Thursday, April 5, 2007

Strategy is Like Blood

The Story
When I was around twenty years old, I had to go to an oral surgeon to have my wisdom teeth pulled. After the teeth were pulled, I was told by the doctor that the gums would continue to bleed for a little while, but that it would stop shortly after I got home. Well, my gums continued to bleed for the rest of the day and continued all night. The next day I went back to the oral surgeon to get the problem resolved.

Thus began my introduction to the world of blood clotting. As it turns out, my blood does not clot like the typical person’s blood. It has difficulty clotting quickly. This problem is compounded when the bleeding is occurring in a moist place, like my mouth, where the saliva interacts with the slow process, making the clotting problem even worse. Now I understood why I had so many nosebleeds as a child.

After that problem with my wisdom teeth, I decided to look more into the chemistry behind blood clotting. As it turns out, for blood to clot, sixteen different chemical reactions must take place. And it is not a case where if you have fifteen of the chemical reactions, your blood just clots a little slower. You need all sixteen chemical reactions for clotting to occur.

It is an all or nothing type of deal. If you miss any of the chemical reactions, the entire clotting system breaks down and does not work.

The Analogy
Forming strategy is a lot like forming blood clots. Just as you need the entire 16 chemical reactions in order to get blood to clot, you often need a number of business initiatives working together in the proper order in order for a strategy to succeed. Strategy is typically not about just doing one thing right. It typically involves doing many things correctly which have a cumulative effect that cannot be achieved without the critical mass of doing all of the activities.

Wal-Mart’s strategy centers around having a low price. However, Wal-Mart does not do just one business initiative in order to achieve low prices. It is in the very fiber of everything Wal-Mart does. Some examples of the wide variety of ways in which Wal-Mart accomplishes its low cost strategy:

• Self-Distribution from its own warehouses, cutting out the middleman.
• Sophisticated computer systems that manage inventory as efficiently as possible.
• Strategic alliances and data sharing with key suppliers to help make the relationship as efficient as possible.
• Low cost building construction, no-frills headquarters.
• Low paid staff, compensated with stock.
• Minimal advertising when compared with competition.
• Everyday low pricing, which is cheaper to administrate than frequent price changes due to sales.
• Very aggressive negotiation on price with suppliers.

Wal-Mart’s ability to own a low price position comes from all over the business—systems, compensation, capital expenditures, negotiations, distribution, operations, promotion strategy, etc. Just as blood needs all 16 reactions to clot, Wal-Mart needs all of these activities and more to hold the low price position. If the only thing Wal-Mart did to build a low price strategy was put a lower price than competition on its merchandise, it would go out of business. That would be like trying to clot blood with only one chemical reaction. It doesn’t work.

Wal-Mart needs the entire system of business initiatives surrounding low costs and efficiencies, in order to profitably offer the lowest prices to its customers. They are all connected. If one of them is left out, there is a chance that competitors will use that missing initiative against Wal-Mart to narrow the cost gap, minimizing Wal-Mart’s ability to hold the low price position.

In the hyper-competitive world of today, it is often all or nothing when it comes to successfully holding a strategic position. Either you do all of the steps or you do not get to sustain the position. Just like blood.

The Principle
It’s one thing to choose a strategic position for your business and declare what it is on a piece of paper. It is quite another thing to make the words on the paper a reality in the marketplace. Just because a company declares that it is going to win with price, service, speed, customization, or whatever does not make it so. At this point, one does not have a strategy. All one has is a set of wishes.

Choosing a position is just the beginning of strategy. The next step is to create the comprehensive list of activities needed throughout the entire organization to make this position come to life. It is like creating the comprehensive list of all the chemical reactions needed to clot blood. One needs to find them all. Finally, there needs to be a process to ensure that the activities on your comprehensive take place.

Let us assume, for a moment, that your strategy’s success depends on holding a position of high service. This could affect a number of areas including:

• The quality of your service force. Have you hired the right type of people for this level of service?

Training. Are you training your service force to adequately provide the service?

Explaining. Does the service force know why service is so important and what type of service is expected of them?

Compensation. Is compensation creating incentives for the right kind of behavior?

Support. Are there adequate support materials and systems so that the service force can do its job?

Image. Are the elements of image (appearance, business name, advertising, etc.) supporting an image of high service?

Customer Communication. Are all the opportunities to interact with the customer offering high service (call centers, sales calls, correspondence, etc.)?

I have often seen companies implement a long list of initiatives to support a strategy and exclude any activity related to compensation. The explanation for doing so is that employees are very sensitive to changes in their compensation, and the executives to do not want to upset employees by changing how they get paid. Unfortunately, the old saying is true, that people tend to act in a way that maximizes their compensation. One can spend a great deal of time and money to build to an infrastructure to support a long list of activities. However, if compensation causes people to not want to do those activities, then all of the work on the infrastructure is worthless.

If the compensation system is creating an incentive for the wrong behavior, it can negate all of the benefits from all of the other activities. Just as leaving out one chemical reaction can keep blood from clotting, ignoring the impact of a company’s compensation program can keep an entire strategy from succeeding.

This same principle applies to many other initiatives. If you design a particular process needed in your strategy, but do not build the computer system support behind the process, the process won’t work. If you design an advertising campaign to support your strategy, but your activities do not live up to the promises of the advertising, all you are doing is accelerating the disappointment with your customers. And the list goes on.

The strategic initiatives needed to accomplish your strategy occur throughout the entire organization and affect all of the processes of your business. Therefore, it is important to get input from all over your organization when developing your strategy. Otherwise, when it is time to implement all of the initiatives to support your strategy, you may find out that the areas responsible for carrying out the various initiatives cannot perform them as needed. This will make your strategy no longer viable.

Another important element is communication. I have often seen businesses reluctant to tell their people about the initiatives required to accomplish the strategy for fear that competition would find out. However, how does one expect all of the wide variety of elements of the strategy to come together if the people responsible for carrying them out do not know about them?

A final element is coordination. To hold a strategic position, all the elements of the business need to be pointed in the direction of that strategic position. For example, if your position is based on low price, everyone needs to be doing their part to support low prices. If 20 percent of the business team is moving in a direction that emphasizes something else, like high quality or snob appeal, it will confuse your customer and hurt your ability to hold your desired low price position.

This is not to say that a company can ignore all of the attributes that are not primary to the desired position. No matter what position one chooses, one must meet minimum expectations on all relevant attributes. However, the driving force behind all aspects of the business need to be in support of the main strategy.

Strategy is a lot like blood clotting. One needs all 16 chemical reactions to make blood clot. If you are missing any one of the 16 chemical reactions, your blood won’t clot. The same is true for making sure a strategy is effective. One needs all of the business initiatives in the organization working like a chemical reaction in the direction of the strategy.

Therefore, key words to keep in mind when planning are as follows:

Complete. Did you complete the task of not only creating a position, but also the list of what needs to be done to support the position and process for getting the list accomplished?

Comprehensive. Is your list of tasks needed to support the position comprehensive enough to include everything required?

Collective. Has the planning process collected input from throughout the entire organization, to ensure that the list of tasks is complete and doable?

Communicated. Does everyone understand what is expected of them in order to build and sustain the desired strategic position?

Compensated. Does the compensation system reward behavior in support of the strategy?

Coordinated. Are the activities of the organization all coordinated to move in the same direction towards the desired position?

Final Thoughts
Plutonium is an interesting element. If you have only a little plutonium, it is relatively harmless. However, if you bring together enough plutonium, you can build an atomic bomb. That is where the term critical mass came from. If the mass of plutonium reaches a high enough level, it can create a huge explosion.

Similarly, if you only have a little bit of activity in your business moving in the direction of your strategy, you competition may see it as being harmless. However, if you reach a critical mass of activity, watch out! You may be able to blow your competition away.

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