Friday, December 24, 2010

Ponder This

When people ask me what my hobby is, I usually tell them that my hobby is to ponder things. I like to ponder all kinds of things.

I think that is a good quality for strategists to have--the desire to ponder things. Pondering means taking the time to fully think things through--to even let your mind wander a bit.

Think of it as mental exercise...stretching the brain.

If all you do is run from meeting to meeting, with your eyes glued to a smartphone all the time, you are letting that pondering portion of the brain atrophy. Ignore the rush of the daily grind for awhile; relax and ponder.

The great "Eureka!" moments of strategic discovery rarely come unless pondering has first taken place. I spoke in more detail on this concept here.

This is why I was encouraged by the comment to the prior blog where Ali Anani suggested I add a 4th "P" to my 3P approach to strategy, a P for "Pondering."

Since this is Christmas time, I am reminded of another time of pondering. It says in the Bible that after Mary gave birth to Jesus, she pondered over what had just happened. During this Christmas season, that is indeed something worthy of pondering.

Enjoy the season and happy pondering!

Tuesday, December 21, 2010

Strategic Planning Analogy #369: Or Vs. And

I recently returned from a vacation to Europe. On the plane ride across the Atlantic Ocean, I discovered that flight attendants are experts in the language of “or”. For the in-flight meal, I had the choice of meat OR pasta. For a snack, I was offered peanuts OR a cookie. For a beverage, I was offered soda Or juice Or water. For reading, I was offered either the USA Today OR the Financial Times.

Whatever became of the word “and”? Why couldn’t I have a cookie AND a peanut? Why couldn’t I have water AND a soda? Why couldn’t I read two newspapers?

It reminds me of the lunch I had yesterday. Before I could fully finish the drink in front of me, the server place before me another glass of the same drink—twice—without even asking me. At these types of restaurants, be careful what you choose for your first drink, because the servers will try to make that your only drink choice for the entire meal. The idea of variety never crosses their mind. What if I want to try one thing, AND then later want to try something else? No, those servers don’t understand the word “and”, either.

It seams that servers (on airlines and otherwise) like treating me as being one dimensional. I’m only allowed to like one thing. That seems a bit narrow-minded to me.

Sometimes, I think many strategic planners can become equally narrow-minded. As we will discuss later, there are several different schools of thought as to how to approach strategy. Individual strategists tend to gravitate towards one of these schools of thought. This then becomes the singular way they treat all strategic problems.

Just as those servers want me to drink the same type of drink all day, these strategists want me to use the same approach to all strategic issues. When you read the writings of the popular strategic writers, the approach seems to be: “choose my school of thought, not the other.” In other words, it is a land of “or” (one school of thought or the other), not a land of “and” (accepting and using multiple schools of thought).

Just as it makes sense to me that I might want to read both the USA Today AND the Financial Times, it makes sense to me that I might want to use the strategic tools found in one school of thought AND another school of thought.

The principle here is that there are a wide variety of strategic issues in business. If you want to be successful in solving this vast array of problems, it helps if you draw upon a variety of strategic resources.

For example, sometimes a company may be sub-optimizing because it is poorly positioned. Other times, a company may have a great position but cannot execute it well. Or maybe the company is executing well, but is executing the wrong thing. Since these are all distinctively different problems, they require distinctively different approaches to fix them. If you limit yourself to only one school of thought about strategy, you may be applying the wrong solution to that particular problem.

The Right to Win
I was reminded about this in a recent article in Strategy+Business, the strategy publication of Booz & Co. The article, called “The Right To Win”, categorized strategic thinking into four different schools of thought.

One is the “Position” school of thought. The idea here is that winning companies create and hold a distinctive position in the marketplace. This school of thought includes the work of Michael Porter and the thinking behind the Blue Ocean Strategy.

Another is the “Concentration” school of thought. Here, winning is supposed to come from focusing your effort on your core competencies. Key books for this school of thought are “Competing for the Future” by Hamel & Prahalad and “Profit From the Core” by Chris Zook.

A third school of thought is the “Execution” approach. The idea here is that winning companies work on aligning people and processes for operational excellence. This includes the quality movement proposed by W. Edwards Deming, the Reengineering movement of the 1990s, and the book “Execution” by Charan and Bossidy.

The fourth school of thought was called “Adaption.” The idea here is that the environment changes very quickly, so successful companies need to excel at quickly adapting to the change via creative experimentation. This is the approach recommended by Henry Mintzberg and was a key part of the book “In Search of Excellence.”

The article pointed out the pros and cons to each of these schools of thought. It showed how each approach was useful in some situations, but fairly worthless in others. And that is the key point. If you limit yourself to only one school of thought, you are only prepared to solve a subset of the strategic issues you may face. You will be fairly worthless in solving the others.

If you want to be prepared to solve all the strategic issues you may encounter, you cannot take an “or” approach. You need to take an “and” approach and embrace multiple approaches.

Otherwise, you will be like the old saying which says that, to a hammer, every problem looks like a nail (even if it isn’t really a nail). Just as a good carpenter has a variety of tools in his toolkit to handle a variety of carpentry tasks, a good strategist needs to put a variety of strategic schools of thought into the strategy toolkit. I talked about this idea in greater detail here.

The Three P’s
That is why I use an approach to strategy which I call the 3 P’s. The three P’s stand for Positioning, Pursuit, and Productivity. The idea here is that a successful company needs to do well in all of three of these areas.

With a three legged stool, the stool is only useful when all three legs are functioning well. If any one leg is missing, then the entire stool is worthless. Similarly, successful companies need to be supported by three strategic legs:

A) A strong/unique Position (a place where you can win);

B) An aggressive Pursuit of excellence in the key elements of that position (which allows you to own the position and adapt faster than anyone else); and

C) An efficient and effective business model, so that there is enough Productivity to allow for optimum profits and cash flow.

My approach is simple. First do a systematic diagnostic of the situation. From this analysis, determine which of the three legs of the strategic stool is most in need of attention (Position, Pursuit or Productivity). Then, use the tools available within that area to fix the particular problem at hand.

Although Positioning, Pursuit and Productivity do not line up exactly with the four schools of thought in that article, you should be able to see how the tools offered in those four schools of thought can be useful in different ways to each of the three legs. All have something to offer at different times, depending upon which leg of the stool is broken.

That is why I shy away from the narrow-minded view that one should lock onto only one school of thought (just as I wouldn’t want to lock into only one beverage for the rest of my life). For example, if you only lock in on the Positioning school of thought, you will only be able to fix one leg of the stool—Positioning. You will be ill-equipped to handle problems with the other two legs (Pursuit and Productivity).

If you want to learn more about the 3 P’s, check out my blogs which feature Positioning, Pursuit and Productivity in the links section.

Not all strategic problems have the same root cause. Different strategic tools are needed depending upon what is the nature of the problem. Therefore, do not limit your strategic toolbox to only one strategy school of thought.

While I was in Europe, I tried one of the local beverages, called Kofola. Kofola was the communist alternative to Coke at a time when Coke was unavailable in communist Europe. It was not the drink for me (it tasted to me like motor oil). It was a good thing the server let me change my beverage choice. Just as Kofola was not appropriate for my taste needs, each strategic school of thought alone will not be appropriate for all of your needs. At certain times, you will need to change approaches (just as I changed my beverage to something other than Kofola).

Friday, December 17, 2010

Change is not necessary (?)

I came across a great quote today by W. Edwards Deming. You may recall that he was the “Quality” guru of the 20th Century. Deming believed that if you continually measured and improved your processes, you would not only achieve higher quality, but you would also achieve higher productivity.

The Deming quote is this:

“It is not necessary to change. Survival is not mandatory.”

I love this quote because it touches on two key lessons we need to learn about strategy.

Lesson #1: Success Does Not Last Into Perpetuity
It is crucial to remember that success is not guaranteed over time. Just because a company is successful today does not mean that it will be successful tomorrow.

Over time, things change. Technology changes, consumer desires change, consumer expectations change, the competitive landscape changes, new product substitutions are created, your product’s place on the product lifecycle changes, your place in the economic cycle changes, your employee mix changes, processes become obsolete, and so on.

The point is that with all of that change going on (and most say it is even accelerating), it is extremely unlikely that the winning strategy before that change will be identical to the winning strategy needed after all that change.

That is why my mantra is to continually tell people that “ALL STRATEGIC INITIATIVES EVENTUALLY FAIL.” Even if a strategic initiative is wildly successful today, there is no reason to expect that success to last forever. It likely won’t even last as long as your job tenure.

Lots of companies who used to be on top of the world and swimming in success are now struggling to survive. Think Netscape, AOL, Kodak, A&P, Blockbuster, Sears, etc. And the business graveyards are full of companies who no longer exist but used to be highly successful.

Don’t let current successes lull you into thinking that all is well. As Deming put it, “survival is not mandatory.” Unless you proactively work and adapt to remain relevant in the marketplace, your success will melt away. There’s even a good chance that your firm will no longer survive.

For more on this topic, read some of my earlier blogs: here and here.

Lesson #2: Strategic Planning Requires Self-Starters
Since all strategic initiatives eventually fail, successful firms need to adapt and change in order to stay relevant. Change is one of the key elements of strategy—discovering what change is needed and how to make that change a reality.

Unfortunately, the mandate for change is often just a whisper in the high levels of a business. It is drowned out by the shouts of the crisis of the day. I have often referred to this as the “Tyranny of the Immediate.” The pressures of keeping the status flow working suck up all the time and energy, leaving little for thinking about change and the future.

That is why I like the first part of the Deming quote: “It is not necessary to change.” There are no shouts demanding strategic change. There are no legal mandates forcing strategic change. Most of your fellow executives are not demanding long-term strategic change.

Instead, the opposite tends to be the norm. The focus is on getting the status quo of the immediate done. Thinking about strategic change gets in the way of meeting today’s goals.

If you do not force the issue of change, it will not be missed by those fighting the Tyranny of the Immediate. In fact, they will be grateful. That is, until all that success from the status quo eventually turns to failure.

As a result, strategists cannot wait until the company is begging for change. This almost never happens, because daily pressures keep us from realizing the necessity for change. By the time the company wakes up to the need for change, it is usually too late…the world has already passed you by and it will be nearly impossible to catch back up.

Therefore, strategists need to be self-starters—people who fight for change even when nobody is asking for it. You are not doing your company any favors if you wait until they beg for change. For more on this topic check out my blogs on the subject of the Tyranny of the Immediate.

It is not necessary to change (you have to be a proactive self-starter and force change onto the agenda). Survival is not mandatory (if you do not force the change, your strategy will eventually fail).

Wednesday, December 15, 2010

Strategic Planning Analogy #368: Managing Losses

Once upon a time, there was a man named Bill who liked to bet on horse races. After years of experimenting on ways to beat the odds at the race track, Bill finally found a way to assure that he would always make the winning bet.

His solution? Place a bet on every horse in every race. That way, no matter which horse won the race, Bill was 100% guaranteed to have placed a bet on it.

There was a slight drawback to this system, however. In addition to a 100% guarantee that he would have a bet on every horse that won, this system had a 100% guarantee that Bill would have a bet on every horse which lost. As it turns out, the losses on the losing bets were greater than the winnings on the winning bets. The system left Bill bankrupt.

Bill loved to boast that his system always picked the winners, but the boasts didn’t impress his friends after they learned this system was also path to bankruptcy.

In horse racing, only a small handful of horses win on any given day (only one per race). The vast majority of the horses end up being losers. Therefore, if you bet on every horse, you will end up losing your money, even though a few of the bets will be for winners.

Although Bill’s system is obviously a foolish way to bet on horses, it is not that different from the way many companies bet on their future. Many companies like to make lots of bets on lots of future growth projects, be that in R&D research, new product offerings, acquisitions, brand extensions, and other such investments.

And just as most horses fail to win their races, most new products, acquisitions, brand extensions, and R&D research fail to make a profitable return on investment. Sure, a few of the bets in these areas will produce winners. However, the losses on all the other bad investments can be so high that they wipe out the profits on the few winners. Worse yet, because so much money was poured into the losing bets, there is not enough money left to fully optimize the potential of the few winners. The potential winners become starved for lack of resources.

Yes, if a company bets on everything, they can boast like Bill that they have created some winners. However, if all the bad bets destroy the company (or destroy the ability to optimize the potential on the winners), then it is a rather hollow boast.

The principle here is that since most of a business’ strategic activities deal with failure, the strategic process should have a rigorous way to minimize the negative impact of failure.

Living With Failure
What do I mean when I say “most of a business’ strategic activities deal with failure”? Well, strategies are typically about finding and implementing the changes needed to reach a larger and more prosperous future. Many of the tactics used to create that change are associated with activities like those mentioned earlier:

a) Mergers and Acquisitions
b) Research and Development
c) New Product Introductions
c) Brand Extensions
d) Reaching out to New Customer Bases
e) Innovation Activities

Lots of studies have been done which measure the failure rates for these types of activities. Depending upon the research, the failure rates tend to be somewhere in the 75% to 95% range. In other words, the key tactics used in strategy usually fail.

The strategic path is a path dominated by opportunities to create negative returns on investment. It naturally comes with the territory, since most opportunities fail. The only way to avoid running into failures is by deciding to do nothing. But just as betting on every horse leads to destruction, betting on no horses will not lead to success, either. So we need to get comfortable living in a world where we use tools which usually fail.

Therefore, the strategic process needs to find a way to minimize the impact of inevitable failure while a company tries to find and nurture the few opportunities out there for success.

Learning From Research
Fortunately, recent research lends some insight into how to do this. My good friends at the Corporate Executive Board have been studying the characteristics of “elite” companies. These are defined as companies which performed above their industry median in both EBITDA margin and growth rates between 1995 and 2008. In other words, these companies successfully managed both the top line and the bottom line over an extended period of time and different parts of an economic cycle.

Starting with a list of more than 1,500 firms, they determined that there were 143 elite companies (less than 10% of the total). The Corporate Executive Board discovered a lot about these elite firms—more than we can comment on here. There was a good summary of some of their findings recently at Right now, we will focus on what they learned about how to succeed while living in a world of failure.

In general, we can learn two things.

1) Time Your Bets
The return on investment is a ratio. The return is the numerator and the denominator is the investment. Elite companies have found a way to optimize the numerator and the denominator by timing their activities relative to the business cycle.

The timing is as follows—buy at the bottom of the cycle (when the denominator is lowest) and sell at the top of the cycle (when the numerator is highest). This process will get you reasonable returns on even weak investment opportunities. And the losers will be less of a loss.

Yes, I know it can sound like a cliché—buy low and sell high—but elite companies actively monitor business cycles and proactively try to make the cliché a reality. Their strategies take into account the context of where they are in the business cycle. They boldly buy when the rest of the world is selling and sell when the rest of the world is buying.

This process has the added benefit of improving cash flow. Buy selling high, the elite firms have more money to invest when prices are low. You can afford the risk of a few more failures when flush with cash and buying when the cost is the lowest.

2) Exit Quickly
Instead of being like Bill in the story who bet all the time on every horse, elite companies are also quick to cash out when failure appears inevitable. Patient money is used for the potential winners, but the funding quickly stops for the losers.

This is done in two ways. First, elite companies set up specific, measurable criteria for success prior to making an investment (early warning signs). If the criteria are not met in these early stages, funding stops.

Second, these companies actively monitor investment performance throughout the entire lifecycle of the investment. This has two benefits. On one hand, it lets the elite firm quickly know when an investment is turning into a failure (so that investment can stop). On the other hand, it lets the company learn what works and what doesn’t work, so that they can make more intelligent investments in the future (ones that are less likely to fail).

Since most strategic activities fail, managing failure is the key to strategic success. The idea is not to avoid failure completely, but to make sure the impact of failure is minimal. This can be done by building strategies around business lifecycles and by actively monitoring investment performance against predetermined criteria throughout the entire investment lifecycle.

Those who bet on horse races do not have the ability to cancel their bet halfway through the race, when they can obviously see the mistake in their original bet. Businesses, however, can back off from their bets if they see failure in the early running of the investment. When things look bad, cut your losses early.

Monday, December 6, 2010

Strategic Planning Analogy #367: Rules vs. Execution

The problem with sports is usually not the complexity of the rules. Usually, the basic rules are pretty simple. In golf, the basic rule is just to “hit a ball until you get it in the hole.” In soccer, the goal is to “kick a ball into a net.”

Unfortunately, simplicity of rules does not mean that the game is simple to play. I know a lot of frustrated golfers who get upset because they find it so difficult to get that little ball into that little hole.

Kicking a ball into a net sounds easy, but if it were easy, why do so many soccer games have such low scores? Apparently, just because you know where the net is and how to kick a ball does not mean that you will be able to kick that ball into that net.

I used to try to play billiards (pool). Before taking a shot, I would carefully calculate out what I wanted to accomplish. I’d work out the math, calculate the angles, and estimate the physics of what would happen when the billiard balls hit each other. After I got it all figured out, I would take the cue stick and hit the cue ball. Unfortunately, the ball never followed the trajectory I had calculated in my head. Because of my incompetency in hitting the ball, it would go a different direction at a different speed. All of those calculations were worthless when it came time to execute them.

I soon came to the conclusion I was wasting my time doing all of those calculations, since I did not have the ability to hit the ball in the direction my calculations desired. So now, I just try to hit the billiard ball very hard and hope it bounces around enough to make something happen.

I guess that’s why there are a lot more seats in a sports arena for spectators than there are for the athletes. Pretty much everyone in the arena knows the basic rules of the game being played. However, only a few of them are able execute the rules in a productive manner.

Businesses have basic rules, just like sports. For example, I’ve spent most of my life working in retail businesses. The basic rules for the business of retailing are pretty simple:

1) Buy goods at a low wholesale price.
2) Resell those goods to customers at a higher retail price.
3) Make sure the difference between your buying price and your selling price is large enough to more than cover all of your costs to sell those goods.

That sounds pretty easy, doesn’t it? However, every year thousands of retail stores close because they were not able to execute these simple rules. Just as in sports, merely knowing the rules does not mean that you will be successful in executing them.
Even if you master the business rules at a more sophisticated level, like I tried to do with billiards, it doesn’t necessarily mean that you can execute those rules at a more sophisticated level. It takes something more.

The principle here is that the knowing the rules is not the same as winning the game. Just as successful athletes bring more to the game than a knowledge of the rules, successful business people need to bring more to their company than a knowledge of the rules of business.

My Finance Friend
I used to work with someone in the finance department of a retail business. He was frustrated because one of the retail divisions at this company kept losing money. He kept yelling things something like “Why can’t these idiots just buy the right goods?” or “This division would make lots of money if those idiots would just sell all the items they bought” or “If these idiots would just quit having so many markdowns in price, they would stop losing money.”

This finance person was pretty smug about his comments. He thought he was superior to those people running the business, because he could see how they were not executing the basic rules of retailing. His idea of fixing the businesses was simple…just tell the people running it to follow the simple rules.

Of course, that would be like a spectator at a sporting event thinking he was superior to the athlete playing the game, because the spectator could see the violations of the basic rules. Yelling at a golfer “You should have hit that ball more accurately!” really is no help at all to the golfer. He knows that. He isn’t intentionally trying to be inaccurate.

Yelling at a soccer player, “If you hadn’t kicked the ball wide to the right, it would have gone into the net!” is equally worthless. The athlete knows the rules. He’s trying to get the ball into the net.

No, the spectator is not superior just because he or she can see the missteps of the athlete. If you put that spectator out on the playing field, I’m sure they would make even more mistakes than the athlete they are criticizing. Their comments are useless for helping win the game.

This is equally true for my finance friend. His comments were worthless to the folks running the retail division. They knew the rules and were trying to execute them. And I’m pretty sure my finance friend wouldn’t have done much better at execution if he were running the division.

What my finance friend did is an easy trap for strategists to fall into. Strategists tend to watch the operation of a business from a distance. They can see the missteps. It is easy then for a strategist to feel smug about themselves, because they see where the missteps are. It is then easy for them to tell everyone that the strategy is failing because of lack of proper execution. It is easy advice, but it is also worthless advice. And you won’t get much cooperation from the business division if all you do is criticize them.

The goal of a strategist should not be to merely point out mistakes. The goal is to help companies find a way to win.

Coaches don’t just tell their teams that they are lousy. No, they help find ways to make the team better. That is similar to what the role of a strategist should be. While everyone else is busy trying to execute, strategists have the luxury of observation and the time to ponder what is happening. This can be used to add value to the division by finding alternative approaches which will improve success.

Going Beyond Criticism
Rather than criticizing mistakes, a strategist should be helping to eliminate mistakes. There are many ways to do this.

First, one can work on strategies to fix the cause of errors. A golfer’s accuracy may be off because of a flaw in the swing. If you can identify the flaw and help the golfer find a way to correct that swing, then you have helped the golfer. Similarly, if you can identify the root cause of a business execution flaw and help find a path to correct that flaw, you have helped the business. To do this, a strategist may need to collect and study lots of data to find the behavior patterns which lead to errors. Or perhaps benchmarking would help find the cause of errors and how others fixed it.

Second, one can change the strategy so that it works with, rather than against, natural strengths. For example, a small, thin athlete shouldn’t be trying to compete as a sumo wrestler. That athlete would be better off changing to a sport better suited to his physiology. Perhaps you need to redirect the division to a new competitive space or a new positioning which is better suited to what you can do well. This involves finding your strategic fit.

Third, perhaps failure is occurring because you are missing a key element of success. For example, even if a team has great offense, it will still fail if it has no defense. It needs to build up the defense it is missing. Perhaps your company is missing something, like a key technology, or access to markets, or a particular expertise. You can help by identifying what is missing and helping to find a way to obtain it, either through acquisitions, or targeted hiring, or licensing of patents, or training, etc.

If you can help in these ways, you have really made a contribution. Now that would be useful strategic advice.

The goal of a strategist should not be mere criticism of execution. Yelling at people and telling them they messed up won’t fix the problem, and it will limit the cooperation you get form the people whom you need to execute the strategy. Instead, work with them to find ways to become better, by either improving performance or by changing paths to something where you can naturally perform better.

At a sporting event, it is the people on the field (the players and coaches) who earn a living, not the spectators. If you want to earn a living in the business field, be more than just a yelling spectator.

Wednesday, December 1, 2010

Strategic Planning Analogy #366: Stats vs. Wins

I was reading a story recently about a quarterback in the US National Football League. It seems he had gotten very concerned about his individual stats when playing the game of football. Quarterback stats include things like percentage of completed passes (which you want to be high) and number of intercepted passes (which you want to be low).

This quarterback discovered that his desire to have great stats was affecting the way he was playing the game of football. For example, if you want a high % of completions and a low % of interceptions, you stop taking risks on where you throw the ball. Instead, you only throw short passes to receivers who are not being well defended.

Unfortunately, there is a negative consequence to this approach. First, if you only throw short passes, you reduce your ability to advance enough yards to score touchdowns. Second, there are rarely opportunities to throw a ball to an undefended receiver, because the opposition usually has a good defense. Therefore, if a quarterback waits until he finds an undefended receiver before throwing the ball, he will end up waiting too long. Eventually a defender will get to the quarterback and tackle him for a loss.

After realizing that his quest for great stats was hurting the team’s performance, the quarterback changed his ways. He started to play to win rather than play to get great stats. The result? His stats got a little bit worse. His completion percentage went down a little and his interceptions went up a little (although in both cases, the stats were still pretty good). However, at the same time, the passes he did complete went a lot further and he wasn’t tackled for a loss as often. The net outcome was that his new approach resulted in scoring more points and winning more games. And at the end of the day, he was happier winning games rather than having great stats.

Like sports, businesses have a lot of performance stats to look at. Business stats often tend to be financial in nature, including things like earnings per share, return on investment, sales growth, and the like. Other stats include things like the percent of customer sales calls which result in a sale, or the number of defects.

Too much of a focus on these stats can cause the same problems for businesses that the focus on stats had for that quarterback. Often times, the best way to achieve these business stats is by taking fewer risks or delaying decisive action. The result may be great stats to put in your next quarterly report, but you could be placing your company in a position to lose your ability to compete and win over the longer term.

Strategic planning is about finding ways to win in the marketplace. Don’t let the quest for better stats get in the way of winning.

The principle here is that the goal of businesses should be to win long-term in the marketplace rather than to achieve the highest short-term stats. Yes, there is usually a correlation between performance on stats and winning. For example, if all of your financial stats are horrible, your company is probably on a path to failure. And successful companies usually have pretty good stats.

However, there is usually a point at which a quest for further improvement of stats can be counter-productive. The reason is similar to the situation with the quarterback. The only way to ensure that bad performance NEVER occurs is to stop performing. And, as we all know, without taking risks, you will never achieve great rewards. We can see that in the examples below.

1. The Quest for Great Stats Can Lead to Behaviors which Hurt the Business
Let’s say you want the highest possible return on investment. One way to do that is by eliminating most of your investments. In the short term, earnings will continue to come in. And since your investments have dropped to next to nothing, your return on investment stats will look great. However, if you stop investing in the future, eventually your source of earnings will dry up as your old business model becomes obsolete and non-competitive. In the long run, you will have nothing.

Eliminating investments to achieve high returns on investment is like a quarterback trying to avoid dropped passes by never throwing the ball. The stat may look good, but you won’t win any games that way.

Instead, it is better to make a number of investments into your future, even if it drops your return on investment a little, because it will increase the likelihood of keeping your company relevant and successful long-term.

Another stat that can be counter-productive if taken too far is sales growth. There are many ways in which a quest for the highest possible sales can hurt a business. First, not all sales are profitable sales. Taking on too much unprofitable business can ruin a company. Second, taking on too much sales can clog up your operations and result in disappointing your core customers, who then take their business elsewhere. Studies have shown that in most cases, the vast majority of a business’ profits come from a small minority of their customers. If going after more business hurts your ability to serve that more profitable core, you can be far worse off, even if sales are much higher.

Third, if your business success is based on owning a niche, you may ruin that position if you try to stretch that appeal too far. Just think of all the high-end luxury brands which chased after mainstream market sales, which ruined the cache of their high-end prestige and eventually destroyed the brand.

Fourth, the attempt to increase sales appeal beyond a certain level can cause a company to try to make a product meet too many needs. As a result, instead of solidly owning one position in the marketplace, the product now confuses the customer and does not really stand for anything anymore. In other words, by attempting to not alienate anyone, the product now also doesn’t excite anyone. Most business successes happen at the performance extremes, not in the murky middle. Yes, extreme positions place a limit on one’s appeal, but those niches can be great places to be if you want to win long-term.

The goal to completely eliminate defects can also be counter-productive. A lot of the methods used to eliminate defects work by institutionalizing processes. You find a way to do things well and never deviate. Of course, when such a process is institutionalized, innovation is also eliminated. How can you get better than the status quo if you are prevented doing things differently from the status quo? Adding new products (or product improvements) will, by nature, make it harder to be defect-free, since there is a learning curve in innovation. If your product mix becomes obsolete due to a lack of innovation, it no longer matters that those obsolete products have 0% defects.

We can go on an on, but I think you get the idea. An extreme focus on statistical perfection can be counter-productive to winning.

2. Be Careful When Choosing What You Measure and What You Reward.
So how do we prevent this type of bad behavior? Well, first look at which stats are currently most measured and most talked about at your company. Then ask yourself these questions:

a) Are these the stats most associated with winning?
b) At what point does additional focus on these stats become counter-productive?
c) Are we moving into that counter-productive level of emphasis?

Then do the same thing for the way in which you reward people. This includes more than just bonuses. In addition, look at what types of performance leads to promotions and recognition. Are you rewarding people for counter-productive behavior. Have you set the goals so high that they can only be achieved by hurting one’s ability to win long term? If so, change the measurements.

3. Make Winning the Top Priority
Finally, if you want to win, you have to make winning a greater priority than just having great stats. As the quarterback learned, he won more games when he made winning a priority over having the best individual stats.

Often times, we like to measure individuals on their individual performance. But in the end, we don’t want people so focused on themselves that they forget to help the entire team win. How much of an individual’s rewards at your firm are based on team effort or on total company success? If none of their reward depends on the whole company winning, then why should you expect them to help you win?

Strategic planning’s goal is to help a company win the long-term battle in the marketplace. Unfortunately, the ability to win long-term is often prevented due to placing too much emphasis on perfecting individual stats. Too much emphasis on stats can lead to actions which prevent doing something wrong, and unfortunately also prevent doing something exciting. Winning takes risks. Don’t let the stats eliminate your risks.

Brett Favre is one of the most successful quarterbacks to have played the game of American football. In his prime, he helped his teams become winners. He helped teams win by taking bold actions. As a result of these bold actions, Brett Favre also holds the record for having thrown the most interceptions. Although that is a terrible stat to own, it is a natural consequence of the type of bold actions he needed to win games. If Brett Favre had focused on eliminating those interceptions, he would not have taken those bold moves needed to win games. Don’t let a quest for statistical perfection eliminate the boldness you need to win.

Monday, November 22, 2010

Strategic Planning Analogy #365: Strategy by Appearance

In the world of fast-food restaurants, Wendy’s wants to be known as the place for fresh, healthy, natural food. They refer to that as “real food.” To quote Ken Calwell, Chief Marketing Officer of Wendy’s, "We want every ingredient to be a simple ingredient, to be one you can pronounce and one your grandmother would recognize in her pantry.”

To build upon this image, Wendy’s recently reformulated its french fries, the first reformulation in 41 years. The new fries are called “”Natural Cut French Fries with Sea Salt.” The two key elements of the reformation were as follows:

1) Replace regular Rock Salt with Sea Salt.

2) Leave the Potato Skin on the french fry.

The idea was that sea salt is associated with healthiness more than regular rock salt. In addition, leaving the skin on shows that these are real pieces of potato, not a processed potato slurry. In combination, this gives the impression that the new fries are a healthier, fresher, more natural food.

But here is what Wendy’s is not advertising. Salt has sodium, whether it is sea salt or regular salt. And the new fries have more sodium than the old fries. One report I saw said the sodium for a regular serving went up from 350 to 370 milligrams of sodium. Another report I saw said the new fries have 500 milligrams of sodium. Either way, it is more sodium, and that is not good for you.

In addition, the new fries from Wendy’s have more calories per serving than the ones they are replacing.

No wonder tests showed that people liked the taste more—there was more sodium and more calories. Yet the new formula gives the impression that the new fries are healthier. That’s a pretty neat trick.

Great strategies own a great position in the marketplace. But what does it mean to “own” a position? Positions aren’t owned just because the facts are on your side. Look at Wendy’s. Their new french fries really aren’t all that fresh and healthy. The facts say they are increasing the sodium and the calories. Yet Wendy’s is building a stronger reputation for its fresh and healthy position with these new fries.

No, positions aren’t owned based on published facts. They are owned based on consumer impression. Or, to quote Jack Trout and Al Ries, positions are won in the mind of the consumer. And the consumer makes up his or her mind based on a variety of inputs—and not all of the inputs agree with the facts (is sea salt sodium really better than rock salt sodium?).

So, just as Wendy’s marketing success is based a lot on impression (rather than fact), so is strategic success. Just because you have all the facts on your side does not mean that your strategy will succeed.

Instead, strategies win when they cause behavior to change in your favor. And you will not create a change in a person’s behavior until you first change how a person thinks about that situation. After all, if my impression towards your brand hasn’t changed, then why should you expect me to change my actions towards your brand? Therefore, strategies need act like Wendy’s and incorporate strong impression triggers (like sea salt and skin-on-potatoes) to help increase the desired change in impression.

The principle here is two-fold. First, strategic management is really the management of mental impressions of all the key stakeholders. For example, if you want competitors to back away, then give them the mental impression that attacking you would be a fool’s errand. If you want consumers to prefer you, then give them the mental impression that you are the best at meeting their needs. If you want to get adequate financing for your strategy, give the lenders the impression that you are a great credit risk. And so on…

The second principle is that effective management of mental impressions requires more than just facts. Minds are influenced in a variety of ways. For example, there is a reason why lawyers and bankers tend to have elaborate offices. It is because banking and legal competency is difficult to see at first glance. Therefore, elaborate offices act as a visual substitute—a quick way to create a mental impression of competency and expertise (They must be competent, because how else could they afford these elaborate offices?). The elaborate office is their version of the sea salt.

Therefore, when creating your strategy, you need to consider two things. First, what are the impressions I want in the minds of all the stakeholders? Second, what can I use as visual triggers to make that impression stronger?

One of the best examples of visual triggers was Oxydol detergent. Back in the middle of the 20th century, Oxydol’s strategic position was to claim superior cleaning due to putting bleach right in the detergent. This was a hard position to sell, because the detergent looked just like all the competitors. Why should a customer change their mental image and view Oxydol as superior?

That was when Oxydol started coloring 5% of the detergent with a harmless green dye. Suddenly, Oxydol looked different from everyone else. Now that consumers could see an obvious difference, they were more willing to change their mental impression of the brand. It must be better, they thought, because it has green crystals not found in any other brand of detergent. So even though the green crystals did not change the cleaning ability of the detergent, they got people to believe more strongly in the superiority of Oxydol’s bleach-in-the-detergent strategic position. This lead to Oxydol becoming the leading detergent in the US for many years.

In the early years, when Wal-Mart was trying to establish its low price strategic position, it would get into massive price wars with everyone. One of the more famous price wars had to do with the price of blue jeans. Wal-Mart and another retailer kept taking turns trying to get a lower price than the other on blue jeans. Eventually, Wal-Mart lowered the price to 9 cents—virtually free.

How did these dramatic and highly visible price wars impact mental impressions? Well, first, consumers became more firmly convinced that Wal-Mart would do anything to have the lowest price. They became so confident that Wal-Mart was always lowest priced that they did a little less price checking. They just assumed they would be better off shopping Wal-Mart. Second, other retailers learned that it was futile to try to beat Wal-Mart on price. As a result, other retailers voluntarily let Wal-Mart get a small price advantage in order to avoid future price wars. In the end, the strategic price position was stronger and competition was weaker—because of a superior management of mental impressions.

As a side note, I think one of the reasons why Wal-Mart has struggled a bit internationally is because they did not do as much of the radical visual examples of price dropping in these countries as they did early on in the US.

Progressive Insurance
In a more recent example, think about Progressive Insurance. Progressive wanted to own the low price position in US auto insurance. The problem is that nearly all auto insurance companies claim to have competitive prices. And insurance can be so complicated that it is hard to make direct comparisons to validate those claims. Therefore, a visual substitute was needed—their version of sea salt or elaborate offices.

The answer was in providing comparisons. Whenever you ask Progressive to give a price quote, they will simultaneously provide the price quote for a few of their competitors. This leads to the following mental impression: Progressive must be really confident that they have lower prices, because they are willing to give you quotes for the competition as well. If Progressive is that confident in their low prices, then I should be, too.

Total Cereal
Back in the mid 20th century, Total cereal owned the position of most nutritious cereal in the US. They did this buy guaranteeing that each serving of the cereal had 100% of the essential vitamins. Then, in the 1970s, a new type of cereal started to take away that position from Total. The new cereal was a granola-based cereal, in particular a version produced by Quaker. Quaker created the mental impression that granola cereals provided superior nutrition, because it was similar to those muesli cereals sold in the health food stores, which are popular as the healthy breakfast in much of the rest of the world.

Total was losing the mental impression, even though the facts would show that Total had more vitamins and minerals than the granola cereal. General Mills seriously considered ceasing production of Total cereal—shutting down in defeat. In the end, they decided to try one last time to regain the mental impression. They did it though commercials showing how many bowls of granola one would have to eat to equal the nutrition of one bowl of Total. It was a strong visual statement—a tableful of granola bowls versus one bowl of Total.

In the end, Total regained its position and is still going strong even today. The Quaker granola cereal—in its original form—is no more.

For strategies to succeed, they much change behavior in the marketplace to one’s benefit. Behavior only changes after mental impressions are first changed. Therefore, effective strategies are designed to change mental impressions. However, just having the facts in your favor may not be enough to change mental impressions. Therefore, great strategies not only find great positions, but also great visual cues to easily drive home that position in a strong way—even if the visual cues have little to do with the facts.

Don’t think that this principle only applies to consumer strategies. It also applies to the world of B to B. Mental impressions impact industrial and business buyers as much or more than consumer buyers. An industrial buyer can lose his or her job if their decisions appear unwise. Therefore, they also look for those visual cues that will bring more approval from their bosses (who may not understand the “facts” behind the decisions).

Sunday, November 14, 2010

Strategic Planning Analogy #364: Product-Focus vs. Solution-Focus

Beginning in the mid 1980s, Kodak and Fujifilm became embroiled in a fierce and bitter battle for global leadership in photographic film. Year after year after year, the companies focused on each other while trying to gain a competitive edge. Tons of money were poured into research to continually make their respective photographic film better and better. For awhile Fuji would have the technological lead. Then Kodak’s advances would retake the technological lead. Then it would go back to Fuji, and so on.

Since neither could get a sustainable edge on quality, they also focused on manufacturing costs and pricing. Again, the goal was to try to get a pricing edge on the other firm. However, pricing was kept so competitive, that there wasn’t much of a sustainable advantage here, either.

Fuji was able to make inroads through innovation by being the first to widely distribute the disposable camera. Of course, Kodak eventually retaliated…and they had a few innovations of their own as well.

This battle continued for decades.

After all of this focus and effort on getting an edge in photographic film, where is Kodak’s photographic business today? Well, by the late 2000s, demand for photographic film had dropped so low that Kodak only did one manufacturing run of its famous Kodachrome film per year—just a mile long sheet that would be cut into a mere 20,000 rolls. By 2009, there was only company left in the world developing Kodachrome film—Dwayne’s Photo—and they were only processing a few hundred rolls a day.

On June 22, 2009, Kodak announced that it would no longer make the Kodachrome film. The film business today is virtually non-existent. Over the last few years, Kodak’s share price has tumbled. $100 worth of Kodak shares in December 2004 was worth only $14.47 by December 2009. And Kodak hasn’t made a profit in quite awhile.

Of course, the irony is that while Kodak was busy internally focusing on beating Fuji in film, outsiders took leadership and ownership of the digital imaging business. And, by comparison, those folks are doing quite fine financially.

In the past, we’ve talked about many things that are like strategic planning. Today, we are talking about something many think is like strategic planning, but really is not.

Strategic planning is about improving a company’s long-term prospects. This is not the same as improving a company’s products. Kodak spent decades focusing on improving its photographic film business. It continually worked on improving the film quality and value. Unfortunately, by focusing on the product, Kodak nearly destroyed the company. The long-term prospects for Kodak do not look very solid anymore.

The sad news is that there are lots of companies out there like Kodak. They mistakenly confuse product planning with corporate planning. They mistakenly assume that if they keep making the product better, the company will automatically be better.

Products, however, have lifecycles…they arrive, grow, mature, decline and then disappear (like photographic film). Over time, lifecycles have been getting ever shorter. If you only focus on the product, your company will die when your products die. And that could be rather soon.

To create an enduring, long-term prosperity for your company, you have to think beyond the current portfolio and focus on how to extend life beyond the current cash sources. Otherwise, the cash will dry up and you will have nothing in the pipeline to replace it.

The principle here is that solutions make a better anchor for strategy than products. Why? Solutions are eternal…products are fleeting. I’d rather bet on eternal solutions than fleeting products.

For example, think about losing weight. This is an eternal problem. There will always be a strong demand for solutions to this problem. But the products people have introduced to solve this problem come and go rather quickly. Individual weight loss fads are fleeting—here today and gone tomorrow.

I remember when low carb products were dominant weight loss fad. I lot of companies created long term strategies around a focus on low carb products. One firm was developing a strategy to build a chain of low-carb only supermarkets.

Of course, the low carb fad went away…and a lot of those firms who had a product-based focus on low carb went away as well. They would have been better off positioning themselves to be a weight loss solution leader, who can shift products while staying true to the solution.

This is what Kodak missed. It focused on the product (film) rather than the solution (visual memories). Consumers don’t want products—they want solutions. If someone comes up with a superior solution, the consumers will abandon the old product and flock to the new one.

Digital imaging is a superior solution over film for visual memories. Therefore consumers abandoned the film and went digital. It really didn’t matter how much better Kodak made the film. The best film was still an inferior solution for visual memories.

I was excited this past week when I saw an example of a company that “gets it” and did not follow the path of Kodak. The company was Northrop Grumman Corp. Northrop Grumman had to make a choice—would they anchor their strategy to products or solutions. They chose solutions.

The solution they chose was to help governments win wars. This is an eternal problem. However, the way wars are won varies over time. Back in the 20th century, wars were won by efficiently moving troops across land and sea. Having a strong Navy would be a crucial part of a war solution.

The wars of the future, however, will be different. Rather than being fought on the ground, they will often be fought on the internet. Instead of moving troops, one uses unmanned drones. Instead of a confrontation between troops, you have terrorists using letter bombs and individual attacks on civilians. Winning the war on data will be more important than winning the war of real estate.

As a result, Northrop Grumman is willing to abandon products which no longer provide the best military solution and shift its portfolio to superior solutions to military problems. According to a recent article in the Wall Street Journal, Northrop Grumman is seriously considering abandoning the shipbuilding business, even though they are one of the largest military shipbuilders in the world. And in their aircraft division, they are shifting the emphasis to unmanned vehicles.

For the future, the big thrust for Northrop Grumman is into the high tech tools designed to win in a digital era: robotic systems, information technology and high-end surveillance equipment. This is where superior solutions to the eternal problem will be found.

Northrop Grumman could have continued its focus on building better warships. It would take advantage of the company’s strengths. And navy ships are still being requested by governments. Isn’t that what strategy is all about? Not when your strengths are focused on perfecting on obsolete solution. That would be like Kodak continuing to squeeze the last sales out of film when digital imaging is known to be the superior solution of the future.

Big navy warships will eventually be as desirable as photographic film. Better to get out when you can still find a buyer for the division than wait until the bitter end, like Kodak, and end up with nothing.

Therefore, it is better to build a strategy around superior solutions and design a plan to become the winner with that superior solution—even if it doesn’t play to your current product strengths. You should even do this if it means hastening the demise of your current product. After all, if you don’t move to the superior solution, someone else will, so your old product will become obsolete either way.

Focusing on building the best product is worthless if your product is an inferior solution for your potential customers. Given product lifecycles, all products will eventually become obsolete. If you want your company to outlast the lifecycle of your product, focus on superior solutions, rather than superior products.

Kodak saw their enemy as Fuji, a company focused on the same product. In the end, the companies which took away all of Kodak’s business weren’t even in the film business—firms like Sony, HP and Flikr. Often times, the superior solution comes from somewhere far afield—totally unlike your product. Therefore, since replacement solutions often come from outside the industry, keep your strategic eyes looking beyond your industry.

Thursday, November 11, 2010

Hey, Check it Out!

I've been published in two editions of the emag publication called "Shift Perspectives" right there next to other authors like Seth Godin. You can check out both emags (#1 and #2) here.

Wednesday, November 10, 2010

Strategic Planning Analogy #363: Star Players

Once upon a time, there was a basketball team which was doing very poorly. The owner of the team started yelling at the coach about how disgusted he was with the team losing all the time.

The coach responded, “The problem is the poor talent on this basketball team. We don’t have any athletic stars on this team. If you can go out and get us some star athletic talent, I can make this basketball team a winner.”

So the owner went out to hire some star athletes. A week or two later, the owner announced that he had just hired some great athletic superstars for the basketball team. These superstar athletes were among the best in their field. It took a whole lot of money to sign them to the team—more than anyone else on the team was making—but the owner was hoping that their superior skills would bring him a winner.

Yet the basketball team continued to lose. In fact, the team was worse than it was before adding the star athletic talent. Why? These star athletes were among the best jockeys the horse racing world had ever seen. Unfortunately, a jockey’s key attributes include being short and light weight—not exactly what you want on a basketball team.

Although the story is made up, it contains a lot of truth. When times are bad, there is a tendency to want to get some superstars on your team. It happens in sports all the time. The idea is that if we can just get one or two star players on the team, we can move from being a loser to being a winner. It’s seen as the quickest way to make a big improvement.

That’s why the top players in a sport make so much money. They are seen as the difference between being a loser and being a winner. And that is worth a lot.

This phenomenon is not just limited to sports. Businesses do this all the time as well. When a business is continuously producing poor results, there is pressure on the board of directors to do something quickly. To common perception is that the quickest path to moving a company from being a loser to being a winner is the same as for a sports team—just hire some star talent.

As a result, businesses pay a fortune to hire one or two superstar leaders from outside the company. They put a business superstar (who’s been on the covers of all the business magazines) into the CEO chair. Unfortunately, the track record for bringing in outside superstars in business is not very successful. James Heskett, a professor at the Harvard Business School, was recently musing on the internet about the research showing how the superstar philosophy often does not usually work in the business world. The results are underwhelming.

Why is that so often the case? I think it is like what happened in the story. You can bring in superstars, but if they are not fit for the task at hand, all that super-ability is wasted. Those may have been the best jockeys in the world—absolute superstars in their field. But their talent is useless for playing basketball. There was not a good fit between the jockey star’s ability and the basketball team’s need.

It also works the other way. A basketball superstar would be a lousy jockey. The outstanding abilities of a leading basketball player are ill-suited to riding a racehorse.

Ignore the fit and you can end up paying too much to get something worthless at getting what you need done.

The principle here is simple. Don’t hire jockeys to play basketball (or vice versa). Even the best jockeys will do poorly at basketball, because it goes against their strengths. It is the wrong fit.

I believe the hiring of outside business superstars rarely works because almost by definition it will be a poor fit. Let me explain why.

The Needs of the Business Looking For a Star
Usually, the businesses with the greatest motivation to hire a superstar are like the basketball team in the story—chronic losers. After all, there is little motivation to go outside and spend a fortune on a business superstar if your business is already highly successful. No, it is the companies with lots of problems who have the greatest temptation to go after a superstar.

Although there can be lots of reasons why a company is consistently posting poor results, it usually boils down to two key issues:

1) A Poor Position in the Marketplace. This blog has talked about the importance of positioning probably more than any other topic over the years (for the best one, look here). It is virtually impossible to win in the marketplace unless you have a winning position. You need a reason why a significant number of customers would naturally prefer you over the competition to solve a particular problem. Without a strong position, the only way to get business is by “bribing” customers with below-cost price cuts and outlandish deals. And that is not a path to being a winner.

2) Poor Resources. If you lack in resources, it is hard to win. Those resources could be a lack of knowledge, competency, infrastructure, IT capabilities, money, modern automation, manufacturing capacity, supply chain connections, or a host of other such tools. Just as you cannot build a great house without great construction tools, you cannot build a great business without the needed business tools.

Therefore, it is probably the case that the biggest need of the business looking for a superstar is a new position and/or better resources.

The Abilities of the Typical Superstar
So if that is what the company needs, what does the typical superstar offer? Well, first, we need to understand that business superstars tend to come from highly successful companies. After all, the logic goes like this: how could this person be a business superstar if his or her business is doing poorly? Almost by definition, a superstar must come from a place with consistent success.

This means that the company where the superstar is from probably already has a good position and good resources. So what sets the superstar above the rest? Usually, they are the people who excel in getting the most out of that position and those resources. In other words, they tend to be super-operators. They can leverage those core elements better than others. They can make production more efficient, selling more powerful, and make the most out of the knowledge, data and capabilities inherent in the business.

The Lack of Fit
So here is the problem. The company needs a new position and a complete overhaul of its resources. The business superstar typically knows how to leverage positions and resources, but is clueless into how to create them in a place that doesn’t have them.

This is like hiring jockeys to play basketball. The fit is all wrong. The business superstar’s brilliance is worthless to the weak company, because there is nothing for him to leverage with his leveraging skills.

Jockeys know what to do if there is already a fast horse in existence. But if there is no fast horse, the jockey doesn’t know how to win. Similarly, a business executive skilled at improving a strong business doesn’t know what to do if there is not already strength to the current business.

I had a boss who put it something like this: “We keep hiring all these great people to turn around the business, but instead of their strengths transferring to the business, the weak business transfers to the people.”

Or to quote Warren Buffett, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

In other words, when the skill-set of the star does not meet the needs of the business, the star will no longer look like a star. It’s not that they suddenly lost all their skills. They just have skills that are useless for the task at hand. Therefore, if you feel a burning need to turn around a weak company, make sure there is a good fit. Look for the rare star who is great at transformation (moving from weak to strong) rather than the more common star who is great at operation (getting more out of something already good).

A company which is producing consistently poor results requires a different type of leader than the company that has been consistently strong. Therefore, it is very risky to take someone who has done well in a successful company and put them in a poor company. It is likely that the skill-set of the superstar at the strong company is a poor fit for the different needs at the weak company. Instead, if you are a weak company, look for people who are good at transformation, not good at operating in a place already transformed.

Operating a strategy well is a far different skill than creating a great strategy. Make sure you know which is the priority need before you fill the leadership position.

Monday, November 8, 2010

Strategic Planning Analogy #362: Driving Force

Awhile back, a friend of mine took a job running a division of a large retail company. Not very long later, I heard he had decided to quit that job and retire early. I asked him why he quit running that business so quickly. He said he quit because the company he went to work with was very corrupt. It seemed to him like almost all the executives were taking bribes under the table.

Not only was he personally against corruption (and was uncomfortable in that environment), he felt it was ruining the company. Decisions were made based on where the bribes were coming from, rather than what was best for the business. In addition, the corrupt culture was so pervasive that my friend knew it would take a significant amount of time and energy to eliminate it from the company. And he didn’t think he would get the support necessary to do such a difficult task. Therefore, he decided to retire.

Not very long after that conversation, I came across a new book which tried to explain why the company my friend just left was having severe financial troubles. The book listed a small handful of mistakes the company had made and made suggestions as to how your company could avoid making those same mistakes.

I decided to call the author of that book. I told her that I thought a lot of the financial problems at that company were due to the corruption and bad decisions made based on the bribery of the executives. I wanted to know why that wasn’t a focus of her book.

The author sort of stammered and stuttered after hearing my question. She got rather vague and evasive in her answer. Reading between the lines, I got the impression that what she wanted to say, but was ashamed to admit, was:

1) She knew about the corruption.

2) She knew that, as an author, she would have been putting herself into harm’s way if she accused management of rampant corruption in a book. Without an airtight case, and lots of concrete evidence, she could be sued and have her life ruined.

3) She knew that publishers could sell more copies of a book announcing “a handful of tricks for avoiding failure” than a book that merely says “don’t be corrupt.”

So she took the safe route and side-stepped the topic of corruption.

I started thinking that her approach wasn’t all that different than that retail company. She wrote content which would put the most money in her pocket rather than writing the truth. The company executives did what would put the most bribe money in their pocket than do what was truly the best for the company and its customers. As a result, both the customers of that retailer and the purchasers of that book got less than they deserved.

Just like that book was supposed to be a guide as to how to avoid failure, strategies are supposed to be a guide—pointing the way to avoid failure and create long-term success. Unfortunately, that book was a poor guide, because it focused on saying what the author thought people wanted to hear, rather than the truth which they needed to hear.

In the same way, if your strategy remains in the lofty world of platitudes and fancy phrases, and avoids the messy reality in front of it, it will be a worthless strategy. Strategies only work well if they match the context of the company which has to implement it. If the company is corrupt (like the one my friend left) or incompetent (like the company portrayed in Dilbert), then you have a bad context for almost any strategy. Unless you address these messy issues, the written strategy is fairly worthless. It will fail under the weight of corruption or incompetence.

The principle here is that one’s real strategy is the sum of what one does rather than the sum of what one says. If you have a toxic culture due to tolerance of bad activity (such as corruption, incompetence, excessively selfish greed, or abuse), then that becomes your strategy.

In these cases, all those pretty little words in the planning document are a waste of time, because they are not what is driving the behavior. Instead, the behavior is being driven by the toxic culture. Whatever you tolerate, that is what you will get. If you tolerate bad behavior (in any form), then your company will become infested with bad behavior.

Toxic cultures tend to promote selfish behaviors which ignore the best interests of the company’s key stakeholders. Rather than doing what is best for the customers, or the shareholders, or for the business, employees in toxic cultures merely look out for themselves (at the expense of everyone else). This creates sub-optimal behavior for the business—a strategy for failure.

Even if the company in the story had not made the mistakes in that book, I am sure they still would have been a failure, because of that corruption. You cannot win in the marketplace if you ignore the marketplace in your decision making. Bribe-driven decisions rarely lead to the best choice for customers.

Most businesses tend to operate in highly competitive spaces. If you are not providing excellence at a value, then you will lose business to others who are.

Toxic culture makes it hard to create excellence, because all of that ignorance, corruption or abusive behavior gets in the way of creating greatness. Toxic culture also makes it difficult to create value, because all of that personal greed sucks excessive money into the pockets of employees, robbing the company of the ability to pass on savings to the customer.

A lot has been written about the success of Wal-Mart. As in any success, there are a lot of factors at play. However, one factor which I think often gets under-emphasized is Wal-Mart’s intolerance of toxic behavior. Wal-Mart tends to take an extreme approach to ensure that its buying staff is not corrupted by bribes. Buyers (and vendors) know that their job (or relationship) with Wal-Mart is in jeopardy if the buyer is caught taking as little as a free cup of coffee from a vendor. Both the buyer and the vendor will be punished. This zero-tolerance approach makes it extremely difficult for toxic behavior to creep in and over-ride the core strategy.

Back around 2006, Wal-Mart fired Julie Roehm, its new Chief Marketing Officer, because there was an appearance of toxic behavior between Roehm and the advertising agency. There was the appearance of Roehm accepting financial benefits (like fancy dinners) from the ad agency. There was also the appearance of potential sexual misconduct between Roehm and one of her subordinates.

At some point, I suspect Wal-Mart almost didn’t care what the extent of the toxic behavior was. Wal-Mart wanted to send a message that even the appearance of potentially toxic behavior was not to be tolerated. Wal-Mart was very loud and very public about why they let Roehm go. Based on this, and many other examples, the word gets out that toxic behavior is not tolerated. Instead, one is to focus on getting the Wal-Mart strategic agenda accomplished.

So, if toxic culture can ruin a company like the one in my story and zero tolerance of toxic behavior can help create one of the largest and most successful companies on the planet, then it appears that this is an important area for strategic concern. So how can you help keep toxic behavior from becoming a ruinous strategy?

1) Watch the Tone From the Top
Everybody below in an organization is watching the people at the top. If they see the people at the top getting away with toxic behavior, then they will see toxic behavior as tolerable and acceptable for everyone else. “Do as I say, not as I do” won’t cut it. The people at the top need to set the example. In fact, they need to set a higher standard for themselves so as not to even give the appearance of tolerating toxic behavior.

Actions speak louder than words. Strategy words lose out to bad behavior every time. Make sure your leaders are modeling the right behavior.

2) Watch out for How Your React When Your Star Players Behave Badly
What do you do when your highest performers behave badly? Do you tolerate their toxic behavior as a tradeoff for getting their high performance? In the long run, it is usually better to get rid of even star performers with toxic behavior, because the negative impact on the whole organization of that tolerance is worse than the added benefit of their slightly higher output.

3) Watch out for How You Set Rewards
People need to be rewarded for doing the things which are in the best long term interests of the company and its strategy. Otherwise, there is the temptation to use toxic behavior in order to maximize near-term bonus. There are lots of ways to hit a short-term sales or earnings target. Many of those ways can involve toxic behavior. If your bonus only focuses on the achieving the “what” rather than the “how” it was achieved, you may be rewarding toxic behavior without even knowing it.

Your strategy is the sum of what you do, rather than the sum of what you say. If your company tolerates toxic behavior like corruption, abuse, incompetency and excessive selfishness, then that becomes your real strategy. And when employees are only trying to optimize their own selfish gain at the expense of everyone else, you have a losing strategy. Fight to keep toxic behavior from getting a toehold in your organization. Fight to keep the focus on living the strategy instead.

The irony is that if you try to make the money the easy way, via bribes, your gains may be cut short. Either you lose your job or the company you work for goes away because the bribery culture leads to destruction. However, if the toxic behavior is avoided, the company prospers, and you can share in that prosperity for a long time. I suspect that more employees got wealthy on Wal-Mart bonuses and stock options than employees who got wealthy taking bribes at the failing retailer mentioned in my story.

Sunday, October 31, 2010

Strategic Planning Analogy #361: Cash Out

A friend of mine always had trouble buying gifts for his father. His father didn’t seem to appreciate gifts unless they were practical. And his father liked to take care of his practical issues on his own, not leaving any room for gifts.

After years of frustrated gift giving, my friend finally gave up. As a result, for one Christmas he just gave his father a card with a check in it. As it turned out, the gift he got from his father that year also was a card with a check in it. And the size of the checks were close to the same amount.

Now my friend was doubly frustrated. It seemed so futile to just trade checks for basically the same amount of money. It was almost like not giving or getting a gift at all, since they both ended up in essentially the same place as they started. It was as if nothing had happened.

Gift giving should be an exciting time, for both the giver and the receiver. But if all you are doing is trading money, a lot of the fun and excitement goes away. Nothing special happened. No great emotional memories.

As obvious as this might be in gift-giving, it is apparently less obvious in the business world. After all, when it comes time to rewarding employees, it usually comes down to just writing a check.

Money is nice and all, but it doesn’t usually lead to long-term emotional satisfaction. I was told one time that the impact of a pay raise on the emotional commitment of an employee tends to last for only about two paychecks. After that, it is just money and the higher paycheck is merely the new normal…nothing special anymore. Like with my friend and his father, the transaction seems cold and lacking in any lasting meaning.

Successful strategic initiatives tend to require a strong, highly committed workforce. And if you want strong, highly motivated employees, you need to give them a reason to bond with the company at a deep, emotional level. And after a certain point, money may be one of your least powerful tools to build this bond. A more inspiring gift is needed.

The principle here is that the best long-term motivator is rarely just cold, emotionless cash. To get the deepest level of commitment, you need gifts that touch the employees in a more meaningful way.

What the Corporate Executive Board Found
I was reminded of this when reading a recent article from Fortune magazine. The article was talking about what it takes to keep your high potential employees motivated to stay at your company and work hard at making it a success. This is an important issue, because a recent survey indicated that about 27% of high potential employee plan to leave the company they are working for within the year. This desire to defect continues to rise every year.

It is hard enough to achieve strategic success when you have committed employees. But when over a quarter of your high potential employees are focused on getting out the company, the likelihood of long-term strategic success goes down considerably.

As a result, this article looked at what it takes to get deep engagement and commitment from those high potential employees. The article reported on a survey of 20,000 high potential employees by the Corporate Executive Board. This survey asked these high potential employees what drove their commitment. They found that money was a very poor motivator. It was way down the list.

Instead, the best motivators included “a mix of recognition and challenges that stretch them without completely stressing them out.” In fact, the top motivator was “feeling connected to corporate strategy.”

These are things that really aren’t based primarily on money. They are more personal. Just as a personal gift at Christmas is more inspiring than just a check in a card, a personally enriching job which connects the employee to the strategy is superior for motivation over just giving the employee a check. Sure, it’s harder to develop these personalized programs than to write a check (just as it is more difficult to come up with a personal Christmas gift), the results are worth it.

Win-Win Solution
The good news is that this survey provides a great win-win solution for both the company and its high potential employees. The win-win idea is to get more involvement by high potential employees in the strategic planning process. If you expand the strategic process to include more people in more ways, there are two benefits.

First, as the survey indicated, employees become more committed to the company and its strategy when they are involved in the strategy process. By getting greater involvement up front, the strategy moves from being just words on a paper to being ideas owned by the employee. By being involved in the process, the employee takes ownership in the plan.

To the high potential employee, it is no longer just A plan…it is now MY plan. It is easier to be committed to something you helped to build. The high potential employee already has a vested interest in making strategic execution a success, because of the emotional commitment already developed in being a part of the plan’s creation. It is harder for them to leave the company, because they have more at stake in the success. And why would you want to leave a place that values your opinions so much that they want you to have a key role in developing the strategy?

Second, the company ends up with a better strategic plan. High potential employees have more at stake in the long-term, because they have not yet made it to the top. They can only have a great long-term future if the company has a great long-term future. Therefore, they are the most motivated to creating a great long-term plan.

By contrast, the senior executives have already made it to the top. They tend to be older and closer to retirement. They may be less motivated to create a great long-term plan, because the investment in the future could detract from near-term profits. By the time the long-term plan comes to fruition, they may already be retired (and not get credit for their part in the plan). After all, the remaining tenure of the average senior executives tends to be shorter than the length of the average long-range plan.

Hence, there is the risk that preoccupation by senior executives with cashing in their careers soon will keep them from optimizing the long-term. Their motivation in the long-term may be less than with the high potential employees. Therefore, if only senior executives are making the strategic plans, you may be sub-optimizing your long-term plan.

Hence, by elevating strategic planning to a broader level and by getting more input and involvement by high potential employees, both the company and the high potential employees are better off.

Great long term strategies need strong commitment by the high potential employees. The best way to get this is by giving them a large role in the development of the long range plan. Not only will this make them more committed to the company, but the company will most likely end up with a better plan.

I remember one time watching two senior executives from different companies trying to impress each other as to who was the best. They started by comparing who made the most money. However, both of them made so much money that it became a meaningless measure. After a certain point, the money failed to make a difference. Therefore, they had to look for other measures. You should look for other measures in your business as well.

Thursday, October 28, 2010

Strategic Planning Analogy #360: Interesting Neighbors

On time, I was shopping with a friend in London. I was bored with what one of the shopkeepers was showing my friend, so I stepped out of the small shop to look around at what was happening on the street.

I looked up and made an astonishing discovery. It is common in England, when someone famous has lived somewhere, for there to be a sign on the side of the building telling who the famous person was who lived there. Well, there, across the street from this shop were two of these signs next door to each other.

At 23 Brook Street was a sign saying that the electric guitar legend Jimi Hendix had lived there back in 1968-69. Next door, at 25 Brook Street, was a sign saying that classical composer George Frideric Handel had lived there back in the mid 1700s.

Although separated by time, I found it fascinating that Hendrix and Handel had been together in location. It made me ponder what it might have been like if two had been there at the same time and had been neighbors.

Just think of the music that the two of them could have written together. Hendrix’s raw energy combined with Handel’s sense of angelic majesty—WOW—that would have really been something. The jam sessions with Hendrix on guitar and Handel on keyboards would have been superb. (At least that’s how it plays in my mind.)

After all, back in the 1970s, the band Curved Air combined the sounds of contemporary rock with a heavy influence from the classical music by Vivaldi. I thought that worked out quite well.

It is interesting to contemplate the combination of a leading musician/composer from the 1960s with a leading musician/composer of the 18th century. The times were very different and the approaches to music were very different. Yet both Hendrix and Handel created great music and I think a combination of the two would have been great as well (even better than Curved Air, who I highly recommend).

After Jimi Hendrix died, people found copies of recordings of Handel’s music in Hendrix’s home on 23 Brook Street, so maybe there was more of a connection than one would originally think.

The point here is that unconventional combinations have the potential to create wonderful things. This not only applies to music, but also to strategy.

Staking out a new position does not mean that ALL of strategic components have to be brand new and original. No, you can take a lot of old and established ideas and still stake out new territory provided you combine them in new ways.

In modern language, this concept is referred to as “mash-ups,” where you invent something new in digital entertainment by mashing together already-made entertainment from a diverse variety of sources. Just as a Hendrix-Handel mash-up could sound wildly original, even though all the influences are borrowed from the past, your strategy could be original even though it is based on older influences.

The principle here is that you don’t always have to look forward into the fuzzy, uncertain future to find innovation. Sometimes great innovation can come by borrowing from solid successes in the past. By recombining solid strategic components from the past in new ways, one can possibly get the best of both worlds—radical new strategies without the risk of going into totally uncharted territory.

Years ago, I recall that the Kool-Aid beverage powder brand asked a university marketing program to come up with a strategy to boost sales. It got me to thinking what I would have done if I had been in that marketing program.

Kool-Aid as Seasoning?
My thought was to come up with a radical new strategic positioning, but anchored in a solid past. Instead of the current Kool-Aid position as a children’s beverage, why not position Kool-Aid as the kitchen seasoning that will make food more appealing to children? For example, would children be more likely drink their healthy milk if it was flavored with Kool-Aid? How about as a flavor enhancer to get children to eat their oatmeal? And how excited would the children be if their birthday cake was seasoned with their favorite Kool-Aid flavor (and how proud would their parents be when the other children at the birthday party think they are the coolest parents in the neighborhood for making Kool-Aid Cake)?

We all know what seasonings are. People have been cooking with powders kept on their kitchen shelves for generations. They can easily relate to the idea. So the concept is rooted in the past.

However, at the same time, general spices and seasonings specifically geared to children’s taste preferences is fairly innovative. So with this approach, one could take advantage of the familiar yet still create an innovative new strategic position.

Combining Kool-Aid with cooking flavors would be like combining Hendrix and Handel. You end up with a new category without having to really reinvent anything. It’s still the same old Kool-Aid recipe—no new inventions here—just a new way of looking at the old.

And hopefully, this would cause parents to buy extra Kool-Aid—the usual amount for normal use, and extra KoolAid for use as a flavor seasoning. Oh, and they would buy even more, just to have on hand for unknown future seasoning needs. After all, you always keep extra flour and sugar around; now add KoolAid to that list.

Kool-Aid as Dye?
One of the key ingredients of Kool-Aid is food dye. What if you repositioned KoolAid as a funky way to get fun colors into your life. There are many rebellious young people who have used Kool-Aid to dye their hair into wild colors. Perhaps this could be expanded into other color enhancing projects?

One could make simple watercolors that parents could give their children to use, knowing that it would be safe. I’m sure that a lot of other innovative dye approaches could be thought of.

The principle would be the same: to create an innovation without having to create a new product. Just combine the old product (KoolAid) with old practices and end up with a new strategy.

Where to Put the Energy
So, when looking for innovative new strategies, it is not always necessary to put a lot of effort behind scientists in an R&D laboratory. New innovation does not necessarily need new products with new patents. Sometimes, all you need to do is put a new twist on an old product by pairing it up with a new way of using the product.

Subway boosted sales when it got people to think about its sandwiches as not just food, but as a diet aid to lose weight. They didn’t really change their product. They didn’t invent anything new. It was the same old sandwiches. However, because Jared Fogle lost so much weight eating Subway sandwiches, it got others to try to do the same. Combining two old concepts (eating sandwiches and losing weight) was a winner.

So instead of putting all the effort and reliance for success in the hands of the R&D lab, consider just taking what you have and recombining it with other things to create something new.

Think of Legos. Those little bricks stay the same, but put them in the hands of creative people and you can build all sorts of different things. You don’t need to reinvent the Lego bricks. You just have to think outside the box and be more creative with what you have.

Just because a strategy is new does not mean all the components need to be new. Sometimes you can create a great new position by taking what you already have and just combining it with other pieces in a new way. Rather than putting all your hope in an R&D lab, get a little creative with what is already in front of you.

The success rate of getting great innovation out of the lab can be quite low. Many pharmaceutical companies are shrinking their R&D budgets because the return on investment is so low. Why not try a different approach by re-applying the stuff that is already right in front of you?