Thursday, March 5, 2009

Strategic Planning Analogy #244: Identify Vs. Indemnify

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.

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