Tuesday, April 29, 2008

Analogy #176: Get Human

Ever try to call up one of those “help” lines for a company and get a worthless computerized phone system? It happens to me all the time. The computer voice will start out by listing about 5 types of problems, and you are to press a number between 1 and 5, depending on which problem applies to your situation.

Almost 100% of the time, my problem doesn’t come anywhere near the five options they give. Therefore, I have no idea which number to press. So I press a number at random hoping that the next level will be more helpful. It almost never is.

Many times, I make these calls from my cell phone or a telephone where the touchpad is in the handset. Therefore, I have to take the phone away from my ear in order to press the proper number. By the time I get the handset back to my ear, I have missed the next round of instructions.

One of my favorite web sites is http://www.gethuman.com/. The primary purpose of the Get Human site is to help people avoid these computerized phone systems and get access to a real human being.

The site lists hundreds of companies and the tricks you have to do when phoning each company to avoid the computerized system and get direct access to a human being. In many cases, the site tells you to “ignore whatever the computer is saying” and press a particular sequence of numbers and symbols. Other times, it tells you to ignore everything the computer says and just wait. Eventually, you outlast the computer and it goes directly to a human. A third approach is that it tells you what to press at each prompt to take the shortest path to a real operator.

This past month, they added a blog feature to the site where people can share their horror stories about using these phone systems.

I must not be the only person frustrated with the lack of help on these help lines, if there is an entire web site devoted to avoiding them. This brings up an interesting question—do companies realize how infuriating these calls can be for their customers? Do they realize how much ill will they can create with their customers?

Most of the time when we talk strategy, we talk about the big picture. We talk about large visions and elaborate positions versus all of the competition in the marketplace. These are all very important, because if you do not stake a claim to a winning position, you have very little chance of success.

However, staking a claim and keeping a claim are two different issues. You get to decide where you want to stake your claim, but the customer decides whether you have earned the right to keep it. If you disappoint your customers, they will pull that stake right out of the ground and throw it away.

In this day and age, direct customer contacts with a company may not happen very often. Your call center may be one of the few chances you get to make the right impression. If those calls turn into a nightmare for your customer (as they often do for me), then all of that fancy big-picture stuff may be for naught. That bad interaction my cause me to reject your firm entirely.

Therefore, strategies must be developed at two levels—the big picture and the little picture. The big picture is figuring out how you want to win the entire game. The little picture is figuring out how to win on every individual interaction.

The principle here concerns interaction and transaction-based strategies. Sales do not miraculously appear all at once. Instead, they tend to come in small doses, a transaction at a time. The more successful transactions one has, the more income one receives.

If you blow it at the point of the interaction, there will be no transaction, and the income dries up. It’s as simple as that. Therefore, a part of your strategic planning needs to deal with ensuring that each interaction between the prospective customer and the company reinforce your strategic objectives.

In many ways, a strategy can be looked at as a series of promises to your customers. For example, if you are Disney, you are making a promise that the interactions will be wholesome entertainment for the whole family. That is why there was some outrage over the recent photos of Miley Cyrus in Vanity Fair magazine, which pictured this Disney Hannah Montana star in a less wholesome manner.

For a department store like Nordstrom, there is a promise of great quality, great selection and outstanding personal service. Many people are willing to pay a premium price for this promise. Yet, if the service at the store disappoints, the promise is no longer believed, and the strategy is destroyed.

American Airlines likes to tell people that “They know why you fly.” However, at the point of interaction this past month, when thousands of flights were suddenly cancelled, American made it clear that they really don’t get it after all. The promise vaporized.

Here are some questions to ask yourself to help ensure that the big picture strategy gets translated down to the interaction and transaction level.

1) What are the promises implied in our strategy?

2) What would the customer expect those promises look like at every point of interaction with the company?

3) How can we create a process which guarantees that the customer expectations are at least met (if not exceeded)?

4) Whenever we are making a change in the way things are done, will the customer perceive the change as bringing us closer or further away from our promises?

5) In a crisis mode, will customers see us as abandoning our promises?

6) How do we react when a salesperson lands a big sale, but does it in a way that destroys the strategic intent of the interaction? Do we reinforce bad behavior?

7) Do the people developing our customer interfaces (phone, on-line, etc.) understand enough of the big picture strategy so that they can ensure that the interface reinforces that strategy?

8) What do we reward people for? Is the quality of the customer interaction on that list?

9) Even for the people who do not have direct interaction with the customer, do they see themselves as a support team to help make the interaction better?

10) How do we handle mistakes made in an interaction with the customer?

11) What about the after-sale interactions the customer has with the product or service? Do these help or hurt their impression of the strategy? Remember, they may need to make another purchase later or talk to their friends who haven’t purchased yet.

Finally, we (as executives) need to ask ourselves how much we really know about our company’s customer interactions. In prior blogs, we talked about how important it is get firsthand knowledge about your company’s interactions from the customer’s perspective (see “Do You Do Breakpack” and “Stuffed Shirt”). Try to buy something off your web page. Go on a sales call. Try to complain on your help line. Better yet, spend some time on the other end of the phone listening to customer complaints.

Ross Perot was shocked when he found out that the directors at General Motors no longer bought cars and in some cases no longer drove them. They had no idea what customers had to go through to get a car repaired. Yet these directors had no qualms about making decisions for the automobile company. Out of touch directors lead to an out of touch company that lost a tremendous amount of market share.

You can’t fix it if you are unaware it is broken. And ignorance is no excuse.

Although it is critical to get the big picture strategy correct, that work is worthless if the company cannot translate it into the right customer experience every time there is a customer interaction. A strategy is not just a theory. It needs to tie into the specific details of how the customer interacts with us.

In reality, our position is what the customer believes about us in their mind. If their experiences cause them to come to a different mental conclusion than what we desire, then we have failed.

Customer perceptions are formed based on many things. Impressions may be formed years before you get a shot at a face to face interaction. Consider the problems at Ford—they have achieved a quality level equal to Toyota, but are not getting credit for it. There is too much bad history to make that statement credible. There’s a reason why the old sayings about what FORD stood for were created by customers: “Found On Road Dead” or “Fix Or Repair Daily.”

Be vigilant in protecting your reputation. Once it goes, it is hard to get back. Grand strategies cannot make up for years of disappointing interactions. Fix the interactions first, and then you have a foundation to make the new strategy credible.

Wednesday, April 23, 2008

Analogy #175: Trend Watching

Once there was a man sitting in the middle of the city with a shotgun. I asked him what he was doing.

He said, “I’m hunting for wild animals out in the wilderness. I’ve been doing it here for over 30 years.”

I replied, “In case you hadn’t noticed, this isn’t wilderness any more. This is an urban environment. There aren’t any wild animals to hunt here anymore.”

The hunter nodded his head and said, “Yes, our company has professional trend watchers. They’ve noticed those trends of greater urbanization and fewer wild animals. In fact, I think those trends may have something in common, since the greatest drop in wild animals occurred when the urbanization began. In my backback, I’ve got all kinds of trend charts made by our trend watchers which show that. Do you want to see them?”

“Forget studying the charts,” I said. “I can see the urbanization and lack of wild animals with my own eyes. The question here is shouldn’t you be reacting to these trends?”

The hunter answered, “Our company has been hunting in this area for over 100 years. It is what we know best. It’s risky to change from what you are good at.”

“If you are so good at it,” I inquired, “Then how many wild animals have you shot at recently?”

“Well,” the hunter said, “I haven’t really had a kill in the last decade or so. But I’ve been practicing a long time and have improved my aim. If I ever do see a wild animal here, I’ll be ready.”

External trends have an impact on performance. It really doesn’t matter how well you’ve been honing your skill and making improvements to your business operations. If the trends have made your business model obsolete, you will not be successful.

The hunter in this fairy tale was probably very skilled at hunting. He practiced to improve his craft. Unfortunately, two outside trends were making that meaningless—the transition of the wilderness into a city and the reduction (down to the point of total elimination) of the wild animal population.

It wasn’t like these trends were a surprise. Their trend watchers knew all about them and had been charting them for a long time. Yet the company did not react to the trends.

Sound silly? Well, McKinsey and Company announced the results of an executive survey today. According to this survey, 70% of the executives see external trends as increasingly important to corporate strategy. The executives for the most part also believed that these trends would have an impact on their profitability over the next five years.

Yet, for the 14 trends looked at, in nearly all cases it was only a minority of companies who actually admitted to taking some steps to address the trend. Worse yet, only 17% of the executives said that they had taken enough action regarding a trend to actually see a significant positive result.

In other words, these 1,306 executives surveyed aren’t all that different from our hunter. They know the trends. They believe the trends will impact them, but they haven’t reacted to them in any meaningful way. They haven’t exploited the new opportunities provided by the trends or avoided the pitfalls created by the trends.

The principle here is that knowledge alone is not good enough. It is what you do with that knowledge which makes the difference. If your planning process stops at just making your executives smarter, then it is incomplete. Taking pride in a backpack full of beautiful charts when the company is failing is not much to be proud of.

Sure, strategists can’t do everything. As the old saying goes, you can lead a horse to water, but cannot make him drink. However, there are things one can do in the planning process which will help increase the chances that the right action will be taken. This blog will look at some of those actions.

First, let’s add a little context. In the McKinsey survey, the ones who had taken action said they were motivated by a combination of five factors:

1) They could see a competitive advantage to taking action.

2) They felt competitive pressure to take action.

3) They had a specific growth opportunity presented to them where an existing business could take advantage of the trend.

4) Customers asked for a change based on the trend.

5) They had a specific new business opportunity presented to them which could take advantage of the trend.

If these are the items which motivate action, then one should try to incorporate them into the strategic process. I suggest three ways to do so:

1) Make it Tangible
It appears that tangible examples of specific business opportunities create more action than mere discussion of academic trends. In the list above, being able to envision specific business options was a great motivator to action (especially factors #3 and #5).

Therefore, whenever presenting trends, try to link the trend to tangible business opportunities. For example, the conversation might go something like this: “Based on this trend, it appears that a new type of business space has been created. The size of that space could be as large as $100 billion in five years. Here are five specific examples of how we could play in that space and get a share of that $100 billion...”

The important issue at this point is not that they pick one of your five ideas. The point is that the audience can now visualize how to specifically turn that trend into big profit. It can stimulate them to find even better opportunities.

2) Make it Emotional
Dry statistics aren’t nearly as motivating as an emotional appeal which stirs the soul. Two good emotions to tap into when presenting trends are pride and panic.

The pride approach looks something like this: “Our arch-enemy, Company X, is already starting to take advantage of this trend (show examples). Are we going to sit on our hands and let our enemy get the upper hand in this area? Of course not! Who’s #1? We are! Let’s become #1 in this new opportunity and show the enemy who is really the industry leader!”

In other words, pride looks a lot like a pep talk to the football team at half-time.

The panic approach looks more like this: “There are already 10 of our competitors trying to take advantage of this trend. New entrepreneurs are entering our space to exploit this trend. If we do nothing, the most likely scenario is that we will be left in the dust as a bankrupt firm while these new entries get all the profits.”

In other words, the idea is to paint a picture which makes the status quo no longer appear to be a viable option. It’s either change with the trends or die. Both pride and panic exploit factor #2 above—competitive pressures.

3) Tap the Lifeblood
Your customers are the lifeblood of the company. Without customers, you have no purpose, no reason for being. If you can show that the customers want you to change with the trends, then you can incite action (see factor #4).

Look into all of your old company records to see if you can find examples of your customers wanting you to move in the direction of the trend. Perhaps they asked for features related to the trend. Perhaps they stopped doing business with you and went with a competitor who was closer to the trend. Tangible examples such as these show the vulnerability of your lifeblood if you don’t exploit the trend.

If you cannot find any old data, create new data. Do a survey of key customers and ask them about the trend and how it impacts them and how it might change their behavior. Maybe even make a video of the conversation and show it to executives. Usually, the words are more powerful if they come from a customer rather than an insider.

Knowledge without action is not very useful. Knowledge of industry trends needs to be translated into something actionable. The strategic planning process should specifically link knowledge to tangible options, emotions, and customer behavior in order to drive the motivation for change.

Remember, the goal is not to watch trends, but to act upon them.

That hunter in the city might have changed his behavior had he been given tangible options such as mentioned in this blog.

Tuesday, April 22, 2008

Analogy #174: The Fall of Rome

There are a lot of different theories about why the ancient Roman Empire fell. My favorite theory has to do with the idea of the “plunder economy.” As it turns out, the Roman Empire was not the most transforming of societies. They did not bring a lot of value to the people they ruled over. Yes, they built better roads and knew how to move water via aqueducts, but that was about it.

Instead, the Roman Empire was built primarily on a plunder-based economy. They would go out and capture new territory and then plunder the new land, taking the riches back to Rome. When the plunder of the past conquests ran out, they would need to expand their empire, in order to find more territory to plunder.

Eventually, the math got to them. As the empire got exceedingly larger, it took ever more plunder in order to support it. They couldn’t find enough loyal soldiers to protect the massive base, so the Romans had to pay increasingly larger wages to increasingly less loyal soldiers. Eventually, the Romans could not find enough new plunder fast enough to fund the ever-larger demands of the ever-larger empire. Then, the barbarians decided to take back their plunder and the game was over.

Growth can be a tricky thing. Yes, growth brought the Romans more territory to plunder. But it also increased the costs of running an empire. The added costs of operating the larger base eat away at the benefits of the growth. Ever-larger conquests are needed to fuel the growing base. Eventually, the math runs out.

Growth was not only tricky for the Romans. It is tricky for corporations. Most corporate strategies include an element of growth. If growth is not managed properly, not only will it create problems, it could lead to your downfall, as it did for the Romans.

The principle here has to do with the foundation behind one’s growth. Is the foundation one of taking or of giving? Ancient Rome had primarily a “taking” foundation. They would strip the riches out of a new territory and take it back to Rome. That is why I refer to it as a plunder economy.

By contrast, a giving foundation focuses more on adding value. Rather than looking for ways to strip value out, it looks for ways to put more value in. Instead of plundering the new land, it renovates the new land, making it even more productive.

Depending on which foundation one uses, one will have a different impact on the mathematics of growth. For example, let’s say that you want to grow profits by 10% per year. Under a plunder foundation, that would at least require a sales growth of 10% per year. Ten years of 10% growth is not 100% growth. Due to the exponentially rising base, ten years of 10% growth is about 160% growth. Ten years of 15% growth would require you to become four times your current size in sales.

And this assumes that you can maintain current levels of profitability. As we saw with the Romans there can be some exponentially rising costs involved in running a large empire, so the top line may need to grow at an even faster rate to create the same level of growth on the bottom line. Usually, the most profitable business is the easy stuff right in front of you (the low hanging fruit). As you grow, there is less low hanging fruit left, requiring greater effort to get the same benefit. For example, to grow rapidly, one might have to expand further away from one’s operational comfort zone or take increasingly higher risks or pay extra for acquisitions in order to ensure that one gets the growth. All of these actions could lower profitability.

Let’s assume that you started with a 5% profitability rate and this plundering causes that rate to drop at a compounded rate of 2%. Now if you want to have that 10% increase on the bottom line over ten years, the top line needs to grow at 12.25% annually, for a total of 218%.

Now, let’s contrast that with the math of a giving foundation. Let’s assume that you want to grow profits by 10% per year. However, because of the value you can add to your conquests, you can improve your rate of profitability by 4% per year. And let us further assume that your starting rate of profitability is 5% of sales. Now, to achieve a ten percent annual increase in profitability, one needs only about a 5.75% annual sales growth. So instead of needing somewhere between 160% and 218% growth over ten years as in plundering, one only needs a 75% growth.

Here are some other points to consider:

1) The Plundered Want To Share in the Plundering
If your growth requires acquisitions, keep in mind that most of today’s acquisition targets are pretty sharp. They know their plunder value and they want you to pay most of that value to them in order to get the deal done. This is essentially what Yahoo has been saying to Microsoft. If you want to buy us, pay us the majority of the plunder value achieved by acquisition.

If you have to share most of the plunder with the one being acquired, there isn’t much gain left for you. This means that the rate of plundering must go up even faster. But that’s the deal if you are not adding much value. Your only real bargaining chip is money, so you have to pay more to get the deal done.

2) Adding Value Creates a Virtuous Cycle
There are many benefits to focusing on adding value versus just adding sales. First of all, the more value one adds, the stronger your value proposition becomes versus the competition. At a certain point, your value becomes so compelling that customers voluntarily shift their patronage from the competition to you. Therefore, instead of having to buy all those extra sales via acquisition, the added sales come all by themselves. Sure, it may cost a bit to add that value, but I’ll bet it pays a higher return than having to buy all those extra sales via acquisition (and having to share the plunder with the one acquired).

In the early days of Wal-Mart, they added so much value to the supply chain and so much value to the customer that they did not need to spend huge sums to acquire other firms. They also did not have to spend huge funds on advertising to acquire new customers. They could very efficiently grow internally, as customers flocked to their new store growth all on their own.

This benefit would be like Ancient Rome not needing to spend money on soldiers or conquests, because others would so like the added value of being within the Roman Empire that they volunteer to be taken over.

3) A Focus on Adding Value Creates More to Lever.
When you focus on adding value, you focus on creating skills and competencies. These skills and competencies can often then be levered in new growth directions. For example, 3M is very good at knowing how to turn certain types of technology into new products. This skill allows them to add great value to technology patents. This skill creates many new internal growth prospects, providing tremendous internal opportunities without having to resort to plundering others.

And even if you have to eventually go out and acquire businesses, the more value you can add, the more you can have left over once you share the plunder with the acquired one. Also, the acquisition target realizes that they are better off if they sell to the one who can add the most value to their business, so you are more likely to get the deal done if competing against others who want to buy the same company (but have less to offer).

The irony is that if you want to grow the top line, the best approach is often to focus less on the top line. Instead, focus on how to add more value. Look for ways to please the customer more, improve productivity, and build unique skill-sets. These will put you in a position where your firm becomes so desirable that the sales opportunities almost create themselves.

If you want to get more out of the marketplace, first look for ways to give more to the marketplace. This tends to create a far more efficient and dependable way to grow than through mere plundering of the success of others. With plundering, the math works against you and your empire could fall.

Near the end, the ancient Roman society had become rather lazy pleasure-seekers. Rather than earning their right to rule, they just lived off the plunder of others and had fun. Don’t ever get as complacent as the Romans. If you continue to plunder your own corporate reserves without ever putting any value back in, you will lose out as well. There’s a reason why there is so much scrutiny these days on executive pay. If it gets too excessive, the barbarians will overthrow you.

Thursday, April 17, 2008

Analogy #173: Vote for your Favorite Pi

When I was younger, I tried to memorize pi out to a number of digits. I ended up memorizing pi out to seven digits to the right of the decimal point: 3.1415926.

There is an urban legend that the state legislature in Alabama passed a law decreeing that henceforth pi would be equal to three. In reality, it was a hoax posted on the internet back on April 1, 1998 (which is April Fool’s Day, not to be confused with Pi Day on March 14th, for those of you always looking for another excuse for a celebration). Once it got on the internet, the story got into all sorts of people’s hands without the warning that it was a hoax.

What is true, however, is that the Indiana legislature back in 1897 tried to pass a law to make pi equal 3.2. Apparently, there was this mathematical quack named William Goodwin who came up with the faulty logic. Goodwin had this notion that he could charge a royalty whenever people used his version of pi. To give his idea credibility, he got House Bill No. 246 introduced into the Indiana legislature, which would make pi equal 3.2 throughout Indiana.

The Indiana House of Representatives didn’t know what to do with the bill, so they gave it to the Committee on Swamp Lands to review. They couldn’t see anything wrong with it, so it was placed to a vote and passed in the house by a vote of 67 to 0.

The next step was to take the bill to the Senate. They gave it to the Committee on Temperance to review. This committee also found no fault with it and approved it for passage. However, by this time, a credible mathematician named Clarence Waldo got wind of what was going on and set the records straight on the truth about pi. As a result, the Indiana Senate postponed indefinitely any action on the bill.

For more information on this story, see here and here.

In a democracy, there is this idea that if you can get enough people to vote in favor of something, it can become a reality. Well, let me tell you. It wouldn’t matter how many democracies passed a law to make pi equal to 3 or to 3.2. Pi would still be that long and complicated number which I memorized out to seven digits. The natural laws of Euclidian mathematics cannot be altered by the vote of some state senators.

As silly as it sounds, a lot of businesses act like this example of the Indiana legislature. Forces within the company try to convince the leadership to accept a particular point of view. The leadership votes to accept this point of view and then builds a strategy around it.

However, just because the executives declared this point of view to be truth does not make it so (just as declaring pi to equal 3.2 does not make it so). When reality settles in, the strategy’s flaws come to light and it fails.

The principle here is to be careful about placing too much confidence in your assumptions about the future. Just because you may all believe it to be so does not automatically make it so. Here are some points to keep in mind.

1) Nobody can be absolutely certain about what the future holds.
Through proper research and analysis, one can become more accurate about predicting the future. However, you will never be 100% accurate about the future because it is an unknown. A venture capitalist once told me that when evaluating a project for investment, he primarily looks for two things.

First, does the business space being entered look big? The bigger the space, the more tolerance there can be for a little inaccuracy in the other assumptions. You know that the assumptions will be off a little, and if the market potential is small, being off a little could mean the difference between success and failure.

Second, are the people running the business smart and adaptable? The ultimate goal is not to be 100% correct at the beginning but to be correct at the end. People who continue to monitor the situation and adapt will have more success than the ones who blindly continue down the same path regardless of new information.

2) The most persuasive voice may not be the most accurate voice.
Just because an executive can persuade someone to believe something does not make it so. We all come with our own biases. For example, career aspirations can cloud our judgment. Other factors can also bias our thinking. As a result, we may push for an agenda which is wrong (such as making pi = 3.2).

It is important not to let shear force of persuasion rule. Be skeptical at first and listen to other viewpoints.

3) Other people outside your company also get a vote about the future.
As it turns out, your votes are not the only ones that count. The competition and the consumer also get to vote on how the future evolves. When building scenarios of the future, be sure to accurately reflect how consumers and competitors would react to your strategy. They won’t just stand still. They will react. And it may not be the way you expect them to react.

For example, Ford now touts the fact that its cars have similar quality levels to that of Toyota. This may be true to an academic scientist, but to the average consumer, they do not believe this. They have voted to believe that Ford is not a good as Toyota, regardless of what Ford executives believe.

Similarly, even though Target stores have very competitive prices, consumers have voted to believe that Wal-Mart has significantly lower prices. Target is not getting credit in the marketplace for its pricing strategy.

4) There are some basic economic principles that are rarely broken, regardless of your confidence.
Just as the Indiana legislature cannot break the laws of Euclidian mathematics, businesses cannot break the laws of economics. Here are a few points to keep in mind when examining points of view:

a) If your strategy has the potential for success, assume that those businesses being threatened will do everything they can to stop you. In addition, they (or others) will try to imitate your successful move, thereby reducing the potential market share available to your firm. For more on this, see my blog “Bombs Start Wars.”

b) Eventually, market forces will create enough competition that returns on investment will fall to levels near the cost of capital. Above average returns are temporary. Don’t count on them for a long time.

c) Being first to market does not automatically lead to success. Fast followers often win in the long run. For more on this, see my blog “Gimme Shelter."

When someone tries to tell you that the old laws of economics no longer apply, be very nervous. Bubble economies, such as the dot-com bubble of the 1990s and the housing bubble of the 2000s, were based on faulty assumptions which defied the laws of economics. Eventually, the laws will win out and the bubble will burst.

So where does that lead us? Should we give up on making predictions? Of course not. Total ignorance is never the best alternative. Here are a few pointers:

1) Don’t assume you have perfect information. Even after starting down the strategic path, continue to collect information and adapt.

2) Don’t wait for perfect information before taking action. You will never have perfect information about the future until the future becomes the past. The goal is not perfect knowledge, but knowledge good enough to point you in the proper general direction.

3) Don’t abandon the laws of economics in your assumptions.

4) Have healthy debates in the beginning and consider minority and outsider points of view. The best strategy may not always be the one that first comes to mind (just as the best point of view on pi did not come from the first mathematician to approach the Indiana legislature).

Actions are based on assumptions. The more accurate the assumptions, the greater the likelihood that your strategy will succeed. Although the idea of achieving total accuracy on assumptions about the future is a myth, thoughtful and adaptive organizations can get accurate enough to have an advantage.

Although new information could lead to a need to adapt a strategy, it should rarely lead one to abandon a strategy. If you find yourself continually making radical changes to your strategy, then either you are not doing enough homework up-front, or you have not done an effective job of applying knowledge to strategy creation.

Target’s overall strategy is to “Expect More, Pay Less.” Depending upon conditions, they will sometimes adapt to put a little more emphasis on the “expect more.” At other times, they adapt a bit more in the direction of “pay less.” But they do not abandon the overall thrust behind their brand. Strategies (like Target’s) should transcend minor changes in the environment.

Monday, April 14, 2008

Analogy #172: Don’t Read the Label

Associate Professor Robert Austin of the Harvard Business School issued an interesting article today. It is the story of Thorkil Sonne and the company he founded, called Specialisterne.

Sonne is a Danish businessman. When his son was three years old, Sonne found out that his son had autism spectrum disorder, also known as ASD. He was told that ASD was a lifelong handicap, with no cure or treatment.

Although labeled as a handicap, Thorkil Sonne did some research and discovered that even though persons with ASD had limitations in some areas, they tended to have strengths in other areas. This was particularly true for those with a form of ASD known as Asperger syndrome.

Many of these ASD people prefer routine to novelty, exhibit a steady focus and are good with repetitive behavior patterns. As an entrepreneur, Sonne then tried to figure out how to put those skills to effective use.

Sonne knew that many software companies are good at developing software, but poor at testing software. Software testing requires an entirely different skill-set from software devlopment. As it turns out, many people with Asperger syndrome are ideally suited for software testing.

Therefore, Sonne created Specialisterne, a company to help others with their software testing. About 75% of the software testing consultants at Specialisterne have Asperger syndrome. The company is doing well and starting to grow internationally.

Most people label those with ASD as having a “handicap.” They see it as something bad—a limitation which has to be overcome. Sonne ignored the label and looked for the unique benefits which come from the condition—the ability to concentrate on repetitive tasks. He then turned this into a unique competitive advantage in the marketplace.

In the business world, we are often confronted with many situations which are quickly labeled as bad. However, as Sonne discovered, sometimes those labels are misplaces. Trait’s characterized as “bad” can actually be a competitive advantage.

Therefore, when designing a strategy, be careful how you initially label something. It may lead you astray and cause you to miss out on the hidden advantage within that negative label.

The principle here is to avoid rapid labeling of a situation as “good” or “bad.” In the initial phase of strategy formulation, it is better to just identify the condition, without adding a label. That way, you are not biased in your examination of the usefulness of that condition.

Items initially labeled “good” are not always that advantageous, and items initially labeled as “bad” can have strategic advantages. The longer we avoid these labels the more we can determine the true worth of a situation.

For example, there was a time when Heinz was receiving criticism about its Ketchup. People were upset because it was so thick that customers had difficulties getting the ketchup out of the bottle.

Heinz could have quickly labeled thickness as a bad thing and worked on making their ketchup runnier. Instead, they embarked on an advertising campaign to tell people that thickness in ketchup is synonymous with quality. The ads told people that thickness was an asset, and since Heinz was the thickest, it must therefore be the best.

Since it was already well known that Heinz was the thickest ketchup, it was a small leap for consumers to now bestow on Heinz ketchup an image of extreme quality. /This stroke of strategic genius further distanced Heinz from the competition and greatly strengthened the brand. The attribute which was originally labeled as bad (thickness) had suddenly become one of the brand’s greatest assets.

In an earlier blog, we looked at many other firms who turned things normally labeled as bad into something good (see “It’s in the Bag”).

In spite of all these examples, we can still fall into the trap of missing opportunities due to labeling items as bad too early in the process. Early labeling can blind us from looking for these type of opportunities. The strategic process itself can help contribute to this problem. For example, many people use the SWOT methodology early in their strategic planning. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The goal in the process is to quickly label characteristics with one of these four terms.

Once something is labeled as a “Weakness” or a “Threat,” strategic thinking moves to eliminate or diminish that trait. However, as we saw with Asperger syndrome and thick ketchup, items often called weak can provide a competitive strength.

Therefore, instead of using the SWOT tool, I would recommend something which delays the labeling until later in the process. So instead of putting things up on the whiteboard under one of these labels, just put them up on the board as a situation or characteristic. The initial goal is to get a complete picture of the situation you are dealing with.

Once you see the complete picture, one can think of a variety of strategic options (or scenarios) under these conditions. In some scenarios, a characteristic can be good. In other scenarios, that same characteristic can be bad. The best strategic option wins, and that option then labels the condition.

If one labels a characteristic too quickly as either “good” or “bad,” it may lead to sub-optimal strategy development. It is better to get the complete picture first while one still has an open mind. Then you have the flexibility to consider more options. This will typically increase the likelihood of choosing an optimal strategic option. So don’t rush quickly to a SWOT analysis.

Sometimes we can fall into the trap of thinking that because a trait can be bad for one company, it is bad for all companies. However, something that is bad for one firm can actually be good for others. For example, Wal-Mart tends to get into trouble whenever it aspires to be too upscale and fashionable. However, other firms have been extremely successful being upscale and fashionable. The idea here is not to label things in a generic sense, but to eventually label them as they specifically apply to your particular strategy.

Saturday, April 12, 2008

Analogy #171: Super Job

Superman is a very busy guy. First of all, he has a full-time job working as a reporter under the name of Clark Kent. Second, he has a full-time job solving crimes as a superhero.

Having two full-time jobs like that doesn’t give Superman much time to do all of the other tasks involved in everyday living. And because he isn’t married, he doesn’t have someone to share those everyday duties with. So when does he have time to do all those mundane chores like cooking, cleaning, doing taxes, laundry, and so on?

So if there was anyone who could use help outsourcing some of his tasks, it would be Superman. But there is so little he can outsource.

It would be difficult to outsource any of the tasks which require his super powers. First of all, there aren’t very many people qualified to take on that task. Second, he couldn’t afford to pay for them on a reporter’s salary. Third, all the other people with super powers are already using them to fight crime. They, too, don’t have time to take on extra duties.

Superman would have difficulty outsourcing his job as a reporter as well. That’s his cover identity. In addition, it is a good source to learn about crimes needing a superhero’s help.

So the wise move for Superman would be to outsource those mundane tasks. However, what would life be like if he outsourced the crime fighting and did the mundane tasks himself? While Superman is at home doing laundry, he hires some person from a temp agency to go out and fight the crimes for him. Not exactly the type of drama that makes for good comic books.

Outsourcing can be a very effective part of an overall business strategy. However, as we saw in the story, it is important to make sure you outsource only certain items. In general, it is wise to keep in-house those differentiating points of expertise in which you excel and which give you your strength.

On the flip side, most experts recommend outsourcing the more mundane things which are a less critical element of your success or which do not provide much of a differentiating advantage.

Using this logic, Superman should continue to do the crime fighting, for which his super powers give him a distinct and unique advantage. However, he could easily outsource some of the mundane tasks for which super-human powers do not provide much of an advantage, like doing the laundry

Although this sounds pretty obvious when applied to Superman, it can sometimes be less obvious for businesses. To apply this principle, you first have to understand your business success model well enough to know what your distinct expertise is. In other words, you need to know what your super powers are that give you an edge.

Not all companies think this through. This applies not only to the companies thinking about what to outsource. It applies to the outsourcing specialists who are looking to get some of that outsourcing. For example, what temp agency in its right mind would try to send crime fighting temps to Superman? To be an effective outsourcing specialist, you have to understand what it is that you do so well that people will be willing to outsource tasks to you.

The principle here is that if you do not understand which areas are most appropriate for outsourcing, you can get in trouble. In this blog, we will look at an industry that is suffering, in part, because of this principle. The industry will look at is the advertising industry.

The advertising industry is long past its glory days of the 1950s and 1960s. Things have been a bit tough for the industry for awhile. Now it’s true that there are a lot of factors behind this problem. However, one of the problems is that advertising agencies and the companies that use them are not following the proper principles of outsourcing.

Advertising agencies are essentially placing where companies outsource a portion of their marketing. So the question here for the brand companies is how much marketing should be outsourced to the agencies. For the ad agencies, the question is how they can out-market their clients.

Back in the 1950s and 1960s, this was a relatively easy decision. It was the era of manufacturing. The manufacturers were experts in knowing how to manufacture something. That was their super power. Although they were masters in knowing how to make something, they were less skilled at knowing how to sell something.

That is where the ad agencies came in. They were experts in knowing how to sell something. It was the era of mass marketing, and the agencies were the masters of it. They could apply that skill to all sorts of products quite well.

Hence, it was a successful outsourcing arrangement. The manufacturers stuck to their superpowers of making things and outsourced to the marketing experts the art of selling what they made.

Now, let’s fast forward to today. Manufacturing is no longer much of a source of differential advantage. It doesn’t take the same level of super powers to run a factory. Lots of people all over the world can do it. In many cases, they can do it cheaper than the owners of the brands being manufactured. Therefore, manufacturing is now what is being outsourced to places like China and Vietnam.

So if the branded companies are outsourcing the manufacturing, what becomes the new differentiating super power? In many cases, the new differentiating factor becomes the ability to out-market the other brands competing in the same space. In other words, the new super power for branded companies is marketing.

So where does this put the advertising agencies? Their specialty now is not that dis-similar from the required super powers of their clients. For an owner of branded products today, it makes about as much sense to abdicate responsibility for marketing to an outsider as it would be for Superman to outsource his crime fighting.

Since both the agency and the client claim expertise in the same field (marketing), it is no surprise that there are more frequent and more contentious arguments between the two sides. The brand owners don’t value what they get from the agencies as much as before, since they are also experts in the field. The agencies feel like they are getting less respect than they used to and are tired of the higher churn rate in clients switching agencies.

In addition, mass marketing is losing out to niche marketing. Niche marketing tends to vary more depending on the particular niche. Therefore, the generalized marketing expertise at the agency may not be as effective as the specialized marketers at the brand company.

If advertising agencies want to see the “glory years” return, they have to stop competing with their clients and instead offer something which is more appropriate for the clients to outsource.

A good outsourcing arrangement is when the client keeps in house the key differentiating super powers and outsources to the agency the less critical factors. Right now, the super powers of the ad agencies and their clients are too similar. Until that changes, there will be continued problems with this arrangement.

If manufacturing can be outsourced and marketing is the key for brands, why don’t the ad agencies become owners of branded products? In other words, why don’t they become their own clients?

Tuesday, April 8, 2008

Analogy #170: Night Light

Over the years, I’ve spent a lot of nights in hotel rooms. After spending all of those nights in hotels, I’m convinced that the designers of hotel rooms intentionally try to hide the light switches. They are never, ever where I intuitively think they should be.

When I first enter a hotel room, it seems like the door immediately shuts behind me, leaving me in total darkness. I stick my arms out to feel for a wall. Once my hand touches a wall, I feel around for a switch for what seems like forever. Three thoughts cross my mind. First, why do hotel doors close so quickly, before I have a chance to find a light switch? Second, why isn’t there a light switch within arm’s reach of the door? Third, I sure hope those walls I’m feeling with my hands are clean.

Usually, I am forced to fumble around until I find the hotel room door again (hopefully I find the door with my hand, rather than my knee or my head). Then I prop my luggage in the doorway so that the door cannot slam shut. This allows a little of the hallway light to peek into the room. That hallway light is just enough to help me find the unusual place where the light switch is placed (often nowhere near the door).

The problem repeats itself if I wake up in the middle of the night and need a glass of water or the rest room. It is so dark that I end up stumbling all over the place—stubbing my toes and crashing me knees into furniture—all because I cannot find a light switch. By the time I finally feel my way to the rest room, my eyes are starting to get used to the dark. Therefore, when I finally find the light switch in the rest room, the brightness blinds me so that I still cannot see. So I crash and stumble some more.

One time I had the opposite problem. There was a nice painting over the top of the headboard of the bed. It had a bright light shining on the painting to show it off. Well, I found it impossible to sleep that night with that bright spotlight shining right over my head. It felt as if there was a huge semi truck coming my way all night with its headlight aimed over my head. It wasn’t until the next day that I found the switch to turn it off. It was near the ceiling on a wall nowhere near the painting or the light. I had to get on a chair to turn it off. Is that a logical place to put the switch?

Few things are more frustrating than being in an unfamiliar place and having no light to see what you are doing. As in the story of the hotel, one ends up fumbling around—getting bumps and bruises along the way. If only the hotels had made it easier to find some light, things would go a lot smoother.

Strategies often take your company to places which are unfamiliar as well. The process of innovation or repositioning can lead your people into unknown territory. Because strategies can often have a goal of being the first to own a particular position, you may be going to places where nobody has gone before. There are no maps. You can feel totally in the dark.

In the unknown in the dark, one can end up wandering aimlessly, hurting one’s self bumping into the furniture. Many strategic initiatives can also lose their way in the dark, as people get tired of bumping into unexpected obstacles and give up.

To succeed, one needs to give people handy access to a source of light. With light, the unknown becomes known, so that you can successfully navigate around the obstacles. Your roll, as a strategic leader, is to help people find that light switch.

The principle here is that strategic planning does not end when the journey begins. It must stick around for the entire journey, providing the light so that people can see into the unknown. It must illuminate by being both the long range beacon (the North Star) and the close range flashlight (the Illuminator).

1. The North Star (Beacon)
When sailors tried to navigate ships in the dark when on the ocean, there was very little to guide them. The ocean looked the same in all directions. To stay on course, they used the positioning of the distant stars. By knowing that the North Star is always to the north, they could navigate by positioning themselves relative to that known northerly light.

Similarly, when the slaves in the southern US wanted to escape to the north to find freedom, they relied on the phrase “follow the drinking gourd.” The Big Dipper constellation looks like a drinking gourd. As long as one is traveling in the direction of the constellation, one is heading north, because it is always in the northern sky.

This same principle applies to strategies. If properly designed a strategy should have a beacon which—like the North Star—can always be seen and help orient people in the proper direction.

For example, everyone at the Four Seasons hotel group understands that excellence in personal service is a strategic beacon for their company. Therefore, whenever a Four Seasons employee is confronted with an unknown situation and feels a bit lost, all they have to do is look for that beacon (excellence in personal service) and they can quickly reorient themselves to sail through the unknown. Just sail towards the light of providing that excellent service, and you will help move the company towards its strategic goal.

At Wal-Mart, the beacon is “low prices.” When Wal-Mart is confronting the unknown, it just needs to find the light of low prices and the proper path will become apparent. The problems at Wal-Mart during 2007 were due in large part to drifting away from that low price beacon and moving too far into the choppy waters of upscale and fashion.

At Google, the beacon is to organize the world's information and make it universally accessible and useful. Thus far, that beacon has helped them find many great new opportunities in the unknown without getting lost or without losing time stumbling around in the dark.

As a strategic leader, one must continually point out to everyone and remind them where your particular North Star is, so that people can intuitively find it when the unknown occurs.

2. The Illuminator (Flashlight)
The beacon provides the long range light. Looking up to that light, you see the big picture. But sometimes one also needs some short range light so one can look down to make sure that one’s knee is not about to bump into something. That requires a flashlight.

Flashlights illuminate a small area in front of you so that you can know what is directly ahead. In strategy, this is done via knowledge gathering. The more you know, the more you understand what is right in front of you. That allows you to avoid those near-term bumps on the way to your strategic goal.

It is quite common for companies to spend a lot of time and money on research prior to embarking on a strategy. This includes research on the consumer, the competition, the environment, and so on. However, it is not that uncommon for firms to significantly cut back on strategic research once the journey begins.

Once you move down the path of your strategy, changes will occur. Your new actions will cause competitive reactions. Consumers may react to your strategy in a different way than you expected. If you stop the research once the journey begins, your knowledge of the environment will quickly become obsolete. That would be like driving with outdated data in your GPS navigational system. It may have been correct at one time, but if you rely on it now, you may end up crashing into a ditch.

Before Tesco entered the United States with its Fresh & Easy retail concept, it spent considerable time researching the marketplace. It spent months with families, going grocery shopping with them, watching them prepare meals, and taking inventory of their refrigerator contents. This research provided the illumination behind developing the Fresh & Easy strategy.

However, after getting a handful of these stores up and running long enough to have impacted the consumers and the marketplace, Tesco had a preplanned breather in their growth strategy to reassess the marketplace. They wanted to gather new knowledge so that they could illuminate the path in front of them and make the proper adjustments.

There will always be a need for strategic adjustments. Therefore, there will always be a need for strategic research.

Being in an unknown environment in the dark can be unproductive. Like a dark hotel room, all you end up doing is bumping into things. To be productive, one needs light. Strategic planning can provide two kinds of illumination. First is the long term directional illumination from a simple, universally understood vision statement. As long as that major goal is known, it can act like the North Star to orient your actions in the proper direction, even when in unknown territory.

Second is the near term directional illumination which comes from research and data gathering. All along the journey, strategic information can help update people on what the environment right in front of them looks like. This is like the flashlight that you can point at your feet to make adjustments along the way to avoid obstacles. Flashlights are not just needed in the beginning. They are necessary for the entire journey.

Some hotels have gotten smart and incorporated a night light into their light switches. That way, you can see the light switch in the dark. Don’t forget to put night lights into your strategic journey.

Wednesday, April 2, 2008

Strategic Planning Analogy #169: Get on Board

I once worked with a company that was concerned about how knowledgeable its outside board members were about the industry we were in. Well, as it turns out, unless an article on the industry happened to turn up someplace like the front page of Wall Street Journal, they wouldn’t see it.

As a result, we got all of the board members subscriptions to the various industry trade magazines. The good news was that the magazine subscriptions were free. The bad news is that I’m not sure if the board members read the magazines.

Almost all of the strategy pundits say that if you want effective long range planning in your organization, you need top management support—all the way up to the board of directors. (Of course, to do almost anything well, it helps to have top management support, as we saw in the blog “Top Management Commitment.”)

It’s hard to get top management or board members actively involved in long range planning if they know very little about the industry dynamics. As seen in the story, not all board members have a full grasp of the industry in which a company competes. Until the problem of insufficient knowledge is taken care of, the problem of good strategic thinking cannot be taken care of.

The principle here is context. Good planning does not take place in a vacuum. Strategic planning is designed to optimize within a context—the marketplace in which you compete. If you don’t understand the context, how can you know if the strategy is the best for your organization (or if it will even work)?

Context includes knowing such things as the competitive landscape, the consumer mindset, the regulatory environment, technology innovations, and other such issues. Many of these issues are specific to the particular industry one is in. Knowing about these issues in one industry may not apply to another.

It’s admirable that board members desire to get more involved in long range strategy. But if the board members are unaware of the total context in your industry, their “help” may not be very helpful. In fact, it might be harmful.

The McKinsey organization recently issued the results of a survey on this subject. In February of 2008, they interviewed 596 corporate directors from around the world. One of the findings of this study was an interest by board members in long range strategy. Even though strategy work was one of the items which boards spent most of their time on (about 24% of their board time), 50% wanted to increase the time spent on strategy work. Talent management was the only other category where a larger number of board members said they would prefer to spend more time than those saying they wanted to spend less time. Hence, the desire to do long range strategy is there.

Although the desire was fairly universal, the effectiveness was not. Only 43% of the respondents to the McKinsey survey felt their board was highly influential in creating corporate value. When comparing the highly influential board member responses to the little influence members, McKinsey saw the following differences:

1) The board members on influential boards are more likely to have expertise in sector and functional knowledge, performance management, and talent management.

2) The board members on influential boards are more likely to spend time with management in substantive debates about strategy. On low influence boards, they do little more than comment on strategies already fully developed by the organization.

3) The board members on influential boards have significant or unlimited access to executives beyond the most senior level. On low influence boards, about the only executives they talk to are the executives who are also on the board.

4) The board members on influential boards have much greater access to leading industry indicators and internal company data.

In other words, effective board members need to understand the context in which the company operates. They get that context through internal expertise, spending time interacting with a broad spectrum of company executives, and by having access to lots of relevant data. Without that context, it is difficult for them to have any influence.

In our last blog (“Blind Confidence"), we saw that when executives do not anchor their strategic goals in practical reality, they become hollow and not very effective. The same principle applies to boards. They also need context in order to be effective.

How much context are you giving your board? Are you giving them sufficient time with all of your executives? Is their time spent with executives interactive, or are they just being given “dog and pony” shows? How much information are you sharing with them about your company, your industry, your customers?

Effective strategies are built around optimizing performance within the marketplace. Unless you understand the context of the company and that marketplace, you cannot create effective strategy. Board members need that context in order to effectively do their job.

Now you might be thinking that you do not necessarily want an effective and influential board. You may be thinking that the more influential the board is, the less influential you are. You may think that keeping the board in the dark is not necessarily bad. After all, it is hard for them to argue against you if they have no point of reference to argue from.

However, consider this: If the board has little actual or emotional ties to the strategy development, then they will place all of the responsibility on you. Later, if there are any hiccups or missteps along the way, you will receive all of the blame. They will be more likely to demand a quick change in the strategic course (which may be the wrong move), and more likely to want to replace the senior “C Level” management (who are blamed for the bad strategy).

By contrast, if the board members are actively involved in the strategic process, then they are more emotionally tied to the strategy. They will be more likely to support it and fight for it during the tough times. Also, since the strategy is developed by a larger circle of people, it is harder to just blame the CEO if things go sour. If the board is actively involved in the strategy formation, then for them to admit the strategy is bad is to admit that perhaps the board is partly to blame. Getting the board "on board" can be a good thing.

And hey, if you give them enough context, perhaps they can help give you a far superior strategy than if you worked without their expertise. Wouldn’t that be nice?