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.

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