Monday, March 31, 2008

Analogy #168: Blind Confidence

Let’s assume, for a moment, that Simon has a cancerous tumor that needs to be removed from inside his body.

As he is walking down the hallway at work, Simon runs into someone he knows named Bob. Simon strikes up a conversation with Bob which goes something like this:

“Hey Bob, I’ve got this cancerous tumor in my body and I’d like you to take it out.”

Bob answers, “But Simon, I’m not a doctor. I know nothing about surgery. I’ve never done anything like this before.”

“That’s okay,” Simon replies. “You can do it, Bob. I have complete confidence in you.”

“But I don’t have any training, or any proper tools,” protests Bob.

“Let’s not get bogged down in details,” says Simon. “You know the goal. Now just go and get it done. Look! Here’s an empty office. I’ll just lie on the desk right now and you take out the tumor.”

Confidence can be a good thing. Without confidence, difficult tasks would never be undertaken. Inspired confidence from leaders provides the motivation for a firm to tackle a new strategy.

However, there is a difference between realistic confidence and blind confidence. Realistic confidence is rooted in knowledge about the task at hand and the capabilities necessary to accomplish it. There is a reason to feel confident, because you know what needs to be done and are assured that you have what is needed to do it.

Blind confidence, by contrast, is not rooted in anything. You really do not have a clue as to what needs to get done or whether you have what it takes to get it done. Just through blind faith, you hope that it can be done.

In the story above, there is no rational reason why Simon should have any confidence that Bob could take out that tumor. Bob has no training or skills in medicine. He has no tools or assistants to help him in the task. Yet, Simon says he has complete confidence in Bob’s ability to take out that tumor. This is blind confidence.

I suspect that if Bob went into that empty office and started to take out that tumor with whatever he could find in that office, Simon would end up dying from the attempt. This was not well-placed confidence.

Sound silly? Well, I’ve been around businesses who have acted almost as silly. The leaders of these companies come out of their strategy meetings with extremely aggressive goals, but not a clue as to what it will take to accomplish them. Then, they go and tell everyone in the organization how confident they are in the people’s ability to make the aggressive goal a reality.

The leaders do not provide any direction, tools, or training to get the job done. All they supply is the goal and the rhetoric: “I know you can do it. I have great confidence in you!”

The company tries to hit the goal, but without the necessary skills, training, direction or tools, they fail. The company (like the patient) dies from the attempt.

The principle here is that blind confidence can be dangerous. Our confidence needs to be rooted in something more. The following four points need to be kept in mind to prevent the perils of blind confidence.

1) Goals cannot be made so aggressive that they do not stand a chance of being accomplished.
Aggressive stretch goals can be very useful in moving a company forward. Jim Collins and Jerry Porras, in their book “Built to Last,” praise the benefits of Big, Hairy Audacious Goals (BHAGs). However, there is a difference between an aggressive goal and a completely unattainable goal.

When goals are left as mere numbers, they can give the appearance of attainability. Saying things like “20% annual profit growth,” “Sales of $10 Billion,” or “40% market share” can sound very impressive. But is it realistic? The only way to tell is to boil down what it would take to achieve these numbers to see if this is realistic.

For example, McDonalds one time tested a McShrimp Cocktail. Customers in the test loved it. An ambitious goal of how many McShrimp Cocktails could be sold was created. But was it realistic?

Upon further analysis, it was determined that even if McDonald’s captured every shrimp on the planet, it would not be enough to satisfy the goal. And even if they could capture nearly all of the shrimp on the planet, the implications on costs would be such that they could no longer get the shrimp at a price at which they could make a profit. And then there would not be any shrimp left for future years. As a result of this analysis, they rejected the goal and did not proceed with the project.

It did not matter how confident McDonald’s management would have been. They could have shouted all day that “I have confidence in your ability to meet these goals,” but they still would not have been met. It was unrealistic.

2) Goals need to be anchored in actions.
It’s one thing to set a numerical target. It is quite another to know how to achieve it. As in the story, Simon had a goal to remove a tumor, but gave the task to someone with no knowledge of how to do it. If you want to achieve a goal, first develop a realistic action plan to get it done.

Remember, if a goal is ambitious, then it cannot be accomplished by doing the same things you did in the past (otherwise the goal would have already been achieved). New results require new actions. If you do not plan the new actions, how can you reasonably expect new results?

Strategic planning should be more than just setting goals. It must provide the key activities necessary to make the goals a reality. This does not mean that you have to understand every detail in advance before starting. But you should at least understand the key milestones necessary to get the job done.

If a goal is not anchored in actions:

a) You could end up trying to achieve an unrealistic goal.
b) You could end up hitting the goal by doing the wrong actions (like achieving a sales goal by destroying profitability).
c) You could end up with chaos, as the company moves in random directions since there is no consensus on what the proper action should be.

Don’t just measure numbers…measure activity.

3) Even a skilled doctor cannot succeed without the proper tools.
Actions require resources, such as people, equipment, training, and so on. Even if Bob in the story had been a skilled surgeon, it would have been nearly impossible to successfully remove a tumor in an unsterile office, without any surgical tools/equipment, anesthesiologist, nurse, or other necessity.

Similarly, if your strategic goal requires certain resources, then the strategy needs to include a path for obtaining those resources. Perhaps you will need to acquire new talent. Perhaps a skillset can only come through acquisition. Perhaps money needs to be invested in R&D or new distribution capabilities.

Offering blind confidence is not enough. You have to offer the proper resources as well. And if you cannot find or afford the proper resources, then your goal is probably unrealistic.

4) What you may think is inspirational leadership may actually come across as clueless leadership.
Finally, if you ignore the first three points and still go on stage to give your speech of confidence, keep in mind that your audience may not interpret the speech as you wish. They may realize that the goal is unrealistic, that you have no clue about which actions to take, and that you have not provided the proper resources to get the job done.

While you’re saying “I know you can do it…I have confidence in you,” the audience may be thinking:

“This is an impossible task. Our leaders are clueless idiots. My future is doomed. I need to start getting my resume out there.”

Hence, instead of providing inspiration and confidence, you have done just the opposite.

Confidence and inspiration are necessary to tackle new strategies. However, unless that confidence is rooted in realism, associated with specific actions, and supported with the proper resources, that confidence is worthless. The only thing it will inspire is employee defection.

There was a Dilbert cartoon where the pointy-haired boss gives a speech to the employees. He says, “Sales are dropping like a rock. Our plan is to invent some sort of doohickey that everyone wants to buy.”

After the speech is over, he goes over to Dilbert’s cube and says, “The visionary leadership work is done. How long will your part take?”

Wednesday, March 26, 2008

Analogy #167: Enemies are Our Friend

There’s something special about sports rivalries. They help motivate teams to perform at their best. Even in the down years, when it is time to play a game against a rival, the team finds that extra effort to perform at its best.

Not only do rivalries help to motivate the athletes, they help to energize and bring a sense of pride to their fans. I found this out the hard way.

One of the greatest rivalries in college sports is between Ohio State and Michigan. I am a graduate of the University of Michigan (twice) and am currently living in the home city of Ohio State. I’ve found it doesn’t take much to energize the people around me in Columbus. All I need to do is wear my University of Michigan shirt around town. I don’t do that anymore. I don’t need to create that much energy against me.

During half-time of one of the Michigan-Ohio State football games, I decided to take my car into one of those fast oil places to get a quick oil change. Because the rivalry is so important to the people of Columbus Ohio, every one of the workers at the oil change shop were watching the game on TV while working.

As I pulled into the shop, the mechanic gave me and my car a very mean stare. At first, I was confused. Then I remembered that I had a large University of Michigan decal on my car. Based on the look I got from the mechanic, I was afraid he would sabotage my car. I won’t do that anymore, either.

Intense rivalries are good for sports. They give the athletes the incentive to play harder. They give the fans more to root for. It creates great excitement and energy. Without the rivalry with the Boston Red Sox, the New York Yankees would be less exciting. They need each other.

There’s nothing like having a common enemy to pull a team and a community together. The same can be said for the business world. Enemies can have a great positive impact on motivating a company to act on its strategy.

Without an enemy, a company can become complacent. Enemies can pull a company together and get them play more like an enthusiastic team.

Therefore, if you want to get your company fully motivated to execute a strategy, it can help if the strategy is in some way connected to fighting a common enemy (or rival). So, at the same time you are developing your strategy, it can be beneficial to also develop that common enemy.

The principle here has to do with motivation. One of the greatest hindrances to implementing a strategy is a lack of cohesive motivation in the company—a lack of desire to put in the extra effort to do whatever it takes to make the strategy a reality.

According to a survey of 50,000 employees by the Corporate Leadership Counsel, only 11% reported that they felt fully engaged in their current work. There was 76% that were neither engaged or disengaged, and 13% felt fully disengaged.

In this highly competitive world, it is virtually impossible to win with a team where 89% are not fully engaged in their work. The only sports teams which make it to the top are teams where all of the members are highly motivated and fully engaged. This attitude is also needed to win in the business world.

How do you get that extra motivation to become fully engaged in the workplace? One way to do so is by creating a strong common enemy.

There are four benefits from properly managing the idea of a common external enemy. These are each briefly discussed below.

1. External Enemies Minimize Internal Bickering and Squabbles
Just as the Ayatollah Khomeini was able to unite the warring factions of Iran by using a common external enemy of the United States, you can use a common external enemy to bring your warring factions together. By getting the focus on something big and ugly outside of the organization, it makes all the petty little internal bickering seem small and unimportant. Showing that we all share a common external enemy gets us to focus on what we have in common rather than what pulls us apart.

During war, personal ambitions need to take a back seat to fighting the common enemy. This is also true in business. Focusing on the common external enemy makes us more of a cohesive team. We band together for the common strategic fight. The internal bickering and game playing that can derail a strategy subsides as the dialog moves to the common threat.

The common enemy can be a competitor, a country, or any other external environmental threat to the status quo. As long as the common external enemy is positioned as being a greater threat than any internal politics, you can band together and become better motivated to jointly make the strategy to beat the enemy a success.

2. We are More Motivated to Fight Concrete Enemies than Abstract Principles
When you can put a face to the force you are fighting, it is easier to focus your energies against it. Abstract principles are harder to build up a hatred against and a motivation to vanquish. For example, your strategy may depend on excellence in innovation. It’s a noble goal, but somewhat abstract. However, if you say that the goal is to out-innovate competitor “X” and displace them as the innovation leader, then you have motivation.

People like to play to win. It’s hard to feel like a winner if there is no rival to compete against. By putting the strategic goal in a competitive context against an external enemy, there is that extra incentive—a focus on a company to beat.

In a classic Harvard Business Review article called “Strategic Intent,” Hamel and Prahalad talk about the success companies have had when they put a concrete competitor’s name to a strategy. Using the example of Cannon’s “Beat Xerox” and Komatsu’s “Encircle Caterpiller,” the article showed how these companies achieved great success. Putting a concrete enemy’s name to the strategy caused them to think that they could become more than they were today by showing them someone else who had already achieved that level.

In addition, it helped them to visualize the types of things they would have to do to achieve such greatness. Finally, it provided a great rallying cry, a foe to be defeated. Victory is sweeter when it comes from battling a visible foe.

3. Enemies Heighten Activities from a “Check List” to a “Game”
Many activities need to be accomplished in order to fully execute a strategy. If you just put all of those activities on a big piece of paper and give it to someone, it looks like a boring “To Do” list. It can become de-motivating, because of the magnitude of the daunting tasks. There isn’t a lot of fun in putting a check mark next to a difficult task when completed.

It is like all of the drills and exercises that athletes go through. They aren’t much fun. Athletes do them, however, because they know they will help them perform better on game day. It is the motivation to win the game against the enemy that causes them to do all of those difficult and strenuous activities.

The same is true in business. If the “To Do” list is renamed as “skill building exercises needed to beat the enemy,” then those same activities look a lot more appealing. The potential thrill of victory makes all the preliminary activities easier to swallow. It is no longer just work. Now it is a game. Games are more fun than work, even if it is the same activity. Winning battles sounds more appealing than accomplishing tasks. Competing is more fun than just doing.

4. Enemies Can Motivate Speed
A “Check List” doesn’t create much of an incentive to act quickly. You know that if you get a task done quickly, it only means than you get to the next item of work sooner. The reward of getting to do more work if you work quicker is not much of an incentive to work fast.

However, if the work is repositioned as a race against a common enemy, then there is an incentive to work faster. The United States worked faster at getting a man on the moon because there was a “Space Race” against the USSR.

People would rather win than lose. If the strategy is positioned as a race against an external enemy, there is that added motivation from wanting to win the race.

A common principle in strategy is that the first to own a position in the marketplace typically has the upper hand and is the most successful. Therefore, the analogy of a race can be quite applicable—a race to win ownership of a position in the marketplace before someone else.

There is a lot of work required to make a strategy succeed. This work is usually added on top of one’s everyday responsibilities. In order to get this work done quickly and effectively, it helps if the work is positioned as necessary to defeat a common enemy.

Many many years ago, a friend of mine worked at Miller Brewing. He told me the CEO at the time had a welcome mat in front of his door with the Budweiser logo on it. He wanted everyone to wipe their feet on the enemy before entering his door. Similarly, when I was at Best Buy, the Circuit City company was always referred to as the “Evil Empire.” By personalizing the battle in these terms, it made it easier to motivate people to defeat the enemy.

Tuesday, March 18, 2008

Analogy #166: Symbiosis

The relationship between the job seeker and the headhunter is an interesting one. To the headhunter, the job seeker is neither a client nor a customer. The job seeker does not hire the headhunter nor purchase anything from the headhunter.

The headhunter receives no income from the job seeker. In fact, in many ways, a jobseeker can be a major pest to a headhunter—always calling and bothering the headhunter. Yet the headhunter puts up with it and even works to help the job seeker become successful in getting a job.

Similarly, the headhunter is neither a client nor customer of the job seeker. The job seeker receives no income from the headhunter. Yet, when a headhunter pesters a job seeker to help come up with a list of contacts for potential job candidates, the job seeker typically jumps at the opportunity to supply names. The job seeker wants to help the headhunter be successful.

Why are the headhunters and job seekers working so hard to help each other become successful, even though neither profits from the other? The reason is because of a mutual self-interest in a third party—the job hirer. If the head hunter can help get the job seeker a job, they get paid by the hirer. If the job seeker can help the held hunter get them the job, they also get paid by the hirer.

Therefore, it is in the best interest for headhunters and job seekers to help each other, because they can both gain from it via the job hirer. By helping each other, they are helping themselves.

Looking for a new job can be a daunting task. Any help you can get in the process is very welcomed. Although there are many sources to tap for assistance, some sources will work harder for you than others. Often the ones that work hardest for your success have some selfish motive, like a headhunter.

The benefit may be indirect and tangential to your success, but so long as there is a connection between your success and their eventual success, they are incented to help create your success.

For example, once when I was looking for a job, one of the biggest helpers I had was a consultant I had used in the past. He went beyond mere friendship and went the extra mile for me. Why? I suspect it had something to do with the fact that if I landed a really good job because of him, I would be more likely to use him as a consultant at that new company. In essence, I would be an opening he could use to get into the door of that company if it hired me.

The reason why I would help a headhunter find someone to fill a job for which I am not qualified is indirect. The more I help a headhunter, the more I would hope that the headhunter would remember me when a job which fits my qualifications comes up.

Similarly, if a headhunter does a good job of helping me get hired, perhaps down the road when I need to hire someone, I will use that same headhunter.

Attaining strategic success can be similar to trying to find success in getting a job. It can help if others have a vested interest in having my strategy succeed. The more others benefit from having my business strategy succeed, the more likely they will help to make that strategy succeed. This is true even if the benefit comes from another source.

Therefore, just as you would tap into other sources to help you with job hunting success, tap into others to help with getting successful strategy implementation. And the more you can tie their success into your success, the better.

The principle here is symbiosis—two parties working together because each one benefits. Symbiosis can be a critical element of strategic planning. This is particularly true if one’s current position is failing and there is a need to move the company to a radically different position.

Once a company gets into the “death spiral,” it can be very difficult to move to a path of prosperity. In a death spiral, the marketplace has pretty much rejected you as a primary or viable alternative. The market has chosen someone else as a more desirable alternative. Neither customers nor suppliers see much reason to deal with you or think about you any more.

It is difficult enough to develop a new strategy to revitalize a brand that has been rejected. Then on top of that is the added burden or convincing people to give you a second chance. Succeeding on both of these tasks is extremely difficult. This is why complete turnarounds are so rare.

As a result, why successful turnarounds need “friends”—other people who will go out of their way to help make this transformation successful. As in the story of the headhunters, friends tend to be more helpful if there is something it for them if you succeed—a symbiotic relationship. Therefore, if you are dealing with a turnaround strategy, it helps if you seek out symbiotic relationships as part of that strategy.

Complete turnarounds in the retail business are rare. When I find one, I examine it carefully to see why it succeeded. Recently, the Lord & Taylor department store chain was declared a successful turnaround by the International Herald Tribune. Although many factors went into that success, a key factor was symbiosis.

Lord & Taylor has been around since 1826. In the early years it had the reputation of being a classier, higher end department store. However, in 1986 it was purchased by the May Co. Under the May leadership the classy brand was destroyed. High end goods were replaced with lesser brands. No money was put back into the stores, making them look like a dump. Service and quality were reduced or eliminated in order to lower expenses. To get customers in, they started shouting price and pushing an endless number of coupons into the market. In other words, they had to bribe people with coupons in order to get any interest.

Lord & Taylor lost its relevancy in the marketplace. There was no reason to prefer shopping there. Other department stores had won over the customers. The desirable brands stopped supplying the chain. When Macy’s purchased May Co. in 2005, they saw no reason to keep the brand and sold it. Lord & Taylor was being rejected on all fronts.

Lord & Taylor was purchased from Macy’s by Richard Baker through the fund NRDC Private Equity. He teamed up with Lord & Taylor CEO Jane Elfers to create a turnaround. The strategic goal was to restore Lord & Taylor to its former image as a classy, contemporary higher end department store. Easy to say, difficult to do.

Lord & Taylor needed symbiosis on both sides—with suppliers and with customers. Jane Elfers was a strong merchant with a long history of dealing with the branded clothing manufacturers. A key part of the turnaround required that she get these brands to actively support the turnaround by allowing Lord & Taylor to sell their better brands again.

The only way to get the brands back was by convincing the brands that it was in their best interest. The angle? Position Lord & Taylor as a way for the brands to regain a balance of power. At the time, Macy’s had consolidated the market to the point where the better brands had very few selling alternatives except to sell through Macy’s. Macy’s had all of the negotiating power. If you didn’t bow to their demands, they could cut you off and leave you with virtually nowhere else to go.

By actively supporting the drive to make Lord & Taylor succeed, the brands would create an alternative to Macy’s. This would weaken the negotiating power of Macy’s and strengthen the power of the brands. Hence, it was in the best interest of the brands to support the transformational strategy of Lord & Taylor.

A similar situation occurred on the consumer side. In its rush to create a national department store brand, Macy’s quickly severed ties with the old names and quickly (& coldly) slapped the Macy’s logo on all of the acquired department stores. This alienated many of the consumers who resented losing their favorite brands (like Marshall Fields) in such a “heartless” fashion.

Another group was alienated from Macy’s because they resented the homogenization of the department stores. Why pay the extra price to go to a Macy’s department store if it feels like a mass merchant?

Lord & Taylor was able to tap into these alienated groups who were looking for someone to succeed at providing a viable alternative so that they would not have to rely on Macy’s.

The two symbiotic relationships fed on each other. As the manufacturers supported Lord & Taylor, it became more desirable to the customers. As more customers supported Lord & Taylor, the manufacturers started shipping even more of their better brands.

Without these symbiotic relationships, the transformation may never have worked.

It is difficult to transform a company when suppliers and consumers have rejected you and found other alternatives. To succeed, you must often find mutually beneficial reasons for suppliers and customers to want you to succeed.

The more people who can win from your success, the more likely you will have a success.

Friday, March 14, 2008

Analogy #164: Secure this Building!

The following is a story from

One reason the Military Services have trouble operating jointly is that they don't speak the same language.

For example, if you told Navy personnel to "secure a building," they would turn off the lights and lock the doors.

Army personnel would occupy the building so no one could enter.

Marines would assault the building, capture it, and defend it with suppressive fire and close combat.

The Air Force, on the other hand, would take out a three-year lease with an option to buy.

As the story above illustrates, a simple three word command like “secure this building” can be interpreted many different ways. Depending on a person’s interpretation of those words, they will do something entirely different—anything from military assault to signing a lease.

Clearly, clarity in communication is important. You wouldn’t want to go to war knowing that all of your orders would be misinterpreted in a variety of different ways. To ensure unity in action, one needs unity in understanding.

The same thing is true in the business world. If you want a business strategy executed properly, then you’d better make sure that everyone has the same understanding of what that strategy really is. Just getting someone to memorize a vision statement is not enough. You have to make sure that their understanding of what that statement means is similar to your interpretation. Otherwise, you may as well be speaking a different language.

In the last blog (“Challenge Your Assumptions”), we talked about the importance of challenging the underlying assumptions regarding why businesses and their customers act the way they do. In this blog, we will take this a step further and talk about the importance of getting unity around the assumptions implied in what we say.

Don’t assume that everyone has the same assumptions. Left alone, people will come up with different interpretations. Therefore, you may think you’ve communicated one type of strategy, whereas the group moves in a different direction.

Let’s take a look at a handful of terms to show how this might occur.

First, let’s look at the word “marketing.” Perhaps your strategy process pinpoints marketing as a problem or recommends a new marketing program. What does that mean?

To some, marketing = advertising, so they would interpret this as a call for a new advertising campaign (or maybe a new ad agency). To others, marketing = sales, so they may see this as a call to revamp the sales team or create a sales contest. For another group, marketing = brand management, and they may see this as a call to reposition the brand or change the product mix under the brand.

Or how about the term “Business Development”? If you were to tell people that the key focus of the strategy is business development, how would that be interpreted?

Well, to some, business development = increasing sales, so they would again look at revamping the sales team or creating a sales contest. To others, business development has to do with customer relationships, either to gain more loyalty from current customers, or to prospect for new customers. This might call for investment in a CRM (customer relationship management) program. For others, business development has more to do with product innovation, or maybe diversification into new business ventures. This could lead to more investments in R&D, or merger/acquisition activity.

And then there is the word “productivity.” If the strategy is focused around becoming more productive, how will this be interpreted?

Some people assume productivity = cost cutting. Therefore, they would want to slash costs across the board and look at downsizing the staff. Others may associate productivity with improving economies of scale. To increase scale, you need to increase sales (and we already know what that implies). For others, productivity is associated with efficiency or fewer defects. These people would look to adding a TQM or six-sigma type of program.

Another group might see a call for productivity as a call for reengineering all of the internal processes. Yet another group might assume this to be a call to invest in the latest technology in order to improve efficiency and lower operating costs over the long-term. As you can see, productivity can imply either spending less or spending more, depending on your assumptions.

Finally, let’s look at the term “positioning.” Perhaps your strategic emphasis is around repositioning the company. How would that be interpreted?

Some, with more of a marketing focus, may see a position as the slogan or catch phase tagged onto the end of your advertising. Hence, the solution to repositioning is to create a new slogan. Others may have more of a product focus and see repositioning as an attempt to change the product attributes, such as lowering the price or raising the quality.

Another group could have more of a competitive focus. They would see repositioning as an attempt to find a unique place for the product/brand in the marketplace where it can best win against competitive offerings/positions. Someone with a customer focus might see repositioning as a call to seeking a solution which they can own in the mind of the customer.

As you can see, depending on the assumptions, simple little directives can lead people in a wide variety of directions. Now some of this is desirable. You want people to internalize the strategy and look for ways to apply it to their piece of the puzzle.

However, at the same time, you don’t want chaos or randomness. The purpose of strategy is to provide direction in where you want to move the company. If there is not enough clarity in the words you use to create a common understanding, then your words have failed.

As a result, do not assume that your message is received as intended. Ask for feedback to see how the message is being interpreted. If there is confusion, take the time to clarify.

Strategies are primarily communicated via words. Based on one’s assumptions, words can have different strategic interpretations. Therefore, do not assume that everyone is on the same page, just because they have the same words. Take the time to ensure that there is unity in interpretation.

They say that about 75% of the population learns best visually (with pictures). Don’t be afraid to use charts and pictures to help get your point across. After all, you are building a roadmap to the future. Just think how difficult it would be to get somewhere new in your car if all your roadmaps were nothing but words.

Tuesday, March 11, 2008

Analogy #163: Challenge Your Assumptions

What is it with Americans and breakfast foods? We seem to segregate food into two categories—food appropriate for breakfast and food appropriate for the rest of the day. And heaven forbid that we would confuse the two and eat one of these foods at the wrong time of the day.

Take, for example, oats. Oats are a common breakfast food found in oatmeal, oat bran muffins, and Cheerios cereal. However one almost never eats oats at any other time of the day.

And what about bread? For some reason, if it is eaten in the morning it has to be toasted. The rest of the day tends to be toast-free.

At McDonalds, I can get all kinds of beef patty combinations the rest of the day, but no pork. For breakfast, I can get all kinds of pork combinations, but no beef.

And then there are these silly substitutions:

1) I can only eat potato chips the rest of the day. For breakfast, they must be crispy hash browns.

2) I cannot eat chocolate cake for breakfast, but I can eat a gooey chocolate muffin.

3) I cannot eat a fruit pie for breakfast, but I can eat a fruit Danish.

4) Corn chips the rest of the day, corn flakes in the morning.

And then, of course, there is the magic egg. You can put almost any combination of any type of food on a plate, and as long as it is inside or next to an egg, it magically becomes a breakfast food. Take away the egg and it might be no longer appropriate for breakfast (think steak and eggs versus just steak).

As an act of defiance, for dinner today I made Ham and Eggs.

Our actions are based on assumptions. Some things are assumed to be right and other things assumed to be wrong. We are much more likely to do the things that fit into our assumptions about what is the right thing to do.

In the case of food, we tend to have assumptions about what is appropriate to eat for breakfast and what is appropriate to eat the rest of the day. Therefore, we eat different foods for breakfast versus the rest of the day.

Is there some medical reason for this? Do oats only have nutritional value in the morning? Is there something about the roundness of a muffin verses the triangular shape of a cake that makes round things better in the morning? Of course not. But the assumptions of what to eat at what times persist never-the-less.

Business decisions are also based on assumptions. We may not even consciously know what the assumptions are behind those decisions, just like we may not know why breakfast potatoes need to be in the form of hash browns.

Strategic planning is often about finding new opportunities. Many times these new opportunities can defy the prevailing assumptions of the day. If we do not challenge the root assumptions of society in our strategic planning process, we may become blind to all of the great opportunities which come from re-writing those assumptions.

The principle here is that behavior is an outcome of assumptions. Unless we challenge those assumptions, we may never get to the optimal behavior.

Take, for example the idea of re-engineering. We may have a ten-step process for getting something done. As part of a productivity strategy, we may want to make that ten-step process more efficient. One way to do that would be to examine each of the ten steps separately to find ways to make each step more efficient.

However, this is based on the assumption that all ten steps are really necessary. If we look at the process holistically, we may find that assumption to be invalid. Perhaps we can get that process done in only 5 steps if we re-engineer the whole thing. Eliminating half the steps could be a far greater productivity gain than just making each of the original ten steps marginally better. However, if the assumptions are never challenged, that 5 step process would not be discovered.

Great new business opportunities often fly in the face of old assumptions. There used to be an assumption that people expected drinking water to be essentially free. Nobody in their right mind would pay for a drink of water. Now the bottled water business is huge—one of the greatest new businesses to hit the food industry in a long time. People think nothing of paying more than a dollar for a drink of bottled water. If the old assumption had never been challenged, this great opportunity might never have occurred.

In an earlier blog, I talked about all the different business models that can be found in the pizza business (see “There’s More Than One Way to Slice Pizza”). If the old business models had not been challenged, then the new business models for pizza would not have been discovered.

Let’s go back to the breakfast foods. There really is a reason behind the segregation of food into these two categories. What one has to realize is that at one time, making dinner was a very time consuming chore. A little more than a half-century ago, the typical time for dinner preparation was around an hour and a half. If you go back more than a century, dinner preparation could take two hours or more. In addition, every day you had to find the time to bake your own fresh bread.

So here was the deal. Nobody had the time or inclination to spend two hours making a meal in the morning. You wanted to eat sooner than that. Back in the 1800s, there were only a limited number of foods you could prepare quickly. They were things like eggs, oatmeal and pancakes. That’s how they got assigned to the morning. The other foods took too much time to prepare, so they were relegated to later in the day.

The toast? Well, fresh baked bread at home did not have preservatives, and back in the 1800s, they didn’t have those nice plastic bags to keep the bread moist. As a result, the morning bread left over from yesterday’s baking was a little dried out. Toasting made the dry bread taste better.

Of course, those assumptions about time seem silly today. The average prep time for dinner these days is close to 15 minutes. Thanks to modern packaging and microwave ovens we can have just about any kind of food we want in about seven minutes or less. So all of the assumptions about what is appropriate for breakfast no longer apply. Yet the habits remain because not enough people are challenging the assumptions.

Yes, some restaurants are serving breakfast all day long. But why don’t they serve dinner all day long?

There is some movement in this direction by the fast food chains. McDonald’s attempted to position its McGriddles breakfast food as an end of the day meal for people who stayed up all night enjoying themselves at nightclubs. McDonald’s is also considering serving breakfast all day long. After all, it is among the highest margin meals they make. Taco Bell invented a new meal, which they call the fourth meal. It is eaten sometime between dinner and bed time. And of course, they plant the assumption that Taco Bell food is most appropriate for that fourth meal.

Therefore, sometime during the strategic planning process, it is wise to bring up the topic of assumptions.

First, we need to bring those hidden assumptions to the surface. If we are unaware of them, we cannot deal with them. They is a “why” for every action and if we know the assumptions, we will know the whys.

Second, we need to challenge those assumptions. Are they still valid, or have they become obsolete, like the assumptions around breakfast foods.

Third, if the assumptions are weak or obsolete, is there an opportunity to replace those assumptions? Great business opportunities to cut costs or create new industries may be possible under a different set of assumptions.

Fourth, we must assess how ingrained current habits are to determine how difficult it will be to change those habits and thought patterns. Some are harder to change than others. For example, clear beer was too far of a stretch for people to accept. The assumption that full-bodied beer must have full-bodied color was too hard to break.

Assumptions drive activities. If you want to optimize the activities of yourself and your customers, it is wise to challenge those assumptions.

This past week, the comic strip Mutts captured this idea of challenging assumptions well. The comic showed two birds sitting on a branch next to a warm, tropical beach. The first bird said to the second bird, “Bob, it’s about time we started to fly north.” The second bird looked at the current surroundings, thought a moment, and then replied, “Why?”

This bird was challenging the assumption that one has to fly north for the summer. Why not just hang out at the tropical beach?

Sunday, March 9, 2008

Analogy #162: Use Your Muscles

About three times a week, I work out vigorously at Bally Fitness. On a typical workout, I burn up about 1,000 calories on the elliptical machine, then do some weights for the upper body, and finally cool down by swimming about 10 lengths in the pool.

When I tell people this, I get odd looks from them as they consider how much I say I exercise and they look at the shape of my body. I don’t exactly look like a body builder. For modesty’s sake, I hide my muscles under a layer of fat.

However, for a person of my age, I’m in reasonably good shape. So the other day, my wife wanted to rent a U-Haul truck and bring a bunch of furniture to the house. Aha! A chance to show off my strength. But then she asked me to see if I could find some friends to do the furniture moving.

What’s the point of exercising if you never take advantage of the strength and endurance you build?


I don’t particularly enjoy exercising a Bally Fitness, but I do it as a means to an end. I do it to have a healthier body, one that weighs less and is less susceptible to catching the cold or the flu. I also do it to give me better strength to do chores around the house. If the exercising did not have these benefits, I would stop doing it.

When my wife wanted me to have others haul the furniture, it made me feel a bit as if all that exercising was a waste of time. I had built up that strength and endurance, so why not use it?

Athletes exercise as well. They train for hours upon hours, building up muscles and endurance. Do they do this because they like to train? In most cases, no. The athletes train because it will make them perform better in their chosen sport. Similar to me, they do it merely as a means to an end.

What would you think as an athlete if you trained very hard but were never allowed to play in the game? What if you were told you had to sit on the bench for every game, and the coach would pick a fan at random out of the stands to play in your position? These fans don’t work out as hard as you do, but they get to play in the game.

Not only is that not fair, but it is foolish. Because you, as an athlete, have been in constant training, you are better equipped to play the game. There is more risk of something going wrong if you put an untrained fan into the game. Why would a coach want to take that added risk when there is someone far less risky sitting on the bench?

Going through the process of strategic planning is like exercise for the corporation. It helps build knowledge and insight. The more you exercise the “muscles” of strategic planning, the more knowledge and insight you will have. Yet, as we will see below, many firms keep strategic planning “on the bench” and make their toughest decisions without it.

What’s the point of having a strategic planning process if you do not apply the knowledge and insight? Why increase the risk of making a less than optimal decision by ignoring the skills you have sitting on the bench?

The principle here is that strategic planning is not to be done because it is a nice thing to do. Getting a strategic plan developed is not the end in itself.

Just like exercise, planning is merely a means to another end. The primary purpose of doing strategic planning should be to reduce risk. The fate of one’s business has a lot to do with the quality of one’s decisions. Strategic planning can reduce the risk of making a weak decision because of the knowledge and insights it provides.

Unfortunately, businesses often do not take advantage of the risk reduction capabilities inherent in strategic planning. On many of the most important decisions, strategic planning is left on the bench.

Back in 2006, McKinsey & Company conducted a survey of business executives. They were asked a number of questions regarding their company’s use of strategic planning. What McKinsey found out was that most companies go through the “exercise” of strategic planning. In fact, more than three-quarters of the executives said their firm had a formal strategic planning process.

However, the study found that less than one quarter of the companies use their strategic planning process to make their most important decisions. Instead, typically top leaders just make the decision (often alone, but sometimes with a small senior group).

With strategic planning often frozen out of the decision-making process, it is no surprise that the study found that over half of the executives were not satisfied with their company’s approach to making strategic decisions. Conversely, the more that strategic planning was utilized, the greater the level of satisfaction.

The areas where executives were most dissatisfied with the decision-making appeared to center around:

1) Not enough alignment between individual decisions and the overall strategy.

2) Not enough monitoring of where a company is heading versus where the strategic plan
wanted it to go.

3) A lack of focus on what is truly important from a strategic perspective.

In other words, when strategic planning is left on the bench, decisions become isolated events. They are disconnected from any continuity to other decisions because there is little regard for any strategic context in the decision making. Without this strategic context, one can lose focus on the big picture and sub-optimize when making the decision.

With each decision sub-optimizing based on different criteria (lack of common focus), what happens is that instead of moving the entire company in the direction of the strategic plan, portions of the company are moving in all sorts of different directions.

This would not be so bad if a company had a process to monitor when a company gets off track on its strategy and a means to get back on course. Unfortunately, about one-third of executives in the McKinsey survey think their company lacks an effective method to monitor progress against the plan. In other words, not only are decisions often made in isolation from strategy, their outcomes are not measured against strategy.

This would be like making a flight plan, but once the airplane is in the air make every decision in isolation without referring to the flight plan. Then, on top of that, ignore the all the instruments on the airplane because you do not want to measure performance versus the flight plan. Under such circumstances, you would be lucky to actually land the plane safely. And if you do, I doubt you would end up at the destination placed on your flight plan.

Why take so many needless risks? Strategic planning can reduce these risks. Exercising is done for a larger purpose. If you are going to the trouble of doing strategic planning exercises, you may as well use those muscles to reduce the risk of making less than optimal decisions.

Strategic planning should not be an isolated project which has no bearing on day-to-day decision-making. Instead, strategic planning should be integrated into all major decisions. By ignoring the strategy at the time when decisions are made, one increases the risk of sub-optimizing and not reaching one’s ultimate strategic goals.

Strategic planning reduces these risks by providing knowledge, a strategic context/focus, and a means to monitor effectiveness early enough to get back on course.

Some people build muscles just for show. That’s nice, but if I’m going to work that hard at getting them, I want to use them. Is your strategic planning department just for show or do you put those muscles to use?

Monday, March 3, 2008

Analogy #161: Buy My Food

My daughter spent many years in the Girl Scouts. As a result, I have many years of experience helping to sell Girl Scout cookies.

Back when my daughter was very young and a Daisy/Brownie scout, it was easy to sell those cookies door to door. People would see that sweet little 6 year old girl and be more than willing to buy cookies from her.

However, it seemed that as my daughter got older, the door to door selling became less productive. By the time my daughter became a teenager, it became a waste of time to go door to door. Apparently, people would much rather buy cookies from a cute little 6 year old than a 15 year old.

Therefore, as she got older, my daughter turned to other activities in order to raise money for Girl Scouts.

Things change over time. Early successes do no imply that success will last forever. My daughter had early successes in selling Girl Scout cookies. However, over time, her success in selling cookies door to door diminished, until it was no longer worth doing.

Was it because my daughter became less capable of selling cookies? No. As she got older, she had more strength and stamina to walk to more doors. Also, she became less bashful and could make a better sales pitch.

Was her declining ability to sell door to door because nobody wanted to buy Girl Scout cookies anymore? No. The Girl Scouts still sell an enormous amount of cookies.

The problem was that my daughter matured from a little girl to a young woman. As it turns out, people are more sympathetic towards cute little girls and feel more inclined to buy from them. By contrast, it is easier to say no to a teenager.

Just as people mature, so do industries. Maturity/decline can reduce one’s potential. You may become more productive and more efficient over time (just as my daughter became better at selling skills over time). But being better at what you do does not automatically make your performance better. If the maturing industry is working against you, there is only so much you can do.

If you want growth, you may need to shift to a different (less mature) industry, just as my daughter had to shift to different fund raising strategies.

The key principle here goes back to a prior blog where I quoted a study from McKinsey. That study said that if you want to be a high profit, high growth company, the best thing to do is become a company which sells high profit, high growth products (see “Dip Your Ladle in the Right Stew”). In other words, if you want success as a growth company, keep adjusting your portfolio to have products in growth industries.

We can see this by comparing two companies: Procter & Gamble (P&G) and Kraft Foods. In recent years, the business press has been far more glowing about P&G and far more critical about Kraft. Now there are a lot of reasons for this, but one major reason is because P&G did a better job keeping its portfolio centered in growth.

Both companies have a long heritage in food processing, stretching back over most of the 20th century. Both companies created or acquired strong, well known food brands with a large following.

However, the problem was that by the end of the 20th century, the food processing business was becoming highly mature. Some of the problems in maturity were the following:

1. It was harder to differentiate name brand food products from each other or from private label products. As a result, they were becoming more like commodities, which squeezes profitability.

2. The rapid growth from consolidating the industry was pretty much over. Instead of the big companies growing at the expense of little firms, they now had to battle each other for tiny share gains.

3. Discretionary spending was moving away from processed food to the restaurant industry.

4. Innovations were harder to come by, more rapidly copied, and smaller in scope.

Proctor and Gamble could see this coming, so they decided to transfer the portfolio out of industries that were less mature (like food) and into industries that were less mature (cleaning products, health care and beauty care). The facts were on P&G’s side. According to the US Economic Census, between 1997 and 2002, the value of shipments in food manufacturing grew only 8.6%. By contrast, home cleaning products grew at 16.2% and pharmacy/medical products grew at 53.7%.

So here is what P&G did to reduce its food portfolio:

1. Sold Duncan Hines cake mixes to Aurora Foods in 1997.
2. Sold Jiff peanut butter and Crisco to J.M. Smucker Co. in 2002.
3. Sold Sunny Delight to Sunny Delight Beverages Company in 2005.
4. Announced the intention of getting out of the Folgers coffee business in January 2008.

To get stronger in health care and beauty care, P&G did the following:

1. Purchased Richardson Vicks in 1985 (obtaining Vicks healthcare brands and Oil of Olay beauty products)
2. Purchased Noxell in 1989 (Cover Girl cosmetics and Noxzema)
3. Purchased Max Factor in 1991
4. Opened a health care research center in 1995
5. Got US FDA approval for its prescription drug Actonel in 2000,
6. Purchased Clairol in 2001
7. Introduced ThermaCare heat wraps in 2002.

During this same time, Kraft stuck to having basically a portfolio of food products. Even then, it was late and slow in adapting to the few areas of growth in food processing, such as organic and low cal.

As a result of this one simple difference in strategy, there is a big difference in performance. As you can see in the chart below, over the last seven months Kraft has struggled to try to keep its stock price up with the S&P 500. By contrast, P&G is performing much better than the S&P 500.

So what have we learned?

1. Don’t Just Rely on Being Better
P&G was pretty darn good at running food processing businesses, but they realized that doing an excellent job in a slow growing mature business doesn’t get you very far. More could be gained by migrating to a better industry, like health care or beauty care. It’s important to do well, but a strategy which only looks at improving execution may miss a greater opportunity that could come from shifting the product mix.

2. Get The Facts
There are many independent sources of information for determining if your portfolio is entering maturity/decline as well as point to industries on the way up. Earlier, I quoted the US Economic Census. Another great source is all of the data accumulated by Stern School professor Aswath Damodaran (look here). Understanding trends will allow you to maximize your portfolio within those trends.

3. Make a Choice

If the trends point to a need to shift, then make the choice of what to let go of and what to add on. But choose carefully. Just because an industry is growing does not mean you will do well there. Move into areas where you can add significant value. For example, in the case of P&G, they were experts at building strong national brands through mass channels. They applied that skill to health care and beauty care.

4. Make the Move
Although it may be difficult to sell off a product core to your history when it is still making money, remember this. It is easier to sell off something when it still is seen as strong by the buyer. Early action will make the sale quicker, at a higher price. In addition, the sooner you start the transition, the less pressure there is to hold a fire sale to dump old things or pay way too much to quickly get into the new things. A moderate pace, started early, allows for more rational decision-making. Rash moves are minimized.

Because Kraft waited longer, it may be more desperate in trying to quickly fix its portfolio mix. This may create less value-added in the transition.

Being a good operator is nice, but operating in a good space may be even more important. The definition of what is a good space changes over time. Therefore, your portfolio may need to change over time.

My daughter couldn’t bring back the past make herself young again. She eventually had to leave the Girl Scouts and do what adults do. You cannot bring back the past, either. Get over it and move on.