, which significantly reduces profitability. With a strong position, one is better able to create demand for your brand without these costly concessions.

Therefore, if you want to improve marketing, one needs to develop strong market positioning. Strong positions come from doing the work of strategy, even if you call it marketing. And then, once the position is developed under the guise of marketing, it is only a short leap to turn the discussion towards building the proper internal business capacities in order to deliver on the promise of the advertising.

Let’s take an example of how this could work. Let’s assume that you are walking down the hallway and you cross paths with a top level executive. The executive says to you, “Say, did you see our new ad on TV last night? I thought it stunk. What did you think?”

You could respond in many ways, depending upon your strategic agenda. For example, if you are trying to get a better strategic focus around who your customer should be, you could respond by saying, “The problem I had with the ad was that I couldn’t figure out who we were targeting that ad towards. Who do you think is the right type of customer to be targeting?”

If your goal is to create a unique position for the company, your response could be, “The problem I had with the ad was that you could have taken our name off of the ad and put any one of our competitor’s names into the ad and it still would have made sense. The ad did not give a compelling reason to choose us over any of those competitors. I think our ad needs to explain the ways in which we are uniquely superior. In what ways do you think we are uniquely superior, so that we can come up with a stronger advertising message?”

If your goal is to get the company to think about how the external trends are changing the landscape, requiring a need for a new strategy, you could respond something like this, “What was most disturbing to me was when I compared our ad to what others are doing. Their ads seem to be more in tune with where the trends are heading. Did you see the ad from company “X”? We normally don’t think of them as a competitor, but their ad is clearly changing the way people look at all kinds of options, including what we offer. If their ad gets people to look at the world in this new way, we could be in serious trouble. Don’t you think we ought to reassess our ad message in light of this?”

By now, you should be getting the idea. If you couch your strategic comments in an advertising context, they can appear less intimidating, and people may be more willing to talk about them. The talking can lead to changes in advertising which can be used to get complementary changes in the rest of the organization. For example, if you succeed in getting the advertising message to express the proper strategy, the next time someone asks you about your thoughts on the advertising, you can say,

“I love the message in the ad, but I’m afraid that our operations are not quite living up to the promise made in the ad. If we could just tweak a few operational issues, I believe the advertising message would be even more effective.”

If advertising is the subject that gets the talking going, then take your strategic ideas and “talk them up” in the context of advertising.

Because some people have had bad experiences with formalized strategic planning in the past, there can be some barriers to getting companies to discuss strategy. Since strategy is closely related to marketing, and since it is common for executives to be more willing to talk about marketing than strategy, marketing can be used as a tool to get strategy implemented. Just talk up strategy in the context of advertising (and don’t mention the “S” word).

Sometimes, the first person one should be talking to is the CMO. If you can get the marketing team as your ally in this process, you can use formal marketing meetings as a platform for holding formal stealth strategy meetings.

Monday, April 23, 2007

Minutes Last Forever

In ancient times, countries went to war in many ways like today’s society plays sports. There was a specific time each year when war was in season. The winner of the annual warfare season took his plunder and things were settled until the next year.

Even the Bible speaks of this phenomenon in II Samuel 11:1, when it says, “In the spring, at the time when kings go off to war…” or in 1 Kings 20:22, when it says, “Afterward, the prophet came to the king of Israel and said, ‘Strengthen your position and see what must be done, because next spring the king of Aram will attack you again.’”

Just as the Old Testament of the Bible is the Israeli account of their battles, other Kings kept records of their battles.

I saw a video of an archaeologist who was an expert in reading the ancient Egyptian Hieroglyphics. Every year in the ancient hieroglyphic records were the accounts of the annual warfare of the Egyptians, spoken of in the most favorable manner. It reminded me of the National Football League’s NFL Films division, which at the end of the year produces a film for every team in the league, giving an account of the past year’s successes. Even the teams that did extremely poorly get a positive slant, with the films saying things like “It was the beginning of a new era” or “The turnaround has begun.”

What was interesting in the documentary on the Egyptian hieroglyphics was that at the time when many biblical scholars believe that Moses would have lead the Israelites out of Egypt, the hieroglyphics did not mention a single battle for three years. It was the only time when there was not a single mention of the annual warfare. There is speculation that the defeat to the Israelis at the Red Sea was so bad that there was no positive spin that the Egyptians could place on the event, so that only left the option of silence.

So, while the Bible mentioned a great victory by the Israelis that wiped out the great Egyptian army in the Red Sea (and may have required a couple of rebuilding years before the Egyptians were ready to battle again), the Egyptian version was unusually silent on the subject. I guess the records of what happened depend upon which side you are on.

They say that the victors write the history. Although the times of the battles of ancient Egypt and ancient Israel are long gone, and the eyewitnesses are long dead, their records still remain, thousands of years after the fact. These records give us our perspective on what happened.

In the business world, a similar phenomenon can happen. There is a hustle and bustle to the fast pace of activity. At times it can all sort of blur together. Memories can get a little fuzzy on the details. In fact, over time, memories of specific events could fade away. Key players may leave the firm. What does not fade away, however, are the records of what occurred. A skillful strategist can use the lasting power of documentation as a tool to help mold and direct strategy long after the particular event is over.

This is the first in an occasional series of blogs on “Stealth Strategy.” The principle here is that many firms no longer show an interest in doing a formalized strategic planning process. Given some of the bad strategic planning processes that I’ve seen over the years, I can understand why people would want to walk away from these processes. However, just because there are bad strategic planning processes does not mean that companies can afford to stop doing strategic thinking.

If you do not think about your company strategically, your competition will do it for you, and you will not like the results. So the goal is to try to get a company to think strategically without setting off those negative feelings about strategic planning in some people who would want to shut down the process. That is why I call it stealth strategy—it is getting under the radar of anti-strategists and bringing strategic thinking into the business process without people realizing that they are doing strategy.

In many companies, the places where a lot of decisions are made are in committee meetings. Therefore, if you can get these meetings to think strategically, you are by default getting the company to act strategically, whether they realize it or not.

Therefore, one might think that a good way to get a company thinking strategically would be to try to head up these committee meetings. Unfortunately, people in business tend to understand power and they would see you in a power position if you ran the committee. The radar of the other committee members would be very active in monitoring your activities in order to keep your power in check. A committee leader cannot sneak something in, because they are the most visible member. Besides, in an effort to monitor the meeting, the committee leader often needs to have an appearance of being unbiased in order to get all of the members of the committee to participate. Therefore, the committee leader may be the least able to direct a committee to think strategically.

Fortunately, there is a more powerful alternative. Volunteer to take the notes and write-up the committee meeting minutes. Most people hate doing that job and will gladly give it to you. Being the writer of the notes is not a position people typically feel threatened by, so their radar will not be active against you. Yet, as we saw in the story above, the documentation of an event outlasts the memory of the event and becomes the official record of what happened.

In the story, depending on your perspective (Egyptian vs. Israeli), the document writers saw the world in a different way, and their record reflected that point of view. These points of view then became the official points of view. As the writer of the meeting minutes, you can record them from a strategic perspective and make strategy the key thrust in what gets taken away from the meetings. This, then, becomes the official thrust of the meetings.

If your committee meetings are similar to most of the ones I’ve seen, there is a lot of confusion going on. Multiple side conversations may be going on at the same time. Decisions may not be entirely clear on what exactly was decided or exactly what everyone was specifically to be held responsible for doing. A lot of verbal back and forth may occur that drifts around a topic and never really gets summed up well at the meeting. Some people may be bored and not really be paying close attention. Others may be using the committee to draw attention to themselves in an attempt to gain an advantage in office politics that has nothing to do with the topic at hand. That is why I have often heard people come out of committee meetings and make a comment to a colleague something like this, “What exactly just happened in there?”

Here, then, is your great opportunity. Because of the confusion, there is a need for someone to summarize what happened into a logical flow so that people understand specifically what was decided and specifically what tasks were assigned. If you take a strategic perspective to your summary minutes to the meeting, you can frame the discussions into a strategic context and explain the conclusions as strategic initiatives (avoiding the word strategy in your summary). The nature of the assigned tasks can also be framed as strategic initiatives.

Over time, people will forget the details of the meeting, and your minutes will be the official recollection. They can be circulated to the bosses of the attendees. Since the bosses were not at the meeting, the only official record of what happened are your recollections in a strategic context. By reading the minutes, you are then influencing the way these bosses think strategically about the committee issues.

At subsequent committee meetings, you can refer to the minutes to help direct further thinking at a strategic level. It is not as threatening, because you are not personally demanding it, but merely saying, “Didn’t this whole group agree last week to think about this topic in such-and-such a way?” Better yet, if you have an accomplice in the committee, you can play the part of the lowly writer, and let your friend speak up for the minutes.

The goal here is not to deceive the group or to lie about what happened. They will catch on to that and make you change the minutes. Rather, the goal is to slowly, meeting by meeting, use a strategic perspective to the way you summarize the activity, so that the group is influenced to approach the objective at hand in an every more strategic manner at future meetings. The more you frame the problem as a strategic issue, the more the committee will need to resolve the problem via strategic thinking, as long as it is done in a stealthy manner.

Years later, some of the official records of that meeting may still be influencing the strategic approach which the company takes to an issue. Remember, committee meetings may only last an hour or two, but the committee minutes may last forever. We still have the hieroglyphics and the Biblical accounts.

Because bad prior experiences may have caused executives to be turned off by formalized strategic processes, one must often turn to alternative approaches to get a company to think and act strategically. One method is to use already in-place committee meetings as a strategic forum rather than official strategic planning meetings. The best way to do this is usually not by heading the committee, but by being the keeper of the committee meeting minutes.

To paraphrase an old friend of mine, “What happens during a committee meeting is not nearly as important as the posturing which takes place just prior to the meeting and the summarizing and record-keeping which takes place just after the meeting.”

Sunday, April 22, 2007

"We Suck Less" Is Not a Strategy

I worked with a retail company one time that had two problems:

    • It’s main product was becoming obsolete, with worldwide demand dropping at a significant rate.

    • It charged more for the product than just about anyone else, without providing any meaningful differentiation to justify the higher price.

A strategic plan was developed to radically transform the retailer into a relatively new concept—one with potentially high growth, but also high risk, because the concept was unproven. The president of the company decided that the risk of transformation was too high, so he decided instead to fix the current business model.

He built a team of people who worked very hard with him to improve the company. They made the stores nicer and more inviting. They added a little bit of variety to the product offering. They added some efficiencies behind the scenes. The stores were very nice.

This plan to “fix” the chain, however, had a couple of serious problems:

    • The chain was still highly dependent on a product that was becoming obsolete.

    • The chain still charged more for the product than just about anyone else.

    • The changes overall increased the cost of doing business without increasing demand for the product.

It didn’t take long for the employees to realize that taking an obsolete, non-competitively priced product and putting it in a nicer store would not solve the problem. In private, they referred to the president’s vision as the “we suck less” strategy. Yes, the stores were better, but the proposition to the customer still “sucked.”

Needless to say, that retail chain is no longer in existence today.

Over the course of time, many businesses find themselves in a situation where their current business model becomes broken. Sometimes the threats to the business model come from the outside. Take, for example what the growth of the internet and digital Web 2.0 capabilities have done to destroy many traditional business models, from industries as diverse as newspapers, magazines, travel agencies, stock trading, advertising agencies, the music industry, or insurance, just to name a few.

Other times, the threat comes from the inside. Lack of controls, insufficient investment, quality control issues, not shifting with your customer’s changing needs, and poor service can also destroy a company’s business model.

Once one realizes that there is a problem, one’s first inclination is to try to fix the problem. Fixing usually involves trying to make the bad things better. Operational excellence or getting to parity with the best in the business becomes the new goal. Eventually these goals to get better are treated as the company’s strategy.

Getting better is not a real strategy. Becoming “less bad” does not make you a winner. To say you “suck less” does not give potential customers a compelling reason to prefer you over the competition. In the story above, all that getting better achieved was to raise the cost structure and speed up the chain’s demise.

In my prior blog (see “Tearing Down The House”), I talked about how it can be a mistake to tear apart a good strategy and throw it away, just because it may have a few flaws in it. The tragic consequences of such a major disruption can cause more problems than the flaws that one was trying to fix. Small changes which reinforce the current strategy would tend to be a better course of action in those cases.

This principle, however, only works if a company is already on rather solid ground with respect to its market positioning and consumer acceptance. As you may recall, the companies I referred to in the prior blog were JC Penney and Kohl’s—two companies already on rather solid ground. If your company is poorly positioned, has a negative image, or is seen as an inferior alternative to someone else, then this principle does not apply.

In those cases, just “getting better” is not enough. Making a rotten apple less rotten does not make it tasty. In a prior blog (see “Rule of 1.5”) we talked about how industries tend to consolidate to a point where only one or two players in a given space are strong enough to earn a decent return on investment. If you improve your position from being 5th best in a space to being 4th best, you are still not good enough to unseat the leader.

Your financial woes will not go away with that type of effort, because you are investing in an area where the marketplace will not give you sufficient credit to justify the expense. The question in the back of their head will be, “If you are as good as you say you are, then why are you not the leader? Since you are not the leader, it must not be as good as you say.” Their conclusion will be that even if you now suck less, you must still suck.

Your only real alternative is to change yourself into something different. You need to find a different, neighboring space where you can reposition yourself as the leader. This is not about taking who you are and making better. This is about taking who you are and making it different; making it uniquely superior in some fashion, based on a different mix of attributes than those used in the prior space. Instead of being about improvement, it is about transformation.

For example, if low price is the defining attribute of the segment you are in and you have a relatively high cost structure, you can never effectively win in that segment. However, there may be a neighboring segment where there are a sufficient number of consumers looking for something similar, except that quality and service is more important to them than price. If no business currently has a solid lock on the quality/service angle, then perhaps you can transform yourself and migrate to that new position and become #1 in that neighboring space.

The idea is to change who you are compared to in the minds of the customer (and on which attributes they compare you). Rather than having people compare you to others who are better at providing lower prices, get them to compare you to others who are inferior at providing quality/service.

In the example used in the story above, just such a proposal was made. A strategy was developed to transform the retailer from being product-based (where it had a distinct disadvantage) into something that was more lifestyle based (where it had an opportunity to invent a new type of retail format in relatively uncontested space).

Unfortunately, this proposal was rejected and instead the “we suck less” alternative strategy was put in place. Why? In the near term, transformational strategies tend to require more resources (time, money, people) and have a longer payback. There also appears to be greater risk, because one is moving away from the historical foundation of the business. By contrast, an incremental improvement program can look more practical for the immediate future.

Unfortunately, you cannot indefinitely postpone the inevitable, and the “we suck less” approach never leads to long-term success. Usually, this harsh reality comes sooner than you think (see “The Room is Smaller than you Think”). In the story above, it only took two years under “we suck less” before the company was sold at a loss.

In reality, the higher risk is not in transforming the company. Instead, the higher risk is in the “we suck less” strategy, because it nearly always fails—and usually fairly rapidly. At least with a transformation strategy, you have a shot.

JC Penney was not always the successful company it is today. There were many lean years when some people thought the company might not survive. It was a mediocre performer at the low price end of the fashion continuum. However, instead of trying to become better at the Price First-Fashion Second space, it decided to transform itself into what it saw as a better space: Fashion First-Price Second. There were a few tense years in the middle of the transition, but now that it has successfully crossed over to the other side, JC Penney is showing great results and is back on an aggressive growth strategy.

Once, I was working with different company that had an inferior position in the marketplace. I was trying to convince the President of the Company to take on a transformation of the business, but his basic response was “I don’t have time for that now. I’m too busy trying to fix the company.” At that point, those words “we suck less” came back to my mind.

Unless you are already a leader, getting better is not a winning strategy. Being good at what you do is merely the minimum table stakes needed to get in the game. If you want to win, you must go beyond merely being good (or even as good as the industry leader) and seek out points of differentiation and superiority.

It takes patience to transform a company. Not all stakeholders have that kind of patience. That is one of the benefits of going private, which many firms are doing. In the private environment, it is often easier to push through a transformational agenda.

Thursday, April 19, 2007

Tearing Down the House

Bob and Joe each had a house they wanted to sell. Bob was a little bit concerned about the condition of his house. His house had a couple of leaky pipes. Bob’s solution to the leaky pipe problem was to tear down the whole house and build a new one in its place. Bob was very careful about supervising the construction of the plumbing. After all, he did not want to repeat the leaky pipe problem. However, he was so focused on the plumbing, he failed to notice that the electricians put in faulty wiring. The faulty wiring would leave you in the dark at night.

Joe had a couple of problems with his house, too. But instead of replacing the house, he brought in a repairman to fix the problems. Then Joe did some research on home values. He discovered that there are certain key areas where one can spend just a little bit of money and get a dramatically higher resale price. So Joe spent a little bit of money on landscaping the front yard (increasing the “curb appeal”) and a little money to upgrade the master bathroom.

When it came time to sell the houses, Bob was in a bind. He couldn’t find anyone who wanted to buy the house he just built for what it cost him to build it. Part of the reason was because of the faulty electricity. Part of the reason was that if someone wanted a brand new house, they would prefer to design the home themselves. He took a big loss on the sale.

Joe made out much better. Because his house had been around awhile, Joe had built up considerable equity in the property. In addition, property values had risen over that time. The improvements Joe made increased the value of the house at a much higher rate than what the improvements cost. Joe made a good profit on the sale of his house.

Businesses can often be like old houses. They aren’t perfect; they have a few flaws that have crept in over time. Sometimes, leadership will look at these flaws and see the business as “broken.” To fix the business, they essentially tear it down and start over again. This could include actions like:

• Eliminating key members of management
• Getting a New Ad Agency
• Throwing away the old strategy and designing a new one
• Going after new customers
• Selling off lines of business
• Changing the core business model
• Etc.

This type of response would be similar to the actions Bob took on his house. He saw some problems and decided he needed to replace the whole house. This drastic response by Bob did not solve his problem. It only created other problems. The same can be true when companies see a problem and decide to revamp everything. Some examples of problems which this could cause include the following:

• By eliminating too many people, a lot of the intellectual capital of the company could be lost, leaving you in the dark on how to run parts of the business. They might go to competitors and use the knowledge against you.

• Too many changes to marketing and positioning can confuse the public as to what you stand for, and you end up standing for nothing.
Even though there may have been problems with the strategy and the old business model, there is no guarantee that the new model won’t have equal or worse problems of its own. It is untested for your business.

• All of these changes can be very expensive and may not prove to have a positive return on investment.

Conversely, Joe took a different approach to his situation. He fixed the problems he could see. Also, instead of tearing down the house, he prudently improved the house in ways that had a good return on investment. As a result he made out just fine.

The business analogy to what Joe did would be to stick with who you are and what your strategy is and just do two things:

• Repair the obvious blunders.

• Invest in activities which enhance the current strategy in a cost effective manner.

This process minimizes confusion in the marketplace and in fact may help strengthen one’s position in the consumer’s mind. Intellectual capital remains, and you do not place a lot of new unknown variables into the mix which would increase risk.

Too often in business, I have seen people eager to take out the axe and try to chop down much of what the business stood for and start over. This is particularly true when new management comes in. The heritage from the old regime is eliminated to make room for the entirely new vision of the new management. Often times, the better approach is to be like Joe—fix up a few problems and then build upon the old foundation to make it even better.

The principle here is the mathematical concept of compounded leverage. The idea, in simple terms, is this: A few small changes to the metrics in one’s income statement and balance sheet can make a huge improvement to the bottom line. There are three primary reasons why this is true. First, in most businesses, net income as a percent of sales is much smaller than many other lines on the income statement. Therefore, a small improvement to a large line in the middle of the income statement creates a proportionately larger percentage improvement to the smaller net income line.

Allow me to illustrate with an example. JC Penney and Kohl’s recently released their 2006 annual reports. At JC Penney, the year over year increase in gross profit percent (before expenses) increased from 38.3% to 39.3%, an increase of 1 full percent (or 100 basis points). Because most of their costs remained similar as a percent of sales, the improvement in gross profits fell to the bottom line, where net operating income grew from 8.7% to 9.7% (the same 100 basis point improvement).

However, because the Gross Profit line is so much larger than the Net Operating Profit line, it only took a small improvement at the top to get a huge improvement at the bottom. For example, at JC Penney, to get from a gross profit of 38.3% to 39.3% requires an improvement of only 2.6%. This little change at the top, however, caused the net operating percentage to increase by 11.5%.

A similar situation occurred at Kohl’s Department Stores. Their 2006 gross profit was 36.4% versus 35.5% in 2005, an increase of 90 basis points. Because Kohl’s made some slight improvements in expenses as well, net operating income increased 110 basis points, from 10.6% to 11.7%. In the case of Kohl’s, a 2.3% improvement to gross margin combined with a 1.1% improvement in operating costs (as a percent of sales) created a 10.5% improvement in net income (as a % of sales).

The second reason why small changes at the top can make bigger changes at the bottom is because multiple changes at the top can have a compounding impact upon each other. For example, if you can improve both gross margin as a % of Sales, as well as increase sales, the two work together to make gross margin dollars much larger than if only one of the two factors (sales or gross margin %) was improved. In essence, you have made a larger percentage slice of a larger pie.

In the case of Kohl’s we saw that gross profit as a % of sales increased 2.3%. What I failed to mention earlier was that at the same time, sales for 2006 at Kohl’s increased by 16%. As a result of the compounding of these two factors, Kohl’s gross margin $ increased by 18.7% and the operating margin $ increased by 28.2%. So, as you can see, a combination of smaller improvements at the top can multiply the benefits at the bottom.

The third reason why small changes can have a big benefit is because some tactical improvements impact multiple lines. For example, if a retailer found a way to run its business using slightly less inventory, it could gain improvements on many lines in its income statement, balance sheet, and cash flow, including:

• Lower operating costs at the store and the distribution center due to processing less inventory.

• Fewer reductions to gross profits caused by large price markdowns to get rid of excess inventory, since you now have less excess inventory.

• Less working capital tied up in inventory (potentially reducing debt and interest)

• Better sales from having fresher merchandise on the sales floor (due to increased inventory turnover).

As a result, the small improvement to inventory could end up having a huge impact on free cash flow due to its ability to impact multiple lines and compound the benefit.

Therefore, it is not always necessary to abandon a strategy and start from scratch in order to make significant improvements. Sometimes all it takes is renewed efforts around a handful of small improvements to the current strategy. This approach is often far less risky and usually requires less time and money to create the positive impact.

Not all problems require the abandonment of the strategic path one is on. Often, great improvements can come by just focusing on a few key initiatives which modestly improve a few metrics while reinforcing the current strategy.

Albert Einstein allegedly said that “the greatest force in the universe is compound interest.” The compounding of small improvements throughout the income statement, balance sheet and cash flow can have a similar type of power.

Tuesday, April 17, 2007

Mission: Unpredictable

Back when I was younger, I loved to watch the old TV show “Mission: Impossible”. Even though the plot was pretty much the same from week to week, I guess I liked that plot, because I kept tuning in.

Essentially, the plot every week went something like this: There would be a really evil person. This evil person would have very predictable patterns of behavior. Because the behavior was predictable, the Impossible Mission Force could devise a plan to use that predictability against the evil person. The evil person would naturally fall into the trap set up by the Impossible Mission Force, because the person’s predictable behavior would automatically lead them into it.

Every week, I would yell at the evil guy in the TV to stop and do something different for a change. I would try to tell him to quit being predictable and to break out of his routine. Yelling at the TV didn’t do much good. The evil person would remain predictable and the Impossible Mission Force would accomplish their mission.

The problem with being too predictable is that—-just like in Mission: Impossible-—people can use that against you. For example, I one time had a job developing the advertising strategy for a retailer. I soon discovered that most retailers are very predictable in their advertising. They tend to advertise the same items in the same way during the same exact weeks of each year.

Therefore, I mocked up an annual calendar which predicted what I thought each major competitor would do in their advertising on each week. Then I called together the top merchandising management and said, “Assuming that this is what the competition is going to do next year, what is the best counter-strategy for us?” It led to some lively discussions and some big changes to our own advertising calendar.

For example, most of the competitors had their biggest Christmas toy sale on a particular week. We decided to go out one week before that in order to capture the demand first, as well as to avoid the risk of them having lower advertised prices on the same items we advertised on the same week. Similarly, there were other times when everyone else was moving in one direction, and we moved in a different direction, to avoid dilution of demand among too many stores at the same time and to avoid the risk of pricing the same item too high in the same week.

At the end of the process we had a program that optimized our position relative to the competition—all because they were too predictable. I could not have been as successful had the competition been less predictable.

Strategies are developed to help you find the proper direction for your business. The goal is to consistently move your business in the direction of your strategy. However, there is a difference between being consistent and being predictable. Being consistent means that you are not wasting effort, because all of your actions are efficiently moving your firm in the same general direction.

Being predictable, however, means that the enemy will know exactly which path you are on, so that they can ambush you. The evil people on Mission: Impossible would always get caught, because they did not deviate from their predictability. The same can happen to your business if you become too predictable. This is not to imply that your actions should be random. Consistency is still important.

You don’t want to mix it up so much that people are confused about what you stand for, either. It is hard enough trying to develop a strong position in the minds of the customer even when your message is clear and consistent.

However, without a little variety in your actions, you can become dull and uninteresting to your customers. Worse yet, you can lose your edge and become vulnerable to effective attack from your competition.

In the Art of War, by Sun Tzu, he refers to this principle using the terms Cheng and Ch’i. Cheng activities tend to be orthodox, expected and predictable. Ch’i activities tend to be unorthodox, unexpected and unpredictable. Sun Tzu believed that to be effective in war, one must continually alternate between the Cheng (orthodox) and the Ch’i (unorthodox).

If all you do is the predictable (the Cheng), then the enemy can prepare and counteract it. If all you do in the unpredictable (the Ch’i), then your unpredictability in fact becomes predictable and the enemy can prepare for it and counteract it. Therefore you need random alternating approaches between the two—enough Cheng so that you get people thinking about you in a particular way and enough Ch’i so that you can take advantage of hitting them in area where they are not prepared.

According to Sun Tzu, you engage with Cheng, but win with Ch’i.

How does this apply to business? Think of Cheng as activities which reinforce your core strategic principle. For example, if your strategy is based on superior quality, then actions to promote quality are your predictable Cheng. Similarly, if your strategy centers around price or service, then price or service activities become your Cheng. You cannot abandon Cheng without abandoning the core position upon which your strategy rests.

Think of Ch’i as an action which provides an unexpected benefit to your offering which is in addition to your core benefits. For example, if you are known for price, yet can occasionally throw into your mix some great quality and service and still keep the low price, then you have upset the mental picture of your firm to be much more than mere price, taking people by surprise.

It is a mental game, where you try to build up enough expectations in one area so that your unexpected actions can have the maximum impact. With your enemy the goal is to unexpectedly gain market share at their expense while they are looking the other way.

With your customer the goal is to pleasantly exceed their expectations. If you always try to exceed expectations in the same direction, then the customer will just increase their level of expectations on that attribute, making it ever more difficult to just meet their ever increasing expectation levels. However, if your excesses come from an unexpected direction, then they cannot be overanticipated by the customer, so they remain true pleasant excesses over expectations.

When Home Depot started out, everyone expected them to have a large selection and low prices, because they were a big box retailer. And in fact, they did have a large selection and low prices. However, when customers entered the store, they were surprised to find out that Home Depot had hired experts in the field of home improvement who could give as much useful advice as that great (but expensive) local hardware store (in fact, many of the original Home Depot employees used to own or operate some of those local hardware stores). This was the unexpected surprise which created success. To paraphrase Sun Tzu, engage with big box tactics (price, selection) but win with surprising hardware store service.

It wasn’t until Home Depot started taking away the surprise that they started to slip. In the name of cost cutting (an expected big box attribute) they replaced these expert full-timers with part-timers who had less expertise. Now, Home Depot was just a boring big box store—good on expected attributes, but nothing more. Suddenly Lowes had more of the pleasant surprises. And guess where the buzz went…to Lowes.

In home improvement centers, being good at the core big box attributes (price, selection) was expected by the customer. Having them did not cause you to win (although not having them could cause you to fail). Winning came from the surprises—unexpected benefits not typically associated with a big-box retailer. To Frank Blake’s credit, as new CEO of Home Depot, he is trying to bring back the pleasant surprises.

I used to know a grocer who operated huge, high volume stores known for their low prices. Unfortunately, they also were sometimes known for having long checkout lines. If the lines got too long, the owner would sometimes break open some packages of cookies and make sure that the people in line had the opportunity to receive a free treat. He did it often enough to make a pleasant situation out of an unpleasant one, but not all the time, which would have made it merely expected, rather than pleasantly unexpected. He would engage on a regular basis with low prices, but win with the occasional surprise of treats.

If a customer knows that a store is doing exactly the same thing all the time, there is little reason for making an extra trip to the store. However, if the store is always doing some little thing a little bit different, people may be inclined to come to the store more frequently just to see what they are up to.

If a business finds a winning tactic and then repeats it all of the time, competition can just copy it and negate the benefit. However, if the business continually changes the surprise, competition cannot negate them, because by the time they find out what the other business is up to and begin to copy it, the other firm is on to something else.

Although a strategy needs to consistently reinforce the core attribute behind the strategic position, this is not enough. It is just the table stakes to be able to play the game. To truly win, this consistent reinforcement of the expected must be enhanced with a variety of pleasant surprises from unexpected directions.

Becoming too predictable allows competition to negate your benefits (as I did with the advertising strategy) and allows your customers to become bored with you. Don’t be like those evil people on Mission: Impossible or maybe I’ll have to yell at you like I used to yell at the TV set.

To save you time, I will unexpectedly not have a final thought today.

Saturday, April 14, 2007

The Room is Smaller than You Think

The Story
There’s an old joke about a man who is going to paint the wooden floor in one of his rooms with varnish. He begins in one corner of the room and starts painting the floor in a diagonal direction towards the opposite corner. Because the job is rather dull and repetitive, the man just moves along quickly, not thinking much about what he is doing.

As a result, before the man realizes it, he has painted himself into a corner at the opposite end of the room with no place to go. He cannot walk out of the corner without stepping into the fresh varnish he has just painted and thereby ruin his work. He cannot stay in the corner and wait until the varnish dries without suffering damage from breathing the varnish fumes. He is stuck in a bad situation that’s only going to get worse.

It’s too late to go back and there is nowhere in which to go forward. The man is stuck. What is he to do?

The Analogy
Strategic Planning is a lot like painting that floor.

The goal of strategic planning is to provide a path to get from where you are today to where you want to be tomorrow. If you do not pay attention to where you are going, you may end up in a place where you do not want to be. You may find yourself “painted into a corner” with no escape.

In such a situation, the strategy you have been using has lost its ability to work any longer. You can no longer profitably move in that same strategic direction. You have hit a wall. Worse yet, your old strategy has left you in a position where you do not have any desirable options for change. You cannot alter your strategy to get to the doorway to your brighter future without destroying the work you have already accomplished (i.e., walk on and destroy your varnish). However, if you just stand in place, the vapors will cause you to slowly die.

When the painter in the story above was painting the floor, he was facing towards the corner where he started and painting in a direction towards the area behind him. He was working backwards, moving in a direction which he couldn’t see. He felt he had to do it that way, because if he tried to paint the floor in a direction moving forward, he would end up walking through the area he had just painted. By not looking behind himself, he could not see that he was painting in a direction that would eventually trap him.

While it is true that companies need to focus on the task in front of them today, like painting the floor directly in front of them, it is also true that sometimes you have to look up and turn your head so you can see where your current path is taking you. Is it leading to a door or to a corner?

This sounds like an elementary principle of strategy that shouldn’t need mentioning—make sure you are moving your organization in the right strategic direction so you do not get trapped. However, you’d be surprised how many times I’ve seen senior executives painting themselves into corners. Just look at how many senior executives have recently gotten themselves and their companies into serious strategic difficulties that are hard to escape from.

Why do so many executives fall into this trap? The reason is simple…they think the room they are painting is enormous in size, perhaps even infinite in size. The feeling these executives have goes something like this:

It doesn’t matter which direction I’m painting the floor as long as I do a good job of painting it. After all, the room is very large. I will be wealthy and retired long before we ever end up running out of flooring to varnish in this room. When it’s my turn to exit the company, I will just walk across the large expanse of yet unpainted surface to the nearest door and leave. Let my successor worry about whether he is painting in the direction of a corner or a door.

The fatal flaw in this reasoning is that these rooms are smaller than we think. We end up painting ourselves into a corner because we think the wall is a far, far away, when in reality it is right behind us. It came upon us by surprise because we did not look up in time to see where we were going and how soon we would reach the wall.

The Principle
The most important principle to learn here is that all strategic initiatives eventually fail. Since all strategic initiatives eventually fail, you must look for new initiatives to replace the old. And since strategic initiatives tend to die faster than we think, we cannot put off the task of finding the replacement to some time in the distant future.

Just because all strategic initiatives eventually fail does not mean say that all companies need eventually fail. Companies can outlast strategic initiatives if they continue to adapt their strategies to the changing marketplace. Even the most successful strategic initiatives will eventually fail. Changing consumers, changing competitors, changing technologies, and changing desires will eventually cause even the best initiative to eventually become out-of-sync with the environment and fail. Something better always comes along.

It is like a lifecycle. Strategic initiatives are born, grow, and eventually die. The role of strategic planning is to help you optimize your position on the current life cycle and help you to get to the next lifecycle before the first one dies.

Going back to the story of our painter, the room is like a strategic initiative. The size of the room relates to the lifespan of the strategic initiative. Doorways lead to the next strategic initiative. Unless we want our companies to die a premature death, we need to be looking for those doorways well enough in advance so that we can plan a way to get there before we run out of flooring.

The rooms are smaller than we think, because we do not control all of the variables that have lead to our success. Events can change suddenly on us, making our current strategic initiative obsolete, no matter how well we execute the strategy. Suddenly, the lifespan shrinks and we need to look for a door.

To illustrate this principle, let’s assume, for a moment, that you run a very successful bookstore. Your store’s image is so strong that nobody else would ever dream of building a competing bookstore in your area. Those who tried to build bookstores in your neighborhood in the past have all failed. As long as people continue to want literature, you believe you are all set. You believe your strategy can go on practically forever.

However, even if you run the best bookstore, that doesn’t mean your store will last forever. What if, for instance, an internet company like Amazon appears, who does not need to build a bookstore in your neighborhood in order to compete? It can offer better selection, better prices and better service than you and potentially make your strategy obsolete.

Or what if a large hypermarket or superstore like Wal-Mart builds a store next to you and decides to sell books at a loss in order to get customers in the store to purchase clothing? It’s not playing by traditional bookstore rules, so it does not need to be a better “bookstore” in order to put you out of business.

Or what if people decide they would rather purchase digital books downloaded from a computer rather than buy paper books from a physical store? Or what if people decide they would rather see their literature in the form of movies rather than in the form of books? Or what if the demographics of your neighborhood change and all of the educated book readers leave town and are replaced by illiterates who have no desire to buy books? There are still people who want literature, but they aren’t in your neighborhood any more. Or what if we hit a deep economic recession, where people can no longer afford to purchase books, but instead borrow them from a library?

In every one of these cases, the bookstore does not lose because it failed to execute perfectly on its strategic initiative to be the best bookstore in its neighborhood. It has continued to be the best traditional bookstore in the neighborhood. Instead, it loses because the concept of a traditional bookstore has suddenly become obsolete for its neighborhood. The strategic initiative has died. You have run out of flooring and painted yourself into a corner.

If the bookstore owner had looked up, he or she could have perhaps anticipated some of these threats to your bookstore and found doorways to new strategic initiatives, such as:

• Building an on-line presence

• Expanding your retail mix to be less dependent on traditional books

• Moving your store to a better neighborhood

• Selling out before the threats became reality and using the money to do something different.

The sooner you look up and see the threats to the lifespan of your strategic initiative, the better able you are to develop a strategy that gets you to the doorway to another room. Those seemingly uncontrollable factors that suddenly shrunk your room are more controllable if you find out about them early enough. This will give you ample opportunity to find all sorts of doors. As long as you keep finding doors, you can paint floors forever.

Just as you cannot paint a floor forever without eventually running out of room, you cannot do the same strategic initiative forever without it eventually starting to fail. All strategies eventually fail, and they tend to fail sooner than you think. Therefore companies need to look up from the daily task at hand make sure they are heading towards a door that leads to another room of strategic opportunity. Otherwise, before they know it, they will have painted themselves into a corner with no escape.

Looking for the next strategic initiative is not a luxury. It is a necessity, if you don’t want to get stuck.

Final Thoughts
You’d be amazed how many executives I have talked to who have said something along these lines:
“I know our strategy is heading for a fall, but I don’t care because I plan to be at another company or retired before the end comes. Besides, if I start making significant investments in a new strategy today, it will only serve to decrease earnings during my tenure and will not provide benefits until after I am gone.”

As a result, instead of investing in the future, these executives tried to coast on the old strategy until they left. In reality, more often than not the fall came before the executive was able to leave or retire and they suffered the consequences. The room was smaller than they thought. And they paid a heavy price.

Thursday, April 12, 2007

Bob The Basketball Player

Once upon a time, there was a man named Bob. He loved to play basketball. Unfortunately, he was awful at making layups. Bob would always miss when trying to get the ball in the hoop via a layup.

Every day, Bob would practice his layups for hours, but it did him no good. He would always miss.

One day, Bob’s friend Sam dropped by to watch him practice. After an hour or so of watching Bob miss every shot, Sam commented to his friend, “You know, Bob, you’ve been trying the same thing hour after hour, day after day and it is not working. You are not getting any better. Maybe it’s about time you tried something different.”

A few weeks later, Sam ran into Bob at the mall. Sam asked Bob, “So how’s the layup practicing going?”

“Great!” said Bob. “I took your advice and tried something different. Now I make every shot.”

“That’s wonderful,” replied Sam. “What did you do?”

Bob proudly exclaimed, “I lowered the basket by 3 feet.”

Strategies are about setting and achieving goals. Many times there are goals already set for you by your investors, lenders or shareholders. For example, they may require a minimum return on investment.

If you continue to fall short of reaching those minimums, you may be tempted to solve your problem by lowering your goals, similar to how Bob “solved” his problem by lowering the basketball hoop. Unfortunately, just as there are rules in basketball about how high the basket needs to be, there are rules of thumb in finance about how high the returns on investment need to be.

Generally speaking, people do not invest in you because they like you. They invest because they believe they are going to get a return on their investment higher than their minimum requirement. If you cannot meet their requirement, they will invest their money elsewhere. Similarly, if Bob cannot make baskets at the required height, people will not put him on their team. They will look elsewhere.

You may be able to fool yourself for awhile into thinking you are a great basketball player by lowering your hoop three feet. Eventually, however, you will have to play on someone else’s court. Then you will find that if you are like Bob, you cannot effectively play by the normal rules of basketball.

The same thing can happen in business. You may be able to capture a large bonus or two by lowering the goals and trick yourself into believing that you are doing well. It will not last long, however. It is a highly competitive marketplace out there. If you cannot play to the high standards expected in the marketplace, you will eventually fail.

The principle here is about finding ways to fill the strategy gap. Returns on investment are based on anticipated future cash flows. Is the cash coming in at a large enough and fast enough rate to meet the goal? If so, you will do alright. If not, you are in trouble.

It is not uncommon for a company to add up all of its anticipated future cash flows and find that there is not enough there to reach their goal. The gap between what you think you can achieve and what you are required to achieve is called the strategy gap. Strategic planning is then needed to find a way to fill that gap. If you cannot find a way to fill that gap, the value of your company will go down.

There are many ways to fill that gap. Some are better than others. Here is a listing of some of those methods:

1) Redefine the Goal
2) Deceive Yourself About Expectations
3) Work on the Denominator
4) Work on the Numerator
5) Work on the business portfolio

Each of these is discussed below.

1) Redefine the Goal
To redefine the goal is to do what Bob the Basketball Player did. He redefined the height of the basket to a low enough level so that he could make his shots. In other words, businesses can fill their strategy gap by effectively eliminating the gap—lowering the goal until it exactly equals what the current business model is already obtaining.

Although this process may theoretically eliminate the gap, it may not produce enough of a return to satisfy your investors/creditors/shareholders. Instead, it may only produce a high enough incentive among these people to get them to replace you with someone else.

2) Deceive Yourself About Expectations
This second option is very similar to the first, except that instead of lowering the goal to meet what you can do, you artificially inflate the expectations of what you can do in order to predict a return that exactly achieves the goal. That would be like Bob the Basketball Player promising that the next time he would make all of his layups with a regular height basket, even though past experience would lead one to believe that he will miss most, if not all of them.

The good news is that this process gives the appearance to your investors/creditors/shareholders that you can achieve their goals. At the same time, it makes your job relatively easy, because you just continue business as usual. However, since the expectations made for the business are unrealistically high, it is only a matter of time before your lies are found out. Eventually, you will run out of excuses for the repetition of disappointing performance and have to face the fact that you are not capable of meeting the expectations with the current business model.

It may not be outright deception which causes one to over-inflate expectations to meet a target. It may just be over-enthusiasm and overconfidence…or maybe you think you’ve fixed the problem, so this time the results will be different. In any event, too much optimism can blind us to the fact that perhaps we do not have as good a business model as we think we do. As a result, even though we claim to have filled the gap, we really have not done so.

3) Work on the Denominator
The concept of return on investment is a ratio. The numerator is your return and the denominator is your investment. One way to increase your return in order to fill the gap is to work on the denominator of that ratio. In other words, find a way to get the same return, but with a lower investment.

There is a healthy and an unhealthy way to reduce the denominator. The healthy method usually involves an emphasis on improving the efficiency and productivity of your resources, so that you need less of an investment in order to achieve your return.

The unhealthy method involves deep cost cuts and taking unnecessary risks by eliminating testing or spreading your resources too thin. They say you get what you pay for, and if you pay too little, sometimes you end up getting less than you bargained for. For example, by eliminating maintenance, you may be able to improve your returns and look good in the near-term. However, long-term, without maintenance things will eventually fall apart and cost more to repair than the cost of the maintenance. Then your returns will plummet.

4) Work on the Numerator
The other side of the ratio is to work on the numerator. In other words, improve your return on investment by increasing your returns.

As with the denominator, there is a healthy and an unhealthy way to increase the numerator. The healthy method usually involves an emphasis on improving the efficiency and productivity of your marketing, so that you are better serving your customer, resulting in improved sales.

The unhealthy method involves either:

A) Promising more than you can deliver, which may increase revenues near-term, but reduce repeat business long-term; or

B) Luring people to purchase with excessively high loss-leader purchase incentives (i.e., bribes) which cannot be cost-effectively sustained over time (for more on this, see “If You Want Loyalty, Get a Dog”).

5) Work on the Business Portfolio
The idea here is that if your current business portfolio cannot achieve your goal, add or subtract business and/or capabilities which will create a more effective portfolio. For Bob the Basketball Player, if he cannot make the layups himself, get him some help on the team. For example, use Bob’s skill as a passer and have him pass the ball to someone who can make the layups. Or, to go back to the height issue, have him sit on top of the shoulders of someone else, so that the two combined are tall enough to reach the basket.

High levels of return usually involve tapping into the synergies which come from combining multiple resources. If you can create the right combination in the right way, you can tap into higher returns.

In this short space, we were only able to touch on the surface issues concerning the achievement of business goals. The key point is that not all methods succeed over the long-term. By taking shortcuts in the near-term, we can actually make our long-term prospects even worse. The best way to fill in the gap between current performance and desired performance is to work on a combination of productivity enhancements, marketing enhancements, and portfolio enhancements. The strategic planning process can help find the best path for your company amongst these options.

When you see someone making excessively high bonuses, it may be more of an indication of their skill at negotiating their compensation than their skill at achieving high long-term returns for their company. Just wait awhile and see if they get those bonuses three or more years in a row. Then you will know how good they are at building lasting performance.

Wednesday, April 11, 2007

Strategizing Vs. Sloganeering

In the past, I have had the pleasure of working with Charlie Rath, the advertising genius behind a number of great TV ads, including the famous “Where’s the Beef?” campaign for Wendy’s.

As a slogan, “Where’s the Beef?” was an instant hit. It became part of the pop culture of its time and was a catch phase used by millions of people in their everyday life. Even to this day, the “Where’s the Beef?” commercials are considered to be among the most memorable and recognizable commercials ever made in the history of television. As far as having impact on its culture, these commercials would have to be ranked as being among the most successful ever.

So what was its impact on Wendy’s? To hear Charlie tell the story, he would say that at about the time the “Where’s the Beef?” commercials aired, Wendy’s was pretty much at an all time low in its ability to execute its strategy. On the factors of cleanliness, quality and service, Wendy’s was noticeably lacking in its ability to live up to customer expectations. About the only thing the stores were succeeding in was in disappointing the customer.

Therefore, when the commercials aired, they accelerated the rate in which people were exposed to this disappointing atmosphere, which accelerated the rate in which people were rejecting Wendy’s as an option. Sure, the ads got Wendy’s noticed, but people did not like what they saw. It just made a bad situation worse.

Eventually Wendy’s figured it out and dramatically improved its strategic execution on quality, cleanliness and service. It once again became a credible option in the fast food industry. Charlie got the company to bring back founder Dave Thomas and make him the chain spokesperson. Although the commercials may not have had as great a slogan as “Where’s the Beef?”, they were plenty good enough, and Wendy’s was able to rebound.

So in the end, one would have to say that:


Coming up with a comprehensive set strategic activities which are well coordinated and executed well throughout an entire organization can be hard work. It is a lot easier to just try to come up with a catchy slogan. The hope is that if the slogan is catchy enough, it will bring customers to your business in droves. They will love your slogan so much that they will overlook that fact that the slogan has no basis in reality and that they will patronize you in spite of your flaws.

Well, that’s a nice hope, but it rarely becomes true. Most examples are like what occurred at Wendy’s. A clever slogan was not enough to overcome poor strategic execution.

The thought that a strategic process is finished once you come up with a catchy slogan is ludicrous. If anything, that is just step #1 in a long journey. Now you have to link that slogan to supporting activity which justifies your use of the slogan and makes the slogan more meaningful in describing your firm than for the competition (a point of positive differentiation). Success requires more than clever slogans. It requires linking many different activities together in the direction of your positive differentiation (see blog "Strategy is Like Blood").

Advertisements are nothing more than promises. They are making promises about what a customer should expect when they patronize your firm. If your company’s strategy (or its level of execution of that strategy) is weak, then you are not living up to the promises in your ads. At that point, the only image you are creating is that of being a liar. You are saying one thing, yet doing another. It is difficult to build loyalty when your broken advertising promises are destroying your ability to get people to trust you.

At that point, you would be better off saying nothing. Otherwise, you will suffer an accelerated defection, as Wendy’s experienced.

Although it is nice to make great promises to your customers about how wonderful you are, it is so much more important to actually be a wonderful company. That’s what strategic planning is for. It is to first help companies find a unique place where they can be distinctively wonderful. Then, strategic planning helps coordinate the list of activities which need to occur in order to obtain and own that wonderful position.

At that point, a clever slogan which captures the essence of your strategy is the icing on the cake. If all you have is the icing, people will like the taste at first but will eventually be sickened on all of the sugar. You need the whole cake (slogan and strategic execution) to build a long-lasting treat.

What good would it be for Wal-Mart to shout “Always Low Prices” if it had a strategy built around a high cost structure? People would see “Always Low Prices” and think “Always High Prices.” Either that, or you will go out of business pricing everything below your cost. The only way that slogan works is if the entire company is devoted to a strategy centered around developing the lowest possible cost structure in your industry. Even just being average with your peers is not good enough. People will see “Always Low Prices” but think “Always Average Prices.” You’re still seen as a liar.

Unfortunately, reality can get in the way of a great slogan.

A recent example of someone who tried to get this right is Staples. Back at the turn of the century, Staples was having problems. Consumer complaints were outpacing kudos by a factor of 8 to 1. After doing some customer research, Shira Goodman, EVP of Marketing for Staples, discovered that what customers wanted was “a simple, straightforward shopping experience. They wanted knowledgeable and helpful associates and hassle-free shopping.” She also discovered that customer prioritized hassle-free shopping over lower prices.

At that point, Shira knew what the right advertising approach needed to be. However, she also knew that the store was not ready yet to deliver on that promise. Staples, in 1981, was not an easy, hassle-free place to shop.

Therefore, the next step was to build a new corporate strategy centered around making Staples the easiest, most hassle-free place to buy office supplies. First, the company removed about 800 superfluous items, such as Britney Spears backpacks. Then Staples improved store signage, making it easier to find where items are located. Sales associates were trained to be more helpful by walking shoppers to the correct aisle rather than just pointing. Since customers said that the availability of ink was one of their biggest concerns, the company introduced an in-stock guarantee on printer cartridges.

According to Shira, “It took about a year to get the stores up to snuff.” It wasn’t until the end of 2002 that the advertising could finally and truthfully make the promise which customers wanted to hear—that Staples was the easiest and most hassle free place to buy office supplies. Therefore, Staples waited until then to introduce the “That Was Easy,” advertising campaign. This clever campaign, with its sales of over $7.5 million in easy buttons, has had a level of cultural impact approaching the “Where’s the Beef?” campaign, but with a big difference. “That was Easy” was being promised by a store that was strategically working hard to execute well on being easy.

Shira Goodman put it this way, "Staples' new advertising campaign illustrates our long-term strategy to truly make buying office products easy. Our new tagline, 'Staples. that was easy' goes far beyond an advertising campaign -- it represents a fundamental shift in our approach to selling office products. It is evolving the Staples brand and guiding every business decision that takes place at the company."

Did you hear that? She said “every business decision.” It’s not just a clever slogan with a clever easy button. That’s just the icing on the cake. The focus on “easy” is a way of life in all aspects of the business; just like low cost is a way of life for Wal-Mart.

Clever slogans are nice, but they are no substitute for a well thought out and well executed strategy. Clever slogans make a promise about what to expect from a company. Clever companies use strategic planning to build a way of life that supports the promises of the slogan. When the two work together, wonderful things can happen. When the two do not work together, you may be doing nothing more than accelerating the rate at which customers defect from your business.

Just for fun, study they way you portray customers in your advertising (how they look, how they act) and then study your real customers. How similar are they? Would your customer be offended by they way in which you portray them?