Sunday, November 18, 2007

Strategic Planning Analogy #129: Time for a Change

One of the things I did while on vacation a week and a half ago was visit a local historical museum up near Haliburton, Ontario. Haliburton is located in some rugged rural country near the Algonquin Provincial Park.

There was an older man with a scraggly beard running the museum. He didn’t own a TV or seem too interested in modern times, but he knew the local history. He said that there were essentially three economic periods to the local history.

The first period was the agricultural era. During the 19th century, there were so many immigrants coming to Canada that the areas already developed for habitation were getting full. Most of these immigrants were farmers by trade, so the government looked for suitable farmland to open up. The Haliburton area had rich soil, because it had been untouched for thousands of years. The problem was that the soil was very shallow, with hard impenetrable rock just below the surface. There was a debate as to whether the land could support agriculture, but given the pressure, the government caved in and opened up the area for agricultural development.

For the first couple of years, the crops were good. However, the soil’s richness was soon depleted and became unprofitable to farm commercially. There were, however, lots of large trees in the area. So eventually, the farmers turned to the lumber industry. This became the second economic era.

Lumbering got the area through the remainder of the 19th century and about half of the 20th century. However, eventually the area became depleted of its large trees. Without the trees, lumbering no longer was economically viable.

About this time, wealthy people from southern Ontario started putting up vacation and retirement cottages along the many lakes in the area on the areas cleared of trees. Thus began the third economic era, the era of cottages. Now the key source of income for the area is taxation on all of those cottages and the tourism industry. In the summer it’s fishing and hiking. In the winter it’s skiing and snowmobiling.

Sometimes business models cease to work. In the case of the Haliburton area, soil gave out and trees gave out, making those economic models no longer viable. It was no fault of the hard workers in the area. Circumstances just changed, making the model unprofitable.

The same situation can occur for a business firm. A successful business model may be in place, but over time it no longer becomes viable. The problem may have almost nothing to do with the quality of the management. I am reminded of the Three Mile Island nuclear power plant disaster of March 28th 1979. At the time General Electric has a large division dedicated to building new nuclear power plants. After that disaster, Jack Welch told the division that they needed a new business model that was not dependent on building a single new nuclear power plant. Jack was correct in assessing that the era of growth in new nuclear power plants in the US was over for a long, long time.

So what do you do when the economic viability of your business or industry or geographic region (like Haliburton) is no longer viable? The people of Haliburton fought back and looked for radically different ways to stay viable—from agriculture to lumber to tourism. Sometimes the changes need to be this radical for business firms as well.

The principle here is “adapt or die.” Success requires more than just strong management and a dedicated work force. Even the best companies can see their viability vaporize due to changes in the environment. Consumers change; products become obsolete; technology reinvents consumer solutions. To survive over the long haul, a company must adapt to the change, like Haliburton did.

Better yet, a company should anticipate the change and get in front of it. This is one of the largest benefits to be gained from strategic planning. It allows a company to develop scenarios around what will cause the demise of its current business model. It also allows a company to see into the future about where new business opportunities may arise. By getting this advance knowledge early, a company can prepare for the times when radical change is called for. The first to successfully transition to the new business model tends to be the most successful. Strategic planning can help improve your chances in that transition.

There is a school of thought which says that businesses should stay close to their core and not stray very far from what they know. In general, this can be good advice. However, if the foundation of your core business model is changing too quickly, there may not be enough left to your core to remain viable. You could stick to the core of agriculture in Haliburton and never find a viable business model. Sometimes a radical change is required.

Take a look at Textron. Textron got its name from textiles, which was the core of its business in the first half of the 20th century. In 1923, it began in the basic yarn business. By the 1940s it had diversified into a number of synthetic fibers and then became the owner of a large number of textile mills. However, by the 1950s, Textron could see that there were risks to being so heavily invested in the US textile business. The textile business was moving overseas to where the labor was cheaper. The margins in the business were shrinking. Textiles no longer looked like the place to be in the US.

Therefore, Textron redefined their core. Instead of the core being seen as textiles, the core was defined as engineering and manufacturing. Textron looked for places where engineering and manufacturing skills could create a greater return. As a result, the portfolio began to change. Textile businesses were sold off and replaced with industries that provided a better future. By 1963, Textron was completely out of the textile business.

Today, some of the biggest divisions of Textron include Bell Helicopters, E-Z-Go golf carts, Cessna Aircraft, and military vehicles. This is a far cry from textiles, but Textron is still around and very successful, with revenues of around $11 billion and employs about 40,000 people. If Textron had stayed in textiles, I believe its fortunes would have been much worse.

Nokia is another company which has radically changed over the years. Started in 1865, Nokia began in the wood pulp industry. In the first half of the 20th century, it got into basic manufacturing of commodities like rubber products (boots) and telephone cable.

In the latter half of the 20th century, they could see that commodity manufacturing had its limits for a company located in Finland. Therefore, Nokia redefined their core from basic manufacturing to being more of a high tech participant in the telecommunications industry (trying to build up from their established base in telephone cable). Eventually, this lead them to the cell phone industry. Nokia is now the world’s largest producer of cell phones, with a global share of about 39%. That’s a long way from wood pulp.

GE is also legendary for redefining itself over the years—shedding business that have less of a future and adding businesses with more of a future. This has kept GE the company on top in spite of the viability of the individual parts.

Now some would argue that when a company gets in trouble, it should shut down, sell off, or harvest its business down and give the proceeds back to the shareholders. The logic is that if there are new opportunities, the shareholders can take their money out of the “losers” and invest in those new industries themselves.

However, success requires more than just money. New opportunities in the hands of incompetent businesses may be no opportunity at all, regardless of how much money you give them. It can be very difficult to start up a new independent business from scratch to attack a new business opportunity. Now you have two risks—the risk in the new industry and the risk in the new company. Established successful firms can diversify/morph into the new opportunity with potentially less risk.

In addition, there are other stakeholders than just the shareholders. What about the communities and the employees? Giving them the opportunity to participate in the new business opportunity can eliminate costly disruptions to society.

Changes in the marketplace will inevitably make all business models obsolete. If you want your business to survive over the long haul, there will be times when significant change is required. Sometimes that change can appear to be a radical departure from the past. Yet, even in times of radical change, risk can be minimized if you can find a redefinition of your core which transcends your current business model.

For Textron, they redefined from an industry focus (textiles) to a competency focus (engineering and manufacturing). For Nokia, it was a broadening of the definition from telephone cables to telecommunications. For GE, it is a focus on sound business principles rather than individual businesses.

As long as you can find that thread to get from the past to the future, there is potential for continued success long after your former business model becomes obsolete. Strategic planning is useful in all of these phases: realizing when it is time to change, looking for the common thread, and transitioning to the proper new model.

Haliburton may soon need to look for a fourth economic model. They used to get more tourism from the nearby parts of the US, like Michigan, New York and Ohio, because it was within easy driving distance. However, now Americans in increasing numbers are flying to more exotic places with more things to do, so tourism in the area is down. Haliburton is looking for a way to revitalize the tourism or perhaps find their fourth economic era. One of the things they are looking at is making the area a haven for the artist community, taking advantage of the scenic inspiration and, in particular, the plentiful stock of rock which can be used for sculpture.

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