Sunday, December 30, 2007

Strategic Planning Analogy #142: Strategy for the Birds

Last week I was driving to Chicago to spend Christmas with my daughter and her newlywed husband. It was a difficult drive. I was driving into a 50 mph wind with gusts that would blow the car all over the road. In addition, there were snow swirls that made it difficult to see where you were going.

It was a tiring way to drive, so I pulled off at an Indiana toll road rest stop to take a break. The wind was so strong that I had difficulty getting the car door open.

Near the car was a tiny little bird. The bird wanted to fly in the direction where the wind was coming from. Every time the bird jumped up to fly, the wind threw it back in the opposite direction. Each time it tried to fly, it was getting further from its goal.

I felt sorry for the bird, but was grateful that I had a car that was strong enough to tackle the wind.

It’s great to have goals, but goals are of little use if you cannot achieve them. Both I and the bird had a similar goal of trying to go west. However, the combination of the frailty of the bird and the strength of the wind made it impossible for the bird to achieve its goal. Although it was still difficult for me, my car was strong enough to fight the wind and successfully get me to my daughter’s house.

In every marketplace, there is a prevailing wind—the conventional way in which things get done. Typically, businesses have a desire to grow and gain market share. For you to grow and gain share, someone else usually has to shrink or lose share. In other words, you have to change the way things currently get done. Therefore, for your strategy to succeed, you often have to go against the prevailing wind in the marketplace.

Going against the prevailing wind is difficult, especially if you are weak like that bird. Just jumping up to fly won’t work. Effort alone is not enough. It takes a sophisticated strategy in order to outsmart the prevailing wind of the marketplace.

The principle here is the idea of the “indirect attack.” If you are a small player who wants to become larger, there is a temptation to directly take on the market leader. After all, that’s where all the market share and profitability is. It’s like the old story about the bank robber Willie Sutton. He was asked why he robbed banks. Willie replied, “Because that’s where the money is.”

However, a direct attack on the leader is often about as futile as that bird’s direct flight into the wind. Leaders have a number of inherent advantages.

1. People are already in the habit of patronizing the leader. Why change?

2. People believe that the leader is a leader for a reason. If you are not the leader, then you must be inferior. After all, if you were better, then you would already be the leader.

3. Leaders are already well known and accepted. Your brand, however, may be an unknown entity.

4. People rarely get into trouble for patronizing the leader. It is acceptable behavior. It is riskier to try something else. Why put your reputation at risk with a non-leader?

5. Who I patronize reflects who I am. If I patronize a leader, then I must also be a leader. If I patronize a loser, then I must be a loser.

6. Leaders tend to be larger and stronger financially. If you get into a fight with them, they can outlast you.

As a result of these inherent advantages, the leader is difficult to unseat. Even if you are every bit as good as them, you will fail in a frontal attack. Even if you are somewhat better than them, the prevailing winds of their leadership position will keep them as the victors for a long time.

So superiority over the leader is not enough. For example, in blind taste tests, Pepsi had a superior taste over Coke. Yet, when the labels are put on the products, the winds of leadership help Coke overcome Pepsi.

So, do we just let the prevailing winds helplessly blow us around? Of course not. Small players never win by going with the flow. The flow is designed only to benefit the leader. Sam Walton frequently pointed out that they key to the early success of Wal-Mart was due to the fact that he was willing to go against the flow and do things differently than conventional wisdom.

Conventional wisdom leads to conventional results. Glorious success comes from doing things differently.

So we cannot attack the flow directly, but we cannot go with the flow either. Therefore, the effective strategy in most cases is to attack the leader indirectly. When a sailboat wants to sail against the wind, it does go directly into the wind. Instead, it uses an angular indirect approach, known as “tacking.” Similarly, small companies need an indirect approach.

In general, the indirect approach works like this—become a leader in a place where the current leader is vulnerable. This could be geographic. For example, while everyone else was attacking large cities, Wal-Mart in its early days went to the rural areas that were being ignored.

This could also be about attributes. If the leader is all about owning price, then try to own something else, like service or quality.

This could also be about demographics. If the leader owns older people, go after the younger ones. This is how the UPN, WB and CW TV networks tried to gain a toehold against the leader CBS.

Or it could be about attitude. Coke had the all-American wholesome attitude, so Pepsi took the rebellious attitude.

So, the strategic task is as follows:

1) Learn the vulnerabilities of the leader

2) Understand your internal capabilities

3) Indirectly attack the leader by trying to own something where the leader is weak and you are capable of building a new leadership (co-habitation). This new leadership comes from redefining the rules and building a point of preference where one did not exist before.

4) Use this new leadership as a launching pad for further growth.

In the beginning, Wal-Mart was like the little bird against the major retail chains. It’s only hope was to go indirect and start in the rural markets which were being ignored. Eventually, it used that base to become large enough and strong enough to take on the whole retail establishment. It became as strong as my automobile, which could go against any prevailing wind. At that point, Wal-Mart took on the entire US grocery establishment and won.

The established marketplace works based on a set of rules which favor the leader. If you are small and want to grow in such an environment, you cannot usually win by directly taking on the leader based on the leader’s rules. Instead, you need to change the rules in your favor. This works best when you take an indirect approach by building a base of strength in a place the current rules are ignoring. Then you can start re-writing the rules around your base and grow.

If you want to be “king of the hill,” rather than try to knock off the person who already has the advantage of the high ground, instead go off and build your own separate hill.

Saturday, December 22, 2007

Merry Christmas

Normally, I'd be telling a story right now, but the only relevant story for this time of year is the Christmas story, which I'm sure you have already heard. I will leave it up to you to discover the principle behind that story and how to make it relevant in your life.

It'll probably be a week or so before you see the next blog. Have a merry Christmas.

Wednesday, December 19, 2007

Strategic Planning Analogy #141: Vasa Matter

August 10, 1628 was the date of the maiden voyage of the new Swedish military ship the Vasa. The Vasa was a huge and glorious-looking warship, extremely ornate with lots of cannons. The cost of the ship was equal to over 5% of Sweden’s entire annual GDP, and it looked as spectacular as its price tag.

Large crowds were on hand to watch the Vasa leave port on its maiden voyage. Shortly after leaving shore, the Vasa hit a small gust of wind. Soon thereafter, it tipped to its port side and sank. Less than a mile from where it started, the Vasa was completely submerged and lost under water, along with the lives of 30 to 50 people. Four years of work lost in a handful of minutes.

What went wrong? As it turns out, just about every type of project management error took place in the prior four years.

Let’s start at the top with King Gustavus Adolphus of Sweden. Here’s some of the things he did which had a negative impact on the project to build Vasa:

1) He kept changing his mind about the strategic direction he wanted to take the Swedish military fleet. Sometimes he asked for large ships, sometimes small ships, sometimes medium ships. Then he would change his priorities for the order in which he wanted them built. This created a planning mayhem for the ship builders.

2) Because he kept losing ships so quickly in the war effort against Poland, King Adolphus kept having to increase the number of new ships he wanted built as well as increasing the speed in which he wanted them built. When speed is of primary importance, other problems can slip through the cracks.

3) Throughout construction of the ships, King Adolphus kept meddling with the process through endless change orders. He kept changing how many and what type of cannons would be on the ship. He kept changing the size of the ships. The problem was that at a certain point in the process, these changes create massive problems. For example, specific trees are chosen and cut a particular way based on the type of ship being built. If you change the design after the trees are cut, it is hard to make the logs fit the new design. In addition, by adding more and heavier cannons to the design, King Adolphus was making the ship more top-heavy at a point when it was too late for the boat design to be adjusted to compensate for the added weight.

4) Throughout most of the process of building the Vasa, King Adolphus was out of the country fighting the war. He was out of touch with what was happening with the shipbuilders. So you had the worst of both worlds—an absentee manager who did not know what was going on yet still wanted to constantly meddle with what was going on.
At the shipbuilding level, there were also a number of events going on that hurt the project.

1) Just prior to the order for the Vasa, the shipbuilding organization had new owners without any real continuity with past orders. In addition, the shipbuilders were not strong financially, which created added stress.

2) The types of ships King Adolphus was ordering were a new type of ship the shipbuilders had never built before. The shipbuilder Henrik Hybertson had nothing to go on based on his prior experience. Because they did not have sophisticated mathematical tools at that time, Hybertson just made up the design in his head based on his best guess.

3) There were not a lot of sophisticated drawings for what the ship was to look like. It was pretty much all in the head of Henrik Hybertson. Unfortunately, late in 1625—one year into the construction process—Hybertson became very ill. He eventually died in the spring of 1627. During his illness he was not able to attend to details as he normally would. When his assistant, Henrik Jacobson, took over after Hybertson’s death, he was not sure what to do, because Hybertson had done very little communication with him during the illness. Jacobson just tried to finish it as much to what he thought Hybertson had in his mind.

4) When the initial stability tests were performed, the ship failed the test. It seemed highly prone to toppling over. In fact the test was stopped midway for fear that the boat would sink if the test were completed. Yet nothing was done as a result of the test. The pressure from the king to get the job completed soon was bearing down on them. Therefore, it was assumed that the master ship designer knew what he was doing, so the problems with the test were not reported. Worse yet, the test was done before all of the top-heavy ornamentation was placed on the ship, which would make it even more top-heavy.

5) Ship stability depended on having the proper weight at the bottom of the ship. On the maiden voyage, the Vasa was leaving port to go pick up the full crew and supplies. Crew and supply weight was an integral part of the design calculation. Without them, the ship would be even more unstable. They should have brought the crew and supplies to the ship, rather than the ship to the crew and supplies.

King Gustavus Adolphus was known as a great war strategist. His war strategies had taken Sweden from being an inconsequential country to a powerhouse in the affairs of Europe. Unfortunately, great strategies, when poorly executed, can result in disasters like the Vasa.

This is true in today’s business world as well. If your project management skills are as messed up as they were for Sweden in the 17th century, your strategy will also sink before you know it. You won’t need competition to destroy your strategy. Your own inability to execute a plan will sink you in your own harbor.

The principle here is that strategic planning should not stop at the design stage. Once a strategy is designed, it must be executed. Poor execution can make a strategy worthless. Therefore, design of the execution is as important as design of the strategy. Design and management of the process needs to be tightly integrated into the strategic planning process.

The Vasa project did not integrate this all together. It failed at three levels:

1) Direction – The strategic direction for what ships should be built kept changing.

2) Adaption – The ship building process was not designed well to adapt to change, be that changes to design once lumber was cut, changes in shipbuilding leadership, changes to number of cannons, and so on.

3) Communication – The communication between the king and the shipbuilders was poor and the communication amongst those building the ship was poor, and the communication of bad news was poor.

To have a successful outcome, strategic planning needs to have a say in how these levels are executed.

1) Direction – Strategic Planning needs to ensure that the strategic direction does not get lost at the point of execution. The keepers of the strategy need to continue to point the way to the “True North,” so that the fury of activity does not inadvertently veer off course. Do not assume that workers will keep on the path on their own. Proactively work to ensure the overall direction is not lost in the daily details of execution.

2) Adaption – During the course of execution, things will change. The environment will change, we will learn more, people will leave, and so on. Therefore, strategies will need to be modified and adapted to the change. If strategic planning is not a part of the adapting, there is no control to ensure that the changes are strategically sound. Poor adapting can ruin the entire strategic foundation that was developed earlier. Therefore, changes should be treated as strategically as the original project design.

3) Communication
– It is impossible for everyone in the organization to execute a plan to make a strategy come to life if nobody at the execution level knows what the strategy is. A strong two-way dialogue is needed between the keepers of the strategy and the executers of the strategy so that the desired outcome occurs. The executers of the strategy are like the forward intelligence unit who can report back how things are going (like if the ship doesn’t pass the stability test). The keepers of the strategy provide direction to make sure the executers understand the strategic context of their actions and what is expected. The two-way communication also helps when adaptation is needed, so that everyone is on the same page.

The strategic planning process should not end when the original strategic design is completed. It must continue into the execution phase. The big annual strategic planning meeting is not an ending point. It is a starting point. The planners and the executors need to partner throughout the entire process—from ideation to implementation. Otherwise, the project will tend to veer off course and sink your chances for success.

General George S. Patton is quoted as saying, "A good plan, violently executed now, is better than a perfect plan next week." In other words, great execution matters a lot in one’s success. It can make a good plan great. The sooner you can integrate the two, the better off you are.

Tuesday, December 18, 2007

Strategic Planning Analogy #140: Two Simple Steps

Awhile back, rap singer 50 Cent (aka Curtis Jackson) was on the David Letterman show. Curtis Jackson said he had come up with the secret for happiness. Naturally, David Letterman wanted to know what that was.

Curtis said there were two steps to reaching happiness. First, you have to figure out how much money it would take to make yourself happy. Second, after figuring out how much money you need, go find a job that pays that much money. It’s as simple as that.

As odd as that advice seemed, 50 Cent was dead serious. He said he knew he needed a lot of money to be happy, so he became a rap star.

This reminds me of an old Steve Martin comedy routine. Steve Martin claimed to have discovered a simple two step process for becoming a multi-millionaire. Step #1: Get a million dollars. Step #2: Invest it wisely. It’s a simple as that.

The problem with these simple two-step processes is that they ignore all of the complexities involved in achieving each step. It’s one thing to just say “get a million dollars” or “get a high paying job.” It is quite another thing to accomplish the task.

For example, let’s say that you want to follow 50 Cent’s advice and get a high paying job. Well, there are a lot of actors making oodles of money, so maybe I should become an actor. The problem is that while there are dozens of actors making a ton of money, there are thousands upon thousands of actors who cannot earn a full-time living at acting. They are all supplementing their income by being waiters or taxi drivers or doing some other low end service job.

The advice doesn’t help me overcome the odds and become one of the few really successful actors. As a result, the odds are that I am more likely to fail as an actor than succeed. These two step plans may be aspirational, but they provide no sense of direction, nor do they give any details on what path to take to overcome the odds. So the simple two step plan as stated is fairly worthless.

I have seen a similar level of worthlessness in company strategic plans. A number of companies claim to have a strategy, but instead just have empty aspirations. Although it may be masked inside a lot of fancy jargon, a lot of business strategies boil down to little more than one of these aspirations:

1) Make a lot of earnings

2) Create high returns on investment

3) Increase the stock price

This isn’t far removed from 50 Cent’s “find a job that makes a lot of money” or Steve Martin’s “go get a million dollars.” There’s no direction or path to increase the odds of success…in other words, fairly worthless as a strategy.

Lately, another phrase like this is becoming popular in business strategy jargon: “Succeed through Innovation.” These companies claim that innovation in and of itself is a strategy. This is no more insightful than saying “succeed by getting a high paying job?” Just as most actors fail to make a lot of money, the vast majority of innovations fail as well. If the strategy is little more than just “go out there and innovate,” the odds are that you will fail miserably.

The principle here is that innovation by itself is not a strategy. It can be an important tool within a strategy, but it is only one of many steps within the strategic process.

In the recently published Winter 2007 edition of “Strategy+business,” the folks from Booz Allen Hamilton published the results of their annual study of the top 1000 spenders of R&D. As in the past, they found that most companies do not get much of a return on their R&D efforts. As a result, it appears that just saying “go out there and innovate via R&D” is not a natural path to success.

Some companies, however, do create great success via innovation. Booz Allen Hamilton found that those who were successful in innovation tended to have similar characteristics. First, these companies worked closely with their customers to ensure that the innovations were something their customers wanted (which they referred to as “customer focus”). Second, these companies focused their innovation efforts specifically into areas which supported a broader strategic plan (which they referred to as “strategic alignment”).

In other words, for successful companies, innovation was not the strategy. Instead, it was just a tool to help bring the overall strategy into closer alignment with the consumer. To put another way, success requires:

1) Winning the hearts of your customers buy providing goods and services which they will love; and

2) Winning the minds of your customers by providing goods and services which they will believe you are the best at offering in the marketplace. Even if you can create the innovation, if the customer does not make you the top of mind best brand for that innovation, you will not get sufficient credit for your efforts. You are most likely to get the credit if the customer can see the innovation as a natural extension of an ongoing strategic position which is already burrowed deeply into their mind.

Hence, if innovation helps in winning the hearts and minds of your customer, than it is probably successful innovation. If innovation is not doing this, than it will probably fail. If you can further win the hearts and minds without innovation, then perhaps innovation does not need to be a part of your strategy at this point.

Let’s apply this principle to an example—energy drinks. Energy drinks are one of the fastest growing and most profitable segments of the beverage industry. It is the single greatest innovation in the beverage industry since bottled water. However, even though the product is a great innovation, not every firm that has entered this space has been successful.

The successful firms were the ones that either found a way to use energy drinks to get closer to their customers or found a way to use their current strategic position to get leverage in the marketplace.

In 2006, about 91.5% of the energy drink market was held by five firms: Red Bull (43%), Hansen (15% via Monster brand), Rockstar (11%), Pepsi (13% via AMP, No Fear and other brands), and Coke (9% with Full Throttle and Tab brands). These five companies fall into one of two categories:

1) Energy Drink Specialists who can focus on owning the hearts and minds of the customer because this is all they do (Red Bull and Rockstar);

2) Beverage Distribution Specialists who can easily integrate energy drinks into their current strategy in order to make their current strategy more powerful (Coke, Pepsi, and Hansen).

Now, let’s look at a firm who appears destined to fail in this category—Hooters Energy Drink. It does not appear on the surface that there is a close enough connection between the Hooters core customer and the energy drink core customer. Also, if you were a bar or nightclub and had a choice of any brand of energy drink to sell, why would you sell a brand that advertises an alternative bar location? So Hooters was not getting close to the bar or nightclub operator customer, either.

Second, this really does not take advantage of any core Hooter strategic strengths. They are not beverage manufacturers or beverage distributors. Energy drinks will end up as a fringe distraction to the Hooters core strategy rather than an enhancement. When the average person thinks about Hooters, the strategic vision would not automatically lead one to naturally think that Hooters should be a leader in this category. Hence, it should not surprise anyone that the readers of Brandweek magazine voted Hooters Energy Drink as the most questionable food line extension of 2007.

By contrast, one of the line extensions thought highly of by Brandweek readers was PetSmart’s diversification into PetsHotel, a place to leave your pet when you have to travel out of town. This is a winner because first it is customer focused. PetSmart knows its customers and it knows how important their pets are to them. In fact, on December 17, 2007, the Wall Street Journal talked about the growing importance in the pet’s place in the owner’s life by pointing out the growing trend among pet lovers to worry about their pets when doing estate planning. Another part of this growing concern for pets occurs when owners are away from home and need someone to care for the pets overnight. PetsHotel fills this growing need.

Second, this trend fits in well with the ongoing strategy of PetSmart. PetSmart is known for caring about pets. PetSmart already has an affinity with pet lovers. Hence, it is a natural fit in customer’s mind to give credit to PetSmart in the pet hotel space. They trust PetSmart for the food their pets eat, so why not trust them to look after the pet overnight? So PetSmart is well positioned to win with this innovation because they know it is something the customer will love (win the heart) and they know it is something the customer will give them credit for (win the mind).

Innovation is not a strategy. Innovation is just a step in a larger strategy process which requires consumer focus and strategic alignment. Without intimate knowledge of your customer and a sophisticated strategic position to leverage, innovation will most likely fail.

So maybe there is a simple two step process after all—consumer focus and strategic alignment.

Saturday, December 15, 2007

Strategic Planning Analogy #139: Learn Your Love

Once, there was a young man who loved a beautiful young woman. Since he loved the woman so much, he wanted her to have great riches. Therefore, he devised a plan to give her great riches.

He left the United States to go work in a rapidly developing Asian country. The young man figured that he could become richer faster in one of these countries. He was right.

While living in Asia, the young man did well. On a regular basis, he would send money back to the United States to the woman he loved. He would also send her expensive pieces of Asian art.

After many years, he finally had become sufficiently wealthy that he could now fulfill his dream of supplying the woman he loved with great riches. Therefore, he came back to the United States to be with her.

When he returned, the young man expected the woman he loved to be happy to see him. Instead, she was very angry. He asked why she was so upset. She said,

“I never wanted great riches. I never wanted expensive Asian art. I don’t even like Asian art. All I ever wanted was to spend time with you.

“But instead of giving me what I wanted, you ran off half way around the world where I couldn’t spend time with you. You were so busy trying to become rich that you would not come back to visit me or even answer my calls.”

The young man replied, “But I did it for you. I love you so much that I want you to have all the riches you could desire.”

To this, the young girl said, “If you had really loved me, you would have done a better job of learning what was truly important to me. Spending time is what was most important to me. I found someone else who understood this. We recently got married. I saved all your money and your art. You can have it back.”

Many companies talk about how important the consumer is to them. They use terms like being “consumer centric” or “customer first.” They may even talk about a goal of “delighting the customer.”

This professed “love” of the consumer is similar to the love that the young man had for the young woman. Just as this young man devised a plan to please the woman he loved, many businesses devise strategic plans with the aim of pleasing their customers.

Unfortunately, the young man discovered that having great love and having a great plan were not enough. Because he did not take the time to truly understand the woman of his affections, his plan was a failure. Rather than making her happy, he made her so unhappy that she left him for another man.

This also happens all the time in the business world. Companies may profess their love of the customer, but spend so little time trying to understand them that their well-laid plans fail. Instead of giving the customer what he or she really desires, they give the consumer what they think the customer wants. Often times they guess wrong. As a result, the customer leaves them and marries-up their loyalties to another company.

The principle here is that customer love without customer intimacy leads to failure. Good intentions and well thought out plans are not good enough. One needs the intimate knowledge of the customer to truly satisfy them.

Although this has always been true, it is even more critical in today’s marketplace. Thanks to web 2.0 technology, consumers have more control of how business works. If you are out of touch, they can use their power to quickly punish you and abandon you.

Facebook’s recent failure with their Beacon technology is a great example. Facebook thought its customers enjoyed sharing all of their information. So, in order to help monetize this fact, they used Beacon to post where Facebook members were shopping (along with some shopping-related ads). They did this without asking permission.

Consumers hated this new intrusion into their lives and made a big stink about it all over the web. Facebook quickly relented and pulled Beacon.

Now you would think that a big consumer products company like Kraft would have figured this out a long time ago. But they have stumbled as well. About a year and ahalf ago, Irene Rosenfeld came back to Kraft to become their CEO (after spending a couple of years at Frito-Lay). What she found when she came back was a company focused almost exclusively on lower costs. Quality suffered. Innovation suffered. And profitability suffered.

As it turns out, customers were willing to spend more, if the product was right. Lower, put still premium prices on mediocre quality weren’t worth much. At that point, one may as well pay a little less and get the store brand rather than Kraft (which is what people did). Being out of touch with the customer was hurting the corporation.

With Maxwell House coffee, Kraft was so focused on beating Folgers that they failed to realize that the customers had abandoned both for Starbucks. Starbucks was more in tune with what the customer was looking for. Kroger pretty much missed the boat on healthy and organic as well.

Finally, Kraft is waking up to what the customer wants in coffee, but it may be too late. Like in the story, customers are only willing to wait so long before they abandon you for another love.

It is very easy for a strategic planning process to get focused on non-consumer issues such as raising margins, lowering costs, improving efficiency, improving supply chain relations, beating up the competition and so on. Although these are important issues, they can blind us to the impact our strategy has on the consumer (the one we profess to love).

In the strategic planning process, we need to continually keep asking ourselves two questions:

1) Do I truly, intimately understand what the customer I love wants from me? and

2) Do I truly understand how my strategic action will impact my ability to please the customer I love?

In business, what we do tends to fall into two categories: things the customer can see (like products, services, and prices) and things the customer is unaware of or doesn’t care about (like how you run your finance department or where you buy your office supplies). You may have a little flexibility on how you approach things in the second category, but never make a strategic decision in the first category without keeping the customer in the forefront of your minds.

Sometimes things which used to fall in the second category move up to the first. For example, most customers used to not know or care where their toys were manufactured. However, after all of the recalls of dangerous toys made in China, country of origin has become an important consumer issue. Therefore, consumer knowledge needs to be continually updated.

Saying you love your customer is not enough. Well-meaning plans that misunderstand the customer are not enough. Strategic plans need to incorporate knowledge gained through customer intimacy in order to succeed.

Today’s customer is less likely to put up with phoniness and hypocrisy than any prior generation. They are smarter and have more access to knowledge and power. Giving mere lip service to “customer centricity” is more perilous than ever before. There is no place to hide. It’s either authenticity or rejection. Don’t just say you love the customer. Show them you love them by some tangible action which resonates to their core.

Tuesday, December 11, 2007

Strategic Planning Analogy #138: Stay the Course

I know of a retail company where the founder and CEO was planning on leaving in a few years. Therefore, the company brought in a person to act as the temporary #2 executive and eventually become the replacement CEO.

Although the company had a number of retail stores, the CEO’s favorite store was the first store. It had one of the highest sales and profitability levels in the chain.

The new #2 wanted to make his mark on the company and prove that he was worthy to take over leadership. Therefore, he set a personal goal to get the second store to have higher sales and profits than the first store.

This #2 executive spent a lot of time tinkering with the second store. He was always modifying the store layout and the merchandise mix. Every little modification was designed to help improve sales and profits.

The result? Instead of gaining on the first store, the #2 store fell further behind. Although the new executive thought the continual changes should have pleased the customers, the customers saw it differently. What the consumers saw was a store that always seemed to be messy due to the changes going on and a store where they could never find what they were looking for because the products kept being put in new locations in the store.

Eventually, the executive gave up on this project. He left the store alone and the store performed well again.

It’s not uncommon for people to want to make improvements. Change is often viewed as a good thing—an opportunity to change for the better. However, from the customer’s point of view, change can have negative consequences. It can upset the normal flow of business and confuse the customer.

This is what happened in the story of this retail executive. He wanted to change things for the better, but his changes made things worse.

The same thing can happen in strategy formulation. In an attempt to improve the company performance, there can be a desire to constantly tinker with the overall strategy. This can be especially true in companies which have extensive annual planning processes and/or elaborate annual off-site planning meetings. If you are going to that much effort, there is some pressure to come up with something new in order to justify the activity. It looks a little silly to go through all that work just to end up saying that nothing is changing and we will “stay the course.”

If you have someone new managing the planning process, there is even more of an incentive to change things. Like the new executive in the story, there is a desire to prove your worthiness. It is hard to prove your worthiness if you do nothing different.

However, it is usually the case that keeping a strategy essentially unchanged for a period of time is actually more effective than continual tinkering. As in the story above, when the second store was left unchanged for awhile, its performance improved. Customers had time to get used to what the store was trying to accomplish and understand how to shop it.

The principle here is “consistency.” It is extremely difficult in today’s society to get a consumer’s attention. They are continually bombarded by messages. The everyday stresses and hectic lifestyles make it difficult for customers to think beyond the “crisis of the moment.” In addition, with all of the multi-tasking going on, it is difficult for consumers to think deeply about any one issue.

As a result, constant tinkering with a corporate strategy can get lost in the mental shuffle. It’s hard enough making a strong impression in the mind about any particular strategic positioning and getting it to stick. If you keep modifying the position, you can easily lose that impression and end up standing for nothing. Consistency of strategy deepens the impression in the mind. Modifications weaken the impression.

An old advertising executive I used to work with called it the “shaving man” theory. His point was that the average executive is consumed with thinking about his company. When he gets up in the morning, one of his first thoughts is about the company. When he goes to bed at night, one of his last thoughts is about the company. Every time he shaves, he is thinking about the company.

By contrast, when the average person is shaving, he is not thinking about that company. It is nowhere even remotely on his mental radar. Instead, he is probably thinking about things like:

1) The presentation he is making to his boss that day.

2) The fact that he doesn’t like the new group of boys his son is hanging out with and that he believes they are a bad influence on his son.

3) He sees his body in the mirror and is concerned that he is getting fat and out of shape.

4) His car is getting old and starting to need lots of repairs. Should he continue to put more money into repairing the car, or buy a replacement?

5) He doesn’t like the boy that’s dating his daughter and he’s trying to figure out how to get that boy out of his daughter’s life.

6) Tonight his favorite football team is playing on TV and he’s thinking about what it will take to win the game.

It’s hard for your company to compete with all of that mental clutter. If you’re lucky, he will think of your company when it comes time to purchase whatever it is you are selling. Anything beyond that is very rare.

In the mean time, the executive who is always thinking about his company, even when shaving, quickly becomes bored with the company strategy and thinks its time for a change. However, for the customer who rarely thinks about the company, he may only just be starting to grasp what the company is trying to stand for. The customer is not bored with your strategy.

If you change your strategy at this time, you may temporarily make the top executives in the company happy (less bored), but you will have confused the customer who has no time to comprehend all the nuances to your tinkering. After the tinkering, the consumer may have no idea what your strategy is and abandon you for something they better understand. In the long run, that will make the top executives unhappy.

I was recently reading a story about the new President of Eddie Bauer. Years ago, Eddie Bauer was a strong brand. It was positioned as a high quality rugged outdoor clothing company for men. They invented the down-filled coat. The strategy was to be the brand of choice when men wanted to have the best functioning rugged outdoor wear, yet still be a bit stylish.

After the Eddie Bauer brand was purchased by Spiegel, they started tinkering with the strategy. They added a lot of indoor home furnishings to the mix. The apparel mix went from being predominantly for men to being predominantly for women. Although stylish was still a concern, ruggedness was being deemphasized.

Now I’m sure that if someone had time to go to all of the executive meetings and read all of the internal company documents, they could have found some of the logic behind why Spiegel did all of this tinkering to the strategy. However, to the average person, this must have seemed like bizarre behavior on the part of Eddie Bauer.

Women, who were not trained to think much about the brand for themselves, would be too busy mentally to comprehend that they should add the brand to their list of choices. Men, who had one type of impression about the strategy would see that the brand had left that strategy, so the men who used to have a favorable impression left the brand. The Eddie Bauer brand essentially died in the marketplace.

All the while this was going on, firms like L.L. Bean stayed consistent with the rugged outdoor strategy and thrived. Sure, they improved the executional tactics along the way, but L. L. Bean stayed true to the core strategy and deepened the impression in the minds of its customers. The consistency at L.L. Bean won out over all the tinkering at Eddie Bauer.

Even though it makes sense to have strategic reviews on an annual basis, this does not justify a need to change your strategy on an annual basis. Too much tinkering will confuse the consumer and weaken your bond with them. Consistency deepens the bond and increases the power of your brands.

Annual strategic reviews serve many purposes. They can help determine if you are drifting off-track from your strategy. They can help you find ways to improve the execution of your strategy. They can help find ways to improve the strength of your strategy. They can even help you know when one of those infrequent times come up when the environment has changed so much that it is time to change the strategy. However, it is not the time for an annual reinvention of the company. If you feel a need to reinvent your company every year, then it is time to get a different set of inventors.

Sunday, December 9, 2007

Strategic Planning Analogy #137: Stop Lying to Yourself

Have you ever heard of people like this?

I’ve heard of women who want to lose weight. To help motivate themselves to lose weight, they purchase an entire wardrobe of clothing which is smaller than the size they currently wear. The idea is that the desire to want to wear those smaller clothes will be a strong enough incentive to get them to take the weight off.

Unfortunately, I have heard that this plan often fails. The clothes may increase the desire, but desire alone is often not enough. Increasing the desire to lose weight does not always translate into increasing one’s ability to lose weight. Now, instead of just being overweight, they have a wardrobe full of clothes they cannot wear. These clothes are a constant reminder of their failure and increase the frustration.

Just like overweight people, businesses also have areas where they would like to improve. It could be a desire to trim a little weight out of a bloated high cost structure. It could be a desire to improve market share, reduce defects, or increase customer loyalty. Inevitably, the ideas ultimately relate to some way of increasing profitability.

In the story, the women did not create effective plans to reach their goals. All they did was establish a desirable goal (go down a couple of sizes in their clothing) and then put an incentive out there (the ability to wear nice new smaller clothes). Businesses often do the same. Rather than build an effective plan, all they do is set up desirable goals/targets and give out incentives if the goal is reached.

Targets and incentives can be very effective if the goal is reasonably attainable. However, if there is no effective plan for reaching the target or goal, it becomes nothing more than a desire that cannot be fulfilled.

This will tend to result in destructive behavior. Either people will become de-motivated by the impossibility of the task and give up, or they try to “cheat” their way to the incentive by looking for ways to meeting the requirement without achieving the desired goal. (We’ve talked about this type of activity in prior blogs “Your Stock is Too High” and “Raking Up Losses.”) Either way, just as the women were stuck with clothes they could not wear, the businesses were stuck with results they did not want.

Worse yet, the unrealistic target and the incentive give a false hope to management that the goal will be achieved. Therefore, they do not spend the time developing a better, more achievable goal, or a better plan to achieve the original goal.

The principle here is to “stop lying to yourself.” If we set up unrealistic goals and targets, we are for all intents and purposes lying to ourselves. A target is like a proclamation to the world that “We can indeed achieve this.” If there is no realistic plan for achieving this, then we have lied.

One of two things needs to happen. Either we need to spend more time trying to figure out what needs to be done to make the target more achievable (turn the lie into truth), or perhaps we need a new goal (abandon the lie for truth).

This principle is especially true when a company falls into the “death spiral.” The death spiral typically starts when a company becomes less competitive in the marketplace. To shore up the lost profits cause by customer defections, activities and expenditures get cut. Without those activities and expenditures, the company becomes even less competitive and loses more customers. So then, to desperately get customers back, prices are slashed. This causes profits to plummet, so costs need to be cut even further. The good employees can see the handwriting on the wall and start to leave, further weakening the company. This type of activity continues until the business unit dies.

When a company starts down this decline, one may at first see it as a mere aberration, rather than a new trend. As a result, goals are set to return to historical growth rates. In addition, because there is a belief that nothing fundamental has changed in the competitiveness of the business model, there will be no plans to meaningfully change the business model.

This can result in disaster. First, by assuming no need to change the basic business model, one will not confront the fundamental issues causing the loss in competitiveness. Hence, the loss in competitiveness will continue. Second, by assuming an aberration rather than a new trend, one sets unrealistic goals, which drive bad behavior.

Back in the 1990s, when I worked at Supervalu, they were the leading food wholesaler to independent grocers. However, two external trends were weakening the competitiveness of their business model. First, independent grocers were losing share to the growth of large supermarket chains. Second, the rise of Wal-Mart Supercenters was not only creating problems for the independent grocers, but was changing all the rules for the entire grocery supply chain.

As it turns out, no matter how effectively you run warehouses for independent grocers, if the independent grocers are going bankrupt due to the chains and Wal-Mart, you have a broken business model. For awhile, Supervalu tended to live in denial, assuming the problem was only minor. Goals were set to grow as in the past, and the basic business model did not change much. This lead to several years of stagnation.

It wasn’t until they stopped “believing the lie that everything was still fine” that things changed. At that point, they changed the business model (primarily through the acquisition of Albertson’s), and are now back on a good path.

It’s like what they say about alcoholism. Until you admit you have a problem, you will not fix the problem. By lying to ourselves, we give ourselves an excuse not to do the difficult work of reengineering the business model.

Over the course of time, companies tend to go through a life cycle. Rapid growth is followed by maturity and maturity is followed by decline. If we are still thinking rapid growth after having reached maturity, we may make bad business decisions regarding investment. If we are still thinking maturity after having reached decline, we may miss out on all the ways to more profitably deal with decline.

Going down with the ship may be admirable in the navy, but not in business. If you know that your business is about to go down, the best move may be to look at liquidation or divestment. Usually, the earlier you take that option, the better, so living in denial is not helping the situation.

Strategic Planning can serve several roles to help eliminate a number of these problems. First, by keeping a close eye on the environment, strategic planning can help build a more realistic point of view about a company’s competitiveness. It can help determine if current problems are an aberration or the start of a new trend. Being the bearers of truth is not always a popular job, but it is a necessary job. Otherwise, a company may be believing a lie.

Second, strategic planning helps discover a path to get to the goal. We don’t want to end up like those women who desire to wear smaller clothes, but have no plan to make it a reality. Perhaps the goal is unattainable with the current business model, but becomes attainable if the business model is changed. Strategic planning can help find that new business model.

In other cases, perhaps the situation has changed so much that new strategic goals are necessary. Strategic planning can help discover what that new goal should be.

Goals and incentives are most effective when they are in tune with the realities of the marketplace. If your view of the marketplace is flawed, you may set up goals and incentives which are inappropriate. Such inappropriate goals and incentives will support bad behavior and keep you from correcting/changing your business model to one which is more appropriate.

I had a friend who successfully lost a lot of weight. Thinking he would always be at that new weight, he spent a small fortune getting all of his clothes altered to the smaller size. What he didn’t realize was that the short-term plan he had been on to lose that weight was not something he could sustain over a longer period. As a result, some of the weight came back and now none of his clothes fit.

Sometimes, we need to take a longer term perspective in order to truly understand our condition. Being too hasty to change when change is not necessary can be just as bad as too slow to change when change is necessary.

Wednesday, December 5, 2007

Strategic Planning Analogy #136: Your Stock is too High

Once upon a time, there was a man who owned an apple orchard. It was the beginning of harvest time. Unfortunately, the man heard a weather report which said there would be a hard freeze that night. If he did not get all of the apples picked before evening, he would lose the crop to the freeze.

Not wanting to lose his crop, the orchard owner went out to find as many people as he could to help pick the apples that day. He found a young man. The orchard owner told the young man, “For every bag of apples you deliver to me before nightfall I will give you one dollar.” The young man agreed to the offer.

Then the young man started thinking about what he agreed to. “The man wanted bags of apples, but did not specify the size of the bag. I will use the smallest bags I can find. The man did not say the bags had to be full to the top. He just said they had to be ‘bags of apples.’ Two apples per bag would satisfy being ‘bags of apples.’

“Finally, he didn’t say where the apples have to come from. I can fill a lot more bags a lot faster if I don’t have to waste time picking them. Therefore, I will buy pre-picked apples from his competitor. Even though I have to pay for them, it is still more profitable than picking them myself due to the time I save.”

Therefore, at the end of the day, the young man delivered 1,000 bags of apples to the orchard owner. Granted there were only two apples per bag and the apples did not come from his orchard. But the young man felt he had lived up to the offer as originally worded and demanded $1,000. The hard freeze came that night and destroyed the orchard owner’s crop.

In this story, the goal of the orchard owner was to get as many of his apples picked before the hard freeze came. However, the incentive program he set up with the young man did not cause his goal to be accomplished. As a result, the orchard owner was out $1,000 and still didn’t get his apples picked before the freeze destroyed the crop.

Be careful about how you set incentives. Incentives do not always lead to the desired consequences.

This is also true with strategies. One may have a strategic goal. However, if the incentives are set up improperly, the resulting activities may not lead to the desired strategic goal.

One of the tools often used to incentivize management is to reward them based on stock performance. Unfortunately, if the linkage to stock performance is set up loosely like the incentive program set up by the orchard owner, the resulting behavior may indeed raise the stock price in the short term, but have no connection to achieving the strategy.

Just as there are many ways to deliver bags of apples, there are many ways to raise a stock price. And in both cases, people can find ways to greatly benefit from the incentive without achieving the desired company goal.

The principle here is that incentives often have a greater impact on determining your true strategy than any amount of strategic planning or mission statement building. Your true strategy is not what you say you will do. In reality, your true strategy is what you end up setting out to actually do. If management sets out to get a big personal reward from their incentive, then your true strategy is to maximize that reward.

The hope is that there is enough linkage between the reward and the strategy that the true strategy will end up being about the same as the stated strategy. However, this will not happen unless two events occur:

1) The setting of incentives is treated as an integral part of the strategic planning process.

2) Incentives are carefully designed so that rewards are maximized only if the strategy is successfully pursued.

Otherwise, employees will be like the young man in the story and find ways to maximize their rewards without achieving the desired goal of the one who developed the incentive. Never underestimate the cleverness of people to find ways to beat the system and reap high personal rewards without bothering to do the hard work of advancing the stated goals of the strategy.

Take stock options, for example. Rather than focus on ways to raise the future stock price through strategy implementation, management in many companies instead focused on how to backdate the option granting date so that they started with the easiest possible goal.

Even if you leave out the problem of backdating, there are lots of ways to raise a stock price near term that have nothing to do with achieving the desired long-term strategy.

1) One can buy back shares.

2) One can make outlandish promises which cause the stock price to go up near-term, but falls back down later after you fail to deliver on those promises.

3) One can cut back on maintenance investments, which boost profits in the near-term, but may cripple the company long term when everything falls apart.

4) One can raise profits near-term by cheapening the offering to the consumer. It may take awhile for the customer to realize the decline in quality, so in the near-term there is a benefit. However, once the customer realizes the value has been lowered, they will likely take their business elsewhere.

5) One can take the money earmarked for investing in a strategic transformation and not spend it, hoping to coast for one more year on the old strategy. You may increase profits in the current year by doing this, but once the old strategy winds down, you are left with nothing, because you did not invest in the future.

6) One can confuse the market through a lot of complicated financial maneuvering, which makes it difficult to see how poorly a company is doing. There are lots of ways to do this, including complex financing, complex intertwined ownership, off-balance sheet activity, and so on. To quote one CEO I knew, “It looks like we are going to have a tough year, so make a big acquisition in order to no longer have comparable financials to last year.”

Over my many years in business, I have seen pretty much all of these activities take place in some form or other. If left to continue in this fashion, one’s true strategy becomes destroying the long-term viability of the company.

After Enron fell apart, I got to talk to a few of the former employees. They told me about how the incentive program worked. Every quarter there was a review of performance. If you improved the earnings of the most recent quarter, you got a ton of stock options. If you did not improve the earnings of the most recent quarter, there was a good chance you would be fired. These are the types of incentives which lead to the behavior which destroyed Enron. Based on these types of activities, the value of the stock becomes too high, too soon and eventually implodes.

Here are some suggested incentives which may improve the link with achieving a long-term strategy:

1) Link bonuses to achieving specific strategic business objectives.

2) Hold back some of the incentive until a multi-year strategic objective is fully achieved.

3) Rather than measure stock price, measure the components which determine stock price, such as changes in return on capital, changes in market share or growth projections.

4) Link bonuses to customer feedback.

Although these approaches are an improvement over mere stock price, even these factors can be manipulated in ways that are counterproductive (although it is more difficult). Therefore, to overcome the “gaming” of formulas, one may want to have part of the incentive be without a formula—a judgment call by the superior on one’s efforts to achieve long-term strategic goals.

You can spend months creating an elaborate strategy to a wonderful future. However, if the incentive program is not linked to that strategy, then you have wasted your time. Stock prices can be manipulated in ways that are beneficial in the short run but destroy a firm’s long-term strategic viability. Therefore, be careful in how you use stock as an incentive. Finally, make sure that discussion of incentives and strategies occur at the same time.

Employees may feel all fired up at the end of a big strategic planning summit and start chanting the mantra of the strategic mission. However, this is not the point at which you can gauge success. Success is measured weeks or months later when one sees whether the day to day actions are moving in the direction of the mission. If they are not, a good place to start in trying to fix the situation is to look at how people are incented.

Sunday, December 2, 2007

Strategic Planning Analogy #135: "Market Smart" Strategy

When I moved to Minnesota, I found out that a lot of people loved to tell jokes which made fun of Iowans. Later, I found out that the people in Iowa had the same jokes, except they changed a line so that the jokes made fun of people in Minnesota.

When I was getting my MBA at a leading school, we used to have jokes. The people the jokes made fun of were people who went to school at Harvard. I suppose the people at Harvard had jokes, too, but I don’t know who they made fun of. Pardon me, as I tell one of these stories, the way I heard it in college.

There once was this young Harvard MBA recipient who just got his first job after graduation. Every day, he would go to the large corporate headquarters and sit at his desk. He looked the part, in a nice suit and all, but he didn’t do anything. He just sat there, nice and quiet. This went on for days.

Finally, his boss came by to see why this new Harvard MBA wasn’t doing anything. The boss said, “We’re paying you a lot of money because we want to take advantage of all that training you got at Harvard. But so far you have done nothing but just sit there. What seems to be the problem?”

The new Harvard MBA replied, “I’m waiting for someone to give me a business case study to read.”

The point of the joke was that most business schools, including Harvard, have relied heavily on business case studies as part of their education process. Students are given a sizable document describing some aspect of a company, usually with lots of words and lots of numbers. The students are then expected to read the case study and be prepared to discuss it in class.

Although many principles can be taught this way, there are some weaknesses with this approach. First, the information is pre-packaged, with pretty much all of the relevant information included, and most superfluous information left out. In reality, the world is a lot messier than that. You have to go out and collect the information, and when you start, you have no idea what is relevant and what is superfluous.

Second, business cases tend to be cold and rely on packaged information. Students are only allowed to see what is in the material. Personal observations and the ability to touch and converse are gone. In the real world, one needs to use all of your senses to go out and learn about what is happening.

The same principles apply to strategy formation. The idea is not to just sit behind a desk and wait for someone to hand you a strategy. Strategies are executed out in the field. Your customers are out in the field. If you are not out in the field observing reality, you will not really know how relevant your strategic ideas are. If you just stay in the seclusion of your office and read some edited papers prepared by others, you are limited by the biases of whoever prepared the documents.

The principle here is “to become market smart by getting out into the market.” The more you understand the marketplace, the better one can strategize about how to win in the marketplace. A key element of understanding the market is getting out from behind your desk and interacting with the market.

A few days ago (November 28, 2007), the folks at the Booz Allen Hamilton consulting group issued a paper entitled, “See For Yourself.” In this paper, they talk about the importance of having leaders get out on the front lines to get firsthand information about what is going on. Their conclusion is that firsthand observations provide insights which will never be discovered if you just sit behind your desk. They give numerous examples of companies who have benefited from this practice, including Toyota, Wal-Mart, GE, Disney, Amazon, and Home Depot. Rather than go through all the examples, I suggest you read the article at
The article makes it sound like they’ve discovered a radical new principle, but it sounded a lot to me like Management By Walking Around (MBWA). MBWA was made popular by Peters and Waterman in their 1982 book titled “In Search of Excellence.” The original idea was that if a manager walks around the various parts of the company where work gets done, they will be better managers. They will find little problems before they become big problems. More important, they will build rapport with people throughout the organization, who will then feel comfortable bringing up issues in an informal manner—not sanitized by middle managers in the formal reports they read at their desk.

David Packard of HP was a strong proponent of this practice back in the 1940s, and the Japanese auto companies have been doing it for decades. Although MBWA was first limited to walking around places where employees do their work, the scope has now been expanded to walking around the places where consumers consume your product or service.

In an article in the December 1, 2007 issue of the Wall Street Jounal (written in collaboration with the MIT Sloan Management Review), the discussion was about making sure you make your observations broadly. The article, entitled “Raising Your Market IQ,” says to not only talk to your current customers, but also potential customers. They also recommended getting information over a long period of time by setting up panels to whom you return to repeatedly over time.

If you were to google the concept of MBWA, you’ll find tons of articles praising it. Something that has lasted this many decades and is still getting praise is more than just a fad. It is a great idea. Unfortunately, the laws of technology are working against it.

Take emails. Back in 2003, the average corporate email user received about 81 emails a day. In 2007, that number has reached to 142. By 2011, it is expected to be about 228 emails per day per corporate email user. If those all occurred within an 8 hour day, that would be about one email every two minutes. Handling email is becoming a full-time job, preventing one from spending time walking around for personal observation.

We live in an era of data explosion. The internet can feed us more information than we have time to comprehend. All of the data we have access to can give us a false sense of security. It can lure us to sit behind a desk absorbing all of this data and never get out into the real world.

The problem is that all of this disjointed data has no context. One needs a relevant point of view to help filter the data and put it into a context which is useful for strategy formulation. Observations help in this regard. They help you understand what is relevant and what is superfluous.

If you don’t get a marketplace perspective, you are left with your own perspective, which is distorted because you tend not to be a normal, average individual. For more on this topic, see my blog “Sometimes the Best Path is Behind You.”

Another problem is that if the information is out in the public domain, then you have no better information than anyone else. Competitive advantage often is little more than having keener insights than you competition, which help keep you ahead in the game. Quality firsthand field observations can help sharpen those insights.

Although the lure and the pressure of technology can keep us from spending time out in the field, we must fight this pressure. We need to make the time to get out to where the action is.

Whether you call it Management by Walking Around or call it Go and See, the idea is that better decisions are made if leaders have personal interaction out in the field. This includes interaction with employees, customers, and potential customers. This firsthand knowledge can provide a context which makes all other data more useful.

No one would want to fight a war without first understanding the terrain. Military strategists typically ask for reconnaissance before developing the battle plans. Similarly, business strategists need marketplace reconnaissance before developing business strategies. Get to know the “lay of the land” out in the marketplace by doing some personal reconnaissance.