Sunday, May 6, 2007

Oh, My!

The Story
One time, I was working with an executive who had been recently promoted. In the past, she had spent her entire career in finance doing primarily treasury-related work. With her promotion, she was given the added responsibility of also being in charge of the Strategic Planning Department.

Since she had never spent any time in strategic planning, she asked me to teach her what strategic planning was all about. I was happy to help. As I was explaining the principles of strategic planning to her, I could often see in her face a blank look of confusion. In her mind, she was used to dealing with “hard” numbers and I was giving her “soft” ideas. Not only was she uncomfortable with what I was saying, but she was having difficulty seeing why it was so important.

Then, one day as I was talking with her, I saw a look of horror suddenly come over her face. I call it the “Oh, my!” look. She looked up at me and said, “You mean to tell me that everything we are doing as a company will someday be obsolete?” Panic started to set in. For the first time, she could envision a future world where the business model the company relied on for success was no longer appropriate.

At that point I knew she finally “got it.” She finally understood what I had been talking about at all those training sessions. Strategic planning may look silly when everything is going well. However, the good times do not go on forever. Planning is needed to find the next strategy for success before the current strategic initiative stops working and becomes obsolete. Planning is not optional. It is vital to a company’s survival.

The Analogy
The executive mentioned above had been trained to think about business in a certain way—from the perspective of the Treasury Department. This thinking acted as a barrier to understanding business from a different perspective—the perspective of a strategic planner. She had to unlearn some of the thinking patterns of the past in order to gain new insights for her new responsibilities.

For example, those “hard” numbers she was used to dealing with in treasury are based on the assumption that cash flows basically go on forever. Rather than worrying about the assumptions behind the business model creating the cash, she had been trained to focus on managing the use of the cash that was assumed to appear from that business model. After talking to me, she discovered that she was acting under a false assumption, since all strategic initiatives eventually fail.

Cash flow is not something that automatically appears. It can disappear…and if nothing is done to alter the strategy, it is inevitable that one day it will disappear. Hence, the “hard” treasury numbers were softer than she originally thought.

Similarly, the only real “hard” truth a businessperson can hold on to is that all strategies eventually fail. Those seemingly “soft” ideas may be more solid, and more reliable than the numbers she was used to dealing with. Unless new strategic initiatives are put into the pipeline, the pipe will eventually stop providing a cash flow. Business is more than just managing the cash in front of you. It is about creating plans to ensure that there is a business source for creating cash in the future.

The “oh, my!” look is the realization that old preconceptions can be misleading. It is the first step in the willingness to start down the path of unlearning the past, so that one can learn a better path for the future.

The Principle
Strategic planning looks at building a better position for your business in the future. One thing that is known about the future is that it will not be identical to the past. There will be changes. Technology will change, consumers will change, competition will change, and so on.

With so many changes going on, it is reasonably likely that the basic premises behind a company’s current success may not be as effective in the future as they are today. New business models will replace the old ones. Companies that stick to the old way of doing things will become out of touch with changing market conditions and cease to be profitable.

Most of the employees in a company are focused on the near term—trying to meet quarterly or annual budgets, trying to make weekly quotas, or trying to squeeze a little more productivity out of the current business model. These are important and necessary activities. However, they are not the only activities a company needs to perform.

Somewhere in the company, there need to be people thinking about the future and the ramifications that the future has to the current business model. It doesn’t need to be everyone, nor even a majority of the people in the business. However, just because it may not be top of mind with everyone, that does not mean that it is not a critical element to long term success.

At some point, every company will be faced with an “Oh, My!” epiphany—the realization that the old model no longer works. It cannot be avoided, because change cannot be avoided. One can, however, control the point at which you reach that realization.

If you never think about the ramifications of the future, the “Oh, My!” will come at the point when the current business model no longer works. In fact, your business model may have been broken for years. Unfortunately, the failure may need to be dramatic over an extended period of time in order for you to realize that the past few years weren’t just a short-term business decline, but rather a permanent change for the worse. By then, it may be too late to do anything. By the time you can react, your position may be too weak to matter.

The good news is that if you never plan, your future demise will come as a complete surprise to you. You won’t have wasted a lot of time worrying or having the “Oh, My!” expression of panic. You could smile all the way to the end, unaware of the coming doom caused by change. Of course, you are still stuck with the premature demise of your company, even if it does come with a smile.

On the other hand, if your company had dedicated resources to continually studying the future and its ramifications, the “Oh, My!” would have been predicted prior to its occurrence. This would provide enough time to prepare a new strategic direction in advance. Rather than reacting to the doom after it has occurred, these planners would be proactively taking advantage of the pending changes, and use the change to gain market share.

Rather than fearing change, planners embrace change. Change is good, because change creates turmoil. Turmoil creates opportunities for customers to reassess their habitual purchase patterns. These reassessments may cause more customers to switch to your business.

It is much more difficult to gain share in a stable environment. Habits are hard to break. In a stable environment, there is little incentive to break current purchasing habits. Therefore, if you want to significantly increase your market share, change can be your best friend.

Of course, whenever somebody gains market share, someone else loses. Therefore, change can be your worst enemy as well. The way to make change your friend, rather than your enemy, is to anticipate the change and build a strategy in which your company is best positioned to take advantage of the change. Sometimes, you can even build strategies that help direct the course of change or accelerate the rate of change.

In order to see the possibilities of change before they occur, you have to let go of preconceived notions about success and the orthodoxies behind them. Every company has orthodoxies, or sets of assumptions, about what it takes to succeed. These orthodoxies were probably correct at the time they were created. However, as times change, the orthodoxies may no longer be as relevant. They may even be wrong. It may be time to unlearn what you think is still the truth.

For example, let us assume that an orthodoxy in your business is to have your inventory in as many locations as possible, so that the local salesperson can personally drive the inventory to your customer as soon as possible. This may have been the proper strategy at one time. However, with the creation of internet ordering capability, centralized call centers with detailed computerized information on each customer, and efficient overnight shipping services, this may no longer be the best strategy. It now may be both more efficient and higher customer service to have the inventory centralized and shipped overnight based on internet or call center interaction.

The idea of efficiency and service may never go out of style, but the orthodoxies around the best way to provide it may indeed go out of style. One of the goals in a strategic planning process should be to periodically challenge your company’s orthodoxies, to make sure they are still relevant for the environment. Then, as one looks ahead, the planning process should look at what the proper orthodoxies will be in the future.

Unlearning old orthodoxies and learning new orthodoxies is a continuing process. In the story above, the unlearning had to do with assumptions around treasury issues. Unlearnings can take place around many other types of assumptions, such as service, inventory levels, where to play in the value chain, how to bundle or unbundled goods and services, pricing, and so on.

Change is inevitable—the future will be full of changes. One of the roles of strategic planning is to prepare your company for the changes in the future. This is done by understanding the future with enough advance notice that you can adapt your strategy to future changes before they occur. By getting your thinking out in front of the change, you can make change your friend. Then, as the changes in the environment cause customers to change their habits, you can have implemented a strategy that causes customers to change their habits in your favor.

Change makes many current orthodoxies obsolete. Unless you are willing to unlearn some of your orthodoxies, you will not be able to adapt to the new orthodoxies necessary for the proper strategy of the future. The strategic planning process should include opportunities to reassess your orthodoxies to see if they are still appropriate.

Final Thoughts
In the book Creative Destruction, by Richard Foster and Sarah Kaplan, there is reference to a work by Mihalyi Czikszentmihalyi, an expert in creativity, who says that the type of thinkers needed to do this type of creative out-of-the-box planning have what he calls “a sunny pessimism.” A good strategic planner needs to be pessimistic enough to realize that whatever success a company is currently experiencing will eventually go away due to change. However, at the same time, a good strategic planner needs enough sunny optimism to believe that he or she can create a better strategy to replace the old one—one that is more appropriate for the new environment.

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