Monday, March 30, 2009
Jose Raul Capablanca, known as “Capa,” was the world chess champion from 1921 to 1927. He is often considered to be one of the greatest chess players of all time. There is a story he liked to tell, which I found at www.chessdom.com.
"I was playing in a tournament in Germany one year when a man approached me. Thinking he just wanted an autograph, I reached for my pen, when the man made a startling announcement. 'I've solved chess!' I sensibly started to back away, in case the man was dangerous as well as insane, but the man continued: 'I'll bet you 50 marks that if you come back to my hotel room I can prove it to you.' Well, 50 marks was 50 marks, so I humored the fellow and accompanied him to his room."
"Back at the room, we sat down at his chess board. 'I've worked it all out, white mates in 12 no matter what.' I played black with perhaps a bit incautiously, but I found to my horror that white's pieces coordinated very strangely, and that I was going to be mated on the 12th move!"
"I tried again, and I played a completely different opening that couldn't possibly result in such a position, but after a series of very queer-looking moves, once again I found my king surrounded, with mate to fall on the 12th move. I asked the man to wait while I ran downstairs and fetched Emmanuel Lasker, who was world champion before me. He was extremely skeptical, but agreed to at least come and play. Along the way we snagged Alekhine, who was then world champion, and the three of us ran back up to the room."
"Lasker took no chances, but played as cautiously as could be, yet after a bizarre, pointless-looking series of maneuvers, found himself hemmed in a mating net from which there was no escape. Alekhine tried his hand, too, but all to no avail."
"It was awful! Here we were, the finest players in the world, men who had devoted our very lives to the game, and it was all over! The tournaments, the matches, everything - chess had been solved, white wins."
About this time Capa's friends would break in, saying "Wait a minute, I never heard anything about all this! What happened?"
"Why, we killed him, of course."
In general, chess games are not won by murdering your opponent. Instead, chess games are won by the player with the superior chess strategy. Similarly, businesses are not allowed to go around murdering their competitors. Instead, businesses need to outwit their competitors with superior business strategy.
Since both business and chess are won by having superior strategies, it may be useful to see what businesses can learn from the strategic approach used by the grand masters of chess. What we find are four principles.
One of the biggest differences between grand masters of chess and the rest of us is their skill at pattern recognition. They can quickly glance at the board of a game in process and immediately grasp the entirety of what is going on across the entire board. This understanding of the “Big Picture” provides the context for making the next move.
This principle also applies to business strategy. Strategic moves do not occur in isolation. They are influenced by the larger environment—consumer trends, competitive activity, regulatory activity, economic conditions, internal strengths and weaknesses, and so on. If you don’t look at the entire playing field, you can miss something that influences the success or failure of your strategy.
In chess, you have only one opponent at a time. In the business world, you have a multitude of players and stakeholders with pieces on the board. This may make understanding the entire board more complicated, but also more critical.
Two suggestions: First, dedicate time and effort to understanding the greater context in which you are operating. Learn your entire chess board. Not only get the data, but get out of the office and see the world in which you compete.
Second, spend time learning patterns. Study historical strategic activity. Study the strategic environment in other industries. Be like the grand masters of chess who practice for thousands of hours and repeatedly expose themselves hundreds of patterns.
The more time you spend looking at strategic environments, the more you will be able to detect patterns of business outcomes. The more patterns you can recognize, the better you can detect which pattern is closest to the one you are currently experiencing. This will provide even more depth to the context for your decisions.
The grand masters of chess understand that the most important factor in a game is your relative position of strength versus the opposition. The stronger your relative position, the more control you have over how the game plays out and the greater the likelihood you will win.
When considering individual moves, the grand masters may see several potential moves that maintain or strengthen one’s position. They may be satisfied with any of them. What they really focus on is trying to avoid the very bad moves, which put them on a path to weakening their position. They understand that once your relative position of strength starts to unravel, it is very difficult to gain it back.
Positioning is critically important in business strategy as well. If you have no relative position of strength in the marketplace, then you have no reason for existing in the marketplace. Two suggestions: First, decide what that position of strength should be. To help in that process, see my blog on “Eight Questions.” Second, every move you make should be designed to protect and extend that strength. Avoid the bonehead moves that cause the long-term strength to unravel, even if it means backing away from some quick near-term gain.
Chess is a game of movement. You don’t just create a position of strength and stop playing. The board is in continual motion. The environment changes, and so must you.
Grand masters of chess understand that since change is inevitable, they may as well get in front of it. It is not uncommon for a grand master to study 10 to 12 moves in advance. The idea is to anticipate what the opposition is capable of doing and try to block it before it happens. Anticipation tends to be more effective than reaction.
The business environment is also in constant movement. There is never a time when you can relax and say “I’m all set” and never have to worry about strategic moves again. Two suggestions: First, do not look at strategic planning as an “event” which takes place one a year or so and then is put aside until the following year. Instead, look at strategy as an ongoing process which needs to be incorporated into everyday decision making.
Second, try to anticipate how things could evolve. Don’t just look at one move at a time in isolation. Understand the longer-term consequences, so that you can avoid unintended consequences.
Grand masters tend to see a game unfold in three phases—the opening game, the middle game and the end game. Their style of play and strategy is different in each phase. The trick is to understand which phase you are in and then act appropriately.
Businesses go through phases as well—start-up, rapid growth, maturity, and decline. Each phase is different enough that it requires a different type of strategic approach. Good leaders recognize when companies are moving between phases and change their strategies appropriately. This is discussed more fully in a prior blog.
One of the more common mistakes I have seen are companies that love the rapid growth phase and try to stay there forever, even when that phase is over. As a result, they over expand. The newly mature environment cannot absorb all of the investment, and the firm collapses under the weight of those excessive investments. Stay aware of the times and get in tune with the times.
The strategic principles of chess are also useful in business strategy. First, realize the full context in which you are acting by understanding the entire playing field. Second, seek out and strengthen positions of relative strength. Third, treat strategy as an ongoing part of everyday activity (not an infrequent event). Fourth, make sure your strategic approach is appropriate to the phase of the business life cycle you are in.
The grand masters of chess can still usually beat the computers. Therefore, don’t just blindly rely on reams of data when creating a strategy. Use your human intuition and think outside the box.
Tuesday, March 24, 2009
Imagine a conversation between Bob, the VP of Operations, and Kal, his boss.
Bob: “I’m building a new factory in St. Louis.”
Bob: “Well, we’ve always had a factory in St. Louis in the past, so I suppose it must be necessary.”
Kal: “Have you done the math to determine if the factory provides a good return on investment?”
Bob: “No, but I checked and we have enough money in the capital budget to build it.”
Kal: “What will the factory be used for?”
Bob: “I’ve got this old piece of paper in the files describing what the old factory used to do many years ago. I know it’s a bit out of date, but we’ll update it as we go along after the new factory is built.”
Remind me not to invest my money in this company.
Factories are important investments. The decision to build a new factory should go through the rigor of strategic and financial planning. Is the factory needed to meet our strategy? Can we justify the financial investment? How do we optimize the factory to support the strategy?
In the story above, Bob did not seem to have a clue about how the factory tied in to any strategy. He didn’t even know how the factory tied into profits. His rationale was that we always had such a factory, and we could afford to build it, so we should build it. That’s not very good justification. Kal should not put up with such behavior.
A lot of firms claim that their most important asset is their people—more important than factories. Yet, many companies put a lot more strategic effort into factories than they do into their people. What if we took that same conversation above and applied it to people?
Bob: “I’m hiring a new person in Accounting.”
Bob: “Well, we’ve always had a person in this position in accounting in the past, so I suppose it must be necessary.”
Kal: “Have you done the math to determine if hiring this person provides a good return on investment?”
Bob: “No, but I checked and we have enough money in the accounting payroll budget to cover it.”
Kal: “What will this new person do?”
Bob: “I’ve got this old job description in the files describing what the position used to do many years ago. I know it’s a bit out of date, but we’ll update it as we go along after the new person is hired.”
As strange as that conversation sounded when it was about a factory, it sadly seems a bit more common when it involves people.
The principle here has to do with investment. Human resources are an investment, just like factories and R&D. Given the movement to a knowledge-based economy, human resources may be your most important investment. The problem is that it is not always treated like an investment.
For most other major investments, two major questions are asked before making investment decisions:
1) How does this investment help us achieve our strategy?
2) Will we get an adequate return on that investment?
1) How does this investment help us achieve our strategy?
According to a recent survey by Waston Wyatt WorkUSA, firms in the USA are not doing well on the first question—connecting individual work to the master strategy. The study claims that 51% of employees do not understand the steps their companies are taking to reach new business goals. In addition, 65% are unclear about the connection between what they do and what they earn. In other words, the link between individual work and company strategy is often missing. How can we expect this “most important resource” to help us achieve our strategy if they cannot identify any understanding of it or connection to it?
This study concludes that “three-year total returns to shareholders are three times higher at companies where employees understand corporate objectives and the ways in which jobs contribute to achieving them.” You wouldn’t build a factory without first knowing how it links to corporate objectives. Why should we treat human investments differently? It is obvious from this study that keeping our human resources in the dark hurts shareholder returns.
My experience has shown me that the collective knowledge of the team is far more valuable than just the knowledge of the leader. There have been many times when I have had an idea about how to achieve a corporate goal. I could have just ordered the team to do what I thought up (leaving them in the dark about why we are doing it). Instead, I have told the group what the ultimate goal is and asked for suggestions as to how we could achieve that goal. The suggestions from the group are often far better than my own idea.
Not only do I gain their ideas, I gain their enthusiasm. Once people understand the goal, there is greater reason and purpose to the work. As a result, there is effort placed behind the work, and a greater likelihood that the goal is achieved.
It’s hard to know if you have won a race if you do not know where the finish line is (and it takes some of the fun out of the running, too). Let the people know about what the finish line is. Then reward people based on their ability to successfully reach the finish line.
2) Will we get an adequate return on that investment?
Now, let’s move onto the second question: are you getting an appropriate return on investment for your hires? In these tough economic times, there is a lot of pressure to reduce headcount. Not all headcount has the same value. If you had a product line portfolio of 100 products that needed trimming, you wouldn’t randomly cut every fourth product from the mix. Instead, you would carefully study the financial and strategic contributions of each product and make calculated decisions. Shouldn’t people receive the same consideration?
The same principle also applies when adding employees. I’ve seen managers with the attitude that employees are a necessary evil to the business and that headcount should always be kept as low as possible. Would we say that about other investments? If you know that you can get a great return on investment by building stores or factories or whatever, you would build them. Why not do the same with people? As long as they are a positive return on investment, why not keep adding them?
When trying to get a return on investment from something like a factory, we typically do not expect to get all of the return in the first year. In addition, we expect to put in additional money over time for maintenance and upkeep—to keep the investment productive. Do we treat people the same way? Do we look at optimizing the multi-year returns? Do we invest in training to keep people at peak productivity?
If you look at your human capital the same as how you look at other capital, you will probably get a higher return from that human capital. Part of this is because there will be a closer link between human activity and strategic goals. Secondly, there will be a closer link between people investment and financial returns.
At first, it may sound cold to treat people like we treat a factory. However, since it often seems like the factories get greater consideration than the people, this is actually a step up. And, as we have seen, if we bring the people into a closer link with strategy, we are actually enhancing job satisfaction—giving people a greater purpose. So, in many cases, this is actually a more compassionate approach.
Saturday, March 14, 2009
I went to a science museum once that had a huge pendulum dangling from the ceiling. These are called Foucault Pendulums. The weight on the pendulum had a small point at the bottom, which slightly dragged through a sand pit. When the pendulum swung back and forth, it left a tiny etched trail in the sand ground showing the path it had taken.
With a pendulum that big, it could go back and forth for hours—seemingly forever. One would think that the pendulum would move in a straight line on its many travels back and forth. Hence, there would be only a single straight etched line in the sand.
However, this is not the case. Slowly, over time, the pendulum starts making curved etches in the sand. How can this be? It looks like the pendulum is going in a straight line. And, in fact, it is going in a straight line. So why is the sand line curved?
The problem is that the earth is rotating underneath the pendulum. The pendulum is indeed going back and forth in a straight line. It is the ground the sand is on that is moving with the rotation of the earth. This is called the Coriolis Effect.
Just as a pendulum goes back and forth, from one extreme to the next, so does public opinion and behaviors. Sometimes people as a whole are optimistic, sometimes pessimistic. Sometimes they want to spend lavishly, sometimes they prefer to be frugal.
Remember what it was like shortly after the events of 9/11 in 2001? People said they were changing their outlook and perspectives on life. They said they would be less materialistic and care more about their families and the people around them. They said they would think about the larger issues and go to church more. They talked as if this was a permanent change to their lifestyle that would last until they died.
Well, it wasn’t more than a few years later that we had one of the largest growth rates ever in the sales of premium luxury branded items. People were spending so much that we had negative savings rates. Attendance and interest in traditional churches dropped to among their lowest levels. Superficial celebrity gossip magazines and web sites were hotter than ever.
And now, after the economic meltdown, things are going back. Conspicuous consumption is out again—frugality is back. People are talking about the importance of family again.
This is just the pendulum of life going back and forth, back and forth. And this is the environment in which you must develop your strategy.
The principle here is something I call “pendulocity.” This is the combination of the words pendulum and velocity. The idea is to remember that world trends, like a pendulum, are always moving back and forth—from one extreme to another.
Sometimes, the velocity is relatively fast, as we saw in the shift from optimistic spending before 9/11 to conservative frugality after 9/11 back to optimistic spending and now again to conservative frugality. That’s quite a few swings of the pendulum in a decade.
Other times the swing is a lot slower. Back in the 1960s, the military was held in low esteem by many in the US. Soldiers coming back from Vietnam were ignored or booed. People went to great measures to avoid service, and the career path of the military was looked down upon by many.
Now, soldiers are viewed as great heroes, getting cheering crowds when they come back. Many are proud again to volunteer for military service. This swing from one extreme to the other took decades.
So not only do you have to consider the direction of trends, but also the speed.
There are three factors in particular about pendulocity that are important to strategy formulation.
1) The Pendulum is always in Motion
When a pendulum swings out to an extreme, it never stays there. It soon starts coming back. The same is true in the marketplace. Lately, I read reports of “experts” saying that the current recession is causing a “permanent” new reality. All those people trading down to shop at Wal-Mart are expected by experts to continue that behavior once things get better. Experts say the new frugality is a permanent behavior change for society.
Yeah, yeah, yeah. I heard things like that after 9/11 and at other swings of the pendulum in that direction. Guess what...it is temporary. The pendulum will swing back. These are not permanent changes to behavior.
Don’t build a strategy that only works at the extreme of the pendulum or needs the condition to be permanent, because that condition is temporary. I remember that at the peak of the low-carb diet craze, someone was building a strategy around supermarkets that only sold low-carb food. It failed miserably, because by the time the first store opened, the low carb craze was already waning. The pendulum was moving back to a different diet craze.
There may always be a niche at the extremes, but the masses move back and forth. The changes are less permanent than you think. Remember that when developing strategies.
2) Anticipate Rather than Chase
One of the problems with the low-carb supermarket strategy was that the concept was chasing a trend that had already peaked. When chasing a pendulum, it is hard to catch up, because it is always in motion. By the time you see the peak and react to it, it may be too late. The pendulum is moving to another location.
The better strategy is to look at the direction the pendulum is going before it reaches the extreme. By anticipating the flow of the pendulum, you can get out in front of the trend and be ready before the peak. Hockey player Wayne Gretzky claimed that much of his success was due to the fact that he did not skate to where the hockey puck was, but rather to where the puck was going. He anticipated the future state of the puck and went there. So should you.
This is why trend monitoring is so important. It allows you to prepare in advance by getting early warning signs.
Early in the life of Best Buy stores, Best Buy put nearly all its effort behind one or two new technologies at a time, like microwave ovens and VCRs. When a technology is new, consumers tend to behave in a particular direction. They desire a store with extra service and expertise, to help them understand the new technology. Hence, they go to specialty stores and are willing to pay a little extra for the expertise.
However, once people get comfortable with a technology, they are less interested in expertise, and more interested in low prices. They shift their purchases to a discount store.
This was a predictable pendulum swing, from a specialist like Best Buy to a discounter like Wal-Mart. After experiencing it a few times, Best Buy founder Dick Schulze said he would never again run a retail concept dependent on a single type of product, because he always go burned when the trend swung away from him.
Instead, the idea was to abandon technologies early—not try to chase every possible sale, because that would be a losing battle against the discounters. Instead, Schulze would anticipate what was the next ascending new technology innovation and become the early leader in that. Then, he was in the right location when the new technology peaked.
3) The Pendulum Curves
The pendulum appears to curve, because the conditions of the ground below it are changing. The earth is always in motion, causing the pendulum to end up in slightly different places on earth each time it goes back and forth.
The same is true of the marketplace. It is in constant flux and movement, like the rotation of the earth. Therefore, when the pendulum swings back, it will not be in exactly the same location as the last time is swung back.
Each time the consumer trends swing back, the conditions will take a slightly different form. It won’t be exactly like it was the last time. There will be some variations. Therefore, one cannot just drag out the old strategy when the conditions come back. It will need to be adjusted for the changing nuances caused by the rotation churn along the way.
Nothing stays the same forever. Conditions change back and forth, like a pendulum. To be in the right place at the right time, one needs to know where the pendulum is going and make the proper adjustments.
The world is not a still photo. It is a moving video. If you develop a strategy around a single still photo (i.e., assume everything is frozen in one location or use only one data point), you will develop the wrong strategy.
Thursday, March 12, 2009
Decades ago, I knew someone who worked in the automotive industry. The company he worked for was having a serious problem: The paint was flaking off the cars not long after purchase. His job was to fix the problem, so that the paint would no longer flake off.
The first thing he did was go to the lab where the paint’s adhesiveness was being tested. He talked to the engineers. They were puzzled, because in the lab, the paint adhered very well. It never flaked off the metal.
So my friend asked them where they got their metal samples to try the paint on. He was told they special-ordered it from an independent metal shop. He examined this special-ordered metal and could see that it was a more refined grade than what was used to build their automobiles.
So the next thing my friend did was get the engineers metal samples which came right off the assembly line. Now, they were testing the paints on the same metal that the paints would go on in real life. As a result of this change, they were able to resolve the problem.
Tests in artificial environments are not always useful in predicting outcomes in the real world. The conditions are often not similar enough to the real world. As we saw in the story, the metal bought from a specialty shop was different enough from the metal on the assembly line to make all of their testing with it useless.
Speaking of useless, there are a lot of people in the business world who characterize strategic planning as useless. I’ve been reading a number of blogs lately from others who talk about strategic planning. The impression I get is that the reputation for strategic planning being a useless waste of time comes from their personal experiences. They’ve seen strategic planning as something that:
a) Takes them away from their important work via off-site meetings; and
b) Has them work on planning exercises that either make no sense to them or seem irrelevant to what they do for a living (too abstract, impractical).
I’ll have to admit. I’ve seen things like that and there is some truth in what they say. The problem, however, is not the idea of strategic planning. The problem is how the strategic planning is practiced.
These people experienced strategic planning like that automotive paint laboratory. The laboratory was isolated from the real world and worked on metal that had no relevancy to the metal on the assembly line. The result was failure. Similarly, many off-site strategy meetings are too isolated from the real world and work on concepts having little to no relevancy concerning how things really get done. Again, the result is failure.
As strategists, we need to put real “assembly line metal” into the hands of the people designing the strategy. Then the strategy will “stick” to the business after the meeting is over, like quality paint.
The principle here has to do with relevancy. The more relevant you can make the strategic planning exercises, the more committed the people will be during the exercise, and the more buy-in there will be to the strategy once the exercise is over.
To make sure you are relevant, we will look at two ideas:
1) Use Real Metal in the Lab
Off-site or dedicated strategy meetings are often like laboratories, where you can play around with potential strategic options. Strategic planning work at these meetings tends to come in three forms:
a) Abstract/Conceptual: Mission Statements, Vision Statements, Position Papers, 2x2 Grids, Scenario Development, and so on.
b) Numeric: Mathematical Simulations, Financial Reports and Projections, Regression Analyses, Graphs, Big Fat Books of Numbers, and so on.
c) Problem Solving: Dealing with specific problems facing the company, looking for specific solutions.
All three are important. The abstract provides the context for everything you do, giving general direction as to what is right and wrong for your company. The numeric lets you see how the abstract impacts your output. The problem solving is what actually takes place to make the strategy real in the marketplace.
The problem comes in balancing the mix. The types of strategic planning complained about in what I read tend to be too focused on the first two types of work and not enough on the third.
Let’s face it. If we do our jobs right, the abstract work shouldn’t change that often. Wal-Mart has had essentially the same conceptual strategy for over thirty years—win with a low cost, low price strategy. Sure, the flavor of that strategy changes every once in awhile, but even that doesn’t change all that often. At Wal-Mart, the early flavor of that strategy revolved around distribution excellence. Then it moved to data management excellence. Now it is moving to lowering costs through sustainable environmental practices. As important as it is to get these big decisions right, once you are finished you really don’t need to spend a lot of time on reinventing them at every meeting.
The purpose of the numerical work is to make us more intelligent about what future outcomes might look like. We all know that this is imprecise work. There are too many variables outside our control. Events will continually change. Therefore, why waste time sweating out all the numeric details to deep precision at a strategy meeting? As I’ve said in a prior blogs (here, here, and here), the idea is to only get precise enough to ensure that you are generally going in the right direction. Too much precision can actually cause problems. Just look for three things: Direction (is the trend going up or down), Magnitude (is it moving a little or a lot) and Speed (is it happening quickly or slowly). That is often all the numerical analysis you need to know to make the right strategic decisions.
This leaves problem solving, for real, live problems impacting the company. These are like the real assembly line metal—a practical place to test the stickiness of your strategy. This is where most of the time should be centered. Now you may fear that if too much time at strategy meetings is on practical problems, the meetings will get too tactical and long-term issues will not get proper attention.
My response is that businesses are going to spend most of their time trying to solve problems anyway. It is the sum of all of these little practical action plans (not your words) that ends up being your real strategy in the marketplace. Therefore, if you want all of these actions to represent your strategy, what better place is there for discussing them than at a strategy meeting? This is your best shot at getting actions to match up with strategy.
Not only that, it makes the meetings more relevant to your executives and lets them see how to apply strategy to their everyday problems when the meeting is over. Hence, it’s a win-win for both of you.
Businesses can only focus on so many big projects at a time. As we saw in a prior blog, if all you can accomplish in your meeting is an agreement on which projects deserve the highest priority, you have done a lot, since you have gotten work priory linked to strategic priority.
2) Get out of the Lab
I’ve written close to 250 of these blogs on strategy. Looking back, I have only rarely ever mentioned dedicated strategic planning meetings. Why? The real work is out in the field. If you want to be seen as relevant, go out to where the work is being done and show people how strategy can help them solve their problems.
My automotive friend had another problem to solve. To test the quality of the manufactured metal, the company had to take samples from the assembly line back to the lab. This forced them to stop the assembly line for sample-taking. It was also a timely process back in the lab, causing feedback and corrections to be very slow.
My friend changed the process so that the metal could be tested right on the assembly line in nearly real time. This saved the company millions and millions of dollars.
The more real-time you can be out there in the field, the more valuable you will be, and the better the reputation will be for strategic planning. Don’t just sit in the “ivory tower” dreaming big dreams. Get your hands dirty out in the field.
Strategic planning has a bad reputation with many in the business world. It is seen as abstract and irrelevant. To ensure that strategic planning gets its proper emphasis and respect in the business, spend most of your time on proving its relevance by using current problems as the basis for strategic discussions.
Economics is called “the Dismal Science” because economists are never in agreement and are usually wrong in their forecasts. It’s just a lot of work by a lot of smart people which gets us nowhere near the truth. If strategists fail to become more relevant, they will go down the same path, becoming “the Dreaded Science.”
Wednesday, March 11, 2009
There's been lots of discussion over the years about a need to overhaul the
Unfortunately, for many poor people, they typically get into the health care system by waiting until they are already terribly ill and then going to the emergency room of a hospital. This is the most expensive way to provide health care.
So why do the poor tend to migrate to the least efficient method of providing health care? Because it is the most efficient for them. Due to their circumstances, the poor often cannot get traditional doctor's appointments. Emergency rooms, however, are required to treat them. It is the easiest way for the poor to get into the health care system. So we are rewarding bad behavior.
Worse yet, I have heard of multiple cases where poor people have intentionally committed a crime, just so they could spend time in prison, where they can have access to free prison health care. The logic is that it is better to spend a little time in prison and get free health care than to be free, but have no health care. They're just working the system to their advantage.
When it comes to strategic planning, businesses often seem to operate like the broken health care system.
For example, one key part of strategic planning is to look into the future, to find the changing trends to the landscape in which one competes. By anticipating change, one can create strategies to take advantage of that change. This is like preventative care—preventing future problems by addressing environmental concerns early, adjusting before the change has a chance to do irreparable harm.
Another key part of strategic planning has to do with regularly examining one's strengths and weaknesses—some form of a SWOT analysis. This is like early diagnosis—understanding what is wrong with a company's health while the problem is still small and manageable.
Unfortunately, businesses tend to be focused on the "Tyranny of the Immediate." The top priority seems to revolve around putting out the biggest fires consuming them at that instant. Long-term issues cannot get proper attention. This is like the inefficiencies of a hospital emergency room. We don't get around to treating anything at the company until it reaches crisis proportion.
Any good strategist will tell you that strategic planning is most effective when done like preventative health care and early diagnosis. The problems are easier to solve. The customers are more willing to cooperate. You can avoid all of the time and money needed to correct an image disaster. Yet the business system seems to favor trying to repair things after the disaster has occurred.
What is the strategist to do? Learn from how the poor use health care.
Occasionally, we have looked at the topic of "stealth strategy." This is the concept of trying to get companies to pay the proper attention to strategic issues when they really don't want to. You need to use stealth in order to sneak the agenda onto the table.
As we have discussed, businesses tend to prefer dealing with repairing emergencies rather than preventing emergencies. Business procedures tend to resemble a hospital emergency room rather than a doctor's examination room. It is not conducive to a long-term strategic agenda. So how do we get the proper attention? By using the system to our advantage.
Poor people know that even though it is not the preferred method, their best access into the health care system is through emergency room. Then, once in the system, they try to get the system to work for them. Sometimes, strategists must do the same thing—get onto the agenda by going through the emergency room (stealth strategy).
I'm not saying that we should just wait around until the company falls completely apart and then try to do strategic planning. That is irresponsible...and unnecessary. Fortunately, there almost always seems to be some sort of emergency already taking place. The tyranny of the immediate has already put something on the emergency room table. All you need to do is go along for the ride.
Once getting in through the emergency room door, you can use the opportunity to shift the discussion in a more strategic direction. There are two main approaches you can use: Dr. Doom and Dr. Diagnosis.
1. Dr. Diagnosis
If you want to solve a problem, it helps to know the cause. When a problem hits the business emergency room, strategists should be volunteering to be the ones to diagnose the cause. The more control strategists have over determining the cause, the more they can stealthily steer the discussion to deeper, more strategic causes. Deeper, more strategic causes lead to deeper, more strategic solutions.
For example, let's say that the latest sales report comes in a little sickly. A narrow diagnosis would say that the cause is a lack of sufficient sales promotions. This would lead to a small, tactical response—a new sales promotion—which may be of dubious long term benefit.
However, a strategist might diagnose this same problem as being a poor positioning with the consumer. This could lead to more strategic cures, like changing the consumer focus, repositioning the offering, changing approaches which work against the global consumer strategy, and so on.
Being a part of how the problem is framed may be one of the most valuable tasks a strategist can perform. By volunteering to be Dr. Diagnosis, you can frame the problem in a manner that forces management to apply a more strategic solution.
2 Dr. Doom
Dr. Doom uses the emergency to build a doomsday scenario. The idea is to get people to see that this is not an isolated problem. Instead, this could be the beginning of a plague.
The point here is to try to steer the discussion to a broader, more strategic perspective. Get management to see the whole forest instead of just the one tree in front of them. The broader and more encompassing you can make the disease, the broader and more encompassing will be the approach towards curing it. By getting people to think broadly, you have stealthily move the discussion to a more strategic level than it would have otherwise been.
This method is most effective when you believe that it is time for the company to undergo a major repositioning of its strategy. Management is reluctant to undergo a major change in strategy if they are comfortable where they are at. Dr. Doom makes the current situation less comfortable. If a plague is coming, it's time to move…NOW!
This is often referred to as the "burning platform." If management believes the company is sitting on a burning platform (fire is destroying the very foundation of the firm), then there is no option but to look for the best way to jump off the platform. Now the ears are ready to hear the strategic analysis that tells them which way to jump.
Some might argue that this is the approach being used by Obama. He is saying that the current situation is so bad that we need to spend money to build a whole new social agenda (broadening the discussion beyond just the economy). Whether you agree with his point of view or not, he did use the economic crisis to get the larger social agenda on the table for discussion.
The business world tends to focus on the near-term, fixing the crisis of today. Strategists tend to focus on the long-term, preventing even bigger problems tomorrow. In order to get the attention of near-term management, strategists should use the near-term problems as launching points for a long-term discussion. This is done by either:
a) Broadening the definition of the cause of today's problem to something bigger and more strategic (Dr. Diagnosis); or
b) Broadening the definition of the effect of today's problem to something bigger and more strategic (Dr. Doom).
This discussion has been about a powerful strategic tool. Be careful how you use it. If you treat every little thing as always being the plague, you become like the boy who cried "wolf!" too often. People will stop listening to you. So pick your battles carefully.
Thursday, March 5, 2009
How would you like it if your next doctor visit went like this?
Doctor: “According to this thermometer, you have a high fever. Don’t you know that high fevers are bad for you? Why would you go and get a high fever if you knew that fevers are bad?”
You: “I didn’t do it intentionally. I just woke up this morning feeling ill, so I came to you for help.”
Doctor: “Well my advice to you is to get rid of that fever. Until you get that temperature down to acceptable levels, you will continue to be sick.”
You: “But Doctor, how do I get rid of the fever?”
Doctor: “It’s your body. You figure it out.”
That kind of doctor we can do without.
As worthless as that doctor discussion was, I’ve heard discussions similar to it take place in businesses. They go something like this…
Business Advisor: “According to this financial report, you have low sales. Don’t you know that low sales are bad for profits? Why would you go and let sales deteriorate so much if you knew that low sales are bad?
CEO: “I didn’t do it intentionally. The financials just seemed to go bad quickly, so I came to you for help.”
Business Advisor: “Well, my advice to you is to increase your sales. Until you get sales back up to acceptable levels, you will continue to have problems.”
CEO: “But Advisor, how do I get sales to rise?”
Business Advisor: “It’s your company. You are the expert, the CEO. You figure it out.”
This business advisor is no more useful than that doctor.
The principle here has to do with the difference between the ability to “identify” and to “indemnify.” Both the doctor and the business advisor could identify a bad symptom (fever, low sales). Big deal. I’m pretty sure the patient knew he/she was feverish before seeing the doctor, and I’m sure the CEO already knew sales were low.
Worse yet, not only was the identification redundant, it didn’t lead to a cure. Identification of a problem is not the same thing as curing it. The doctor and the business advisor basically said “fix it yourself.” That’s pretty worthless advice.
If you want to be a useful business advisor, you need to go beyond being able to identify. You need to be able to indemnify.
According to the dictionary, indemnify has two meanings. The first has to do with insuring against future problems. The second has to do with trying to make things whole after a problem has occurred. If you want to be a useful strategic advisor, you should be providing concrete action plans in both of these areas.
1. Insuring Against Future Problems
People typically don’t just get sick. There is usually some underlying cause. Many illnesses come about due to bad eating habits and poor lifestyles. It was recently determined that even your risk of cancer increases when you overeat.
By the time the fever shows up, damage has already occurred. It would have been better if the person had been eating better, exercising more, and taking better care of themselves in advance. A good doctor would have been urging this better behavior, in order to prevent future diseases.
The same is true for business advisors. Getting companies to behave better now can help prevent a lot of bad outcomes in the future. Good eating habits are a lot like good investing habits. Are you feeding your development pipeline with lots of good projects in various stages of development? Starving the pipeline (bulimia) or stuffing all the money into your pockets as profits or bonuses (binging) will not provide long-term business health.
Eventually, the current profit machine will weaken. If there is nothing in the developmental pipeline to replace/supplement it, the company gets “sick.” A proper balanced investment diet is needed, which provides some near-term profits and some long-term investments.
Companies can also get fat and lazy, assuming that the current profit stream will go on forever—all by itself. However, as we saw in a prior blog (“Oh, My!”), all profit streams eventually go dry. We must continually exercise the company so that it can be nimble enough to react quickly to changing conditions.
Organizational structure and internal processes are fair game for strategic discussion, since unhealthy structure/processes can cause later financial diseases.
Is the business lifestyle sufficiently consumer oriented? As we saw in the last blog, ignoring the consumer eventually leads to financial illness as well.
When times were good, bad business habits were allowed to fester. But as we can see in the current poor economic environment, the weak are not surviving. It’s never too early to put in place good business behavior. Are you benchmarking to learn what healthy behavior looks like?
2. Make Things Whole After a Problem Occurs
Try as we might, we cannot prevent every disease. Business problems will occur. We need to do better than the advisor who just points it out. We need strategies that provide practical solutions to the problem.
Yes, we need our various business “thermometers,” which show us where the operational fever is. But once we identify the symptoms, we need to determine the core illness and help management provide a prescription for a cure.
In the current economic downturn, I have heard many people accurately assess the problem (“Our results are negatively impacted by the economy.”) but not everyone has a prescription to fix the problem. Abercrombie and Fitch tried to hold steady and wait out the recession. That hasn’t worked too well. There need to be action plans which try to make us whole again (or at least better than if we do nothing).
Strategists and business advisors need to get their hands dirty with the nitty gritty of the business. Lofty business missions and position statements go only so far. They are like maps, showing where you want to go. Just because you own a map of Paris does not mean you’ve successfully gotten to Paris. You still have to make the journey. After handing off the map, the strategist can’t walk away saying “job done.” There will be road blocks and detours along the way, requiring the strategist to help redraw the route.
Problems are going to happen. Course corrections will be needed to get back on track. Stay in the game, to help with the corrective action.
Although the identification of issues is important, they are worthless if no action is taken to correct or prevent the problem resulting from these issues. Strategists can help a company avoid problems in the first place by helping a firm adopt healthy business habits. Second, they need to stick around to help develop specific corrective courses when problems occur.
Many financial “thermometers” are backward-looking. They tell us how sick we were in the past. It’s not very useful to give the doctor last month’s temperature. By the time we get the data, it is too late to stop the damage. Try to find leading indicators.
Monday, March 2, 2009
Imagine, if you will, that you are walking down a city street and encounter a street vendor selling his wares. The Vendor says, “Buy my goods.”
You respond, “Why should I buy it?” The Vendor replies, “So that I can make my sales quota.”
Confused, you ask the Vendor, “But what does your product do?” The Vendor replies, “It provides income to myself and my family when I sell it to people like you.”
A bit baffled by his answers, you ask yet another question, “Is it better than the competition?” The Vendor replies, “It is for me, because I don’t make any income off the competition.”
At this point, you are getting rather angry and perturbed by the vendor’s selfish responses, so you ask one final question, “What’s in it for me?” The Vendor replies, “The satisfaction in knowing that you helped me earn a living.”
At this point, you walk away without making a purchase.
I doubt that a vendor like the one in the story sells many goods. There is nothing in his sales pitch oriented towards customer benefits. All he sees are his own personal benefits. Rather than sounding like a salesman, he sounds like a beggar asking for money.
Any business person would know better than to act like this, right? Not so fast. Although perhaps not as blunt as this salesman, it seems that many businesses these days are so pre-occupied with their internal issues that attention to the customer’s point of view is not getting the attention it deserves.
The principle here has to do with orientation. A lot of businesses claim to be consumer oriented, but if you look at their actions, it seems like the consumer was forgotten. The current bleak economic situation seems to be making the problem worse, as fear of bankruptcy crowds out thoughts of consumer orientation.
Look at the auto industry. All they seem to be talking about are internal issues—problems with the unions, problems with the dealer networks, problems with credit lenders, problems with regulations, and so on. To the consumer, this is just a lot of “blah, blah, blah.” The message consumers hear seems to be, “Buy from me so that I don’t go bankrupt.” …Sounds a lot like that street vendor.
The customers don’t want to hear about your problems. They just want a good car at a good price that meets their needs. If you cannot do that, then you must be a bad manager, and why should the consumers support that?
The focus on the compensation at financial institutions is sending a similarly poor message. They also sound like our street vendor, with all the talk about how much income and bonuses they make off our transactions, rather than what the customer gets. In fact, it was the ridiculous way in which compensation was given to mortgage firms that caused the housing crisis in the first place. The orientation was on how to get my personal reward for signing up another bad mortgage (internal orientation), rather than providing good financing for the consumer (external).
Circuit City decided that sales help was an excessive cost (an internal focus), so they eliminated their best sales people. Without that consumer-oriented selling force, sales plummeted and now Circuit City is bankrupt, never able to recover.
An internal orientation may look good for a short time. The mortgage firms had a few great years. Circuit City got rid of a lot of costs. However, the long-term ramifications were devastating.
Never take the customer for granted. Try to win over their business every day. And if you screw the customer now, they WILL screw with you later.
Consumer orientation is essential for long-term health. When putting together a consumer-oriented strategy, three factors should be kept in mind.
1) What Problem Am I Solving?
Consumers purchase things in order to solve problems. And the problem they are trying to solve is not how to get you a big fat bonus. Speak in the language (the context) of the customer, and show them how a purchase will solve a pressing problem they are trying to deal with. In these tight economic times, discretionary spending is shrinking dramatically. If you want to sell in this environment, show how your purchase addresses an essential need.
2) Why is my Solution Superior?
Being able to solve a problem is good. Being the best way to solve the problem (at least for some segment of the population) is even better. If you want to win, your strategy must create a point of superiority. I am shocked at how many times I’ve asked a top executive the question “why would a consumer prefer your brand over the competition” and gotten a blank stare in response. This is a question for which every executive should have a rapid and plausible answer.
If you cannot articulate a reason why consumers should prefer you over the competition (other than the silly answer from our street vendor), then don’t expect the consumer to be able to figure it out. Nobody has a monopoly. There are always alternatives. Put into your strategy a believable and defendable reason why you are the best alternative.
3) Why Should we Continue to do Business Together?
Questions 1 & 2 tend to be more rational. However, there is also an emotional element to choice. Are you creating an emotional bond that makes the customer want to keep coming back?
There are lots of ways to sell someone a product or service that will turn them off from ever wanting to deal with you again. Avoid these and build a strategy around emotional bonding.
At the end of the day, businesses succeed by selling something to someone at a profit. As a result, the consumer is a critical target to orient your strategy around. If all you do is perfect internal procedures or maximize internal rewards, you may cruise along fine for awhile, but eventually the customer will figure out that they are not the focus and they will go somewhere else.
Have you ever noticed how quickly after it starts raining that the streets are filled with vendors selling umbrellas? Now that’s consumer orientation in action, reacting quickly to changing consumer needs.