Friday, February 29, 2008

Analogy #160: Hire My Strategy

One time I was interviewing a candidate for a real estate analyst position. The purpose of this job was to analyze potential new store sites to help determine the likelihood of success if a store were built there.

One of the key responsibilities for this person would be to fly out to potential markets and then drive around to observe the area. These drive-around observations would be used to help determine the quality of the site, the type of neighborhood it is in, and how easy it is to drive to the site.

Near the end of the interview process, the candidate for the position asked a question: “Do you think the fact that I am declared legally blind and unable to drive a car would cause any problems?”

Needless to say, this candidate was not hired for the job.

Trying to land a new job is a lot like trying to land a new strategy. However, in the case of a strategy, one has to do it twice—once to convince the company to “hire” the strategy and once to convince the consumer to “hire” it.

In the story above, the candidate failed to get the job. Since there are usually far more people applying for a job then there are openings, most people who apply will fail. With such a high level of competition, one needs a good plan of attack in order to get hired.

Similarly, consumers usually have many choices of who to patronize. If your strategy does not resonate with them, you will fail to be chosen. Hence, you need a good plan of attack as well.

In this blog, we will look at four key principles used by candidates looking for a job and apply them to landing a strategy with your company and your customers.

Principle #1: Make Sure there is a Fit Between Capabilities and Qualifications
One of the best ways to increase your chances of getting a job is by having a close match between your capabilities (what you are good at) and the job’s qualifications (what they are looking for). The tighter the fit, the better the odds of getting the job.

In the story above, there was not a good fit. The job was highly dependent on strong observational skills and the ability to drive well in unfamiliar markets. Unfortunately, the capabilities of the candidate did not match up well to these qualifications. He was legally blind and unable to drive.

Now you may be saying to yourself, “Why would somebody so mismatched even apply for the job?” Yet it is not that uncommon for companies to do that with their strategies.

For example, let us suppose that the market leader in your industry is winning based on a low cost strategy. You might then conclude that a low price strategy is the ideal strategy for your industry and embark on building a low price strategy for your company.

However, your situation may be hampered by the fact that your company is not a low-cost operator. In fact, the market leader has such a cost advantage that you are not even close and could not catch up, let alone surpass them in low cost efficiency. At best, you will be inferior to the entrenched leader on price.

In such a case, your ability to land a low price strategy in the marketplace would have about as much a likelihood of success as a blind person applying for that real estate analyst position. The company should not even be trying to “apply” for that strategic position based on low price. Instead, it should have applied for a strategic position closer suited to its capabilities (Service? Quality? Convenience? Uniqueness?).

If you want to land your strategy, people (both internally and externally) must believe that the company has the capabilities to be the best at delivering what the strategy promises. Then, once you land the strategy, one has to deliver on the promise in order to keep the position. Therefore, only seek out strategic options where you have a chance of actually achieving superiority.

Principle #2: Keep the Resume Clear and Concise
Experts in the field will tell you that there are so many resumes out there, that there is not enough time for recruiters to analyze them all in detail. At best, you only have a few seconds to get your point across. If the recruiter cannot figure out who you are (based on your resume) in a few seconds, your resume is tossed out. Hence, the mandate is to make your resume clear and concise.

The same can be said about a business’ vision/mission/business statement. If it takes more than a few seconds for a person to figure out what you stand for based upon one of those statements, then you have lost the battle. You will be tossed out.

As mentioned in a prior blog (see “Play it Backwards”), fuzzy statements filled with vague platitudes are worthless in pointing out who you really are and what you are trying to accomplish. That makes them too hard for the internal troops to execute and too hard for the customers to embrace.

As marketing guru Al Ries likes to point out, successful companies can get the essence of their position down to a word (or two). For example:
Wal-Mart = Low Price
BMW = Ultimate Driving Machine
Apple = Cool Design
Disney = Family Fun

Can you boil your winning strategy down to a handful of words?

Principle #3: Look the Part
When you go in for an interview, rest assured that the interviewer will not only be paying attention to the words you say. He or she will also be paying attention to how you look. There’s a reason why experts recommend going to the interview in your best outfit, with shoes shined and hair cut.

To get the part, you need to look the part. If you look like a bum, you will be thought of as a bum (regardless of what you say), and few people want to hire a bum.

The same applies to your strategy. It is not just words on a piece of paper. It is the way you interact with all of your stakeholders. To be accepted as having a strategy of quality and service, everything you do must have the appearance of quality and service. Looks need to mirror strategy.

One of the keys to success for the Four Seasons hotels is the fact that everything you see reinforces the position of quality and service. Sometimes quality can be hard to scientifically calibrate as a consumer, because you cannot see all of the workings behind the scenes. Therefore, you look for visual cues to fill in the blanks. Therefore, make sure those visual cues shout out the message that reinforces the strategy.

When the warehouse club concept was first taking off, they sometimes put their stores in previously occupied buildings. I know of instances where the warehouse club operator spent extra money to covert a nice interior to something that appear cheaper in order to give the appearance of a better value.

Similarly, I know of a supermarket operator who did studies and found out that paying baggers to bag your groceries was as cost efficient as having the customer bag their own (since they were faster, so you could have fewer checkout lines). However, the company did not hire the baggers because it would create the appearance of being higher priced, even though it was not higher priced in reality.

Target is currently suffering in this recession, because its appearance in stores and advertising make it appear more expensive than it really is. In reality, Target’s prices are only about 1 or 2% higher than Wal-Mart on comparable items. Yet their appearance makes that gap seem larger.

Principle #4: Get Frequent Exposure
Job hunting experts will tell you that you need to keep your name in front of the hiring influencers. Don’t just send a resume. Also follow up with phone calls. After the interview, follow up with letters and phone calls.

Headhunters can easily forget who you are over time. Therefore, you need to put reminders in front of them on a periodic basis.

The same is true of strategy. If you only pull out the strategy once a year and then put it back on the shelf, it will not become ingrained into who you are and what you do. The essence of the strategy needs to be a part of the everyday conversation. The strategy will be forgotten if there are not frequent reminders.

Landing a strategy is like landing a job. If you want your strategy to be successful, use the same principles as in job hunting: fit job/strategy to capabilities, have a concise resume/mission statement, look the part, and get lots of exposure.

Once you land a job, the work is not over. You need to keep building your skills and looking for ways to advance your career. Similarly, the job does not end once the strategy is crafted. You need to keep building on your strategic strengths and leveraging your position.

Sunday, February 24, 2008

Analogy #159: Choosing Your House

When it comes time to choose a house, my wife and I have a problem. She is allergic to new houses and I am allergic to old houses.

More specifically, my wife is allergic to many of the chemicals used in modern home product manufacturing, like formaldehyde (which is in a lot more products than you would first imagine). I, on the other hand, am allergic to certain molds and dust, which are common in many older homes.

Of course, the current housing crisis is making everyone a little sick to their stomach.

Choosing the place where you live is an important decision. You don’t want to end up in a place where you are sick all of the time.

The same is true of businesses. You don’t want to position your business to be operating in places where performance will be continually sick.

Different people have different tolerances. I can tolerate the problems that come with new home construction. My wife can tolerate the problems that come with older homes.

This is similar to business lifecycles. Business problems are different depending on the age, or stage in the lifecycle. Business startups, for example, are different from mature firms. Rapid growth provides different challenges than businesses in decline.

Some business cultures, or management styles, are better suited to particular stages in the lifestyle than others. A manager, for example, may be very good at starting up new businesses, but miserable at managing through a decline phase. In a sense, that manager is “allergic” to decline-phase businesses, just as I am allergic to musty old houses.

A company is far more likely to be successful if it chooses places to live that avoid their allergies. Therefore, strategies should take these natural allergies into account when decided which businesses to live in.

There are four key principles related to finding the right house for your company.

1) Understand Your Allergies
You cannot avoid your allergies if you do not know what they are. Take the time in your planning process to understand your strengths and weaknesses. And when you are discovering your weaknesses, get specific.

For example, I said earlier that my wife is allergic to new houses. More specifically, she is allergic to many of the chemicals used in new construction, like formaldehyde. An all-natural new home, like a log cabin, would be something my wife could tolerate. Similar for me, I said I was allergic to old houses, but specifically I am allergic to certain molds that can form in old houses. If a house was well maintained and the humidity controlled, then an old house wouldn’t bother me.

The more you know about the specifics of your weakness, the more you can plan around it or compensate for it.

2) Avoid Toxic Houses
In general, a company will best succeed if it goes with its strengths. Therefore, your corporate portfolio should be skewed towards businesses in the portion of the life cycle you are best at. For those portions of the life cycle you are not suited for (your allergies), avoid them in your portfolio.

For example, let’s say your strength is in knowing how to squeeze more profits out of a mature business and your allergy is in start-ups. Now there may be a great opportunity in some new start-up industry. You may see a lot of your friends investing in this new business. You may say to yourself, “This is a great new opportunity. I should invest in it.”

However, if this is not an area of your strength, such a move could be a disaster for you, even if it is a success for others. Because your natural inclination is to squeeze profits out of a company, you might destroy your start-up my asking it to be too profitable, too early, and starve it of the necessary start-up capital. And even if you can nurse it along, there will be others in this start up industry who are much better at it. In the long run, only a small percentage of the people who enter a start-up industry are truly successful. I would bet that the ultimate winners would tend to be those who have natural strengths at doing start-ups.

Just because a new house may be wonderful for me, it doesn’t mean that it is wonderful for others. It might be toxic for my wife. You have to discover which houses are toxi for you, and then avoid them.

3) Minimize the Threat
In a perfect world, you may be able to avoid all toxic houses. In reality, you may end up with a few, anyway. What to do? In the case of house allergies, I can take an anti-histamine. What is the equivalent in business? It is delegation and separation.

When IBM wanted to get into the pc business, it knew that its core business was allergic to this type of a start-up and that the normal culture would kill it. Therefore, it used delegation and separation. The team given the task of developing the PC was placed in a remote location where the rest of the business would not interfere. Power was delegated to this team so that they could do the start-up the right way, rather than the IBM way. If this had not been done, the PC would never have come out of IBM.

Different phases in the lifecycle have different needs and different challenges. If you try to treat them all identically, you will not be optimizing the performance at each phase. Therefore, if you portfolio has a mix of businesses in different stages, separate them and manage them differently. Back in July of 2007, I did a series of blogs on these differences (see “Same Title, Different Job,” “Management By Yelling,” “Management By Dreaming,” and “Management by Growing”). It would be wise to understand these differences when dealing with the different phases of the lifecycle.

4) Be Prepared to Move
In my case, I may be able to tolerate a new house, but as the house gets older, I may not be able to tolerate that house as much any more. It’s the same house. What has changed is that the house aged. With the aging came a growth of mold which I am allergic to. At some point, it may make sense for me to sell the house and move to a newer house again.

The same thing can happen in business. You may be great at running a small start-up. However, your success could end up creating a large, mature business which you are not well suited to running. Your business moved from your comfort zone into a place where you are allergic. What to do?

One thing you can do is replace management with a team better suited to the new environment. I have great respect for what Dave Thomas did at Wendy’s. When his company evolved to a certain point, he realized that it was entering a phase to which he was allergic. Therefore, he voluntarily stepped down from leadership and handed the company over to management better suited to the new environment.

The other thing you can do is sell the business. There are many people in the high tech dotcom space who are good at starting businesses, but not running them once they become big and bureaucratic. Therefore, they tend to sell the businesses and then go and try their hand at another start-up.

GE is strong with late growth/early mature businesses. When businesses look like they are going into late maturity/decline, they sell them. When they are looking to replace these businesses, they typically don’t start from scratch (where they are allergic), but instead buy established businesses entering the phase they are best at.

It is not a mark of defeat to admit that a business has moved into a phase where you are allergic. It shows that you are smart enough to know when change is the right thing to do.

The worst thing you can do is ignore the inevitable. Business will move through the lifecycle, whether you want them to or not. In today’s environment, the movement through those phases seems to be accelerating. To not include this in your plan is a travesty, because it robs you of the opportunity to properly prepare for all of the changes which come with moving to a new phase in the life cycle.

According to a survey which the Sage company did in Ireland, 53% of the businesses did not have a plan for moving their business to the next stage in the life cycle. Just as it takes time to move to a new house, it takes time to change management or get your business prepared to be sold. This should be a part of your overall plan if your company is moving into toxic territory.

Business units progress through various stages of a lifecycle, from start-up to growth to maturity to decline. Each stage has different challenges. Your company may be much better at some stages than others. This should be accounted for in your planning process, so that you can take advantage of your strengths and avoid your weaknesses.

As people age, we try to fool ourselves and others through plastic surgery, makeup, hair pieces, hair dyes, etc. We can try to do the same thing with businesses and try to put on a show that we are still a growth company, even when we are no longer in the growth phase. The tricks might fool a few, but eventually living in denial of the truth will hurt you.

Wednesday, February 20, 2008

Analogy #158: It’s in the Bag

I love those brown paper bags from the supermarket. When I was a young child, they were my favorite toy. I liked to cut them open, lay them out flat and draw miniature cities on them. Then, I’d get my little toy cars and run them up and own the streets. Other times, I’d draw a board game on the back and try to get my sister to play the new game with me. You could also turn the bag into a mask.

When I got a little older, I used the brown grocery bags to cover my school books. They were great. Not only did they protect my books, but they gave me lots of space to doodle on.

As I became an adult, the bags were very handy for covering packages that I wanted to mail. I also loved to use them when packing for long car trips, because the bags wouldn’t tip over.

Now, I use the bags to sort out my recyclable bottles and cans. When the supermarket asks me if I want paper or plastic, I usually say paper, because paper bags have so many more uses around the house. Sometimes, however, I get the plastic bags because my cat likes to sleep on them.

From the point of view of the supermarket, the bags are nothing more than a cost to be minimized. Plastic bags are cheaper and more efficient for the baggers, so that’s what they want to use.

For me, those bags are a valuable resource around the house. Sure, they help me get the groceries home. But after that, I still find additional uses for them. That’s why I tend to prefer the paper bags.

So there is a disconnect on perception regarding the bags. The store sees it as a cost, while I see it as a valuable resource. This explains why they push plastic while I prefer paper.

Perceptions can impact all sorts of strategic decisions. Depending on how we perceive something, we will make different strategic decisions. If something is perceived as a cost, the attempt will be to minimize it or eliminate it. However, if we look at the situation differently, we may see a new source of value within that cost. Now, instead of trying to eliminate the process, the goal is to extract a monetary return out of that newfound value.

The principle here is that strategic planning needs to do more than just examine the current sources of profit. Concurrently, a good strategic plan should look for additional profit sources within the system. Often times, things that are currently perceived as burdensome costs could actually be untapped sources of profit if we were just to look at them a little differently. For example, if you want a valuable bag when shopping for groceries at Aldi, you have to pay for it.

Since “burdensome costs” would be treated differently in a strategy than “untapped sources of profit,” it is important that we label things properly when creating our strategy. With “untapped sources of profit” sounding a lot more desirable than “burdensome cost,” it may be worth your while to ponder ways to convert costs into profits.

In this blog, we will look at a few examples of this principle in action.

Example #1
Australians drink a lot of beer. In the process of brewing beer, a waste product is developed, called a yeast extract. At first, this would be seen as a wasteful byproduct of brewing—something costly to dispose of. Fred Walker, however, looked at the situation differently.

Fred realized that this yeast extract had nutritional value. It is extremely concentrated in B vitamins. The trick was to find a way to exploit this hidden value in the waste product. So, in 1923, Fred’s chief scientist, Dr. Cyril P. Callister, added a few ingredients and converted the yeast extract into a sandwich spread. It was named Vegemite.

In the 1930s Fred Walker’s company teamed up with Kraft Foods and really started to promote Vegemite. In the 1940s, Vegemite was a key part of an Australian soldier’s rations. There are songs and poems about Vegemite. Australian children get in the habit of eating it at a very early age.

Today, over 22 million jars of Vegemite are sold by Kraft every year. That is more than one jar a year for every man, woman and child in Australia. So much for yeast extract being a wasteful byproduct.

Example #2
Tyson Foods is one of the world’s largest meat processors. In the process of preparing meat, a lot of byproduct waste is produced. Much of that waste is in the form of meat fat. Instead of just viewing this as a wasteful cost to be disposed of, Tyson Foods looked for a way to make this fatty byproduct more valuable.

What they discovered was that ConocoPhillips had found a way in Ireland to convert fat into fuel. Therefore, on April 16, 2007, Tyson announced an alliance with Conoco Phillips to convert their fatty by-product into biodiesel fuel.

The expectations are that by 2009, this byproduct will produce 175 million gallons of biodiesel per year. That would represent about 3% of the diesel produced by ConocoPhillips in the US.

Later, on June 25, 2007, Tyson Foods made another announcement. They had formed a 50/50 joint venture with Syntroleum, a synthetic fuels technology company. The new venture, called Dynamic Fuels LLC, would use the byproducts from Tyson to create diesel, jet and military fuel.

The first facility would produce about 75 million gallons of synthetic fuel annually. Construction would start in 2008 and fuel production would begin in 2010.

By using a new set of eyes, Tyson has converted its fatty waste into usable fuel. Their new strategy has allowed them to diversify from food processing into renewable energy development.

Example #3
On any given day, Wendy’s fries a lot of hamburgers. If a meat patty is left on the grill too long, it starts to get dry and hard—unsuitable for use as a hamburger. Sometimes, Wendy’s will fry up more than they can sell, creating this unsuitable hamburger meat.

So what do you do with this waste, throw it out? Looking at this situation differently, Wendy’s converted this cost into a profit center. They found a way to remoisten the meat by putting it into a chili sauce. Now, instead of having to throw the meat away, they have another profit center, Wendy’s Chili. This was then extended into even more profit centers by putting the chili on baked potatoes and salads.

Example #4
There was a period of time when HEB Supermarkets in Texas had a reputation for running a state-of-the-art information technology department. HEB was always getting requests from other firms who wanted to tour their IT facilities. Eventually, HEB decided to charge a fee for these tours. Then they started to do a little IT consulting for other firms at an even higher fee. It may not have amounted to a lot of money, but it helped subsidize the IT department and helped HEB continue to afford to be state-of-the-art.

Example #5
One of the biggest costs for McDonald’s is real estate. The rent cost on all of those restaurant sites is huge. So the question is—how can McDonald’s convert that cost into another profit center?

Well, those restaurants tend to be in places near a lot of houses and a lot of people. Not only is there a lot of demand for burgers in these locations. These are also places where cell phone usage demand would be high. However, these also tend to be neighborhoods where the local folks do not want to see ugly cell phone towers near their houses.

So, McDonald’s pondered this concept—could we design our restaurants in such a way that you could hide a cell tower in them that would not create an eyesore? AT&T is supposedly working with McDonald’s on this solution. The upside potential for McDonald’s in collecting fees from AT&T is enormous.

One of the objectives of strategic planning should be to help executives take a fresh look at the business. By doing so, one may find that items which today are seen as burdensome costs can actually be new sources of profit. These types of discoveries can help create new strategies for growth and expansion that would otherwise have been missed. The beauty is that because these new ventures are already related to your core processes (and often turn waste into profit), the returns should be fairly good.

This idea of turning waste into profits plays well with the green movement. Therefore, not only may you find new sources of profit, but you may also improve your image as a green citizen. What more could you ask for?

Tuesday, February 19, 2008

Analogy #157: Skin Shedding

Back when I was in High School, one of my best friends had a collection of snakes. It seemed like those things were shedding their skin all the time. In fact, snakes shed their skin about 3 to 8 times a year, depending on age, species and feeding habits.

Skin shedding is an important part of the life of a snake. Without the shedding, the snake could not grow. In addition, skin shedding is the means by which snakes get rid of any parasites on their body.

The shedding process starts with a period of inactivity. During this time, the eyes of the snake will become a dull, bluish-white color. This is because there is a thin layer of skin covering the eyes which must also be shed. As this layer over the eyes gets ready to be shed, the snake has difficulty seeing. Without adequate vision, snakes at this time can become unpredictable and aggressive.

Also during this early process, the new underlying skin gets a chance to toughen up a bit. Once the new skin is ready, the snake rubs its nose on something to cut the old skin open. Then the snake wiggles out of the old skin all at once. If the snake is healthy, the skin will come off in a single piece.

After shedding the skin the snakes go back to normal activities, like eating. Some of my friend’s snakes preferred to eat live food, so he would have live mice and baby chicks around. Once they ate enough of them, the shedding process would start all over again.

The strategic planning process is a lot like snakes shedding their skin. Businesses can be burdened with old activities, old business units or old strategies which need to be shed. The way that snakes shed their skin can teach us much about how businesses should shed their skin.

1) Without Shedding, A Snake Cannot Grow
Old practices, old businesses and old strategies can hold a business back. Often times, the best path to growth is by taking a new direction, by doing something a little different. Unless we are willing to shed ourselves from the past and embrace the new skin, we cannot grow the business to its optimal potential. So businesses must also shed in order to grow.

2) Shedding Helps Get Rid of Parasites
There are many things that can keep a business down: obsolete practices, toxic cultures, nagging cash drainers which should no longer be a part of the portfolio, and so on. These are like parasites to the company, robbing the company of its resources while providing nothing in return. Sometimes, the only way to get rid of these parasites is to make a clean break with the past.

3) The Old Skin does not come off until the New Skin is ready
It’s one thing for a business to rid itself of parasites and other hindrances to growth. However, if there is not a replacement strategy in place and ready to go, a company is stuck. New sources of cash flow need to be developed while the old sources of cash are still in place to fund/support it. Once the new sources have started to prove themselves, you can then shed the old businesses.

4) The Eyes get cloudy before the Shedding Occurs
When moving into new directions, the future appears a bit more cloudy. You cannot rely as much on your past history. When blazing new trails, there aren’t any maps to rely on. Yet, just because the future is not completely clear, this is no excuse to hold back. In fact, it is just the opposite. It is during the times of environmental change, when vision less unclear, that strategic change is of even greater importance. Cloudiness is a sign that the methods of the past may no longer be appropriate and that it is time to shed.

5) The Skin is shed all at once
Often times, a complete break with the past is needed in order to capture the growth of the future. It’s hard to move forward if you keep looking backwards. To eliminate distractions, a full shedding may be required. It’s a competitive world out there. In the race to the future, competitors who are unencumbered by the past can often capture leadership in the future faster than someone who is only half-shed and trying to live in both worlds.

The principle here is that the strategic planning process can be an integral part of the shedding process. It can help you to know when it is time to shed the past and can help you find which skin to wear in the future.

GE is a great example of a company which knows how to shed its skin. Over the years, GE has entered all sorts of new businesses, like entertainment, financing and energy. At the same time, GE has exited a whole lot of industries, particularly in basic manufacturing. Planning helps GE manage the continual shedding of old businesses, and the putting on of the skin of new businesses. It helps in staging the timing—knowing when to shed, when to expand.

For example, when GE got into plastics, it was a new growth industry with plenty of opportunity to add value. Now plastics has become more of a commodity (where value is harder to add), so GE is getting out.

Someone who was naturally gifted in this area was Charles Lazarus. He made a highly successful career out of knowing when to shed his skin.

Back in the 1940s, he took over the family business—a used bicycle shop. To grow sales, he decided to consider adding new products to the mix. Charles Lazarus noticed that right after World War II, the soldiers were settling down and having babies. Therefore, he decided to exploit the trend by adding baby furniture to the store mix. Based on the initial success, he made the bold move. He shed the skin of the bicycle shop and devoted the entire store to baby furniture.

In 1948, Lazarus renamed the store the National Baby Shop (bold ambitions for a one-store operation). Business was much better, but Lazarus wanted to grow even more. He noticed that cribs are not a big repeat business. He wanted to sell things that brought customers back more frequently. His customers often asked if he sold toys. Therefore, he added toys to the mix. It was a hit.

In the 1950s, Lazarus saw that the self-service supermarket format was growing rapidly, replacing the old full-service grocer. He thought that this self-service superstore concept was the future of retailing, and could be applied to other items besides food. Based on this observation and the success of the toys in his store, Lazarus decided to shed his skin again. In 1954, he shed the furniture skin and the full-service skin by opening an all toy store which was set up like a supermarket. He called it Children’s Supermart.

As he was growing the concept, he opened a store in a location where he could only have a small sign. Therefore, to keep the letters in the sign large, he shortened the name of the store to Toys R Us.

After building the chain up to four stores, he sold the operations in 1966 to Interstate Stores for $7.5 million. Interstate Stores was a conglomeration of discount department stores operating principally under the names of White Front and Topps.

Unfortunately, Interstate Stores got into financial difficulties and declared bankruptcy in 1974. Lazarus saw another opportunity to shed skin. He convinced the authorities to put him in charge of the bankruptcy. He shed the skin of the discount department stores and decided to dedicate the company to toy superstores. This was a bold move given that this was such a small part of the original company.

However, in 1978, Interstate Stores came out of bankruptcy and changed its name to Toys R Us. Sales were only around $300 million at the time. However, by growing rapidly, sales reached $4.8 billion by 1990, the year Lazarus retired as CEO. That’s pretty good considering he started the baby furniture portion of the bicycle shop with an investment of only $5,000.

His success was due to understanding the marketplace and knowing when to completely shed his skin, from bicycles to baby furniture to toys (and from full service to self-service). Although it was intuitive to Charles Lazarus, many of the rest of us could benefit from a more disciplined approach through strategic planning.

Just as snakes need to shed their skin in order to grow, businesses periodically need to shed themselves of their past in order to grow. Times change, requiring businesses to change. To effective adapt to this change, there must be a willingness to shed all of the old skin and wholeheartedly embrace the future.

The technical term for the shedding of skins like snakes is “ecdysis.” This is from the Greek word meaning “to strip off.” As it turns out, some exotic nightclub dancers have taken to this term and refer to themselves as an “ecdysiast” on their resumes (it sounds classier than saying you were a stripper). For different reasons, perhaps we should be referring to ourselves as ecdysiasts as well.

Monday, February 18, 2008

Analogy #156: Don’t Blame Me, It’s the Environment

I knew an old grocery wholesale executive who liked to tell the same story, year after year. After having heard it so many times, I can almost recite it by heart. Being in the grocery wholesale business, this executive spent a significant part of his time visiting grocery retailers. Whenever he would go to visit a grocery retailer whose store was not doing well, he would hear the grocer complain that it was not his fault that his store was doing poorly. He would blame his problems on the environment, saying things like:

“The economy is bad. There is too much unemployment in the area.”

“The weather is bad. Nobody shops much in this weather.”

“The population is declining. There aren’t enough people living here anymore.”

“People are eating out in restaurants more and not buying as many groceries.”

The retailer would then conclude by saying, “It’s not my fault…nobody could make money in this environment.”

At this point, the wholesale executive would leave the store, and in every case he could go down the street and find a different grocery store that was thriving in that same environment. His point was that there are ways to make money in any environment, and somebody will figure it out. It may as well be you. The environment is not the reason the store was failing. It was because the store manager did not know how to adapt to the environment.

When things are going poorly, it is easier for executives to blame the external environment rather than blame themselves. “It’s not my fault,” they say. “No executive could have been successful in the environment I was faced with.”

However, at some point, shareholders do not care why your business is doing poorly. The shareholders will just move their money to a company that is thriving in that same environment. And trust me, there will always being a thriving company for the shareholders to invest in, that will give them a better return, regardless of the economy.

It’s true that the environment is not always favorable to a particular business model. But where is it written that a company has to stick to a particular business model that is no longer appropriate for the environment?

One of the most important reasons for doing strategic planning is to discover (with enough advance notice) those trends that will destroy your strategy so that a better strategy for that coming environment can be found and put in its place. If a company starts its transition soon enough, it will never find itself in a position where its strategy is out of tune with the environment.

If you wait until disaster surrounds you before taking action, your options are rather limited. However, if you do strategic planning in advance, you can anticipate future problems and prepare a plan to thrive in whatever the future has to offer.

Back at the end of the 20th century, an industry whose entire livelihood was threatened by changes in the environment would have been the US grocery wholesale industry. These food wholesalers were suffering from two major environmental problems:

1) The primary customer of the food wholesaler, the independent grocery store, was disappearing.
During the 1980s and 1990s, the growth and consolidation of the large supermarket chains, combined with the rapid growth of the Wal-Mart Supercenter put the weaker independents out of business and was threatening the viability of even the stronger independent grocers. Between their economies of scale and the ability to use general merchandise to subsidize grocery prices, these chains were putting independents at a major disadvantage. Many independents gave up and sold their stores to these self-distributing chains. I don’t care how great you are at wholesaling food for independent grocers. If your customers are going away, then you are in trouble.

2) Even at its most efficient, the food wholesale business model was less efficient at distribution than a large, self-distributing chain.
Food wholesalers are at an efficiency disadvantage, because they service a wide variety of independent stores over which they have limited influence. Because all of the needs of their independent customers are different, they cannot design a warehouse and distribution network that is optimal for any one of them in particular. By contrast, a large supermarket chain can run all of its stores the same way. As a result, they can create their own warehouse and distribution network that optimizes for that type of store. This makes self-distribution for large chains more efficient than food wholesaling for independents.

Therefore, in many ways it does not matter how well run and efficient a food wholesaling business is managed. If your industry is running out of customers and the business model your industry uses is less efficient than the alternative, even the best executive will have difficulties. Consequently, a food wholesaling executive might say that their problems are not their fault. It is an environment where no executive could succeed.

That type of response, however, is unacceptable. The environment cannot be blamed for any company’s failure. This trend did not happen overnight. It gradually happened over many years. There was plenty of time for a food wholesaler to detect this trend and adapt by altering its strategy.

Executives in such a situation have two choices. Either:

a) Use strategic planning to change the business model to better adapt to the changing environment; or
b) Stay with the current business model let the environment dictate a more dire future for the business.

Let’s take a look at how three companies reacted to this situation: Fleming Companies, Supervalu, and Cardinal Foods.

Entering the 1980s, Fleming Companies was one of the largest and most successful food wholesalers in the US. Given its past success, it saw no reason to radically change its strategy. It decided to continue to concentrate primarily on wholesaling groceries, primarily to independents. Yes, the trends were working against them, but they thought they could beat the odds due to their size.

As Fleming continued to stick to its original strategy, the ever more hostile strategy took its toll. Its customer base of independents began to whither away. In desperation, it took on ever more risky business, including a very risky deal with K Mart. In further desperation, Fleming lied about its financial health by getting its vendors to help it use deceptive accounting practices.

Eventually K Mart declared bankruptcy and the SEC began an investigation into its accounting practices. As a result, in April 2003 Fleming declared bankruptcy. The Fleming Companies, as it was known, ceased to exist.

Fleming could claim to be a victim of a bad environment, a firm with few options. It could claim that bankruptcy was inevitable, given the harsh conditions of a declining client base. However, Supervalu and Cardinal Foods had a different outcome.

Going into the 1980s, Supervalu was about as large and as strong as Fleming. However, Supervalu could see the trends on the horizon and was willing to do something about it. Rather than depend solely on the fate of the independent grocer for its future, Supervalu decided to become its own customer. In other words, it changed its strategy. Supervalue started moving from being a wholesaler to becoming more of a retailer. It started slowly, in order to keep the independent customers from getting upset and fleeing.

Then it started looking for the big deal to get into grocery retailing in a big way. After several attempts, it bought the Albertsons chain, making it one of the top 5 grocery retailers in the United States. Now Supervalu is doing fine.

By contrast, Cardinal Foods was a small player in grocery retailing. In looking at the trends, it could see that there was no long term hope for a small grocery wholesaler. Such a strategy was doomed. Therefore, in the late 1970s, it decided to change its strategic direction. Cardinal Foods decided to take its wholesale distribution expertise to an area where the environment was more favorable—pharmaceutical distribution. Starting in 1979 Cardinal began to acquire a number of pharmacy distribution companies. By 1997, it had acquired 15 such firms, making it a major national player in pharmacy wholesaling. In fact, the pharmaceutical business was doing so well for Cardinal, that it changed its name to Cardinal Health and exited the food wholesale business in 1988.

Starting in the mid 1990s, Cardinal Health expanded further into the medical business, while continuing to strengthen its pharmacy distribution core. Now, Cardinal Health has sales of over $80 billion and is one of the largest companies in the US based on sales.

So, was sticking to a strategy of primarily being a wholesaler to independent grocers a failing strategy? Yes. Does that mean that companies in that industry were destined to fail? No. By using the tools of strategic planning, Supervalu and Cardinal Foods had the time and the initiative to modify their strategy so that they could survive in the new environment. Fleming has no excuse. It cannot blame the environment. It can only blame itself for not preparing in advance through effective strategic planning as Supervalu and Cardinal Health did.

Although environmental trends may cause a particular business model to fail, it does not mean that the company using that business model has to fail. Good strategic planning includes understanding the impact of environmental trends on business models and proactively finding new models more appropriate for the changing environment. Over the long haul, management cannot use the environment as an excuse for poor performance. Good management anticipates the environmental changes and plans a new strategy that will thrive in the new environment.

In general, shareholders do not care if a management is operating an inappropriate business model as well as humanly possible. Perfecting the obsolete is not their goal. Their goal is financial success, which comes from excellent performance with the appropriate business model for the environment. Your goal should be the same. Don’t be afraid to adapt like Cardinal Health did.

Saturday, February 16, 2008

Analogy #155: The First Dose is Free

Back in the early 1990s, there was a new retail format being developed in the US—pet food superstores. At the time, the industry consisted of a few small chains scattered around the nation. One of the largest firms was Petsmart, which at the time only had a handful of stores in the southwestern US.

The company I worked for during this period was considering entering the pet food supermarket business. Therefore, I went down south to visit a few Petsmarts to see what the concept was all about.

I started talking to one of the store managers. He began to brag about Petsmart’s success in selling very profitable high-end dog food. He said they had a program of always giving out free samples of this dog food. The store manager told me that once a dog tasted this high quality product, the dog would be hooked and would refuse to ever eat again the cheap stuff sold at the grocery store.

Since these pet food superstores were about the only place to get this higher-end dog food, the owners would be forced to keep coming back in order to satisfy the cravings of their dog. That made it worthwhile for Pestsmart to give away the free samples.

I thought about this for a moment and then said to the Petsmart store manager, “So, you’re like a drug pusher. As they say, the first dose of heroin is always free.”

Although I think drug trafficking is despicable, I must admit that it is very profitable. Some of that profitability is due to the illegal, immoral, and brutal tactics they use, which I do not condone. However, I think that some of those profits are based on sound business strategies.

The purpose of this blog is to distill some of those sound business strategies used by drug traffickers and apply it to legitimate businesses. Perhaps, like Petsmart, we can find something to apply to your business to improve your performance.

There are three principles about the drug pusher’s strategy which I would like to discuss.

1) Apply the Principles of Customer Lifetime Value (CLV)
Drug pushers know that once they get you hooked, they can make a whole lot of money off of you, because you will keep coming back….over and over and over again. The lifetime value of all of those return visits to buy drugs is huge.

With each customer providing such a long string of profits, it doesn’t take a math whiz to figure out that you can spend a lot of time and money seeking new customers and still come out on top. The lifetime of profits more than make up for the costs of customer acquisition.

That is why some drug pushers spend a lot of time and money trying to build trust with a potential customer base. They know that in the long run, they will get a hefty return on that investment. They’ll even throw in free samples to get the deal rolling (more about that later).

So here are some questions for you:

a) Have you developed a compelling enough position in the marketplace that once a customer gets hooked, they want to keep coming back? Is there something unique which you offer that they cannot get anywhere else?

b) Do the tactics in your strategy serve to strengthen customer bonds over time, so that customers will see the benefits in coming back over and over again for their needs? Two examples: First: using a frequent shopper program which rewards customers in a way that makes returning to you more beneficial than going elsewhere. Second: Getting to know the customer in a way so that you can use that knowledge to serve them better than a competitor who does not know them as well.

c) Once you have the compelling strategy with the bonding tactics, are you spending enough time and effort to bring new customers into your program? Have you calculated your customer lifetime value, so that you know how much you can afford to spend on customer acquisition and still come out on top?

2) Sampling Beats Talking
Drug pushers know that they can talk forever about how good drugs will make you feel. However, in the long run, the best way to get this fact across is to let you experience the drugs first hand. Hence, the phrase “the first dose is always free.”

There is an organization called Trendwatching, which tracks consumer and business trends. They named one of these trends “Tryvertising” (see link). The idea is that we are such an over-advertised society that mere words have become less persuasive. If you really want to get people interested in your product, get them to try it out.

Some examples from Trendwatching:
a) Small one-use sample packs for toiletries
b) Getting your products placed inside hotels (furniture, home furnishings), so that people can try them out while staying at the hotel.
c) Free trial of a Sony handi-cam camera while at the London Zoo.

My favorite example is Charmin bathroom tissues. Proctor & Gamble designed high quality, high-end portable toilets to place in high traffic locations, like New York’s Times Square. They even had some color coded so that you could choose between a stall that had Charmin Extra Soft toilet paper or Charmin Extra Strong toilet paper. A chance to try before you buy.

So my question for you is this: Are you getting your product into the hands of your customer, so that they can experience the benefits for themselves? You can talk strategy to the customer all you want, but personal experience can be so much more compelling.

3) Vigorously Defend Your Territory/Position
Drug dealers don’t like it if someone else tries to invade their territory. They will defend their territory to the death (literally…hopefully the death of the other guy).

Drug dealers understand the value of exclusivity. If you are the only game in town (or in a particular area), then you will be more profitable. Now I’m not recommending that you murder your competitors or engage in illegal activities which restrict competition. However, there are strategic moves one can make that can have a similar impact.

For example, the more you make your selling proposition unique (or patented), the harder it is for others to invade your territory/position. If you continue to innovate, you can always stay one step ahead of the competition, so that they can never catch up with where you are. You can develop strategic partnerships so that you have the exclusive rights to products or technologies.

Also, if you build up your capacity to satisfy a market faster than the competition, you can suck up all of the available opportunity and not leave an opening for the competition. This could include sucking up all of the available real estate for a store, all of the shelf space in a store if you sell the product, or all of the raw materials if you are a manufacturer. These types of hustling activities were mentioned in more detail in the blog “Pursue, Pursue.”

So the question I have is this: Are you just sitting back resting on your past (and letting others catch up or pass you by) or are you actively defending your position by fortifying it against attack?

Although much of what drug dealers do is not something to emulate, there are still a few things we can learn from them. We can exploit the concept of lifetime value, get into tryvertising, and/or vigorously defend our turf.

We try to convince our children to “Just Say No” to drugs. However, it is a tough battle when drug pushers use the tactics mentioned above. These can be powerful tools to overcome even strong initial resistance.

Tuesday, February 12, 2008

Strategic Planning Analogy #154: Gaps & Plugs Part 2

Many people find themselves in a situation where they need to lose weight. Since a lack of discipline is often the reason why they got into this problem in the first place, usually they are not looking for a disciplined approach to solve the problem.

Instead, many of these people look for a simple one-step solution for losing weight. For example, they may buy an exercise machine and expect that to solve all of their problems. The problem with just doing exercise alone is that:

1) It can make you hungrier, so you end up eating more and not lose weight.
2) It can put undesired muscle bulk on the body, so you don’t lose weight.
3) If you discontinue the exercise, the muscle bulk can turn to fat.

Then there are the various starvation diets. If you do that alone,

1) Your body will adjust and slow down its metabolism, so the reduction in calories becomes less effective.
2) Eventually you have to come off the starvation diet, and because your metabolism has slowed down, you gain weight faster.

Experts agree that the best method to lose weight is a balanced, disciplined approach, combining modest reductions in eating with modest increases in exercise. Not only is this more effective, it is more sustainable over the long haul.

Just as people want to lose weight, companies want to gain sales and profits. As we saw in the prior blog (part 1), undisciplined extreme approaches in a singular direction rarely lead to sustained growth.

Instead, just like weight loss works best with modest modifications to both diet and exercise, planning for growth works best with modest modifications to both current businesses and new ventures.

The principle here is that instead of putting all of your growth bets on one big “home run,” it is usually better to string along a lot of base hits, both in shoring up the current business as well as experimenting with new ventures. Here are three rules to keep in mind when taking this type of balanced approach.

Rule #1: If you want different results, you need to do things differently
On the old TV show “Third Rock From the Sun,” Harry Solomon was watching a Road Runner cartoon on TV. Harry turns to Tommy and says that he knows that the latest trick of the Coyote is going to work to capture the Road Runner. Tommy reminds Harry that he has already seen this cartoon and that it did not work when he saw it last time. To this, Harry says something to the effect of, “Yes, but this trick is too ingenious not to work eventually.”

There’s an old saying that the definition of an insane person is one who continues to do the same thing and expects different results. Harry was under this same delusion in thinking that if the Coyote did the same thing over and over, eventually the cartoon would have a different result.

As silly as this sounds, some strategic planning processes aren’t much different. They plan an ambitious goal for a current operating division—something that the division has never come close to achieving in the past. Then they do nothing different and are surprised when the goal is not met.

If you want a different result, then you need to do different activities. Planning is more than just planning goals. It is about planning activities. The key question to ask is “What are you going to do differently in the current division in order to achieve a different (and much better) outcome?”

The strategic plan should not just map out results. It needs to map out the new processes and approaches which will be used to achieve these new results. Premeditated forethought into how to re-engineer the current business is needed to provide the catalyst for improvement. Otherwise, people will tend to return to the comfort of the status quo, which produces status quo outcomes. When the change is articulated into the plan, it is more likely to occur, because it is more likely to be measured.

Rule #2: If you want to be in the right place at the right time, be in lots of places
Because the current business is more familiar, it is easier to articulate the specifics of change into the plan. However, when moving into new ventures, there are more unknowns. Predetermining all the specifics can be premature (and potentially destructive) because the likelihood of guessing wrong is high.

Therefore, it is usually safer, particularly in the early stages, to make a lot of small bets in new ventures. Many experiments will help educate the company on the best eventual path. As Thomas Edison used to say, the benefit of doing lots of experiments is that you learn what doesn’t work. Then you can concentrate on the things which do work.

In other words, if you want to be in the right place in picking new ventures, first put yourself in a lot of places. This doesn’t mean that you should just randomly pick things to experiment on. Every experiment should be consistent with the over-arching strategy and should try leverage current strengths. But that still leaves lots of opportunity.

One of the strengths of Google is its constant experimenting into related businesses. Most don’t pan out, but by doing so, they find the few nuggets which pay off big. They put themselves in a lot of places in order to eventually be in the right place.

Rule #3: If you want the right experiments to move to the next level, don’t predetermine expectations.
One of the most critical elements in experimentation is knowing when an experiment is not working and needs to be dropped. Quite often, there is a tendency to continue to waste resources long after the project should have been dropped.

As we discussed in the prior blog, there is a hesitancy to drop a project if a company is already psychologically attached to it due to prior expectations of success. The pressure to fulfill those expectations can make us throw good money after bad and keep bad projects alive.

Therefore, in the early stages, do not assign quantifiable expected goals for an experiment. For example, don’t start six experiments and say from the start that you expect all six to each place a million dollars of profit on the bottom line next year. At that point, you have declared them to no longer be experiments. They are now projects that must be completed in order to achieve that predetermined goal. It is almost impossible to pull the plug on them now, even if they are bad, because expectations have been set under the presumption that it must succeed and make $1 million.

A better approach would have been to say that we don’t know which of the six experiments will work, but somewhere in here is a multi-million dollar success story. That way, if one of the experiments does not appear successful, it is easier to drop it early, when losses are small.

Setting ambitious goals is often a good early step in planning. However, trying to get all of the extra performance from a single source can be quite risky. It is usually better to take a balanced approach, looking for gains from both current business and new ventures. For current businesses, focus on new ways to do things, since the old ways produce the old results. For new ventures, experiment in the early phases on multiple ideas, and then prudently stop investing in the experiments which do not work.

Another quick way to lose weight is through amputation, but I don’t recommend it. The side effects are worse than the benefits. Similarly, a quick way to gain sales in a business is to make a big acquisition. Since most big acquisitions end up destroying value, I would think long and hard before making that choice. Lots of sales growth isn’t worth much if it destroys profits.

Saturday, February 9, 2008

Strategic Planning Analogy #153: Gaps & Plugs Part 1

Although Wal-Mart is on the leading edge of technology today, this was not always the case. Back in the early 1960s, when Wal-Mart was first starting out, its systems were very crude.

The accounting system consisted of a bunch of pigeon holes on the wall of the office—one pigeonhole per store. The paperwork for each store would then be stuffed into its appropriate pigeonhole. Once a month, the paper would be taken out of the holes and Sam Walton and Wanda Wiseman would close the books.

Not wanting to waste a lot of time doing paperwork, Sam Walton came up with a way to really speed up closing the books. He called it the ESP method. This is how Sam Walton explained the method in his autobiography:

“It’s a pretty basic method: if you can’t make your books balance, you take however much they’re off by and enter it under the heading ESP, which stands for Error Some Place.”

Sam Walton used a simple plug to make his books balance. The plug was needed because Sam did not know how else to bridge the gap in his books.

A similar situation often occurs in strategic planning. First, one comes up with ambitious goals for the company. Then the core business is examined to see if it can achieve the ambitious goal. Many times, the core business appears to fall short of the goal. This creates a “planning gap.”

The question then is how to plug this strategy gap. One approach is to just make-up a line in the plans and stick the gap there, sort of like what Sam Walton did with his accounting books. Perhaps instead of calling it ESP, we could call it USP—Unknown Source of Profits.

Unfortunately, just as Sam had no idea what caused his accounting error, this method will give you no idea for how to fill your strategy gap. Your strategic goal in this case has no real connection to your planning activities. Therefore, it should be no surprise that when plugging your goal in this manner, you usually fall short of hitting the goal. The unknown source of profits becomes an unfound source of profits.

In general, there are two places to look when trying to fill this gap—current operations and new ventures. The main principle here is that “putting all of your eggs into one basket,” be it current operations or a new venture, is typically sub-optimal. Instead, a more balanced approach between the two is normally more successful.

In this blog, we will examine some of the pitfalls associated with the extremes—either looking to get it all from current operations or all from new ventures. In the next blog, we will look at how a more balanced approach can often be better.

1) Too much Dependence on the Core can Start a Death Spiral
Ambitious goals are not bad, per se. In the book Built to Last, the authors say that successful companies tend to have “Big Hairy Audacious Goals,” called BHAGs.

If a goal is big, hairy and audacious, then it must by definition expect more than what one would naturally receive from current operations run similar to how they are run today. Therefore, by definition, BHAGs create a planning gap with current operations.

One way to fill the planning gap is to place nearly all of the expectations for filling the gap on current operations, even though by definition BHAGs stretch beyond the capacity of current operations. In other words, once the current patterns of expectations are trended out, they are adjusted to become exceedingly aggressive—far more than just stretch goals. For example:

a) Sales growth goals could be raised significantly above historical trends;
b) Cost cutting goals could place expense expectations well below anything ever done before;
c) Performance is expected to improve even though capital spending is curtailed.

Under this scenario, the implications to the company tend to follow one or more of these patterns:

a) Internal Decline: Employees figure out that the goals are unrealistic/unattainable and that they will now have a miserable time being yelled at and no longer get any bonuses. The good people will start to leave the company and the rest will be demoralized. The balance of employees’ time could move from trying to make improvements to trying to “cover one’s ass” and deflect the blame to someone else. Instead of performance getting better, performance will get worse.

b) External Decline: In order to hit the extraordinary near-term goals, the long-term viability will be threatened. For example, to hit unrealistic sales goals, promises may be made that cannot be fulfilled. To hit unrealistic expense goals, customer service could suffer. Lack of proper investment could eventually make your internal processes obsolete. For a short period of time, these tactics could work, but in the long run, they will ruin your future potential. Customers will eventually realize you do not live up to your promises, have lousy service and are obsolete. They will take their business elsewhere.

These two types of decline can put a company into a “Death Spiral.” It works as follows: over time, demoralized employees and defecting customers hurt performance. As a result, the planning gap between ambitious goals and shrinking results gets even larger. With a bigger gap, the pressure increases on the core business, causing even more internal and external decline. Every year it gets worse until the whole thing blows up.

2) Too much Dependence on New Ventures can Start a Money Pit
Although putting all the burden for filling the gap on the current business can lead to a death spiral, it is also potentially dangerous to put all of the burden on new ventures. One of the big problems with new ventures is that they tend to be at least partly outside our range of expertise. Without that expertise, we do not know what a realistic expectation should be for new ventures. Not knowing all the potential pitfalls, there is a tendency to set these goals unrealistically too high.

This can lead to one or more of the following issues:

a) Distorting One’s Risk Profile:
There are two ways this can increase the riskiness of your firm. First, if one wants big rewards quickly, there is a tendency to gravitate towards riskier investments (risk=rewards). Second, to find big results quickly, one tends to focus on fewer, larger ventures rather than a lot of smaller ones. By focusing on fewer, larger new ventures, the likelihood of failure increases, since most new ventures fail and you don’t have a large pipeline of options.

Technically speaking, if your risk profile goes up, then your key stakeholders should demand an even higher return on investment, since they want to be compensated for taking the added risk. This places even more pressure on looking for even bigger near-term returns. Even if you do not increase your return hurdle rate due to extra riskiness, it should be done. Otherwise you may approve projects at the lower rate which would not pass the test at the more accurate higher rate.

b) Hesitancy to Pull Back if News is Bad:
With all the pressure to find a success with a few big new ventures, there is pressure to be overly optimistic in expectations on these ventures. Revenues tend to be estimated on the high range and costs tend to be estimated on the low range. When reality starts setting in—and prospects do not look as bright—there is pressure to keep plodding along anyway. Too much has already been invested, people are expecting a success, there is little else in the pipeline to replace it, and your career may be damaged if you admit failure. As a result, bad ventures tend to live on longer than they should.

c) Throwing Money at the Problem:
When prospects start looking bad and you still want to succeed, a common response is to throw more money at the problem. Since this is a new venture, you may not have a lot of internal expertise to rely on…all you have is money. The hope is that if you throw more good money after bad, something good will turn out. It rarely does, so then you try an additional round of throwing money at the problem.

d) Current Business Envy:
With all of the attention and glamour given to the new venture, those working on the current business could feel left out and jealous. All the good people may shift over to the glamour side of the business, which hurts current business performance. Or, to keep them working on the current business, you may need to throw some additional money in their direction.

As a result of these four possible results, a focus on trying to get too big of a return too quickly on too few new projects can create a money pit—a place where you keep throwing money, but see little in return.

Setting ambitious goals is often a good early step in planning. However, if you have no idea of how to achieve those goals, you will most likely not achieve them. In general, there are two sources for filling the gap between current trends and an ambitious goal—current operations and new ventures.

As we saw in this blog, too much reliance on only one of these sources will tend to lead to problems, so the goal is still not met. In the next blog, we will see that a more balanced approach tends to be more successful.

Studies have shown that smaller, consistent increases in performance improve stock prices more than large promises which are never realized. Too much blind ambition can be a hindrance.

Monday, February 4, 2008

Strategic Planning Analogy #152: Stuffed Shirt

One time, I was the keynote speaker at a luncheon. The audience consisted mostly of small, independent grocers. I walked up to the podium, and just as I was about to say my first words, one of the independent grocers stood up and shouted me down.

He said, “Before you start to speak, first convince me that you are worth listening to and that I wouldn’t be wasting my time by staying.”

Well, needless to say, nothing like that had ever happened to me before (or ever happened again). I replied by saying that my first job out of college was working at a small, independent family-run retail business. Now, even though it was not the grocery business, the experience allowed me to experience first-hand the problems faced by small, independent retailers.

I guess what I said was good enough to convince that man, because he sat down and allowed me to give my speech.

There are lots of symbols that should have helped create credibility for my speech at that luncheon. I was an executive with a title from the largest and most successful food wholesaler in the country (the company who they had chosen to supply them with groceries). I was also designated as the keynote speaker, a position usually reserved for the best presentation.

Yet, in spite of these external credentials, that man in the audience was not convinced. He had never met me before and was suspicious of “stuffed shirts” from corporate headquarters. To him, we were guilty of being worthless windbags until proven otherwise. I had to convince him that I had more than just superficial credibility. He needed to know I had “street cred,” the credibility that comes from having been out there on the front lines with an independent retailer.

A similar problem can plague a strategic planning process. If the person leading the process does not have the respect of the people out in the field who have to implement it, the results will not get the respect necessary to carry them out. The strategy will die at the point of implementation.

The principle here is that strategic planning is severely hampered when those leading it lack credibility with the people in the field. At some point, it does not matter that you know you are right in your strategic plan. If those implementing the plan are not equally as convinced that the strategy is right, there is a good chance they will not pursue the strategy fully enough to succeed. As we saw in the last blog (“Pursue, Pursue”), strong pursuit is as important as having the right plan. Your credibility can have a direct impact on how committed the troops are to pursuit.

Equally problematic, if the field organization does not respect the people in the strategy development process, they will not fully cooperate in ensuring that you have a proper strategy in the first place. Good strategies are based on good insight. The people in the field are your eyes and ears as to what is going on. Their insight is needed to ensure that the right choices are made. If they do not respect you, they will be less cooperative and less concerned about being fully forthright in sharing their perspective.

Result? Without respect, you will be seen as a stuffed shirt—not worthy of serious time and effort. They will humor you while the strategy is being developed and give lip service at the time of implementation, but ultimately ignore you.

It’s sort of like how the career civil servants treat the politicians inside the beltway in Washington DC. They see the politicians as a bunch of stuffed shirts that come and go. It really doesn’t matter who they are or what political party they belong to. The career civil servants know that they will outlast them, so they humor the politicians and then do as they please.

I believe that one reason strategic planning is a bit out of favor at the moment is because too many stuffed shirts have ruined the respect for the process.

Without respect, it still may be possible to coerce people into greater cooperation through fear (threats of being fired) or bribery (incentives linked to strategy implementation). However, as we saw in an earlier blog (see “Soulless Capitalism”), unless people are emotionally committed to a strategy, it will be difficult to get cooperation when the going gets tough (and at some point, it always does). Then, instead of plowing through the rough patch, they will blame the stuffed shirt strategist for giving them a bad strategy (and then abandon it).

Therefore, not only is it important for the strategy to have credibility, it is important for the strategist (and strategy leaders) to have credibility. Just as I had to persuade that man at the luncheon that I had enough credibility to be worth listening to, you have to persuade your people that you have enough credibility to be worth listening to regarding strategy.

How do you create this credibility?

1) To Create Street Cred, Spend Time on the Street
As mentioned in a prior blog (see “Do You Do Breakpack”), we talked about the benefits which come from spending time with the people out in the field. One of the best ways to break down credibility barriers is to show that you do not spend all of your time hidden away in an ivory tower. Firsthand experience on the front lines can go a long way.

The Nordstrom company has had a longstanding policy that all the executives must spend at least some time each year working a store sales floor, all the way up to the CEO. When I was at Best Buy, we had all the executives spend time at the call center listening in to customer complaints so they could hear firsthand what customers were saying. Then they all had to go to a store in a remote location to get a feel for how it all played out on the sales floor.

2) Park Your Ego At the Door
Yes, you want to gain the respect of the people in the field as being qualified. But that does not give you the right to beat them over the head with it. If your ego gets too large, it can appear as if you give no credibility to the people in the field. If you treat them like dirt, they will put up barriers to working with you.

This is a two-way street. If you want their respect, then you have to give them some respect.

3) Bring Something to the Table
Equally important, if you want respect and credibility, add something of value to the process. If all you do is coordinate meetings or call in consultants, then you truly are nothing more than a stuffed shirt. Prove your worth by making worthwhile contributions.

Strategies are most effective when the troops are emotionally committed to making it a reality. This is far more likely to occur if you have developed credibility with them as someone worth paying attention to.

One of the potential problems to outsourcing your strategic planning process to a big consulting firm is that they may not have credibility with the troops. Yes, they benefit from their global reputation. And given how much they cost, they must be adding value somewhere, right? But they still could be perceived as outsiders who are clueless about the nuances of your company if the engagement is not managed properly. In that case, they are merely stuffed shirts wearing slightly nicer shirts.

Friday, February 1, 2008

Strategic Planning Analogy #151: Pursue, Pursue

Once upon a time, there was a man being chased by a wolf through the forest. The man knew that if he could just outrun the wolf and get to the town on the other side of the forest, he would be safe.

As he was running through the forest, the man came to a fork on the path through the woods. He knew that eventually either fork in the path would get him out of the forest to safety at the town on the other side. However, he did not know which path would be the most ideal way to get to the other side.

Not wanting to make a poor choice, the man stopped to carefully consider the two alternatives. One path was slightly shorter, but it was hillier and not as well developed. The other path was wide and smooth, but required running a longer distance.

While the man was standing there contemplating the merits of the two alternatives, the wolf caught up to him and ate him.

Life is full of choices. For example, when a person get up in the morning, they have to choose what to wear, what to eat for breakfast, what tunes to listen to on the ipod during the morning commute, and so on. However, although there are many choices in life, not all critically important.

In the story, the man had a major choice to make—how to best avoid getting eaten by the wolf. He decided that his best alternative was to quickly get to the town on the other side of the woods before the wolf could catch him. Then he had a lesser choice to make—which path to take to get through the woods. In trying to optimize the lesser choice (which path), he lost sight of the greater choice (outrun the wolf). By stopping to over-think the lesser decision, he was no longer outrunning. As a result, he was eaten.

In reality, stopping to ponder his path choice was not the best use of his time. Even if he took the longer path, the wolf would follow the scent and have to take the longer path as well. The need to run quickly was more important than the path chosen, since both would have gotten him to the desired endpoint (if he continued to run fast enough).

In the business world, we can sometimes fall into the same predicament as the man in the woods. We can become so obsessed with optimizing minor choices that we lose sight of the larger goal.

In the case of the man in the woods, success would be determined more by his ability to outrun the wolf than his ability to choose which path to take. In other words, execution was more important than optimization. The man did not execute well on the running (he stopped). As a result, he did not succeed on the larger plan.

This is also often true in business. Our ability to execute can be more critical to success than ensuring that every fork in the road is optimally taken.

The principle here is that degree to which we pursue our strategy can be every bit as critical to success as the choice of which strategy we pursue.

Many times throughout my career, I have been asked what I believe to be the best strategy for a retailer. The way I answer that question is as follows:

There are lots of strategic options for retailers. And for virtually every one of them, I can find you a retailer who is succeeding extremely well with that strategy as well as a retailer who is failing miserably with that same basic strategy. Since each strategic option can produce both winners and losers, there must be something more than just strategy choice which creates success.

At some point, it doesn’t really matter which strategy you choose. So long as you meet the following criteria, any strategic option can be good enough:

1) It must provide a solution desired in the marketplace;
2) It must be a solution your firm is capable of profitably winning at versus other alternatives available to the customer;
3) It must be a large enough business to provide a sufficient return.

If these criteria are met, then the battle shifts to pursuit. It is the firm that best pursues this strategy which will win. Out-pursuing the competition tends to involve several elements:

A) Speed – Am I the first to hold the position in the mind of the marketplace? Am I the first to build sufficient capacity to support the solution? Am I able to outrun the competition as the solution evolves over time? Am I considered a leader in the business?

B) Magnitude – Am I building a large enough capacity to satisfy demand? Am I putting enough resources towards the solution in order to outperform the competition? Am I building such a strong position that others find it difficult to attack?

C) Efficiency – Am I doing things in a manner which reduces waste (of time, of money)?

D) Effectiveness – Am I focusing my efforts in the direction which noticeably improves my ability to best satisfy the solution (and not diverting attention and resources to activities superfluous to the solution)?

If you can out-pursue on these four factors, then you can win the battle. Conversely, if you let someone out-pursue you on these four factors, it becomes almost irrelevant which strategy one chooses, because you will end up losing.

And finally, if you spend all of your time sitting back contemplating which is the single best strategic option (and never get around to pursuing any of them), I can assure you that you will never win in this manner, either.

This is not to imply that effort spent in choosing a proper direction is a total waste of time. You still need to discover a path meeting the three criteria mentioned above (desirable, winnable, and sizable solution). Out-pursuing in an area that is undesirable, unwinnable, or too small is a path to failure as well.

Sometimes, finding a strategy meeting these three criteria can take some time and research. This is time well spent. After all, although many strategies could be potentially successful, many may not. You have to eliminate the options where you could never win, no matter how much you pursue. But after that, just choose one from the set of potential winners, get out of your chair and pursue, pursue, pursue.

Now, let’s look at this principle in action. Back in the late 1950s and early 1960s, it was becoming obvious that the discount department store was going to become a large, profitable solution in the retail marketplace. During that time, a number of firms got into the business and built their first discount store. This list included K Mart (1962), Wal-Mart (1962), Target (1962), Woolco (1962), Shopko (1962), Ames (1958), Hills (1957), Bradlees (1958) as well as a host of others like Zayre, Turnstyle, Spartan-Atlantic, Shoppers Fair, and so on.

Virtually none of these companies survived. Is it because the discount department store strategy was a failure? Of course not. Wal-Mart and Target are doing quite well, thank you. Why did Wal-Mart and Target survive while most everyone else failed? My contention is that Wal-Mart out-hustled or out-pursued everyone on the low end and Target out-hustled and out-pursued on the high end.

Their dedication to speed, magnitude, efficiency and effectiveness was legendary. They didn’t just sit back and say, “Well, I’ve got stores in a winning format, so I guess that makes me a winner.” Instead, Wal-Mart and Target did a superior job of:

1) Working hard to pursue excellence in delivering the solution (always looking for ways to be better than everyone else)
2) Working hard to blanket markets with stores so as to capitalize on their position
3) Using their economies of scale to further their pursuit.

So yes, Wal-Mart and Target were correct in choosing a good strategy. But that only allowed them to play the game. To win the game, they had to out-pursue others in the same space.

At the end of the day, the ultimate goal is not to pick the optimal strategy. The goal is to win with whatever strategy was chosen. So although it is important to pick a good strategy, it is as important (if not more so) to design your organization so as to out-pursue others in making that strategy a reality. There may be several strategies which could equally work for your firm. Don’t paralyze your actions by spending endless years trying to figure out which one is slightly better. Instead, just pick one and then move your focus to pursuit.

Yogi Berra once said, “When you come to a fork in the road, take it.” This would have been good advice for our man in the woods being chased by the wolf. By not taking any fork, he ended up standing around and getting eaten by the wolf. Running down either fork would have been a better alternative.