Sunday, September 30, 2007

Howdy Partner!

Once upon a time, there were two nearly identical companies in the same industry, called Alpha Company and Beta Company. Both companies wanted to grow, and both realized that if they increased their power throughout the entire supply chain, it would help their growth. However, both companies took a different strategic approach to reach this goal.

Alpha Company decided to reach its goal primarily through acquisitions. It started to use its resources to buy up companies in other parts of the supply chain. The logic was simple: the more companies they owned throughout the supply chain, supposedly the more power they would have within the entire supply chain.

Beta Company decided to reach its goal primarily through strategic alliances and partnerships. Beta used its resources to create superiority within the one area of the supply chain where it already operated. It then used that superiority as a bargaining chip to convince others in the rest of the supply chain to form preferential partnerships.

The results for Alpha Company were as follows:

1) Alpha could only acquire companies which were willing to sell to them. Usually, the companies who were the very best in their sector were strong enough that they did not see the need to sell their company to Alpha. Either that, or they asked for so much money that Alpha could not afford them.

2) Alpha ran out of resources before completing the acquisition of an entire supply chain network. They had more of the pieces of the puzzle than before, but the network still had many holes in it.

3) Rather than spending time improving their core business, their time was spent trying to integrate the acquisitions. This always seems to be more difficult, more time consuming and more expensive than originally anticipated. And while they were doing this, other companies—like Beta—were improving their core business. This was reducing the competitiveness of Alpha’s core business.

4) Because Alpha always demanded that its divisions work exclusively with each other, they were not always able to use the best partner in every situation. This weakened their position in the marketplace and lowered the sales in the acquired companies.

5) Many of the rest of the businesses in the supply chain no longer saw Alpha’s core business as an ideal partner, because Alpha had acquired one of their direct competitors. Therefore, the business they used to give to Alpha went to others who did not own businesses in their sector. This lowered Alpha’s sales in the core business.

6) With the lowered sales in the core as well as the new businesses, Alpha was forced to cut some costs in an attempt to save profitability. However this only served to weaken the quality of their offerings, making them even weaker in the marketplace.

The results for Beta Company were a bit different:

1) Because they had invested in making their core business superior to competition, Beta became a sought-after partner. Beta was able to use this clout to create preferential partnership deals with the best players in the rest of the supply chain. It had deals with great players throughout the entire supply chain network.

2) The preferential partnerships became more profitable than the former way of conducting business. Much of the added profitability from the preferential partnerships was plowed into the core business to make it an even stronger competitor/partner.

3) Even though Beta had preferential partnerships, it refrained from creating very many “exclusive” partnerships. Therefore, it could still work with others in the network if it made more sense for its customers.

4) Although the companies which had not formed partnerships with Beta were a little angry with them, most were pragmatic enough to understand that Beta had become so superior in its field that it still made sense to deal with them, in spite of their own anger. In addition, they felt that at least Beta had not become a traitor by buying one of their direct competitors, so they liked dealing with Beta more than Alpha.

In the end, Beta kept getting stronger within the entire supply chain, while Alpha kept getting weaker. Eventually, Alpha filed for bankruptcy while Beta became the darling of Wall Street.

One of the key issues addressed in strategic planning is the concept of growth. Nearly all of a company’s stakeholders want to increase the growth of the company. Acquisitions are often seen as a “sexy” way to achieve that growth. Just spend a little money and—BAM!—you are instantly larger than before. It’s a lot faster than trying to diversify as a start-up. In addition, you eliminate some diversification risks versus start-ups, because you are purchasing known competencies (that you do not currently have) which are already established in the marketplace.

The problem is that although acquisitions may at first seem to be the best way to diversify and grow, they are fraught with problems of their own. As we saw in the story above, Alpha was worse off than before due to its acquisition strategy.

In today’s rapidly changing economy, it is often better to grow via partnerships, alliances and preferential agreements rather than through acquisition. This was the successful approach of Beta in the story above.

Therefore, when developing growth strategies, always make sure you consider the partnership approach.

The principle here is that “control” is not the same thing as “ownership.” Often, we rush to the conclusion that the more we own, the more we control. Therefore, we try to own a lot of things.

In reality, ownership can often weaken one’s control. In the story above, Alpha’s power in controlling the supply chain was less after their acquisitions than before. It lost power as follows:

1) It lost the power of dealing with the best people in the industry. Part of this was internal because they were now limiting themselves to using the companies they acquired, which were not always the best choice for every situation. Part of this was external, because now others were less willing to work with them because they did not want to work with a firm which owned one of their direct competitors.

2) It lost power in their core business. This was due to multiple factors, including having less time and money to invest in the core, as well as a loss in productivity due to the loss in customers who did not want to deal with them any longer because of the baggage of having to deal with their other divisions.

Often times, more power can be gained through partnerships than through acquisitions. Partnerships can give you a great deal of control over how the entire ecosystem works without tying up all of your capital. Think of the medical profession, which thrives on referrals. Partnerships are a way to get a disproportional amount of “referrals” at a preferred rate.

In the story above, Beta gained power in several ways:

1) It became more powerful in its core business, because it was able to concentrate more resources on improving its performance. This made it a more desirable partner.

2) It became more powerful in determining how the profits in the entire ecosystem were divvied up. Through its negotiations, Beta obtained a preferred status, which allowed it to negotiate more favorable terms for itself. As a result, Beta tapped into a larger share of the entire ecosystem’s profit pool without having to invest in more of the ecosystem. This makes for a great return on investment. By contrast, when Alpha acquired other companies in the ecosystem, it had to pay a premium to get the deal done. Hence, the company who sold the business to Alpha extracted a great deal of the profitability through the premium price, leaving less for Alpha.

Now some of you may be saying that acquisitions are better because they bring more synergies. Perhaps this is true, but acquisitions also bring more dis-synergies from people who no longer want to work with a company who bought a direct competitor. Often times, the net synergistic benefit is higher with the partnership, because you are more likely working with a better mix of partners.

Although growth is often a very good thing, not all attempts at creating growth are equally beneficial. In many cases, partnering is a better way to grow than acquisitions. Ironically, partnering usually creates greater control than ownership. And in the end, control is what typically leads to greater profitability.

People who volunteer to do a job usually do a better job than those who are forced into it. In a sense, acquisitions are like forced labor, whereas partnerships are more voluntary.

Tuesday, September 25, 2007

The Illusion of Precision

Way back when I was getting my MBA, we were placed on various teams for doing a project with an outside client. As part of our presentation, we were referencing some of the consumer research done by the client.

One of the women on my team kept wanting to present the consumer research results out to four decimal points. She wanted to put in our presentation statements like “32.1432% of the consumers” believe such-and-such. I kept telling her that I thought it was silly to go out to four decimal places, since the statistical significance of the results were + or – 3%. In other words, that 32.1432% could just as easily be 29.2% or 35%.

But she kept insisting that if we used more decimal points, we would look more precise and our conclusions would be more convincing. I replied that it would make us look stupid, as if we didn’t understand statistical significance.

We finally reached a compromise. I got her to come down to only three decimal points. (Okay, so it was only a small victory—but I claim it anyway)

Strategic planning lives in a world of imprecision. Nobody knows exactly how the future is going to turn out—and certainly not out to four decimal points. Yet, for some reason, we feel more comfortable if we give the illusion that there is more precision our strategy than what is called for.

That is what happened on my MBA project. One of my teammates believed that if she used more decimal points, it would make the data appear more believable and the conclusions more convincing.

In reality, adding those extra decimal points did not make the data any more precise. It was still only accurate to + or – 3%. And in the vast majority of the cases, one would come to the same strategic conclusion had the number had been 30% or 34%. So why sweat the extra digits?

As I like to say, “You only need enough accuracy to get to the point where you make the right decision. Any additional accuracy beyond that is a waste of effort.” For more on this, see my blog “What’s a Few Seconds Among Friends.”

In the world of strategic planning we can create an illusion of precision by burying our vague notions about the future under a pile of numbers and/or words. Just because you can build a gigantic and highly detailed excel spreadsheets with thousands of numbers in them does not mean that it is any more precise than a small handful of “big picture” numbers. Breaking numeric imprecision into smaller pieces does not make the overall notion any more precise.

Similarly, taking a notion of where to go and filling a giant notebook full of detailed steps on how to get there does not make the notion any more precise. If your compass direction is off by 5 degrees on a 100 mile journey, breaking up that 100 miles into 528,000 individual instructions on how to move for each foot of the way on that imprecise path will not get you any closer to your destination. In the end, you will still be 5 degrees off.

So here is today’s question: Is having the illusion of precision a just useless indulgence, or can it actually damage your strategic planning process?

The principle here is that the creation of the illusion of precision can actually be very damaging to your strategy. In fact, you are probably better off if you work with less precision. The reasons are as follows:

1) It can unnecessarily limit your inputs
2) It can unnecessarily limit your outputs

These are explained below.

1) The Illusion of Precision can Unnecessarily Limit Your Inputs
If you start believing that your conclusions are far more precise than they really are, then you will start believing that you have all the information you need. The thought process becomes, “Why look for additional inputs when you know exactly what is going on and exactly where you are going?”

As a result of this illusion, one stops gathering data. This can be very dangerous. The future is full of unknowns. As you move down the path, you will have the opportunity to learn more. This additional knowledge can help you make modifications to your strategy to put it on a better course. However, if you are no longer looking for data inputs, then you will miss out on that opportunity.

Usually, the initial strategy has more of a top-down orientation. In other words, the initial strategic design is developed primarily by top level executives, who then communicate the direction down to the lower level troops. If too much of an illusion of precision is given in that communication, then it tends to stifle any feedback from the troops.

The troops are your eyes and ears to the world where you business is operation. To miss out on the input your troops could give to the process is a great waste of talent and insight. However, if the precision in the assumptions appears too great and the strategy is presented as a precise manner that looks fully completed, then it is harder for the troops to feel like it is worth their while to try to add their point of view.

Conversely, if the strategy is presented in general terms and then the call is put out to the troops for input, you will get a better response. In addition, because they had a greater hand in developing the strategy, the troops are more likely to be enthusiastic about making sure the strategy gets accomplished.

2) The Illusion of Precision can Unnecessarily Limit Your Outputs (Actions)
If too much precision is given as to how the strategy is to become accomplished, then it becomes harder to improvise the action outputs. The strategy becomes like a cookbook recipe. There are precise measurements of everything that is to be done—a cup and three quarters of this, a half teaspoon of that, an oven temperature of 350 degrees for exactly 28 minutes, and so on. If your strategy reads like a recipe, then the people will act like they are using a recipe and will follow all of the directions as closely as possible.

Unfortunately, when it comes to building a strategy for the future, we’re not exactly sure what the ideal recipe is when we start. If people believe they have to follow each step exactly as outlined, then we miss out on opportunities to improve our actions as we learn more.

It would be like me having a goal to get a number of people from Minneapolis to Dallas rather inexpensively. My initial conclusion could be that the best approach would be to get everyone on a bus and drive down Interstate 35, the expressway which connects the two cities.

It is one thing to suggest the bus trip down I-35 as a possible means to accomplish the strategy of getting many people to Dallas inexpensively. It is something quite different to say that the bus trip down I-35 is the strategy.

Things can happen. For example, part of I-35 in Minneapolis was the bridge which recently collapsed. It will take over a year to replace it. If you think the strategy is to precisely use I-35, then you will be waiting over a year to start your journey.

Second, what if there is a change in airline fees, and one of your people has special connections so that you can charter an airplane for less than you could charter a bus? If you are forced to “stick to the recipe” and do not ask for input from the troops, you would miss out on this desirable alternative.

Therefore, the best approach is to make sure everyone understands the ultimate goal (get a bunch of people from Minneapolis to Dallas), but provide for some flexibility in how it gets accomplished. That way, the troops can adjust to the unforeseen (like a bridge collapse) and seek out improved alternatives which come up (like connections to get low airline fares to Dallas).

Now we don’t want to get so imprecise that they troops decide instead to go to Istanbul rather than Dallas. Randomness is not an option. But, by the same token, you don’t want to be so precise that you lock into a sub-optimizing recipe of actions which cannot be changed.

Due to the very imprecise nature of the future, one should not presume to have all of the strategic answers to high precision at the beginning of the journey. By doing so, one is at risk of ignoring additional information as one moves down the path (and thereby missing out on the benefits of mid-course correction and the insights of the troops out in the field). In addition, one is at risk of locking into a “follow the recipe exactly” approach to implementation which eliminates the flexibility of adapting to a better course as situations change and new opportunities emerge.

Flexibility needs to be a part of your strategic implementation, and too much of an illusion of precision can hamper that flexibility.

When I was in Boy Scouts, they taught us that if you got lost in the woods and are looking for a way out, look for a directional marker as far out in the distance as possible and walk in that general direction. Otherwise, if you focus too close to where you are standing, you will tend to walk in circles and never get out of the woods. Similarly, to keep your strategy from moving in circles, look in the broad general direction rather than deceptive detailed precision right in front of you.

Tuesday, September 18, 2007

Rich Soil

Many years ago, my wife thought I needed a hobby, so she chose one for me—gardening. At the time, I was living in the perfect place for a garden.

1) The home was originally built prior to indoor plumbing, so the area where the outhouse used to be was very fertile.

2) There was a large aquifer of water just under the surface. It was so close to the surface that the house couldn’t have a basement. When a truck drove in front of the house, you could hear the echo through the hollowness above the aquifer.

3) The garden had a nice sunny southern exposure.

4) At the time, my children were small and we had a kiddie pool for them. When the water got a little slimy, I would put a submersible pump in the pool and use the water to keep the garden moist.

The garden was very successful. The tomato plants grew over 6 feet tall and were full of tomatoes the size of softballs. All the other produce was equally as plentiful.

When I moved to a new location and tried gardening again, I had different results. This new house was built on a drained lake bed. The ground was virtually solid hard clay. There were so many trees that the garden got little sunlight. The area was full of rabbits who would eat the young sprouts when they came out of the ground. The growing season was so short that by the time I replanted the seeds after the rabbits got the first batch, frost would come before the produce was ready to pick.

The results of this second garden were so bad that I quickly gave up gardening as a hobby. So now, about the only thing I am good at growing is my waistline, eating food from the supermarket.

Businesses want to grow and be very productive, producing abundance like my first garden. However, the results that businesses have can often be closer to my paltry experiences with the second garden.

In both gardens, I was using similar seeds and plants, purchased at similar types of stores. But even though I was starting with the same “beginnings,” I was having different “endings.” Why? The different results were due to the fact that I was planting my seeds into different environments. One environment was far more conducive to growth than the other.

Seeds are like strategies. One can have great strategies, just as one can have great seeds. But if you plant those strategic seeds into a bad corporate environment, one can end up with awful results.

The strategic process should not end with the creation of great strategies. This is only half the battle. The other half of the battle is making sure that you have created the proper environment for those strategies to grow in.

Sometimes a strategy which is great for another company may be bad for your company because of a difference in the corporate environment. For example, one time I tried to grow okra in my second garden. Okra thrives in long, hot, sunny summer environments. I planted them in cold, shady short-summer Minnesota. It was an utter disaster because the plant was inappropriate for the environment (which makes me wonder why someone would sell okra seeds in Minnesota).

Not only does the strategy need to be appropriate for the strengths and weaknesses of the firm, but the strategy must include a clear path for how to make it succeed within he unique culture of the organization. Perhaps the strategy will even need to include steps on how to change the culture.

Successful implementation is not automatic just because the strategy is “great.” The implementation path needs to be strategized as well. Otherwise, your great strategic seeds will lead to nothing but frustration.

The principle here is that a good strategic process must plan for the entire process, including the building of the proper internal implementation environment. The McKinsey organization recently conducted a survey with over 100,000 business people to try to determine which soil is best for planting strategic seeds. What they discovered was the following:

1) There is not one factor which creates a successful environment. One cannot rely on a single “trick” to turns a company into a strategic powerhouse.

2) Instead, companies need to be performing fairly well across a number of factors. This is like my first garden, which had many different good attributes going for it.

3) Once gaining competency across many basic management skills, the highest likelihood for success came from companies which excelled in three areas:

a) Accountability—People knew exactly who was responsible for accomplishing each aspect of the strategy. Clear roles make it easier to accomplish great things.

b) Direction—People had a good sense about the big picture of what was trying to be accomplished. Giving direction is not the same as giving orders. People were given freedom in making choices of how to get the work done. But there was no confusion about ultimate goals and objectives. There was a greater context surrounding all the activities.

c) Performance Culture—The winning organizations had found a way to break down silos and work as a team. There was openness and trust, which made cooperation much easier to accomplish.

So here is the question strategists must wrestle with…

When designing strategy, are you stopping at the point of the “great idea” or are you helping create the right soil for the strategy by focusing on ways create greater accountability, greater direction, and a trusting performance culture?

Strategy without such a context is like a seed planted in a dried lake bed made of hard clay. It will not be successful. I have personally experienced trying to create strategy in an environment like this—little to no accountability, vague direction, and lack of trust. It is a difficult struggle…not very fruitful.

The handoff from idea to implementation is a tricky task. Unless the soil is properly prepared, the handoff will most likely be disappointing. Just as it took years of outhouse usage to create my great garden soil, it may take considerable time to create an environment conducive to accountability, direction and trust. Time spent by leaders going to the field organizations to explain the context around the direction is important. Time spent linking strategy to tactics to the proper individuals via clear accountability is time well spent. Time spent building trust will pay back large dividends.

Don’t assume that implementation will magically occur. Make implementation as important as ideation.

If you want your strategy to produce great results, it is essential to design it in conjunction with designing an organizational environment capable of putting the ideas into practice. Although many elements are necessary to create this environment, three of the most important are Accountability (knowing who’s responsible for what), Direction (understanding the big picture and how you fit in), and Performance Culture (an environment of trust and openness, where people can cross-functionally work together).

Without this environment, your ideas will most likely wither away.

It is interesting to me that the same chemicals used to make fertilizer can also be used to make bombs. They can either help produce life or destroy life. Be careful how you fertilize your strategy. If you use the concepts mentioned above, you will create life and growth. However, if you fertilize your implementation with mindless platitudes and “happy talk” B.S., then you will most likely bomb.

Sunday, September 16, 2007

Soulless Capitalism

Shortly after Enron started to implode on itself, I started receiving a lot of resumes from recently laid off Enron employees. I interviewed a few of them.

One of the questions I had for them concerned how Enron got into the mess it was in. How could a company so lose its moral compass that it ended up making so many unethical decisions?

The answer I got was this: On the first day of orientation, you were taught about Enron’s RICE guidelines. Rice was an acronym for the following four principles: Respect, Integrity, Communication, and Excellence. Supposedly, these were the guiding principles of Enron which were supposed to direct your decision making.

However, the people I talked to said that you never heard about RICE after orientation. After orientation, this is what you saw and heard:

“You will have very aggressive quarterly goals to meet. If you exceed those goals, you will be rewarded very well with Enron stock. If you did not meet those goals, your career at Enron might very well be over.”

Consequently, people soon figured out that Rice was a sham and that the true principle of Enron was “Do whatever it takes (perhaps even questionable behavior) to make your quarterly numbers.”

One of the tasks of strategic planning is to develop a business mission statement. Many executives I have met place very little emphasis on this process. They do not see how it creates much relevance for the day to day business. And given some of horrible mission statements I have seen over the years, I can see why they would say that. Many mission statements are useless gobbledygook. They are just a bunch of fancy words which sound impressive, but provide no guidance to the organization. (For fun you can go to Dilbert’s web site and play a game to make up worthless mission statements.)

Other times, a company may have an “official” mission statement but ignore it, as was the case with Enron. Although they handed you a paper with the words respect, integrity, communication and excellence, it was obvious that the company marched to a different mission based more on greed, deception, and miscommunication.

Given that mission statements are often worthless or ignored, it is easy to see why they are often not a business priority. However, I contend that without a well thought out and well ingrained mission statement, you can end up creating another Enron-type situation in your own company. Therefore, they deserve serious attention.

The principle here is that in war, mercenaries are never as effective as soldiers who believe in the cause and are fighting for that higher objective. Mercenaries fight merely for the money they earn. If the battle becomes too intense, a mercenary may decide that they money is not worth the risk and pull back. Or, when an area is conquered, they may personally help themselves to an excessive amount of the plunder and run away with the riches for themselves rather than for the country which hired them. Worse yet, if the opposing side decides to pay them more money, they may switch sides and use their knowledge about you against you.

By contrast, a soldier who believes in the cause is fighting for something they value more than money. As a result, they are willing to sacrifice more to reach the goal. They will fight harder for the cause and be more loyal to country they are fighting for. Many are willing to even die for the cause.

When a company eliminates, ignores, or writes a worthless mission statement, they are in essence treating their employees as mercenaries. There is no higher cause worth fighting for. The employees are only there for the money. As a result, you are opening yourself up to all the problems which come with a mercenary work force.

1) Without a strong, noble corporate mission, employees are more likely to act with selfish self-interest as their motivation. Personal power and greed begin to choke out cooperation for the greater good. (After all, without a mission, there isn’t much of any greater good to cooperate or make sacrifices for.)

2) When it comes time to hire people, the good soldiers who want to fight for a cause will not apply for jobs at your company, because they want to work for companies who provide more than just a paycheck. This is especially true with the younger generation just entering the workforce. So you will be stuck hiring people who are only in it for the money and also have a more difficult time tapping into the next generation.

3) When the times get tough, the mercenaries will jump ship and go work for a different company which offers easier prospects for growth, promotions and money. Their loyalty is only to themselves and the WIIFM (what’s in it for me) motivation takes over. The costs associated with higher turnover will come into play.

4) The cost of doing business probably goes up because mercenaries probably will demand more money to do the work than a dedicated soldier. In addition, because the mercenary is less devoted to the cause, they are probably less productive. As a result, you would need more mercenaries than dedicated soldiers to get the same amount of work done.

I saw a company make the conversion from being a place with a cause to being mostly just a place to make money. Prior to the conversion, a large number of people were willing to consistently work long hours (60+ hours per week) because they enjoyed being a part of the cause. After the conversion, many of these people said that it wasn’t worth the long hours just for the money, so they cut back to working only 40-50 hours per week. How’s that for a quick drop in productivity?

5) Because you do not have the positive motivation of the noble cause to incent people to work hard, one has to rely more on negative punishment to get the work done. That is why companies like Enron reviewed an employee’s performance every three months to see if they should be fired.

During the initial war in Iraq, the front-line Iraqi soldiers were mercenaries. They were told that if they refused to fight and wanted to turn back, the Iraqi soldiers behind them who were dedicated to the cause had orders to shoot them. Although businesses might not be that harsh, mercenary-type environments have a tendency to become more repressive and punishment-oriented. Fear is more prevalent. It was a combination of the fear of reprisal if numbers weren’t met and the promise of huge stock bonus if numbers were met which caused people at Enron to make bad choices. Cutting ethical corners was feared less than the punishment when numbers weren’t met.

By contrast, a company with a noble cause can create a healthier and more productive environment. The irony is that by focusing a little less on pure profit, one creates an environment which tends to be more profitable (and less likely to be the next Enron).

Business mission statements can help crystallize that noble cause and keep it its awareness high in the organization. However, that only happens if:

1) You can get top management to believe in the higher mission and live it out on a daily basis.

2) The business mission clearly articulates a noble cause which is:
.......Relevant to the business,
.......Meaningful to employees/customers,
.......Not just a bunch of platitudes about becoming bigger and better at making money.

3) Employees see that the mission statement is more than just words, but is a meaningful part of the way the business is run.

Nearly every business can come up with a noble cause:

Wal-Mart: Saving people money so that they can live better lives.
Walt Disney: To bring happiness and joy to people’s lives.
Mary Kay Cosmetics: To give unlimited opportunity to women.
Cargill: To improve the standard of living around the world.

The Johnson & Johnson credo is a great mission statement. It can be seen at Not only is it a great statement, but it is a foundation for how the company is actually run.

Although on the surface a business mission may seem like a minor thing, it can be an extremely useful tool if crafted properly and used as a guiding principle for how the business is run on a daily basis. The value in a business mission statement is that it can crystallize a noble cause for a company beyond just making money. This helps a company fill its ranks with dedicated soldiers who work harder because they believe in the cause. By contrast, without the noble cause in the mission statement, the ranks are filled with mercenaries who tend to be more selfish and can make your company more like what Enron became. And over the long run, the noble cause tends to create greater profits than just a myopic focus on money.

Before Enron imploded, I had a conversation with the President of US Operations for Enron. I told him that I had heard that Enron worked its employees very hard, forcing them to put in a lot of hard, grueling hours. His response was that they had hired a lot of people who came out of investment banking. These former investment bankers were used to these types of conditions, so they did not complain.

I saw the results of a survey which asked investment bankers if they would continue in that profession if it no longer provided the abnormally high wages. Over 80% said no. So Enron appeared to be hiring out of a pool teeming with mercenaries who though they might strike it richer at Enron. Is it no wonder that Enron imploded?

Friday, September 14, 2007

Filling the Gap

It’s odd the phrases one remembers from their youth. When I was in high school, I had a friend whose father loved to spend his time in the great outdoors. Not only did he love to be in the outdoor wilderness, but he loved to read stories about full-time outdoorsmen from the past.

In one of these books, the author had a little saying to help in making decisions about which path to take in the woods, particularly when coming to a challenging spot, like a swamp, a canyon or a raging river. His saying went like this:

“Don’t go under what you can go over, and don’t go over what you can go around.”

In other words, when coming across challenging terrain, it is safer to find some sort of bridge over the danger than to walk into the danger. However, it is safer still to avoid the dangerous terrain altogether.

It’s odd how I can remember this little saying, but have trouble remembering birthdays, anniversaries and phone numbers.

In strategic planning, we often have some ambitious goals. These could include goals about hitting particular sales targets, profit targets or stock price targets. Many times, it may appear highly doubtful that one can reach these goals by continuing on the path one is currently on.

For whatever reason, the goal appears to require a higher level of performance than the current strategy provides. For example, let’s assume that I am a US-based retailer who has set an ambitious sales goal. Afterwards, I do the math and it appears that even if I completely saturate the entire US with my stores, they will not provide enough sales to meet my goal. There is a gap between the potential available with my current strategy and my desired goal.

This gap is similar to the dangerous terrain mentioned in the story. I am on one side of the danger, and my goal is on the other side. How do I reach my goal? What do I do to fill the gap?

Just as in the story, I have three options: go under, go over, or go around. To go under would be to plow ahead straight into the danger with the current strategy and see if I can find ways to squeeze more out of it than I currently know of. To go over would be to build a bridge to the future by diversifying into additional sources of revenues and earnings. To go around would be to avoid the challenge in front of me and settle for whatever I can attain without taking on the additional risk of plowing ahead or building a bridge.

For the outdoorsman, the goal was risk avoidance, so he tried to avoid treacherous terrain as much as possible. In the business world, we realize that if you avoid all risks and challenges, there is a good chance that we will produce unacceptable results. Some level of risk and challenge must be undertaken in order to reach the ambitious goals on the other side. There is some truth in the statement “No risk, no reward.” However, it is also true that risk can sometimes lead to failure.

So what should a business do to get to the other side? We will look at each of the three options separately to learn when each is appropriate.

Option #1: Go Under
There is a school of thought which believes that businesses often under-estimate the potential of their current strategy. These people would advise going down into the treacherous territory and continuing your core strategy. Although today you may not see how you can get enough potential out of the current strategy, these experts believe that often, over time new opportunities will develop which expand your potential without the need for radical strategic change.

Hence, the terrain may not be as treacherous as you thought. You may be able to make it through to the other side and achieve the ambitious goals without a significant deviation from what you are currently doing. For example, chains like McDonald’s and Starbucks have reached points in the past where they sensed they were reaching total saturation and could no longer rely on their core strategy to fuel their growth ambitions. However, over time, they discovered they could build far more units than they thought without saturating the market.

There are many reasons why there may be more long term potential than one originally thinks. For example, if you have created a relatively new innovation, the current acceptance level for the innovation may currently only be among early adopters. It is fairly easy to quickly saturate the early adopter segment. However, over time your innovation may move from the early adopters to the mainstream customer segment. This would create far more potential than what is available today.

Similarly, new technology often starts out as being relatively expensive and limited in its uses. However, over time the price of the product typically goes down and the number of uses for the product typically go up. Lower prices and greater uses increase the potential for the product far beyond its original potential. Take microwave ovens. At first they were seen as expensive luxuries for the rich with limited usefulness. However, once prices came down and the supermarkets provided products specifically designed for the microwave, the consumption of microwaves skyrocketed. Now, many homes have several units.

When the UNIVAC mainframe computer was first invented, the company hired a consultant to help them determine what the potential market size was for computers. Back in 1950, the experts determined that the number of computers in use by the year 2000 would be 1000 computers, which works out to be about 20 new customers per year. The “experts” failed to take into account lowered prices and expanded uses for the product.

This does not mean that one can merrily go into the treacherous territory and magically come out on the other side. It takes effort to move a product from early adopter to mainstream. It takes work to get the costs lower. It takes effort to find the additional uses for the product. The core product may need tweaking in order to squeeze more potential out of it.

And, of course, sometimes it really is true that there is not a lot of potential for your core business. Maybe a new innovation will make your product or service obsolete. Or perhaps there is potential for the business, but your competition does a better job of capturing that potential. This could leave you stuck out in the middle of that swamp or raging river without enough energy to get to the other side. The swamp could suck you in or the river wash you away.

Therefore, it is wise to rethink the potential of the core business to determine if there is more long-term potential than what is currently visible. But don’t blindly go into the swamp just hoping that “something will turn up.”

Option #2: Go Over
If one cannot easily get to the other side with the core business, it may be necessary to keep evolving your business in order to find paths to long-term growth and prosperity. One may need to add new businesses to the portfolio and get rid of old businesses. GE is considered one of the most successful businesses over the last century. They have stayed successful over time in part because they have continually modified their portfolio. They have diversified into newer, growing industries and exited stagnant businesses. Nokia has done the same.

These new businesses can get you in on the ground floor of amazing growth potential which can be far greater than what is available out of the current core business. These are the bridges that can help you get to the other side without trudging through the swamps or raging waters of a more mature business.

Sometimes the best way to avoid company obsolescence is to diversify into the businesses which are making your current business obsolete.

Of course, diversification also has its risks. Just as it is often the case that we underestimate the potential of our current business, studies have shown that companies frequently overestimate the potential of new businesses (and underestimate how difficult it will be to master the new business).

Option #3: Go Around
Sometimes the risks of going under and going over seem too high. At that time, you may want to avoid all of the risk by selling out to someone else (take the money and run).

Ambitious goals tend not to get achieved on their own. Hard work and prudent risk-taking are required. Sometimes the best path is to look for ways to expand the potential of the core. Sometimes the best path is to diversify away from the core. Often, it is wise to do a little of both (hedge your bets). However, the worst thing to do is create ambitious goals and then have no real path to get there. This will only create disappointment. The best way to find the right path for yourself is to further scrutinize your core assumptions to ensure that you are not overly pessimistic about the core business potential or overly optimistic about the ease of diversification.

A recent study looked at the characteristics of successful companies versus non-successful companies. The non-successful companies tended to be at the extremes, either doing no diversification or in doing too much diversification, particularly into areas far removed from the core. The most successful companies tended to mildly diversify, and usually into areas somewhat close to the core.

Tuesday, September 11, 2007

It Depends

One day, when I was a young boy, my Dad came to me and said, “Let’s go to the police auction and get you a bicycle.”

I was really excited.

As it turns out, the local police department had collected a lot of stuff from raids, robberies and abandonment. If they didn’t know who the property belonged to, the police kept it. When they got too much stuff to store, the police would hold an auction to get rid of the property. One of the items they claimed to have a lot of was bicycles. My Dad figured we could get a pretty good bike fairly cheap at the auction.

When we got to the auction, I saw a huge selection of bikes. They all looked great to me. I would have been happy to come home with pretty much any one of them (although a couple of them looked rather beat up).

After a couple of hours at the auction, my Dad said, “Let’s go home.”

I replied, “But Dad, we didn’t get a bicycle.”

My father responded, “These people are going crazy with their bidding. They are bidding up the prices higher than what the bikes would cost new in the store. I’m not paying those kinds of prices for a used bike.”

So, sadly, I did not get a bike that day.

Business strategy involves making a lot of decisions. Should I invest in “project x”? Should I acquire “company y”? Should I move in the direction of “competency z”?

We would like the answer to be a simple “yes” or “no”. Unfortunately, the answer often should be “it depends.” In the story above, I looked at those bicycles at the auction and I thought they were great. If someone asked me if we should buy one of them, I would have said “yes”. By contrast, by Dad looked at those bikes and saw what people were willing to pay for them and said “no”, because he thought it was a bad value.

So were the bikes worth buying? It depends. They were functionally sound, so they had value. I would have enjoyed owning one. However, when the price became higher than the value of a new bike, they were not worth the price. So, the bikes were worth buying until the bidding got too high.

One cannot universally say that under every circumstance the bikes were worth buying or not worth buying. It depended upon the price. Similarly, one cannot look at most strategic decisions in isolation and say they are universally good or universally bad. They may be good for some companies and bad for others due to differences in competencies or synergies or cultural fit. They may be good at one price but bad at another price. They may be good if you put the right manager in charge but bad if you put the wrong manager in charge.

Therefore, when evaluating a strategic option, one must not automatically assume that the option is universally good or universally bad. Instead, it must be evaluated in light of all the variables which impact its value specifically for your business.

We are going to look at two examples which illustrate this principle.

#1) The Horse Race Track
Many years ago, a businessman thought it would be a good idea to bring horse racing to a city in the Midwest. He spent a small fortune to build a grand place to watch horses race and bet on them. Unfortunately, the revenues were not enough to cover the investment. The businessman was losing large sums of money rapidly.

To solve his problem, he sold the business at a huge discount to another investor. The new investor believed that at the lower price he paid for the assets, he could make a positive return. Alas, he could not. Therefore, this investor sold the business to a third investor at a huge loss.

This cycle went on for awhile until finally somebody paid so little for the assets that he was able to make a profit.

So the question is this: Was building the racetrack a good investment? Initially, one might say no, because it would never in its life provide an adequate return on the original investment. However, if you asked the final investor, he would say he was getting a fair return on HIS investment. So, in reality the answer is “it depends,” and in this case it depended on how much you invested in the venture.

The point is this—instead of looking at something and automatically assuming it is a bad investment or a bad strategic choice, first ask yourself this question: Is there anything I can do or change in order to make what initially looks bad into something good? Can I pay a different price for the investment? Can I repurpose the assets into something else which is more valuable? Is there a way I can combine these assets with my own assets and create something more valuable combined than what they are worth alone? Can I manage the assets better?

Start by answering “it depends,” and then look for the necessary set of circumstances which would make it a good choice. Then see if it is possible for you to make that set of circumstances come to life.

#2) The Acquisition
One time I was making a speech to the top management of a firm and was pointing out all of the strategic benefits they could have if they acquired a particular company and used those assets in a particular way. The executives got excited and concluded that this would be a “great” acquisition.

Along the way, the executives got so carried away with the “greatness” of the idea that they decided to pay whatever price it took to get the deal done. Then they put someone in charge of the project who was not committed to using the assets in the strategic manner I had originally suggested. However, since this was seen as a “great” acquisition, the quality of the management did not seem all that crucial.

As you have probably guessed by now, the company paid too much for the firm and then did not realize the strategic benefits due to the way it was mis-managed. The acquisition turned out to be a failure.

The problem was that the executives convinced themselves that the acquisition was universally good, so the details were not as important. They should have approached the acquisition by saying its success depended upon certain events taking place, such as getting it at a good price and using the assets in a certain strategic manner. Had they made the success appear conditional rather than universal, the company would have done a better job of making sure those conditions existed.

So was this acquisition a good idea? The answer is “it depends.” It is like the example of the bicycle. The acquisition target added value to a point, but not if you overpay. The acquisition’s full value could only be realized if the assets were used in a particular manner. By not using them in this manner, the company turned a good acquisition into a bad one.

So the point here is to not assume a universality of goodness around a particular strategic option. Make an effort at the beginning of the process to determine what conditions could exist to make the option go from good to bad and then put in place safeguards to keep those conditions from occurring. And if they occur anyway, have the strength to pull back from the option and abandon it early, if necessary.

Although we would like simple yesses or no’s to our strategic evaluations, it is often more likely the case that the true answer should be “it depends.” If we approach all of our decisions with an “it depends” mindset, then we are more likely to be able to discover the conditions which will create success and then take the steps to ensure that those conditions exist before moving forward. Or, if we cannot make those conditions exist, we can have the fortitude to back off.

On the old game show “Let’s Make a Deal” contestants would trade one item for something else. The problem was that there was an unknown in the equation. Either they knew what they had but didn’t know what they were trading for, or they didn’t know what they had, but they knew what they were trading for. When you make a deal, it’s a good idea to fully understand what you are giving up and fully understand what you are trying to get. It is only then that you can know if it is a good deal.

Sunday, September 9, 2007

It's the Tactics

One time I was invited to be a part of a roundtable of retail strategists, sponsored by the Corporate Executive Board. There were about 18 retailers represented at the roundtable. Included in this mix was a broad spectrum of retail types, from high-end fashion to low-end commodities, from big box stores to little stores.

Some of these retail strategists came from what I call “tier 1” retailers, retailers who are respected for being among the best in the business. Others represented “tier 2” retailers—good firms, but with a few weaknesses.

At one point the question was asked, “What is your greatest strategic challenge.” We went around the table so that everyone could respond. The tier one retailers gave a variety of different answers to the question. The tier two retailers, however, mostly gave the same answer. They responded that their greatest strategic challenge was in trying to get the people out in the field to execute the strategy designed at headquarters. This problem was not mentioned by the tier one retailers. Gee, do you think there is a connection here?

The fun and sexy part of strategic planning is the creation of the grand and glorious vision. This is where we create the story about how our company is going to achieve great success in the marketplace. The dull and more mundane part of the process can be making sure that the vision comes to life in the tactics out in the field.

Although this may not be as sexy, the story above seems to imply that the great companies seem to find a way to excel at getting tactical execution in the field. By contrast, the second tier companies struggle more with tactical execution. It would appear that unless one can master the art of the tactics, it is extremely difficult to achieve tier one status.

Although there can be many reasons why a firm has difficulties in getting its field to execute the tactics, they tend to revolve around three principles:

1) Great Tactical Execution Requires Great Strategic Direction
2) Great Tactical Execution Requires Proper Motivation
3) Great Tactical Execution Requires Focus

These three principles are discussed below.

1) Great Tactical Execution Requires Great Strategic Direction
It is a lot easier to execute tactics if they are rooted in a great strategy. If your company’s strategy is based on a well crafted and well articulated position in the marketplace, then it is easier to make that position a reality.

Great strategic positions have the following characteristics:

a) Desirable: You are providing a solution which a significant number of people want.
b) Believable: There is ample evidence to convince people you are capable of delivering on that promised solution better than any one else.
c) Ownable: You are uniquely positioned to own this solution in the minds of the marketplace. Nobody else holds that position anywhere near as well as your company. It is your distinct point of market differentiation.
d) Achievable: You have built an infrastructure and competency so that you can truly deliver this solution better than anyone else. Given the constraints of who you are, this is a winnable position for the firm.

If you have a strong position like this and clearly communicate it to your employees and customers, then tactics are easier to achieve. Everyone can see what is important to your success, and the chosen success is based on owning something your firm can achieve.

To paraphrase my father, “Most great companies succeed because their selling proposition is so great that their employees cannot screw up enough to stop the success.”

If you have a vision which is not based on providing a unique and desirable solution in the marketplace, then consumers have a more difficult time finding a reason to patronize you. If the customer doesn’t have a compelling reason to choose you, then it is much harder for the field employees to get them to choose you.

If your vision is just to become better and become more like the market leader, you are facing a difficult execution battle. Why should a consumer switch from the market leader to patronize you if you are not as good as the leader (even if you are closer to being like the leader than before)? Even if you become good enough to be equal to the leader, why should a customer switch? To give your employees a shot at executing something great, you need to supply them with a plan that allows them to provide a point of superiority.

Without first developing a compelling position, expectations for field performance are often little more than “hopes.” You hope the field can pull it off these unrealistically high levels of performance, but you haven’t put anything in place that would make that hope very likely.

2) Great Tactical Execution Requires Proper Motivation
There’s an old saying that people perform best on that for which they are rewarded. Therefore, if you want great tactical execution of strategies out in the field, you need to reward that type of behavior.

I have seen instances where top executives will give “lip service” to the strategy when talking to the field, but reward them for something else. Whether it is intentional or not, when the employee out in the field hears this, their takeaway is something like this:

“If you have any spare time, it would be nice if you could put some effort behind the strategy, but your ‘day job’ comes first. If you do your day job right, you will get a big financial reward. If you do your day job wrong, you will get severely punished. If you do the strategic strategy right, I might give you a pat on the back, but still yell at you if the day job requirements suffered as a result.”

In such a situation, it is no wonder why it is difficult to get the strategy executed out in the field. The people out in the field are pragmatic and do what gets rewarded. If strategic tactics are not rewarded, then good luck in trying to get people to do them. You have to make these key tactics an important part of their “day job” definition.

Another problem occurs when rewards are given out even when performance has been poor. In his new book “Doing What Matters,” author James Kilts talks about his philosophy which allowed him to be so successful at Kraft, Nabisco and Gillette. When Kilts came to Gillette, the company was in trouble and was not executing well. What Kilts noticed was that people were rewarded for effort rather than performance. Kilts quickly changed that so that you were rewarded for succeeding rather than just trying. Suddenly, he started seeing a lot more successes.

3) Great Tactical Execution Requires Focus
Based on my observations, people in the field are far more likely to succeed if the company is focused. There are two aspects of focus which need emphasis—focus in scope and focus in time.

If you give people a list of 100 things to excel in, it is highly unlikely that they can achieve perfection at all 100. In fact, with that large of a load, it is likely that nothing will be done perfectly. However, if you narrow the list to about 4 to 6 items, it is likely that one can do well at all of them. This is the principle of focus in scope. Narrow the scope of areas of excellence so that it is manageable.

Focus on only 4 to 6 areas where execution is critical. Later, as these areas are mastered, one can change the focus to a short list of other tactical areas. Thus, instead of trying to get it all done at once, do it sequentially in small bites. Find a simple metric to measure each of the handful of executional behaviors you desire and tie this to rewards.

Next comes the focus in time. When you spend time with the people in the field, what topics dominate the discussion? When the people in the field are working, how much time do they spend on these handfuls of expectations? The goal should be to get so focused on these handfuls of behavior that they become a meaningful part of every day. A large part of every day should focus on these important tasks.

For example, the key metrics should be updated as frequently as possible—daily, if it makes sense. Every day, when the field gets to work, they should be aware of the most recent performance on these metrics, not only for the entire company, but for their particular area. Not only does this provide great feedback on performance, but it also shows that you are serious about these issues. Whenever you talk to the people in the field, bring up the key areas and the most recent metrics. The more time spent on the key areas, the more likely they will get executed well.

Great strategies are more than just great ideas. They are great ideas executed greatly out in the field. The strategic planning process does not end when the idea forming is completed. The process must include making sure the hand-off to the field is done properly. To ensure good field execution, it pays to have a strategy built upon a viable position, with proper rewards, and proper focus.

I’ve seen compensation systems that were so complex that nobody could figure out which behavior would optimize their reward. Hence, reward systems need to be focused as well.

Thursday, September 6, 2007

A Puzzling Picture

My wife used to love to do jigsaw puzzles. It is challenging enough just to do the puzzle, but she also seemed to have extra challenges. For example, when we had young children and a dog in the house, puzzle pieces would often end up missing from the table or chewed upon.

Sometimes my wife would swap puzzles with someone else or pick up a puzzle at a garage sale. These people would claim that all the pieces of the puzzle were in the box, but often there would be a few missing. Sometimes the box would include a few pieces from a different puzzle which did not belong there.

However, the challenge I never understood is that my once my wife started a jigsaw puzzle, she would never look at the picture on the box to see what her puzzle was supposed to look like. She enjoyed the challenge of not knowing exactly which piece comes next.

One of the first steps in the strategic process is to gain an understanding of the environment in which your strategy must succeed. If you don’t understand the consumer environment, the competitive environment or the internal environment of your organization, it becomes difficult to choose the strategy which will win in these environments.

Therefore, early in the process, one needs to conduct research in order to determine what that future environment will most likely look like. One can think of the picture of that future environment as being like the picture you have when one has completed a jigsaw puzzle. The goal of the research is to gather up the jigsaw puzzle pieces so that one can begin to build the picture of the future.

However, even though my wife had numerous challenges in building her jigsaw puzzles, the challenges in building the strategic environment puzzle are far greater. First of all, since we are looking into the future, not all of the jigsaw puzzle pieces are fully developed yet. Even if we get the entire handful of available puzzle pieces in the right place, there will still be lots of holes in the puzzle. The missing pieces of the future will need to be guessed at based on what we see with the pieces we do have. If we wait until all of the pieces have been made, then it is often too late to take advantage of that environment. The entire picture is already set so that we can no longer influence it to our advantage.

Second, not all of the puzzle pieces will be in the same location. It is not as if all of the information needed to get a point of view on the future environment can be found from a single source. This puzzle comes without a box. You will need to do research in many different areas using multiple sources in order to find your puzzle pieces—the clues to what lies ahead.

Third, some of the information you gather will end up not being useful. It is like gathering up a pile of puzzle pieces and not knowing how many of those pieces actually belong to your puzzle and how many are part of a different puzzle. When you look at an individual puzzle piece, it is often hard to know what it is you are looking at. It may not be until much later that you can tell whether that piece of information will help you develop your view of the future or not.

Fourth, since there is no puzzle box, there is no photograph on a box lid showing you what your puzzle is supposed to look like. You have to start putting all the pieces together without knowing in advance what you will discover when the picture becomes more complete.

Finally, the future can change depending upon your actions or the actions of others. Therefore, the picture on your puzzle pieces may get altered over time and morph into something a bit different.

Now how’s that for a challenging puzzle?

Here are a few principles to help in this challenge. The first three have to do with where to look for the puzzle pieces, while the fourth is about how to interpret the pieces after you find them.

1) Look for Leading Edge Fringe
What will be commonplace in the future often already exists today on the fringe of society. Look for the people and places and businesses which operate on the fringe of society and tend to always be ahead of the curb. They will help you gain a glimpse into what is next. If you want to learn about future technology, look into what is currently getting the technology geeks excited. Figure out which projects are getting the priorities in research labs like at MIT.

If your interest is in lifestyle changes, there are certain spots on the globe which frequently exhibit these trends first. Check out what these places are up to.

Find out what the leading edge people read and listen to. Then do the same.

2) Look for “Parallel Universes”
Often times, unrelated industries and business ecosystems go through similar stages of evolution. The trick is to find one of these industries which seems to operate similar to yours, except that it is further along in the evolution. Watching its path is like seeing into a parallel universe of your own path, only you get to see further ahead, because they are further along.

As an example, when I was working in the grocery wholesale industry, it seemed like the drug wholesale industry was facing many of the same challenges, only sooner. By watching the current environment in drug wholesaling, I often got a glimpse into the challenges that would soon impact grocery wholesaling. By understanding how successful drug wholesalers dealt with the issues, I could get insight into which strategies might be most suitable for the wholesale grocery industry.

3) Look for Experts
Fortunately, you do not have to go on this journey by yourself. There are expert puzzle piece gatherers out there who do this full-time. These trend experts have already done a lot of the gathering of information already. Take advantage of their years of experience.

For example, one time I was working on a project where we needed to gather a lot of information on the teen market. At first, we thought about doing a massive consumer research project with a large sampling of teens. This approach had a number of drawbacks—it would take a long time, it would be very expensive, and we weren’t sure we even knew enough to ask the right questions.

Then we though about hiring an expert on the teen market and pay them a small fortune to do a major part of the project work. This also had drawbacks—it would be very expensive, there was a risk that we would hire the wrong “expert,” and by outsourcing the work, we would not be internalizing the knowledge as much.

As a result, we picked a third approach. We contacted a large number of different groups which all claimed to be teen experts. We told each of them we just wanted to “borrow” a couple of their experts for about a half a day to chit chat and get their top line opinions of what was going on in the teen environment. About six or seven groups agreed to do this, and to do it for very little money.

So, over a short period of time, we spent a few hours with each of these groups to understand their point of view on the teenage environment. We looked for commonalities in their perspectives. It was sort of like interviewing people who had already interviewed thousands of teens, so we got the benefit of far more data gathering than we could have done on our own (and much quicker and cheaper as well). Because we talked to multiple experts, we minimized the risk of being lead astray by false expertise. And because many of the experts came to similar conclusions, there was comfort in the reliability of what we heard.

4) Look for Connections to Universal Truths
In general, the needs and wants of society do not change all that much. What changes are the ways in which we satisfy those needs and wants. It goes back to the basic Maslow’s Hierarchy of Needs. We want to feel loved. We want to feel like we belong. We want to feel secure. We want to eliminate stress and find ways to better cope with the everyday pressures of life. The better you can link your puzzle pieces to these universal themes, the more powerful and more accurate you picture of the future will become.

So when interpreting your puzzle pieces, look for the pieces which point to a superior way to solve universal problems. If they truly are superior, they should eventually replace the current solutions. If you can jump on these quickly, you have an edge in enjoying the fruits of future growth.

Great strategies look for ways to exploit the evolving environment. Therefore an understanding of the environment is a critical early step in the strategic process. However, since the future is not completely known, your quest for a future vision can be very difficult. It is made easier if you look on the fringe, look for parallel universes, look for experts and look for connections to universal truths.

To quote Richard Rumelt, professor of business strategy at UCLA, “There are only two ways to get [a pathway to substantially higher performance]. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment—in technology, consumer tastes, laws, resource prices, or competitive behavior—and ride that change with quickness and skill. This second path is how most successful companies make it.”

Building this type of puzzle may be difficult, but the rewards can be very great.

Sunday, September 2, 2007

Postponing the Inevitable

I used to live in Minnesota, where it gets very cold in the winter. On one particularly cold winter day, the high temperature was only supposed to get up to around 25 degrees below zero Fahrenheit, and that’s before you add in the wind chill index.

Usually on those days, I would call in and take the day off, huddled in my warm house. Unfortunately, we had flown people into town to hear an all day lecture by me, so I couldn’t just call in to take the day off.

The meeting went all day and into the night. It was bitter cold. Most people couldn’t get their car started. I was one of the “lucky” ones who did. At least I thought I was lucky. However, it was so cold that the oil did not properly lubricate the engine, and I ended up ruining my engine that night.

I took it in to a repair shop. The mechanic told me that what I needed was a whole new engine, and that the repairs would cost about the same as buying a new car. Then he gave me an alternative. For a lot less money, he could replace a few engine parts with some reconditioned parts. He said that if I took good care of the car, I could probably get about 18 months of use from the car with these parts. The drawback would be that the car engine would get progressively noisier and less powerful, until it wouldn’t work at all.

I took the less expensive repair. The repairman was absolutely right. The engine kept getting noisier and noisier with all of its clanging and the performance kept getting worse. Eventually, it got to the point where I didn’t think I could get another day of use out of the car, so I drove it to an auto dealer and got a new car that very evening. And it was almost 18 months to the day from the repair.

Businesses can be like automobiles. An external event (like that bitter cold weather) can suddenly make the engine of prosperity in our business stop working properly. When that happens, we usually have two choices. We can either develop a new engine of growth for our business (one that will thrive in the new environment), or we can try to make do with the old engine for as long as we can.

Often, businesses do the same thing I did with my automobile. They put in just enough of an investment to keep the old engine running. The problem with that approach is that:

1) It’s a temporary fix at best.
2) Because the strategy did not change for the new environment, it will continually become less effective.
3) The strategy is still going to die. You will still have to replace it eventually.
4) Often times, by waiting it becomes increasingly harder to catch up with competitors who made the big investment earlier.

If this is true, why then do so many companies postpone the inevitable? In many cases, it is because the timeframe of the leadership is different from the timeframe of a repositioning strategy. In an earlier blog (see “The Room is Smaller than you Think”), we talked about how many leaders think that they can stretch out the current strategy to last until they retire. Then they figure that the new leader can worry about investing in a new strategy. Unfortunately, the strategies don’t always last that long, even if they baby it along like I did with my automobile.

This idea was brought home to me again while reading an article by the consultancy of Booz-Allen (Barclays’ Global Acceleration, August 30, 2007). The article was talking about the transformation of Barclays Bank. Back in 2003, the management of Barclays Bank realized that their current strategic engine was essentially broken, given the new forces in the global economy.

As a result, Barclays Bank completely rethought their vision and started to put into place all of the parts to make the new vision a reality. To quote the article, “The new vision has been easy to articulate, but difficult to accomplish.” The author went on to say that implementation was made difficult by the fact that shareholders were not exactly accepting of taking a “profit growth holiday while we invest for future growth.”

It wasn’t until 2006 that the fruits of the effort began to really take shape. Now the new strategy is proving itself to have been worth the effort. However, one had to wait three years before seeing a major improvement. How many firms have the patience these days to wait three years?

I did some research into the average CEO tenure for large corporations. Depending on who did the research and how they defined the tenure, you get different answers. However, all of the studies tended to agree that CEOs keep their jobs for a significantly shorter period than a decade ago, some estimating that the average tenure has been cut in about half. The good news is that it seems to have stabilized over the last year. The bad news is that the average CEO only keeps the job for about six years or so.

Boards of Directors seem more willing these days to dismiss a CEO who doesn’t perform. According to one article, a new CEO has only about 20 months to make a big mark on performance. Otherwise, they lose credibility with the board of directors. Is it no wonder that companies look for the quick easy fix (like I did with my automobile) rather than making the big investment with the slow payback? The Barclays story gets written up and made newsworthy because it is rare.

Target spent decades developing the classy image which gives it permission from its customers to sell some higher margin fashion goods in a discount environment. Wal-Mart tried to leapfrog all of that effort and get permission from its customers to do so in only one year. It failed, and the strategy was quickly abandoned. They didn’t have the patience to do it the right way.

So how can one successfully transform a company when the timeline is long but the patience is short? I have two suggestions:

1) Run Parallel Processes
2) Become More Inclusive

These are briefly discussed below.

1) Run Parallel Processes
There is an old saying that “If it ain’t broke, don’t fix it.” Well, when it comes to strategy, that saying doesn’t work. For strategy, a better saying would be “Build a replacement while the current strategy is still creating cash.”

All strategies eventually fail. All strategies eventually fail. Your strategy (in its current form) will eventually fail. Failure is inevitable due to changes in the environment. If failure is inevitable, then it is wise to always keep an eye out for what will eventually weaken your strategy and prepare in the background the new replacement.

It can take many years and lots of money to create the replacement strategy. If the current business still has a few years left in it, it can help fund the replacement process. In the case of Barclays Bank, they were fortunate that the business in the UK was still strong enough to help carry the business and fund the transformation until it could pay for itself. They did not wait until the business was completely broken before starting the transformation. They saw the handwriting on the wall in where trends were headed and acted quickly to transform before the cash engine completely gave out.

Hence, the principle is to run parallel operations—one that still has life in it to keep the cash coming in the door and one that will be reaching its full potential about the time that the engine in the other strategy is about to give out. If you wait until the first engine is already dead, then you will not have the time or the money to build a proper replacement strategy. You are stuck trying to squeeze a little bit more out of the first engine after its best days are already done.

2) Become More Inclusive
The days of the independent CEO are coming to a close. To be effective, leaders need to reach out more to their constituents, including customers, the board of directors, and employees who have a stake in the long-term future of the company. The more you can reach out and build bonds with these people, the more willing they will be to work with you on long-term transformations.

Boards need to feel a sense of ownership in the long-term strategy. The more they see the strategy as being their own, the more patience they will have to get it accomplished. Conversely, if the strategy is too closely tied to the CEO, any impatience with the strategy will directly lead to impatience with the CEO, leading to an early CEO departure.

Since all strategies eventually fail, the only way to keep a company from eventually failing is to periodically reinvent the strategy. Unfortunately, true reinventions can take a lot of time and money. Therefore, it is better to start the transformations while the old strategy is still strong enough to carry the business through the transformation. In addition, it is important to get as much buy-in to the strategy as possible, so that people have a personal stake in making the transition work.

The studies I read showed that if a CEO was able to deliver a strong performance, he/she could beat the odds and keep their jobs longer. Parallel processing would appear to be the best tool to beat the odds.