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.

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