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.

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