Friday, August 29, 2008

Analogy #203: Collaborate Vs. Communicate

One of the most impressive feats of the second half of the 19th century was the completion of the US transcontinental railroad. This railroad line linked Omaha, Nebraska to Sacramento, California. Construction of the railway began in 1863 (during the US Civil War) and ended in 1869. During these 6 years, approximately 1,777 miles (2,859 km) of track were laid down, much of it across treacherous, snowy mountains. Not only did the workers have to battle the terrain, but they had to battle attacks by Indians.

This was an extremely important development, as it connected the entire United States—from coast to coast—with efficient travel. Prior to this rail line, a cross-country trip could take as long as six months. Now, the coast to coast trip could be completed in just one week.

The task to build the line was divided between two companies. The Central Pacific company was to start in Sacramento and build eastward. The Union Pacific company was to start in Omaha and build westward. Each worked independently and devised its own process for building its railway. The US government paid each company independently based on how many miles of track they laid down (at preset amounts based on the difficulty of the terrain).

Although the companies worked independently, the US government, however, needed to intervene in the decision of where the two tracks would connect. Both companies were trying to direct the connection point closer to where they controlled land (so as to maximize their profits). In doing so, the two firms could not come to an agreement. To settle the differences, the US government determined that the connection point would be Promontory Summit in Utah. On May 10, 1869, the golden spike which connected the railways was driven into the ground at Promontory Summit.

The building of the transcontinental railway was a complex and extremely difficult feat. Many strategic business plans today call for their own version of a complex and extremely difficult feat.

In today’s world, when large complex projects are undertaken, there is usually a lot of talk about “collaboration.” The thinking is that complex projects in a “knowledge-based” economy are more efficient if there is continual collaboration and dialogue amongst those with various pieces of the relevant knowledge.

To foster collaboration, companies tend to add quite a bit of complexity to the business. Intricate matrix organizations are built, with multiple reporting relationships (and lots of dotted lines on the org chart). Expensive data/knowledge warehouses are built, with the capability for real-time sharing and interaction across the entire organization.

The transcontinental railroad didn’t worry much about collaboration. Other than collaborating on the initial design and the ending connection point, there was hardly any “working together” between the Union Pacific and the Central Pacific. To the contrary, rather than collaborating, they were encouraged to compete against each other to see who could lay the most track. Without collaboration, they very quickly completed a very difficult task.

This blog will try to show that modern businesses may be over-emphasizing the need to collaborate. As a result, they are building an unnecessarily complex infrastructure which may be choking efficiency rather than helping. It may be more productive to move to a structure more like that used to build the transcontinental railroad.

The principle here is that there is a big difference between collaboration and communication. The dictionary defines collaboration as various parties working together on a project. By contrast, communication is just a sharing of information. Communication tends to move in one direction (from the person with the information to the person without). This is typically not a group of people who need to work together side by side to get the project done. It is just a data dump.

If we consider all communication to be “collaboration,” then we significantly overestimate how much true collaboration is going on. These inflated estimates then cause us to create elaborate collaboration solutions which may not be justified. Worse yet, all of that forced collaboration may create a bureaucratic nightmare that makes it harder for people to independently just go out and get the work done.

We can see this by looking at the typical life cycle for a major project.

Usually, a new strategic initiative starts with data gathering. Great strategies are not created in a vacuum, but within a context—an answer to a real need in the marketplace. One must understand the context in order to create the proper strategic solution. Therefore, data is needed to answer questions like:

1) What are My Capabilities?
2) What are the Key Issues/Concerns of my Customer?
3) What is the Competitive Landscape?

Getting the answers to these questions does not require collaboration. Instead, what is needed is a good data dumping process. In the fall 2008 issue of the MIT Sloan Management Review, there is an article about IBM’s attempt to create innovation through a massive collaborative process. Over 150,000 IBM employees were asked to participate in a multi-day on-line collaboration concerning ideas for innovation. IBM came up with a sophisticated process for such collaboration via computer software on the internet.

What was the result? Although lots of people wrote in and submitted ideas (available for all to see), there was virtually no dialogue which built upon any ideas. There was no real connections between submissions. It was just a data dump. All of those ideas could have just as easily have been mailed in on post cards. The ability to collaborate was not necessary.

Next comes the visioning—the choosing of the right course. My experience is that great visions come from great visionaries—not committees. Collaborating committees tend to compromise and dilute the vision into something bland and average. It doesn’t offend, but then again, it doesn’t inspire or excite the emotions. Radical, groundbreaking visions, typically result in love/hate reactions—something that would typically not escape a collaboration until watered down. In the case of the transcontinental railroad, Abraham Lincoln was the visionary who chose the path and made it happen, not a collaborative team.

Yes, visions need to be communicated and accepted around the organization. But this is more about persuasion than it is about collaboration. It is about disseminating information and inspiring folks. Sure, there is room to accept feedback and modify things a bit, but the overall vision, if properly chosen, should remain in tact.

Now comes the implementation phase. Collaboration is important here, particularly at those points where people’s work intersects with each other. Choosing the point at which the Union Pacific and the Central Pacific were to meet was one such intersection. To me, the key here is to:

1) Identify points of intersection early.
2) Come to a rough agreement of how you will mesh at the point of intersection (collaborate).
3) Go off and do your thing somewhat independently (not collaborate).
4) Check in periodically to see if you are still on a path to mesh, or if new information/knowledge requires readdressing the earlier decision (collaborate).

For example, if you are designing a new car, it is important that the people designing the chassis and the people designing the engine have a general agreement about engine dimensions, so that the engine fits into the spot where it is to be located in the chassis. That is collaboration. However, you do not need the chassis people to collaborate on building the engine. They are not trained in that skill. Nor do you need the engine people designing the chassis. As long as the intersection point (putting the engine in the chassis) is worked out well in advance, you have most of the collaboration you need.

The exception would be if the engine designers discover that they cannot design a proper engine to meet the earlier specs. They you may need to reconvene and collaborate on a new revised conclusion.

Having everyone fully collaborating together as one unit all the time can be counter-productive. Most great advances in business are driven by the forces of competition. If you eliminate internal competition, you can become as inefficient as the old communist regimes. Internal competition between Union Pacific and Central Pacific caused the train track to be built more quickly than if they had worked together. In my time at Best Buy, I saw how internal competition can bring out the best and drive great improvement.

A similar thing happens with best-in-class benchmarking. I have often seen people speak of moving best-in-class processes throughout a firm as “collaboration.” This is not collaboration—this is teaching and learning. And if you force everyone, all the time, to act in the same exact way, you have frozen productivity and innovation. You can never get better, because doing anything different from the current standard is not allowed. To make advances, you need renegades—people who do not collaborate and go off on their own to experiment and find the next improvement.

By the time you add internal competition and renegades into the mix, even the implementation stage is not as much about collaboration as one might at first think.

Collaboration is not the same as communication. Communication seems to be more critical than collaboration. If we focus on building organizations that are unencumbered with bureaucracy, but communicate well, we are probably better off than if we had focused on building complex collaborative structures.

There’s an old saying that “too many cooks spoil the broth.” In other words, if you bring together a lot of chefs to collaborate on a cooking project, it will fail because the combination of all of their conflicting ideas will create a disaster. Better to find one great chef and let him or her create their masterpiece with a single, working recipe.

Friday, August 22, 2008

Analogy #202: Tax vs. Toll

Once there was a king, King Antaro, who wanted to use his power to make a lot of money. What he did was build only one road which went across the entire kingdom. King Antaro then put toll booths all along the road.

King Antaro was excited. He thought to himself, “I have a monopoly on all road traffic across my kingdom. Anyone who wants to get from one side of the kingdom to the other has to use my one road. I can charge whatever I want for people to use this road, since they have no other choice. I’ll be fabulously rich in no time.”

So King Antaro had his toll booths charge extremely high rates for passage on his road. Nobody wanted to pay that much to travel across the kingdom, so they avoided the kingdom altogether. They found alternative routes in neighboring kingdoms and did their business transactions with others.

As a result, not only did King Antaro not get the toll money he expected, the kingdom’s economy suffered from a lack of business. It was leading to the King’s financial ruin.

Suddenly, King Antaro had a new idea. He eliminated the tolls booths and allowed everyone to build any kind of transportation business they wanted in the kingdom. The only condition was that they would pay the king a very small tax from their profits. New transportation businesses flooded into the kingdom. This lead to a growth in the rest of the economy.

The small income tax on all of this growth added up, and in no time King Antar became fabulously wealthy.

One of the long-standing principles of economics has been that monopolies create extraordinary wealth for the one who owns the monopoly. The thinking is that the monopoly allows the owner to charge excessive fees, which “unfairly” exploit everyone else (who have no alternative but to pay the fee). As a result, most governments try to limit monopoly practices by businesses.

The modern equivalent of the monopoly has been the platform wars. Companies try to create technology platforms that become the industry standard—a near monopoly for anyone wanted to do something in that space. Then, like King Antaro, they set up high tolls for anyone who wants to use that standard. Microsoft has made a fortune from owning the operating platform standard for PCs. Sony’s Playstation II made a fortune off the tolls it charged from anyone wanting to create a game which plays on their proprietary gaming standard.

Going back even further in time, Philips made a fortune off of owning the monopoly on the cassette tape standard, and extracted a toll off of every cassette made. It is no wonder that the companies behind Blu-Ray and HD DVD spent so much money trying to make their version the standard for next-generation DVDs.

King Antaro found out, however, that there are limits to this monopoly/toll booth phenomenon. First, if you charge too much, you will limit the usage of the standard. Second, there are always alternatives to your near-monopoly. King Antar eventually realized that if he gave up control and made the market open, he could make more money off fair taxation of the open market than he could off exploitive tolls from the closed market.

As we will see in this blog, the evolving business model seems to be abandoning the old platform wars and moving to something more akin to this taxation model. As you build your strategies into the future, you should keep this in mind as you develop your business model.

The principle here is that monopoly-like business models appear to be drifting away from the exploitation model (extracting tolls on a tightly controlled path) to a taxation model, where you can do anything you want as long as you pay a tax.

The problems with the tightly controlled model are that:

1) Nobody likes to be tightly controlled. They will resist and seek out alternatives (or build a competing system).

2) Controlling the path usually results in restricting the commerce. Less total business will take place because you are not smart enough to dream up all of the potential possibilities.

3) Tight controls tend to restrict innovation and progress (standards must be maintained). As a result, instead of integrating incremental change, you get replaced by an innovative leap by someone else.

4) Tolls tend to be high fixed charges, no matter how successful the toll payer is. This tends to restrict risk and experimentation.

5) Tolls require people to behave in a particular way (tell you which road you have to take). This is not always the best way.

By contrast:

1) If the system is fully open, there is less incentive to avoid it or build an alternative (standard is more likely to thrive for a longer period).

2) As others add innovative applications for your platform, they make the standard ever better, ever stronger (the virtuous cycle). The market for your standard increases in size.

3) Taxes do not demand how someone makes their money…they just take a cut, regardless of what you do. This freedom can result in more money-making ideas…more things to tax.

For an example of this principle, compare how Facebook is trying to use more of a traditional “toll” approach for how people use its site, whereas Apple is using more of a tax approach for its mobile Apps Store. The “tax” for Apple, in this case, comes from retail markup on what Apps others build. I borrow this comparison from Umair Haque, Director of the Havas Media Lab, who is a Harvard Business blogger:

“Apple took something terminally closed - the mobile value chain -and pried it radically open. Facebook - still thinking in yesterday's terms - took something radically open - the www - and is trying to make it a little bit more closed.

“Apple took something radically evil - the mobile industry - and is making it a little bit more good: finally, now that it's usable, there's an incentive for you to get stuff that's actually useful on your phone, instead of just being a zombie whose head is getting ripped off by suits scheming up hidden charges in boardrooms.

“Facebook - still thinking in yesterday's terms - took something radically good - the self-organizing incentive for people to share knowledge with others on the www - and is making it a little bit more evil: exclude people from accessing it, trying to pollute it with ads, subvert it with pseudo-friends, silo it across mini-networks, dilute it to the point where low-quality apps proliferate like weeds.”

In other words, the near-monopolies of the future will not thrive based on control and exploitation. Today’s transparent and consumer-advocacy marketplace will not tolerate it. Instead, tomorrow’s near-monopolies with thrive by being the most consumer-friendly, with the gains coming from sharing in the success of those who choose to opt in.

The irony is that the monopoly-like models of the future will be a net result of avoiding all of the practices which created the near-monopolies of the past. Practices like control, exclusivity, ownership, and dictation of terms are giving way to openness, inclusion (even bringing competition and customers into the process), lack of ownership, and uninhibited free flow of ideas.

Or put another way, we used to think of “monopolies” as one large, single unit of power. Future “monopolies” will be nearly infinite units of independence who gain from working together. The “monopoly” comes from having one large, single unifying force which causes everyone in the value chain to be better off than if they were not in the value chain. And the one managing that force in the chain (and collecting the taxes) is the best off of all.

Umair Haque refers to this fragmentation as “atomization of the value chain.” But I think Umair may be missing the point that even if the value chain is atomized, they system only works if there is still a monopolistic type of force to enable the atoms work together. And no matter how open Apple’s App Store is, Apple still wants to be the sole owner of the store. This is not the end of monopolistic-like activities. It is just a different manifestation…a kinder, gentler force, but a force nevertheless.

Apple’s larger move into retail—Apple Stores, I-tunes and App Store—is no accident. It looks like the retailer may be in the best position to become the tax gatherer. Let everyone else make whatever they want to sell (the more the better), but if you are the best way to buy it (and store it and play it back), then you have the best chance of putting your tax-like markup on most of the transactions. And, by the way, it also makes it easier to sell your own stuff.

In the past, it was concentration of power and exploitation (through tolls) which tended to lead to greatest profitability. In the future, it appears that dispersion of power will lead to the greatest profitability—provided that you manage the enough of the way everyone interacts so that you can “tax” it (get a cut of their success).

In building your future business models, you may want to look for strategies where you can “atomize” a market, yet still control the system enough to extract a “tax.”

EBAY used to try to exert more control over its system, but they are finding that if they open things up and act less like a toll-keeper and more like a taxman, they are better off. Now, some of that conversion was due to bowing to the demands of their partners, rather than a premeditated strategy. Why be like EBAY and wait until forced into it—be proactive.

Thursday, August 21, 2008

Analogy #201: Cockroach Infestation!

Cockroaches are pesky pests. They are almost indestructible. Scientists believe they have survived over 300 million years of calamities.

Once a home gets infested with cockroaches, they are extremely difficult to get rid of. They just keep on breeding, making the situation worse. In some urban areas, about half of the children who see a doctor for ear problems have a cockroach in their ears. The rise in asthma among children in urban areas is attributed to breathing in too many cockroach body parts and feces.

One time, I started working at a company and was introduced to the team of consultants who had been working with the company for a number of years. When I shook their hands, I said, “So you are the cockroaches.” I think my straightforwardness surprised them a bit.

I’m no longer associated with that company, but I understand that this large consulting firm still is. Like I said earlier, once infested, it’s hard to get rid of cockroaches.

There are parallels between cockroaches and consultants. Both are hard to get rid of once they find a way in.

However, given today’s environment, most companies do not keep a large in-house strategic planning function. Instead, they like to get assistance from one of those large consulting firms (like McKinsey, Booz, Bain, Accenture, A.T. Kearney, Bearing Point, Monitor, Boston Consulting, Strategos, Capgemini, etc.). So the consultants are let in the door.

I’ve worked with nearly all of these large consulting firms at one time or another. And yes, they have some very intelligent people who can be useful to the strategic success of your firm. But, remember, they can also be like cockroaches—persistent pests who drain your checkbook.

The principle here is that consultants need to be managed well in order to achieve the benefits and avoid the infestation. Listed below are see key rules to keep in mind to manage them properly.

Rule #1: Remember that Their Goals Are Different From Yours
Your goal is to quickly and efficiently develop and implement a successful corporate strategy. The consultant’s goal is get as many billings and fees from you as they possibly can. These two goals are not always compatible. Remember: Once they “fix” the problem, the gig is over. “Quick and efficient” is not always in their best interest.

I had a friend who was hired out of business school to work for one of these consulting companies. He said the first thing they did was send him to consulting classes. When I asked what they taught, he said it had nothing to do with teaching him something useful for the client. They were classes in how to get as many billings and fees from the client as possible.

Rule #2: Manage the Menu
When it comes to conflicting goals, you want it to be your goals which win. The way to do that is by spending an inordinate amount of time on the “Menu”—the contract for services.

Consultants will want to do two things to the interpretation of that contract:

a) Increase the Scope of the Overall Problem (The bigger the problem, the bigger the fee for solving it)
b) Decrease the Scope of the Current Contract (Make the acceptable deliverables as small as possible)

By doing these two things, they guarantee that meager output of the current contract cannot possibly fix the newly redefined larger problem, so you have to sign them up for a lot more contracts (each with its own large fee) in order to get the job done.

To avoid this, you have to actively manage the wording of the contract up front and hold them to it (or dock their pay). First, clearly define exactly what the problem is that they have been hired to solve (for this contractual engagement). Second, clearly define what the acceptable deliverables are (what they specifically have to do in order to get fully paid). Third, hold them to the contract.

Rule #3: Date Before You Marry
Once you realize that these folks want to partner up with you and be around forever, you realize that this is less like a one-night stand and more like a marriage. Long-term compatibility can become an issue. Different consulting groups have different philosophies and operating personalities. Find the firm whose personality is most compatible with your company.

Choose them as you would a marriage partner. Go on some dates and get to understand how compatible you are. Or, to switch metaphors, as long as you are going to be infested, find the cockroaches that are the least objectionable.

Rule #4: Ask for Farms, Not Food
There’s an old saying that if someone gives you a fish, you eat for a day. But if they teach you to fish, you can feed yourself forever. Consultants tend to want to keep giving you fish—today’s answer for today’s problem—forever (with a fee on each delivery). You’re better off having them teach you how to fish so that you are no longer dependent on them.

As part of the contract, make sure that the consultant’s knowledge is transferred to you and that they teach you how to deal with this type of problem on your own in the future. Getting the whole farm (and the knowledge to farm it) is a lot more valuable than just one batch of crops.

Rule #5: Get the “A” Team
In reality, you are not hiring the entire consulting company. You are hiring the people they are sending to work on the project. Like all companies, they have some great people (the “A” team) and some lesser people (the “B” team). Make sure you get the “A” team.

Sometimes you see the “A” team up-front (when they pitch you for the business) and at the end (for the final presentation of results), but nowhere in the middle. Make sure you find out who is doing the work and guarantee you get the people you want for the stated amount of time.

Rule #6: Give Them Your Watch
There’s another old saying that the role of a consultant is to steal your watch and then tell you the time. In other words, they get paid to tell you the knowledge you already had in your possession.

I was talking to another consultant about this and he admitted that they brought very little new knowledge to the project and that we basically already knew what to do. However, he claimed that most internal bureaucracies are resistant to change. Without the catalyst of an outside consultant, it is tough to create that change. Too many barriers are put up.

They allow you to tell the skeptics, “Look, we hired the experts and paid them a whole lot of money, so we’d better do what they say.” This can often be more effective than saying, “Do it because I want us to do it.”

If this is true, then use it to your advantage. Tell the consultants exactly what you want to do and then use them as a catalyst to get the change you desire. Prophets are not respected in their home town, and your internal strategy people may not be as respected as out-of-town consultants. So don’t be afraid to give the consultants your watch—provided you have set the time on it to be exactly what you want.

Rule #7: Do the Work
Usually, the end result of a consulting engagement is a recommended list of things to do. If you want to benefit from the recommendation, you have to do the things on the list. It shocks me how many times a company will hire a consultant, get a list of things to do, and then not do them. They think that if you pay the consultants enough, the problem will go away. The end of the engagement is the beginning of implementation. Don’t expect magical results if you don’t do the work of implementation.

Although I could have said a lot more, I think by now you get the idea. Because consultants have a different agenda than yours, you have to carefully manage them. If you leave them alone and let them set the rules, you will usually be disappointed (and have spent more money for that privilege). However, if you set the rules, the process can be very beneficial. You’re the customer. Act like one and demand satisfaction. Otherwise it will feel like you’re dealing with cockroaches.

I know someone who was interviewing for a job at a new company. To impress him, the company showed him their relationship with their consultants. This man quickly found out that this was the same basic consulting team doing the same basic work that they did for the company where he used to work.

However, there was a big difference. At his former company, the executives managed the consultants well. Work was done in a timely fashion and implemented as recommended. The company received many benefits. By contrast, this new business managed the same consultant poorly. The process was taking forever, it cost a whole lot more for the same work, and nobody implemented anything, so they got no benefit.

After seeing this, my friend did not pursue the job opportunity with as much gusto.
So next time, when you are dissatisfied with a consulting engagement, don’t just rush to put all the blame on the consultant. Perhaps you didn’t manage them as well as you could have.

Wednesday, August 20, 2008

Analogy #200: Stakeholders as Customers

I can pretty much determine the beginning of my total disenchantment with government. It was 1991. The Senate Ethics Committee was investigating the “Keating Five,” five senators who were under suspicion of ethics violations. These five senators were accused of corruption by improperly interfering with an investigation by the Federal Home Loan Bank Board (FHLBB) into the demise of Lincoln Savings and Loan.

Charles Keating, CEO of Lincoln Savings and Loan, had given large campaign contributions to these five senators, only one of which represented the state of California (where the S&L was located). When his savings and loan got into trouble, he asked these senators to intervene to get the FHLBB to stop investigating him. Three of the five Senators did actively try to interfere with the investigation and improperly protect Mr. Keating.

In the Ethics Committee investigations, the five senators were asked why they had gone to such extreme levels to protect someone with such questionable behavior. The five senators all tended to answer in a similar manner, saying that they were “only trying to help one of their constituents.”

Constituents?? The dictionary defines a constituent as “a resident of a district represented by an elected official.” When did the CEO of a California Savings and Loan become the constituent of a Senator from Ohio? I thought the constituents of a US Senator from Ohio would be voters in Ohio.

Yes, Mr. Keating helped fund the election of a number of politicians, including an Ohio Senator, but I thought that made him a source of capital—an important partner, not a constituent.

So, I guess I live in a nation of representative government, but the government does not represent the people of the voting district, but the suppliers of money, wherever they come from.

It seemed to me that the senators had crossed the line. They had forgotten who their true customers were. I believed they were elected to serve the region that elected them. These senators in essence said that they were elected to serve the interests of the ones that funded them.

They showed no shame or embarrassment about this. They just thought of funders as constituents.

While I agree that politics runs on money, I draw a line between funding and electing. Those that fund the politicians may be important partners in the process of government, but they are not the customers.

Others would say this is a naïve approach, and that good politicians must balance their ability to serve two masters—the ones who elect them and the ones that fund them. Both are constituents (or customers).

A similar situation occurs in business. Businesses need outside funding to effectively achieve their strategy. Some of that funding is in the form of debt and some is in the form of equity. Although your shareholders and creditors are important partners in the game, they are traditionally not seen as customers. The customers are the ones who buy things from you.

But now there is a school of thought that businesses should treat the people who fund them as customers, too. To think otherwise may be naïve.

The principle here is that in today’s modern world of business funding, we may need to make room for two customers—the ones who buy from us and the ones who fund us.

Wait a minute! Isn’t that what got us into trouble during the dotcom bubble? All the dotcom entrepreneurs at that time were so busy courting the venture capital money sources that they forgot to create a compelling business model for an ultimate consumer. Instead, the capital sources became the “customer” that got all the sales pitches. When they got funding, that was treated like making a “sale.” Ultimately, that model blew up, because you eventually have to earn your keep by selling something to a real customer at a profit.

Well, according to an article by the folks from Booz & Co., times have changed. The article, entitled “First Capital, Then Strategy,” claims that supply and demand are what have changed. Authors Seamus McMahon and Michael McKeon, both Booz executives, say that sources of capital (debt and equity) have become scarce, whereas great strategic ideas are fairly common.

The scarce capital sources have become more demanding. Rather than passively investing and waiting, they are demanding—with a very short-term time horizon. It’s a “deliver results now, or I’ll take my money elsewhere” environment. In addition, these sources of capital are taking more active roles in the companies where they invest.

Hence, the article concludes that if you want some of their money, you have to do two things:

1) Woo them like you would any other customer in order to get them interested in you.

2) Satisfy their desires, just as you would satisfy the desires of any other customer. In this case, that means giving into at least some of their demands for short-term gains.

Of course, here is the dilemma (with business and with that article). Many of the tactics these sources of capital want to you to do are in direct conflict with your long range strategy. Case in point: One of the pillars in the success of Southwest Airlines has been its aggressive activity in locking up long-term jet fuel contracts at favorable prices. This has protected them from the recent rapid rise jet fuel prices.

Well, now some of those short term thinkers wanted Southwest to make a killing by reselling those contracts at a fat profit. Of course, Southwest’s response was that if they sell off the contracts, they will have destroyed their successful long-term business model. Sure, they could make a great near-term profit once by selling off those contracts, but it would destroy the ability for Southwest to be a profitable airline into the future. Destroying an entire business forever just to get one “great” transaction looked like a bad bet to Southwest.

But the sources of funds often don’t care about long-term prospects. As long as they can find a long continual string of short-term gains, they are okay. The trick for the funders is to keep shifting the funding from one short-term gain company to another.

So you see, the strategy of the funders is not always in sync with the strategy of the businesses. Business strategies typically look for longevity of prosperity for the company. Funders often look for one-time boosts regardless of long-term prospects. Their long-term prosperity comes from finding a continuous stream of different companies to get a boost from.

So the trick here is balance—a balance between your needs and their needs. The goal is to find a way to give into the funders just enough to get that funding. In other words, if you give them a little bit of a short-term boost, they may be more willing to support some long-term initiatives.

So, instead of thinking of your funders as the primary customer (as in the dotcom bubble), or thinking of them as a silent partner (when sources of capital were abundant), we need to think of them as another customer along side of the customers who buy our goods and services.

Think of it like traditional consumer segmentation. Different consumer segments want different things, so you build a portfolio of solutions to cater to the diverse needs. Your sources of funds are just another consumer segment for your company. Add a solution for them to your mix.

It may dilute your long-term strategy a little bit, but it allows you to get at least some funding for your strategy, so that you can live to fight another day. And it may be a little bit distasteful, like my feelings about how politics get funded, but it may be the price we need to pay until the supply and demand equation changes.

It appears more important than before that a long-term strategy needs to include a strategy for how to obtain funding. Since these sources of funding have different needs, you need to create a strategy which incorporates a way to satisfy at least some of those needs. The trick is to build a strategy where you satisfy their needs without completely sacrificing your own needs.

If you don’t think all of this through in advance, you may end up caving into all of the wishes of the capital sources. This may make them rich but leave you with a bankrupt future.


Just as all customers are not alike, not all sources of capital are alike. There are some sources of capital which are more long-term oriented and may have desires more in sync with your long-term strategy. It may be worth your while to spend more time looking for (and courting) these types of sources.

Friday, August 15, 2008

Analogy #199: Movement vs. Progress

When I was a child, I was fortunate to have teachers who tried to instill in me a sense of the big picture. There was this librarian who kept insisting that before starting to read a book, examine the entire book. See if it has a glossary or index in the back. See what else it has to offer. That way, reading the book will be more fulfilling and we’ll get more out of it.

I had a Social Studies teacher in high school who tried to instill these same principles. On the last day of school, this teacher gave us a final exam. The exam was huge! It was about the size of a small phone directory. There were hundreds and hundreds of questions to answer. Even worse, we only had an hour to complete the exam. There was no way that any human could get all those questions answered in an hour.

When the students saw the size of the exam, they started to panic. Not wishing to waste any of the precious time, most students just dove in and started answering the questions as fast as they could—in sequential order—starting with question #1.

After only a few minutes had passed, one student closed their test and handed it into the teacher. The student and the teacher both had big smiles on their face. At this point, I knew there was some kind of trick here.

As a result, I stopped racing through the questions and took the time to examine the entire test more fully. I noticed that on the last page, there was a special message. The message said that all we had to do was write a particular word on the top of our test and hand it in and we would get an “A” on the test.

Then I realized that the teacher had never said we had to answer all the questions. He just handed out the test. So I wrote the word on the top of my test and handed it in…with a smile.

The business world had a bias towards activity. “Looking good” means looking busy. When trying to hire people, job descriptions will often ask for people with “a bias towards action.” The kiss of death is to appear idle.

However, just because one looks busy does not mean that one is productive. The students taking that exam were extremely busy. They were rushing from question to question, trying to answer as many as possible. Unfortunately, it was an effort in futility.

Had they taken time to pause and reflect on the project before them, they would have seen that all they needed to do was write a single word on the front of the test. Instead, they were so busy “doing the work” that they ended up never finding out what the real work was supposed to be.

It is so easy to fall into this same trap in the business world. We get so caught up in racing to get work done that we never take the time to determine if it is the right work to be doing. Time is wasted. Effort is wasted. Money is wasted. And while we are so busily doing the wrong thing, competition can calmly do the right thing and get a huge advantage.

The principle here is that there is a big difference between activity and progress. Sure, all progress requires some activity, but not all activity leads to progress. In fact, too much of a bias to quick action can actually slow down or stop progress.

Sometimes, stopping the busyness and taking time to reflect and ponder can lead to your greatest progress.

Great strategic insights come from looking at the big picture and seeing something which others have missed. It’s hard to see the big picture when your head is down and busily focusing getting some mundane task completed quickly. And it’s hard to see what others have missed when you don’t take time to really sit back and look.

Howard Schultz got the original vision for Starbucks while relaxing at a café in Europe and just watching the human interactions around him. I’ll bet the executives at Folgers and Maxwell House looked a whole lot busier on that same day. However, I suspect that Howard Schultz was a lot more productive that day.

It takes time to synthesize all of the various data inputs and create a point of view about how the world works and how you can find a winning position within it. And given how the world is continually changing, more time is needed to occasionally refresh that point of view. This cannot be done unless you step back from the busyness and ponder.

I was impressed when Gap stores decided this past spring to pull back a huge chunk of their advertising. The reason was because the stores were not ready with much of a compelling reason to shop there. Heavy doses of advertising would just have accelerated disappointment. Instead, the Gap sat back, kept its advertising relatively idle, and reinvented its merchandising approach. Now, with a renewed vision, the Gap is bringing back the advertising again.

This is so different from many companies which, in times of panic, just crank up the busyness in hopes that working harder and faster at what they’ve always done will make things better. Let’s remember that this is the same work which got the company into trouble in the first place. Doing it faster and more frantically won’t change the fact that it is still the wrong work. And while keeping busy doing the work, there is no time to consider how to change the strategy and figure out what would be better work.

A little time spent up-front pondering the big picture can save a lot of grief and wasted effort later on. More of the world is like that Social Studies test than one might think. Spending a little time up-front examining with the big picture may present a far easier solution to the problem (just writing a word on the front) than grinding out busyness the old fashioned way (answering all of the questions).

New solutions can be easier because:

1) It is uncontested territory…it’s almost like having a monopoly.

2) New solutions tend to have higher margins, and less competitive intensity…the path to profits is easier.

Unfortunately, the lure of busyness is difficult to resist. In tough times, there is fear of losing a job. Busy people appear more essential, more valuable…less likely to be laid off.

Also, there is a satisfaction which comes from accomplishing things (even if they are the wrong things). You can point to things you’ve done. You can check things off a list. It can actually be fun.

In the busyness of activity, you don’t have time to ponder all the things that could be wrong with the big picture. Ignorant to the long-term doom, you can be content with “Gettin’ ‘R’ Done.” By contrast, sitting back in a pondering mode can be scary work. It is unstructured…you never know when you are done…and it forces you to come to grips with some very big problems.

The siren call to action may sound great, but often times it must be resisted or your actions will cause your business to crash against the shores.

If you want to hit a target, you must aim before you shoot. Similarly, if you want your business to succeed, you must aim its direction before you act. When you watch someone aim their rifle, it doesn’t look like much activity is going on, but that aiming makes the productivity of the shooting activity so much better.

Not all activity is productive. In fact, much is unproductive and keeps you from thinking about what would be productive activity. Taking a pause before diving into the work may be the most productive thing you do.

I’ve watched many a hockey or soccer game where there is a lot of action, but not many goals. It’s exciting and fun to watch, but not very productive. Don’t let the fun and excitement blind you to the fact that the teams did not reach their goals.

In the same way, don’t let the excitement of doing deals, updating logos, doing brand extensions, and so on, blind you to the fact that in many cases this work will not get you to your goal. Studies show that most of these great-looking “activities” actually destroy shareholder value. Taking time up-front to sit back, ponder and get the big picture will increase your chances of avoiding the loser activities and doing the winning activities.

Remember: Success is not determined by how many things you do, but by how much value you add. If an activity destroys value, it was not only a waste of valuable time, but it negates any other effort which added value (a double destruction). Even doing nothing is better than destroying value.

Wednesday, August 6, 2008

Analogy #198: The Magic Eye

Back in the 1990s, there was a popular entertainment diversion called the “Magic Eye.” These were colorful pictures that at first glance looked like just random patterns with no meaning. However, if you changed the way you looked at them, you could see a 3D image pop out of them and float in the space in front of the picture.

The secret to finding the hidden 3D shape was in the way you looked at the Magic Eye picture. If you focused your attention too sharply on the picture, you would never see it. Instead, you had to let your vision relax. Then, all of the sudden, the 3D image appeared.

It was a strange sensation. At first, you would look and look and look at the picture and be frustrated that you couldn’t find the 3D shape. Then, once it appeared, you were amazed that you had not seen it sooner, since it was now so clear to you.

At the top of this blog is one of those Magic Eye pictures. Later on, I’ll tell you what 3D image you should see in it.

Finding the proper vision for your company can be like trying to find the 3D image in a Magic Eye picture. Somewhere in that messy looking future is the proper vision, but at first it is hard to see.

Like with the Magic Eye, sometimes you need to relax your eyes in order to see the vision. Then it will pop out and look incredibly obvious. Once the obvious vision pops out, you can rally the troops to create the path which will make that vision a reality.

In this blog, we will look at some mental tricks to help make your vision pop out and become obvious.

The principle here has to do with taking advantage of the way your brain functions. In a recent issue of the New Yorker magazine (dated July 28, 2008), Jonah Lehrer wrote an article entitled “The Eureka Hunt.” This article looked at some of the recent brain research focused on how we, as humans, create moments of great insight—called Eureka moments.

In studying people who have had great insights into difficult problems, the scientists detected a pattern. First, the person would focus on the difficult problem at hand—gathering information, pondering the issues, struggling for a solution. Eventually, this effort would lead to an impasse—a dead end, a mental block. After all of that mental effort, no solution would present itself…it would seem impossible.

After the mental block, the person would walk away from the project and spend time in some innocuous activity—either some rote routine activity like taking a shower or some form of mind-numbing entertainment. Whatever the activity, the point would be that the former problem had slipped out of the conscious mind and the person was not aware that any further consideration was being given to it. It was as if the mind had taken a mental vacation from problem-solving and was in a passive mode—like on autopilot.

Then suddenly—out of the blue—the solution would present itself. It would be clear and obvious. There would be a sense of certainty that the problem was indeed solved. It would just take a little time to work out the little details.

How did the brain do this? Scientists said that first the brain intensely focuses on the issue. It shuts down a lot of the sensory areas in order to block out distractions. Then, primarily the left side of the brain goes to work seeking information and looking for a solution. This left hemisphere searching tends to reach that impasse.

That’s when the problem is shifted over to the right side of the brain. Although the right side of the brain tends to be less logical and less precise, the right side is better at connecting the dots for the big picture. It can draw from a larger, more diverse, more abstract world. This is all going on in the background while you are unaware.

When it finds a solution, the right side of the brain gets the attention of your consciousness, creating that eureka moment. Although it appears to be a sudden flash of insight, it is really the result of hard work in the mental background.

But here is the true secret. If you spend all of your time consciously focusing on the issue, you will keep the brain too isolated in the left hemisphere. You will never get past the mental block. To get the problem into your right hemisphere—where it is solved—you need to walk away from the problem, unfocus yourself and sort of let your conscious brain vegetate.

To quote the New Yorker article, “The relaxation phase is crucial. That’s why so many insights happen during warm showers…The big ideas seem to always come when people are sidetracked, when they are doing something that has nothing to do with their research.”

It’s like that Magic Eye. You can only see the 3D image if you stop staring intensely and let your eyes relax. Similarly, you can only catch the vision if you stop focusing intensely and let your mind relax.

So what are the implications for vision hunting?

1. Stop Focusing So Much On Focusing.
Yes, initially one needs to focus. But then, one needs to relax. Some people are known to use focus enhancing drugs, like Ritalin, to help them find insights. This article says to stop that. Those drugs keep the mind in the wrong place.

2. Walk Away and Find Diversions
It’s okay to take a leisurely break every once in awhile, even on company time. The article praises firms like Google that put ping pong tables in their headquarters. Firms need to encourage some of this more playful behavior. It was even suggested that companies might encourage sleeping on the job, since many great ideas come in that half-conscious state when one first wakes up (for more on this topic, see my blog “Genius Sleep”).

When I used to work at the former Best Buy headquarters, at those times when we would hit an impasse I would suggest a trip to the “automotive sculpture gardens.” Although it sounded glamorous, what I was referring to was a path on the property that went through a wooded swamp. There was a rickety bridge going over the swampy area. From the swaying bridge, you could see where someone had dumped old auto parts into the swamp. A few of the larger pieces stuck out of the wet and mucky goo. Hence, the “automotive sculpture gardens.”

The point was that a walk through a wooded swamp (with the accompanying insects and smells) was a distinct departure from the sterile and intense world of the corporate headquarters. It was a chance to get away from it all, so that your brain could subconsciously shift to the right hemisphere while you were mentally diverted into a more restful activity. This diversion helped create great insights.

3. Don’t Force Visioning Onto a Timetable
The more you force a timetable onto visioning, the less productive it becomes. Just because you take an Outlook calendar and block off 10AM as the time when a vision occurs does not mean it will happen that way. Studies show that great insights tend to come when people are in good moods more often than when under pressure.

Rather than trying to force an entire strategic planning cycle into a single, tightly-scheduled, meeting-packed week, let it be running in the background all year round. Annual strategic offsites are better served for communicating that “obvious” insight (which popped out at you earlier) and rallying the troops around it, rather than as the time when the insight is forcibly created.

If you want great visionary insights, first spend some time focusing intensely on the problem. But then walk away and relax. Both tasks need to be encouraged in your corporate culture.

The item you were supposed to see in the Magic Eye picture at the top of this blog was a dollar sign. If you follow these principles, you should see more dollar signs in your business as well.

Sunday, August 3, 2008

Analogy #197: Change the Rules

I used to live in a city that was having some problems with the quality of the municipal water supply. There was too much of a certain chemical in the water.

By law, when a city was in violation of water standards they had to send a letter to every household in the community. This letter had to do three things:

1) Inform people of the problem with the water;
2) Explain the risks in using the water;
3) Provide details on how the city was planning to fix the problem.

In essence, this is a summary of what the city said in the letter.

1) The levels of a particular chemical in the water exceed the maximum allowed by the government.
2) We don’t think it’s a big deal.
3) Our primary solution is to petition the government to raise the allowable levels for this chemical, so that our current levels would be considered safe.

For some reason, I did not get a lot of comfort from that letter.

Every industry tends to have a certain accepted way of doing business. They become the standard operating procedure—the rules for how things get done. Most of the time, these rules aren’t written down—it is just how the industry evolved.

There are reasons why these standardizations are useful:

1) Getting the entire supply chain in an industry to work smoothly requires the cooperation of many different firms. The more procedures are standardized, the easier it is for these firms to work together.

2) There is usually a limited pool of quality employees in a given industry. It’s difficult to tap into that pool of employees if your procedures are radically different from the norm, because they are trained and experienced to excel within these norms.

However, it should also be pointed out that these accepted ways of business are somewhat arbitrary. They do not have to work that way. Other processes could have just as easily have evolved over time.

In the story, it seems rather audacious that one little community would challenge the water standards set by the Federal Government. After all, it is assumed that scientists picked the maximum levels for that chemical in the water based on solid evidence. Similarly, it may seem audacious for a business to ignore the operating standards of its industry.

However, I am reminded of a conversation I had with a doctor at Mayo Clinic who was on a team of experts to determine what was the acceptable range of health should be for one of those common measures used in medicine, like blood pressure or cholesterol. He said that it’s not as if you are healthy and that all of the sudden after reaching a certain point you suddenly become unhealthy. He said it is a gradual thing and that as measures like blood pressure and cholesterol gradually go up, you gradually become less healthy.

According to this doctor, the point at which you declare one of these ranges to go from “healthy” to “unhealthy” is somewhat arbitrary. And in fact, he disagreed with the committee he was on and thought the range for “healthy” should have been narrower.

So maybe it was not that audacious after all for that city to challenge the federal water standards. And maybe it is a good thing if your business’ strategy challenges the standards of your industry.

The principle here is that industry standards are arbitrary to some degree and that sometimes it is in your best interest to change them. There are several reasons why you might want to change industry standards.

1) The standards tend to protect the established leaders. If you are not an established leader, they may become a barrier to your success.

2) The standards may not play to your natural strengths. A different set of rules might give you more of a competitive advantage.

3) Standards tend to reinforce the status quo. True innovation may require abandonment of some of these standards. In fact, almost every major innovation creates a new set of standards for how things are done. If you are unwilling to bend the rules, you may never truly innovate.

Here are some examples of firms which changed the rules in order to get an advantage. We’ll start with the typical rules in furniture. Furniture brand firms in the US tended to be large companies who desired to made their furniture in their own factories. They spent lots of money to create a consumer demand for their brands. Labor costs were high, but they were able to pass the costs on to the smaller, and less powerful retailers.

Then along came Ashley furniture. Ashley had no desire to own manufacturing facilities. When cheap labor markets like China opened up, they aggressively went into these countries to source their products from anyone who could meet their specifications. Ashley didn’t care about establishing a strong, separate brand name for their products. They just sold them under the name of their retail brand.

By abandoning the status quo and rewriting the rules, Ashley had several advantages. First, they were able to secure products far cheaper than the status quo, who were burdened with factories and unions and other costs, which were higher and less flexible. Second, by sourcing directly, Ashley entirely avoided the branded manufacturing middlemen, saving even more costs.

These savings allowed Ashley to provide a far superior value to the customer. The customer responded, and Ashley thrived. Most of the large, established furniture retailers in the US who played by the old rules have gone bankrupt. In the mean time, Ashley has catapulted to becoming the largest furniture retailer in the US.

And, of course, everyone knows the story of Starbucks. Before Starbucks, the rules about coffee went something like this. Coffee was something you consumed at home or at work. Coffee was purchased by consumers in bulk in ingredient form. The customer manufactured their own coffee. The ingredients tended to be heavily couponed and sold in supermarkets, with the choice usually made on the basis of price.

The key manufacturers, like Folgers and Maxwell House knew the rules and played by them. The consumers knew the rules and played by them. That is, until Howard Schultz came along and changed the rules. At Starbucks, you consume the coffee at the coffee shop. You buy it one cup at a time, prepared by someone else. Quality became far more important than price.

Now, consumers are drinking a lot more coffee, but Folgers and Maxwell House are struggling, because they stuck to the old rules.

I am very excited about the prospects for Alan Mulally, the new CEO at Ford Motor Company. He is an outsider who has no personal connection to the old rules about the automobile industry. As a result, he is far more inclined to rewrite those rules. I hope he is able to do so.

Industries tend to run using generally accepted rules and procedures. However, just because everyone tends to do things in a similar manner does not mean that it is necessarily the only or even the best way of doing things. It may be a result of historical quirks or factors which are no longer as relevant in a changing society. Therefore, when developing strategy, the best tactic is not always to look for ways to outdo everyone within the current paradigm. Instead, you may be better off looking for a new paradigm which plays by another set of rules.

Even if you like the status quo, one must not get too cozy with them. It is important to keep your eyes on the horizon, looking for firms who want to destroy the rules which are helping to create your success. As we have seen, if you stick to the old rules when society is migrating to the new rules, you will lose out. As a consequence, even if you prefer the old rules, you may need to quickly shift gears in order to remain relevant.

When I received that letter from my city water company and found out how little they were prepared to do to fix the water quality, I changed the rules about the way my family consumed water. I bought a home water filtration system.

Not all rule changes are driven by innovative businesses. Some are driven by rule-changing consumers. Keep an eye on the leading edge consumers. They may already have a new set of rules in mind. All you have to do is tap into them.