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.

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