Sunday, June 29, 2008

Analogy #188: Advice on Advice

Once there was a king who gathered his close advisors around his round table. He asked them this question: Do you think I should invade the neighboring kingdom?

The first advisor was head of the military. He thought to himself that his fighting men hadn’t been in battle for awhile, and he had an updated version of bows and arrows he wanted to try in real battle. Therefore, he answered “Yes.”

The next advisor was in charge of the King’s money. He knew such a battle would be expensive and use up much of the reserves. Later, if the King asks for spending money, he knew that he might get his head chopped off if he had to tell the King he was out of money. Therefore, he advised “No.”

The next advisor knew that if the king won the battle, there would be opportunities for promotion within the larger kingdom. Thinking he would benefit the most from this opportunity, he said “Yes, let’s invade our neighbor.”

The next advisor thought to himself that if the king wins the invasion, he will take all the credit. However, if the king loses the battle, he will blame the advisors. Therefore, seeing no personal upside to the invasion, but seeing plenty of downside, he advised, “No.”

As they continued this around the table, there were about as many people advising “yes” as advising “no.” The king was unsure of what to do. Therefore, he told his advisors “Give me your answer once again, but this time explain why your prior answer is in the best interests of the kingdom.”

The group of advisors started to panic, because none of them had answered based on what they thought was best for the kingdom.

At some point, all leaders need to seek out advice. In the story, the king wanted advice on an invasion. Similar situations can occur in business, such as whether to invade a new sales territory, attack a particular competitor, introduce a new product, etc.

All of the king’s advisors give the king advice. Unfortunately, each advisor gave their advice based solely on what was best for their own personally-biased interests. None of them had considered the bigger picture.

When asking for strategic advice, it is important to frame the question in a manner which forces the advisor to look at the bigger picture. Otherwise, the advice is as worthless as what was given to the king.

The principle here is about understanding the difference between strategic advice and implementation advice. If one is not careful, one may think they are asking for strategic advice, but get implementation advice instead. This confusion can prove to be disastrous.

Strategic advice is needed to determine what the optimal strategy should be. This is big-picture thinking. Implementation advice is used to determine the best way to achieve the already agreed upon strategy. This is more about tactical expertise. Both are important, but they require a different thinking process.

Although your advisors are probably not as selfish as the one’s in the story, they probably do have personal biases based on their area of expertise. These specialized areas of expertise are very useful at the implementation stage, but can get in the way if too narrowly applied at the strategic advice stage.

Let’s illustrate this with four types of expertise: legal, financial, marketing and operations.

Lawyers are trained in finding ways to reduce liability risks. This is an important area of knowledge, but if applied too narrowly at the strategic level, it can create bad advice. I once was working with a private school that took over a new school building. The question came up about what to do about a playground area. The legal and insurance advisors advised them to not have any playground at the school, so the school did not have one.

The legal and insurance advice was based on doing what produced the least liability. It was not based on what would produce the best school. The overall strategy—to run a great private school—was not factored into the advice. I’m sure that if you had asked these same advisors, they would have recommended that all the children stay home and never visit the school, since having children in the school would increase the liability risk significantly.

A wise person once told me that the role of a lawyer is not to tell you what to do, but rather to listen to you tell him or her what strategically correct thing you are doing and then have the lawyer advise on how to do that with the least legal liability. In other words, the specialized legal expertise is applied at the implementation level instead of the strategic level.

Pure financial discipline tends to look for ways to conserve cash and avoid risky investments. The best way to do that is to stop reinvesting in the old business and not venture into new areas. Over time, this will tend to choke off the future growth of the company. The company will starve to death because the money is horded, rather than fed to the business through investment.

As we saw in the story, the man in charge of the king’s money was reluctant to invade because that did not conserve cash, and it was risky. The financial bias always leans towards “no” when it comes to spending.

All profit streams, if not reinvested in, eventually dry up. If you take no financial risks, you will achieve no long-term financial rewards. You must continue to take risks and feed the business. Again, pure financial advice is great for finding the most prudent financial way to implement a strategy, but it may be poor approach towards finding that strategy. We talked about this in greater detail in a prior blog (see “Oh, my!”)

Marketers are biased towards communication and selling. As much as pure financial biases tend to starve a business to death, pure marketing biases tend to spend a business into bankruptcy. Focusing only on the top line (sales) and forgetting the rest of the income statement and balance sheet can create a “growth at all costs” mentality. Rarely can you afford “all costs.” The marketing bias for “Yes” can be as deadly as the financial bias to “No.”

The dotcom bubble should have taught us that a single-minded quest only for market share can lead to poor long-term strategy. Marketing concerns need to be balanced with other priorities. Once again, a pure marketing expert can advise on the best way to market an already chosen strategy, but may give bad advice when choosing which strategy to market.

Most of the great operations people I have met are like great soldiers. If you tell them to “take that hill,” by golly they will find a way to accomplish that mission. Unfortunately, they are not always the best at deciding which hill to take.

Operations experts often have a bias towards cutting costs, since that is something they feel some control over, and something for which they have been rewarded in the past. However, if you don’t know what is the best strategy, then it is hard to know which costs are least critical to the strategy, and therefore the best things to cut.

A pure operations mindset tends to react with a bias to action—just do more of what we’ve done before, but do it a little more efficiently. However, sometimes the best strategy is to stop and do something differently.

As mentioned earlier, let these experts advise on how to take the hill (the tactics), but not necessarily listen to their advice on which hill to take.

This is not to say that people in these fields are incapable of strategic decision making. Many of them are actually very good at it. But this is only possible when they consciously take off the bias of their “departmental expertise” hat and put on their broad- thinking “corporate” hat. And this becomes easier to do if the leader makes it clear which times they are looking for the corporate hat strategic advice and which times they want the tactical expertise hat.

The process of finding the best strategy requires a different type of thinking from the process of finding the best tactics. Strategy thinking requires a broad-based multi-disciplined approach. Tactical thinking requires more specific discipline expertise. Be clear about which type of advice you are looking for, or you may not get the advice you need.

Back in 2000, there was a move called Thirteen Days, which looked at the decision making that took place at the White House during the Cuban Missile Crisis of 1962. In the movie, President Kennedy kept asking all his advisors about what he should do. The military advisors were portrayed as being in a rut. Their advice on every question was to kill someone or blow up something.

President Kennedy kept telling them that his primary strategy was not the use of the military for killing or destruction. Yet, in spite of this, the military kept giving the answer formed by their military expertise bias. They were incapable of making the leap to broader strategic thinking. Make sure you surround yourself with people who can make that leap. (For more on this inability to leap outside one’s expertise, see “Henry the Hammer.”)

Tuesday, June 24, 2008

Analogy #186: Fat Cats

I have a cat which is terribly overweight. We try to get her to exercise, but she’d much rather just eat and sleep.

One thing the cat will do is go outside and walk around a bit. To encourage her to go outside more, we decided to reward that effort. Since her favorite reward is food, we would give her food as a reward after having spent time outside.

We wanted her to associate getting food with going out—to encourage her to go out and exercise more. Instead, she associated getting food with coming back in. So she started coming in more. Rather than spending a lot of time outside exercising, she would go out for only a few minutes and then come back in—expecting to get some food.

The cat would try to keep this routine up for awhile—go out for a couple of minutes, come back in for some food, immediately go back out for a couple of minutes, get more food, and so on. As a result of this routine, she was actually gaining weight rather than losing weight.

Obviously, this reward system had some flaws in it.

We wanted to get the cat to exercise, but since she didn’t want to, we gave in to her food cravings to try to entice the right behavior. We did not end up getting the right behavior, because she found a loophole to fulfill her cravings without performing the right behavior. All we ended up with was a fat cat.

There are many “fat cats” in the business world as well. These are people who find a way to get excessively rich at the expense of the company without giving back much in return. We entice these people to come and stay with lots of money, because that’s what supposedly motivates them. In return, we expect to get some great productivity out of them.

However, just like my cat, they find a way to get what they want without helping to get what I want. In the end, they remain “fat cats” and I look like a big fat loser.

The principle here is about getting the right linkage between motivators and desired outcomes. The closer the linkage, the higher the likelihood of success. In the case of my cat, the linkage was weak. I wanted to motivate exercise, but I did not choose a motivator directly related to exercise. I did not make exercise more exciting. I did not reduce the barriers to exercise to make it easier. I did not enhance her self-esteem through exercise.

Instead, I did the opposite. I rewarded her for stopping the exercise and coming back inside. I wanted her to become healthier, but the reward made her less healthy.

I was looking for a distant connection, where even though I did not really make exercise more appealing, I created a reward that loosely was connected to the exercise. It was so loose that she found a way to disconnect the reward from the task and get the food without the exercise.

In the business world, monetary rewards can often be just as ineffective. They are only loosely and indirectly tied to business behavior. For generations, study after study has shown that money is, at best a short-term motivator. After that, it doesn’t work well. People find loopholes to get the money without doing the desired work. Things like back-dating options or padding the budget get more attention than doing the work.

Enron failed because it relied too much on obscenely high monetary rewards to motivate behavior. To get their hands on all that money, the employees started bending the work rules. Rather than earning the money through hard work, attention moved to earning it through questionable business practices.

Shortly before the Enron meltdown, I spoke with one of their top executives about this issue. I was concerned that extremely high goals tied to extremely high monetary rewards could create people issues. He said that this practice tended to lure employees from investment banking who were used to this type of environment, so it worked fine with them. You get the type of people who are most in tune with your rewards. Enron wasn’t luring energy experts who loved the business. They were luring people who would stop at nothing to get their hands on big piles of cash.

According to Anders Dahlvig, CEO of IKEA, “Paying the highest as a strategy is a dangerous path to go on, as you only get people who are motivated by money, and they will leave when they get a better offer.” Instead, Dahlvig wants to find people who are motivated by more work-related items, so he tries to be the best at things like recognition, development and work conditions.

Marcus Buckingham at Gallop has done a lot of research into this area and agrees that they more you reward with items that are closely linked to the actual activity of work, the better off you are. Buckingham has boiled it down to 12 questions:

1. Do I know what is expected of me at work?
2. Do I have the materials and equipment that I need in order to do my work right?
3. At work, do I have the opportunity to do what I do best every day?
4. In the past seven days, have I received recognition or praise for doing good work?
5. Does my supervisor, or someone at work, seem to care about me as a person?
6. Is there someone at work who encourages my development?
7. At work, do my opinions seem to count?
8. Does the mission or purpose of my company make me feel that my job is important?
9. Are my coworkers committed to doing quality work?
10. Do I have a best friend at work?
11. In the past six months, has someone at work talked to me about my progress?
12. This past year, have I had opportunities at work to learn and grow?

If you focus on this more than the monetary rewards, you will get highly motivated employees who will give you their best. It lures the people who want a place where working well is highly valued. These are the people you want.

This is the driving force in the culture at Google. They wanted to build an environment where hard, dedicated workers want to be. They filled the campus with all sorts of perks (like food and entertainment), so that you’d want to stick around the office. They created a highly collaborative environment, where people could bond, making it even more desirable to stick around. They give freedom to pursue one’s own projects, one of the greatest motivators to the truly creative. Successful project completion is highly valued and recognized.

By using the motivators which are most tightly linked to the desired behavior, Google has a long waiting list of great people who are begging to work there.

I’ve been at places where the culture has shifted away from this to more of a money-based reward culture. The pattern is always the same. First, many of the best, most creative people leave. Of the ones who stay, they tend to be less emotionally tied to the company, so they don’t work as long or as hard. People who love the business are replaced by people who love the money. Teamwork is replaced by selfish greed. Performance suffers.

Passion is a wonderful thing. I’d take a roomful of people passionate about the business over those who are only there for a paycheck any day. Therefore, create motivations which appeal to passionate people.

Just as it’s hard to get a cat to lose weight when you bribe them with food, it’s hard to get a good work ethic when you bribe employees with non-work rewards like money. Money makes people want to leave work and enjoy spending the money. It makes people think of early retirement. And over time, it doesn’t make folks want to be better, more loyal employees.

Executives frequently say that their most important asset is their people. Yet, when it comes time to develop strategies, people concerns are often just an afterthought, if mentioned at all. A key part of any good strategy should be making sure that you have the right people, properly motivated. Proper motivations try to get as tightly linked to the day to day work life as possible. This tends to have much greater success than mere cold cash.

One time, I was working at a company which had just released its proxy statement. Employees started reading the document to see how much money all the top executives where making (which, by the way, was quite a bit more than what those reading the proxy were making). Employees started complaining about the seeming pay “injustice.”

Finally, someone said that the reason the top executives make so much is because it takes that kind of money to lure that level of talent. Not being particularly impressed with these leaders, my response was, “You mean to say that if I paid less money, I could get a better level of talent?”

Sometimes, less money can actually improve the talent, provided you substitute it with something more closely linked to motivating talented leaders.

Friday, June 20, 2008

Analogy #187: A Cup's Worth of Value

In Lemonland, most of the children tried to make a little money by running lemonade stands. All the children got their lemons for the same Lemonland lemon groves. They also all used the same official Lemonland Lemonade Recipe. As a result, the lemonade at all the lemonade stands tasted pretty much the same.

With all of these children on every street corner trying to sell the same product, it was hard for any one child to get an advantage. There were just too many lemonade stands relative to demand and all the lemonade tasted the same.

As a result, some of the children started cutting the price of the lemonade. At first, this created an advantage, but eventually all the other children dropped their prices to match, eliminating the advantage. So then, some of the children started dropping the price even more.

These cycles of price dropping and price matching went on for quite awhile, until there was little revenue left for making a profit. As a result, the children started doing whatever they could to cut their costs. Again, as soon as one child got a cost advantage, the others would copy it, eliminating the advantage.

There was one child, however, who refused to follow this trend. She charged more than any other child. Yet, at the same time, she sold more lemonade than anyone else.

I went to see her to find out what her secret was. When I asked her how she could sell more of the same identical lemonade than anyone else, even though she charged more than anyone else, she responded, “I’m the only one left who still offers the lemonade in a cup.”

Sure, everyone was selling the same identical lemonade. However, lemonade without a cup is not very valuable. It’s not like you can pour some in your pocket to drink later. And if you pour it into the palm of your hands, it will just run through your fingers and make your hands all sticky. Without a container to put your lemonade in, there is little desire to purchase it.

So even though the lemonade was a commodity, the user experience could vary considerably, based on something as simple as a little paper cup.

In the business world, a large number of items appear to be commodities, just like that lemonade. And like those children, there is a temptation to cut prices and cut costs in order to get a temporary advantage in the market.

However, as the story illustrates, if you focus just on the commodity, you can miss out on the bigger picture—the entire experience. People don’t just buy an item (like 8 liquid ounces of lemonade). Instead, they buy a “purchase experience”, which includes convenience, service and maybe a little paper cup to hold the purchase. The item may be a commodity, but the purchase experience doesn’t have to be.

The principle here is that the way one develops their strategy depends a lot on how one defines their business. For example, if you take a narrow product-centric approach to define your business (like “I sell lemonade”), you may take one approach (like cutting prices and costs to the point where you no longer offer a cup).

However, if you define yourself more broadly, as playing a roll in the entire consumption experience, you could develop a much different strategy. In the case of the lemonade stand, a broader definition could be something like this: “I provide convenient, on the spot, liquid refreshment to hot, thirsty customers.” With this type of definition, you would never consider a strategy which eliminates the cup. You might even add ice to the lemonade to make it more refreshing.

Just because you sell the same identical product as someone else does not mean that you have to provide the same identical experience. When you define yourself as an “experience provider” rather than a seller of a particular product, it can open your thinking to more strategic alternatives.

I was recently reading a story about a company called Granite Rock (courtesy of Granite Rock sells granite, which is a commodity product. If Granite Rock had defined themselves narrowly as just a seller of commodity granite, they probably would have created a strategy of minimal investment and lowest prices, just like most of the other companies in the field.

Instead, however, they looked at the entire value chain and defined themselves as a company which improves the value process for purchasers of granite. With that type of definition, the strategic focus turned from “pushing granite” to “helping customers”. What they discovered was that for granite purchasers, time is money. Granite Rock determined that each wasted minute for its customer’s truckers cost them $1.20.

As a result, Granite Rock invested considerable sums of money to make their transaction process faster. They developed a system called “Granite Express” that automatically loads trucks like an ATM machine. The driver swipes a card, pulls in his truck, and lets the machine do the loading. This process cut the loading time from 24 minutes to 7 minutes, saving the purchaser over $20. Better yet, because the machine was automatic, it is open and available 24 hours a day. Just think of how much money could be saved by not having to wait all night for the granite loader to open up for business.

Thanks to these kiHow to Brand Sandnds of added services, Granite Rock is doing well, in spite of charging about 6% more than its competitors.

Back in 1998, the Booz Allen Hamilton consultants (now called Booz & Co.) wrote an article called “How to Brand Sand.” The point of the article was that nothing—not even sand—is a true commodity, if you look at the bigger picture. This article resonated with me because in college I worked for a company which sold sand. Unfortunately, the sand company I worked for thought narrowly about their business, so they cut out virtually all the costs and sold primarily based on price (and eventually had to shut down the business).

In the Booz article, they listed the variety of strategic options which open up if you define yourself more broadly within “commodity” industries. They defined the strategic process to find these options as follows:

1) First, carve up the market from every angle—profits, needs, behaviors—to identify those customers who are responsive to differentiation.

2) Second, differentiate your offering in one or more of the six "generic" dimensions of differentiation.
a) Quality Control
b) Supply Reliability
c) Product Customization
d) Applications Knowledge
e) Convenient Packaging
f) Services which make Process More Convenient for the Customer

3) Third, bundle several differentiations into a brand, and then communicate that brand consistently and strongly.

4) Finally, align your business capabilities to reinforce and defend the brand and the underlying sources of differentiation.

If you follow a process similar to this, you can have a far richer strategy development process—both richer in terms of strategic variety and richer in terms of profitability.

Before starting the process of choosing one’s strategy, first take some time to make sure you have properly defined the business you are creating that strategy for. If you define yourself too narrowly (product-centric), you may end up feeling trapped in a commodity free-fall, where your only strategic option is to keep cutting costs and prices to get an edge.

However, if you define yourself more broadly as a provider of consumption experience solutions, you may find many, more desirable strategic options. This does not just apply to fast moving consumer products. It can also be applied to seemingly mundane industrial products like granite and sand.

When I was a child, a buddy and I opened up a lemonade stand. Business was awful. Adults didn’t take the time to stop. They just drove buy. The only people to hang around the stand were other children.

We soon discovered that the other kids were more interested in toys than in lemonade. As a result, we went and got some of our old toys we no longer wanted and started selling them to the other children. Suddenly, we were making money.

If we had stuck to a narrow, product oriented business definition (selling lemonade), we would have been a dismal failure. However, by taking a broader business definition (making people who hang around on the sidewalk happy), we were able to modify the strategy to create a success.

Tuesday, June 17, 2008

Analogy #185: The Goodness of Grain

Here are some stories about three retailers. The first retailer sold shirts. She decided to do a survey to find out what size shirts she should sell. The survey results said that the average person in the area wore a medium-sized shirt, so she loaded up her store with lots of medium-sized shirts.

The store owner didn’t sell a single medium-sized shirt, although she did quickly sell out of the few smalls and larges she carried. Frustrated, the store owner went to the person who did the survey and complained. “How can the average person in this market be a medium, yet I could not sell a single medium shirt?”

The surveyor said, “Well, according to the survey, half of the market wears small shirts and half of the market wears large shirts. Therefore, the average size is a medium.”

A paint retailer wanted to start selling barn paint, so he conducted a survey to see what colors people used on their barns. The survey result said that the average barn color was orange, so the retailer stocked up on orange barn paint. He didn’t sell any orange paint. When he complained to the survey reseacher, the man replied, “Well, half the barns were red and half the barns were yellow, so the average color—halfway between red and yellow—is orange, even though there was not a single orange barn in the market.”

A third retailer sold swimming suits and wanted to find out what kinds of swimming suits to sell, so he did a survey of the market. By now, the survey researcher was hesitant to tell the retailer what he found, since the last two retailers complained so much about his research. Therefore, when the retailer asked him what the results were, he reluctantly said the following:

“Well, I did the research you asked and found out that half the market is men and half the market is women. Therefore, I’m not sure if the average customer has two sexes or no sexes. I really don’t know what type of swimming suit is appropriate for that type of average person.”

Just because the average shirt size was medium, the average barn color was orange, and the average person had two and/or no sexes, does not mean that the market is full of medium-sized, orange barn owners with two/no sex. The averages masked the reality that in fact there was not a single person fitting this profile. It was just a midpoint within a diverse mix of people.

Even though medium shirts are the closest average to the whole population does not make it the best choice for particular individuals who are either small or large. Similarly, although orange is halfway between red and yellow does not make it the best color for individuals who want red or yellow barns—even if it is the closest color to the average for the whole market.

Averages may describe the overall market, but transactions take place at the individual level. If you have a diverse market (and most markets are), then averages can steer your decision-making in the wrong direction, as it did in these stories.

So, no matter what your business may be, don’t fall into the trap of these retailers and look only at the averages.

The principle here is about granularity. The idea is that if you dig down deeper to a more granular level, you will tend to make better decisions than if you just try to appeal to broad market averages.

The shirt retailer would have been better off getting granular, to find out that she should not have catered to an average “medium” person, a person who—in fact—did not exist. By becoming more granular, she would have seen that a better approach would have been to carry lots of smalls and larges, with very little medium. Either that, or she could have specialized in either only large or only small, to get a strong position with half the market.

This sounds like a pretty basic concept. However, just because a principle is simple and basic does not mean that it is necessarily in widespread usage.

I was reading a new study today by the folks at McKinsey & Company. They were doing research on companies who operate in growth industries. They found that just being in a high growth industry does not guarantee that your company will automatically be a high growth company. In fact, many of these companies are slow growing.

Based on their research, the McKinsey folks found three major causes for slow growth companies in a fast growing industry. One of the top causes was firms who operate in a high growth industry, but have a product portfolio which excludes the highest growing part of the industry.

In other words, they operate their business sort of like the retailers in my story. They see that on average, the industry is growing, so they enter the industry. However, they do not get granular enough to find out which parts of the industry are causing the growth, so they make the wrong choices.

This would be like someone wanting to participate in the growth in the automotive industry, so they decide to start building gas-guzzling SUVs. Then, they will be confused when their growth is much less than the average of the auto industry. Had they done a more granular analysis, they would have seen that all the growth is in small cars and hybrids, while the SUV sector is declining.

Again, it sounds simple, but according to research, it is often not put into practice.

We have talked about granularity for determining product mix. As we saw in the story, you can also use granularity to determine your targeted customers. Not all customers are created equal. Study after study has shown that most of a company’s profits come from a small minority of their customers and that a large sector of the customer base is actually unprofitable to serve. To optimize profitability in such a mix, it helps to get granular and treat different customers differently.

This concept is popular in the banking industry, where the profitable customers often get all kinds of special personal service while the unprofitable customers are pushed towards a lower cost interaction on the internet. If you had treated all of these customers with average service, the most profitable would flee to a competitor who treats them better, and the other customers would become even more unprofitable to serve.

Going granular and owning a small niche can often be more profitable than compromising your distinction in order to capture the entire “average” market with a bland mass product produced in huge quantities. We talked about something similar to this in a previous blog (see “Talk Your Ear Off”).

In a diversified marketplace, where people are accustomed to having their distinctions catered to, a bland product placed in the middle of “average” rarely does well. In fact, knowledge of the average customer in the market can actually be a disadvantage, because it provides a false sense of confidence that you understand who the customer is. However, as we have seen, the average person may not provide any real insight into the diverse mix in the marketplace. If the market is half male and half female, it may make more sense to choose one segment and specialize in it, rather than try to design clothing that works well for the average half-man/half-woman. Get granular enough to find the real, solid customer opportunities

The same principle applies to industries. If you want to grow in a growing industry, spend time getting granular enough to find out which part of the industry is truly fueling that growth.

Buried treasure is rarely just sitting on the surface. That’s why the treasure is said to be “buried.” If you want to find it, you have to dig through the granular sand. If you want to find the treasure in your industry, get granular and dig around to find the best customers and the best product segments. Then target them in a specific manner, rather than relying on average appeals.

Tuesday, June 10, 2008

Analogy #184: Don’t Cut Down All the Trees

Did you ever wonder what it would be like if countries were colored like they are on maps? When you look at a map, one country may be colored brown. Immediately on the other the side of the border, the next country on the map is colored green. Wouldn’t it be something to see such a border in reality, where everything is brown on one side and green on the other?

Well, the island of Hispaniola is something like that. The island of Hispaniola is in the Caribbean Sea, located southeast of Cuba. The western half of the island is the nation of Haiti. The eastern half of the island is the Dominican Republic.

You would think that because the island is so small, and since both are surrounded by the same body of water, that the climates in both countries would be nearly identical. They are not. Haiti is like a dry, barren desert. It is brown. The Dominican Republic is a lush, tropical area which gets plenty of rain. It is green. It’s almost like those multi-colored maps, brown on one side of the border, green on the other.

Why are the climates so different? It has to do with trees. In a desperate search for fuel, the Haitians have cut down nearly every tree on their half of the island. By contrast, the people of the Dominican Republic did not cut down all of their trees.

It is an interesting quirk of nature that if you want a lot of rain, you need a lot of trees. The trees interact with the atmosphere in such a way to promote the growth of rain clouds. Without the trees, the clouds do not form. With virtually no trees in Haiti, there is virtually no rain in Haiti. Because the Dominican Republic still has lots of trees, they get a downpour nearly every day.

When Haiti had lots of trees, their climate was like that of the Dominican Republic. But those days are long gone and now they suffer from a shortage of water.

This is a tough problem for Haiti to fix. It would take generations to re-grow a large forest. In the meantime, there is still a desperate shortage of fuel, so the temptation to cut down the trees for fuel would be great. Finally, Haiti does not have the monetary resources necessary to pull off such a project. With all of the immediate problems that they have, it is hard to commit to something with a payback so far into the future.

At first, it is hard to see the connection between trees and rain. It is not necessarily intuitive. Therefore, when the trees are being cut down for fuel, people do not make the connection between this act and its consequences to the climate. They seem like separate, unrelated issues. However, whether we see it or not, the two are interrelated. And the consequences are quite dire. By the time people figured it out, it was too late to do much on a near-term basis.

Business models also have many interrelated parts. Sometimes it is difficult to see how the pieces all interrelate. Therefore, we think we can do certain things in one area of the business without it impacting the rest of the business. Unfortunately, just like losing those trees lead to losing water, disruptions in one part of the business model could cause a financial drought for the entire company that would take generations to repair.

The principle here is about managing the interrelated pieces of complex business models. In many ways, you have to manage all of the pieces together, like a delicate ecosystem. Piecemeal approaches that only look at one isolated decision at a time can end up destroying that delicate business ecosystem.

For example, outside investor activists often do not have the same level of intimate knowledge that insiders do about the interdependencies of the business model. Therefore, they come bursting in with all sorts of ideas to break up the company and sell off pieces (or some other such restructuring).

Many times, these can be good ideas. A fresh perspective can be useful. However, other times, these suggestions may be the equivalent of telling Haiti to cut down all of its trees. Without realizing it, these innocent looking breakups end up selling off a key resource that makes the whole business ecosystem work. Without it, profits for the whole business dry up, because they sold of f what helps create the rain.

Recently, an executive of Southwest Airlines was talking to financial analysts/reporters. An analyst mentioned the fact that Southwest has some great long-term pricing contracts on jet fuel at favorable rates. Those contracts are extremely valuable in today’s environment. It was suggested that Southwest could make a bundle of money by selling those contracts.

But Southwest knows that those fuel contracts are their trees. They help create the low-cost structure upon which the entire business model is dependent. The executive correctly responded to the analyst that yes, they could make a lot of money on such a deal, but immediately after that, they would be out of business as an airline. Without the fuel contracts, Southwest’s entire business model would be in an irreversible drought.

Similarly, analysts and activist investors over the years have suggested that fast food chains divest of the restaurants they own. The idea is that they could fetch a lot of money from spinning the restaurants out to the franchisees. In addition, it would help them better focus on the franchisor side of the business.

The fast food companies contended that although the relationship may not be so obvious, owning a few of the restaurants does indeed improve the overall business model. By owning a few restaurants, they better understand the problems of the franchisees. It helps keep them closer to the ultimate customer. And it provides easy ways to experiment. As a result, they make the companies better franchisors, who can better serve the needs of franchisees and customers. Hence, without this so-called “fringe” business, the core business would suffer. They are like trees…an integral part of the entire business model.

If you have to cut down some trees, have plans to replace them. In the retail business, I have seen what happens when you keep taking money out of the business and don’t put any back in. Stores start to look run-down. The shopping centers deteriorate and become less desirable places to shop. Eventually customers give up on the run-down stores and shop the shiny new competitors.

Some have argued that Eddie Lampert is going down that path with Sears. By under-investing, in Sears, it is like cutting down all the trees and not planting any replacements. The stores become barren wastelands, as the customers depart for greener pastures. More on this topic can be seen in the blog “Don’t Eat Your Seed Corn.”

Before you start to break up a portfolio, or restructure the business, or pull back resources from a particular area, first check how those pieces inter-relate with the rest of the business model. Although it might not be obvious on first glance, they may play a vital indirect role in the prosperity of the core business.

Losing those pieces may have dire long-term consequences. Just as it could take generations for Haiti to replace its trees, it could take your firm a long time to replace a vital resource once it is lost.

The water shortage in Haiti due to a lack of trees has gotten so bad that salt water is seeping into the freshwater supply, ruining what little water there is. Vacuums tend to get filled. And if you’ve taken away the elements that create success, the vacuum may be filled with things that hurt you.

Monday, June 9, 2008

Analogy #183: Bridge Out Ahead

A friend of mine told me the story of a time back when large sections of the interstate highway system were being built. There was a large section of this expressway which appeared to be completed near where my friend lived. Yet, for some reason, the government would not open it up for use.

At first you could assume that perhaps they were waiting for the concrete to dry and cure. Or maybe they were waiting until all the signs were up. However, after a large number of weeks had gone by, you still were not allowed to drive on the new highway. Surely by now the concrete was ready. You could see that all the signs were up.

One man in particular was upset by the delay in opening that expressway. He knew it would make his daily commute both faster and smoother. As each day passed, he became a bit more angry about not being able to use that highway.

Eventually, he could not stand the wait any longer. One night, after dark, he pulled away one of the barricades and drove up the ramp to the new highway. It was wonderful! The road was smooth—no potholes! He could drive as fast as he wanted because there were no other cars on the road.

Just as he was starting to relax, he caught a glimpse of something ahead. The highway was missing a bridge! He immediately slammed on his breaks. Unfortunately, he could not stop in time, and he drove over the edge to his death.

I guess there was a reason for not opening up that highway after all.

Strategic planning is about moving a company from its current location to a superior destination. In that respect, building a strategy is like building a highway—a route one can take to get to that destination.

It may appear that the strategy is in great shape, just like that new highway. Unfortunately, there can be some critical pieces missing, just like that bridge. Unless you make sure that all of your bridges are in place, your strategy can drop off the edge and never return.

The principle here is that not everything moves in a smooth incremental succession. Sometimes, there are gaps that can only be crossed by building an additional strategic bridge.

Bridges tend to take a lot longer to build than the highway on either side of the bridge, because the bridge is a more complicated structure. Therefore, if you don’t start building the bridge until the highway reaches the gap, there will be a very long wait before you can use that highway. A lot of precious time will be lost in the race to the future.

A better approach would be to determine in advance where those large gaps are and start building the bridges right away. Then, by the time your strategic highway gets to that point, you will be ready to connect it to the bridge and not skip a beat.

A good example of this has to do with managing the succession from one CEO to the next. Due to egos and cultures and other such issues, that transition can sometimes be quite difficult. It can be like a bridge, which needs to be worked on far in advance of when it is needed.

At Microsoft, Bill Gates had a great deal of difficulty relinquishing power and control to Steve Balmer. Fortunately, they started the transition well in advance of the time when Bill Gates was to leave the company. And they needed all those years to get the egos and the bugs all worked out (too bad the transition to Vista did not go as smoothly).

The time to start thinking about successors is not the day after the CEO announces his or her retirement. That is as irresponsible as building a highway and forgetting to build the bridges.

Perhaps the next step in succession is not a new CEO but to sell the company to a larger one. The time to start work on the deal is not at the time when you want to sell. This is another one of those bridge concepts which takes extra time. It can sometimes take years to woo a company into cooperation. Because Microsoft ignored this long courtship process in going after Yahoo, the deal had difficulty creating any traction.

If you want to sell out, not only do you need to woo the potential suitor, but you may need to transform your company into something more desirable to them. Perhaps you have overlapping businesses you need to sell in order to gain government approval. Or perhaps you need to migrate your business to a more compatible platform. Or perhaps some key investors need to be persuaded. The more of this you do up front, the less desperate you will be later on to get all the pieces to fit. And let me tell you, if you have to get it all done at the last minute, it will cost you dearly.

Sometimes, bridges have to deal with acquiring scarce resources, be it raw materials, technology or people skills. It can take extra time to get these resources in place, so treat them like a bridge. For example, rather than relying on the open “spot market” to try to gain those resources on a just-in-time basis, you may want to work well in advance to develop the kinds of relationships that will allow you to get long-term contracts that guarantee supply at favorable rates.

If you have to acquire to get the technology you need, start the courtship well in advance.

In a prior blog, we talked about how the time before we hit the gap is usually shorter than we think (see “The room is Smaller than you Think”). It is equally true that the time it takes to build a bridge over that gap is usually longer than we think.

As a result of these two trends, we can hit a stall point, where the bridge is not ready in time. Impatient investors, board members and employees will get as upset as the man in the story and want to plow ahead before the bridge is ready. If you resist, they may replace you. If you do not resist, then you will be the one driving that car off the edge of the highway.

Now there is not enough time or resources to treat everything like a bridge. Fortunately, not every gully needs to be crossed on a deluxe bridge. Sometimes, you can move along quickly by just paving over those little hills and valleys and live with a few little bumps.

The trick is to isolate those key gaps where serious bridge-building is needed and get to work on them with sufficient lead time.

If you want smooth, seamless transitions in your business, then you have to realistically evaluate how long it will take to build those transitions. Then, you need to sequence the timing of your projects so that the projects end in time to be ready when needed. And since those gaps tend to come a little sooner than you think, and the building tends to take a little longer than you think, build in some slack time.

Most movies are not filmed sequentially, from beginning to end. That can be a very inefficient way to make a movie, wasting both time and money. Complicated scenes are started earlier, some scenes are filmed simultaneously on different lots, and scenes using the same resources may be filmed together, even though they do not occur in the movie together.

The same can be said about implementing your strategy. It may be more efficient to tackle the projects “out-of-sequence.” Get to the bridges sooner. Although it may look messy on your side, the customer will only see the smooth, continuous movie.

Monday, June 2, 2008

Analogy #182: Blueprint for Success?

Once there was a man named Joe who did a very good job of managing an office building. His job was to see that the building and all of its systems were in good operating order. Joe made sure the electrical systems worked, the air conditioning worked, and that the building was secure.

Joe did such a good job in these areas that he got a promotion. In his new job, Joe was in charge of a much larger and much older building.

Joe came to the new building with a large bundle of papers under his arm. The guard at the door asked him what all those papers were. Joe responded, “These are the blueprints of the building I used to work at and the schematics of all of the equipment that was in that building. These papers never let me down in the past, so I expect they will continue to fuel my success.”

“But Joe,” said the guard, “This building doesn’t look at all like the old building…and the equipment inside is a lot older and made by other manufacturers. How are those papers going to help you here?”

“These are the papers I know. I have become an expert at interpreting them. It is because of my ability to interpret these papers that I have been so successful. Why abandon something which has worked so well for me?”

Well, as problems turned up at Joe’s new location, Joe stayed true to his word and relied on the old blueprints and schematics. However, because they were not designed for this building, they gave Joe bad advice. Joe kept putting holes in the wrong walls and destroying the equipment by wiring it improperly.

The building quickly was in worse shape than when Joe started. Joe was fired.

Joe was confused. He knew those were great blueprints and schematics. He wondered what went wrong. Joe finally concluded that the problem was because nobody else in the building was using his blueprints and schematics. If they had just been more like him, Joe concluded, there would not have been any problems.

Joe eventually got another building management job. And guess what…he brought those same papers to his new job.

Joe had been very successful earlier in his career. He attributed his success to following a particular blueprint. Unfortunately, that blueprint is only an accurate representation of one building. If you try to apply that blueprint to a different building, it is not very useful.

It seems silly that someone would rely on a blueprint designed for an entirely different building, but similar things happen in the business world all the time. Many successful business executives move around to new jobs with different companies, often in different industries. When they get to the new job, they bring along the “blueprint for success” which worked so well in the past. All the tricks and dashboards which worked so well before are expected to perform exactly as well in the new location.

Most times, though, there is enough of a difference in the circumstances that the old tricks don’t have the same impact. Differences in corporate culture, customer base, core competencies, reputation, or resources can make your new situation not very similar to the old blueprint of success. As a result, you will be like Joe, putting holes in the wrong locations and destroying the operational systems.

It can be something very simple, like an executive I knew who honed his skills in tough New York City. When he took a job in the more people-sensitive Midwest, his formerly successful tough style failed miserably. His failure to adapt his style to the new culture eventually forced him out of the company.

Other times, it can be subtle nuances to the local business. They are not always easy to detect at first. The companies may look very similar at first blush, but these nuances may be enough to make success in each depend on very different variables. Coke and Pepsi may look similar at first, but they have reached their success in very different ways.
Just because you have some great “blueprints” doesn’t mean that you can just walk into any building and be an instant success.

The principle here is that learning is better than knowing. You can know how to do something so well that you can do it in your sleep. But if situations change, the thing you know how to do may no longer be useful. Knowledge has limited applicability to limited situations. Get outside those boundaries and the knowledge is worthless. If you only know one way, and that way becomes worthless, you become worthless.

Better than knowing how is to learn why. Learn why the blueprint is successful. Learn the broader principles behind when the tricks work better or worse. Learn a variety of skills and when they are most appropriate. That way, when situations change, you will understand how to adapt to the change.

Knowledge can lead to cockiness. You may have had great success in cost cutting and become cocky enough to believe that all problems can become solved through cost cutting. Therefore, without deep thought one can approach every problem by rushing to cut costs.

However, some problems can be caused by years of underinvestment. The solution may be to temporarily increase costs through investments in technology or infrastructure.

This idea is similar to the flaw of having only one trick up your sleeve, which we talked about in the blog “Henry the Hammer.”

So. when confronting a new situation, such as a new job or a new responsibility, keep the following ideas in mind.

1. Don’t assume that the strategic tricks of the past will work exactly the same in the new situation.

2. Don’t rush too quickly into action. Take time to learn. Learn the nuances of the business. Learn the culture. Talk to key customers. Talk to the old-timers. Learn how it is similar and how it is dissimilar to situations in your past.

3. Don’t assume that all of the blueprints currently in use by the business are all wrong and that all of your blueprints are all right. The truth is somewhere in between. Remember, the business you are inheriting got as far as it did by doing something right. Learn what that was, before changing it.

4. Don’t be afraid to try new things. For example, if you move to a new company from a competitor and try to do things exactly like they do it at the old place, all you are building is an inferior clone of the old company. The marketplace already has one of those. You need to develop a strategy which is uniquely different, so that it stands out in the marketplace and can own a position of its own for which your new firm is most ideally suited.

5. Just because you may be more comfortable doing things one way doesn’t mean that your entire team can quickly adapt to your way. It may be easier and faster for you to adapt than to get a whole team to adapt. I know of a place that collected a large number of great employees who came there to avoid a particular management style. New management came in and brought the style these people were trying to avoid. As a result, many left the company.

This is not to say that you abandon all of your experience from the past. Experience is a good thing. But the true value of experience is in how well it prepares you to learn and adapt.
Those big consulting companies can sometimes be very useful. They hire very smart people. They’ve been exposed to things you have not seen. However, they do not know the nuances of your business. Therefore, there advice is often rather generic. They can make more money if they quickly push the tricks they know rather than spending time to learn the particulars of your situation. They take the same old power point presentations and just fill in the blank with your company’s name.

These can be clever and useful tricks, but don’t just abdicate all the power to them. Make sure you get them to adapt to your nuances and particulars. Don’t just take what they know. Force them to learn and adapt.

What works well in one place will not necessarily work as well in another place. Strategy is about exploiting one’s uniqueness in the marketplace. Generic one-size-fits-all strategies will never be optimal. Take the time to learn the nuances.

When it’s time to hire people, do you hire them just for the blueprints they have under their arm, or do you look to see how well they can learn and adapt?