Thursday, February 25, 2010
Once upon a time, two families were planning their vacations. The Smith family really got into the vacation planning mode. They planned out all of their vacations for the next 10 years at the same time. They planned out, down to the minute, where they would be and what they would be doing for the entirety of all of those vacations. Then they started making the arrangements so that they would be prepared to do everything on that 10 year vacation list.
The Jones family took a less aggressive approach to planning their vacation. They knew they wanted to spend time on a warm beach this year, so they decided to just start wandering south. They figured that if you keep heading south, eventually you will find a warm beach.
Well, even though the Smith family put a lot of time into planning their vacations, they turned out to be a disaster. Over the course of 10 years, a lot of things happened that disrupted those carefully crafted vacations. First, Mr. Smith was not always able to get away from work every year precisely when the vacation was planned. Second, many of the amusements and attractions they wanted to see were no longer in existence years later when they planned to see them. Finally, some of the hotels they had arranged to stay at had been sold to other firms who did not recognized their reservations from so many years earlier. Because they had not kept up on adapting to these details, the vacations were awful.
The Jones family had a disastrous time as well. It turns out that it took a lot longer to find that warm beach than they thought. All that wandering wasted most of the vacation days. Second, once they got to the beach, they found out that all of the lodging had already been reserved. There was no place to stay at the beach. They had to stay many miles away from the beach in an ugly, dirty part of the city. And because so much time had been wasted wandering, they had to go home almost as soon as they had arrived. If only they had picked a particular destination in advance so they could have locked it up while there were still vacancies.
In the field of strategic planning there tend to be two major schools of thought. One is the “positionist” school (as championed by people like Michael Porter) and the other is the “emergent” school (more in line with the thoughts of Henry Mintzberg).
Since we don’t have space to fully expound on the nuances of each position, I will briefly summarized the two schools using quotes from Walter Kiechel III from the Spring 2010 issue of Strategy+Business.
“A positionist…believes that you should conduct a rational analysis, decide on the competitive position you wish to occupy, develop a strategy to get there, then execute.”
“Fat chance, counter those of the emergent persuasion…You begin with the hand you’ve been dealt. You go from there…setting off in a general direction. You run into reality…, learn from your mistakes, make corrections and ‘execute like hell.’…In the process, your strategy emerges.”
In other words, positionists tend to believe that if you get the big picture right, the little details will take care of themselves. By contrast, the emergents believe that if you get the little details right, the big picture will take care of itself.
In our story about vacation planning, the Smith family were positionists and the Jones family were emergents. And in the end, both approaches lead to disaster.
The Smith family, as good positionists, found great destinations (i.e., positions) for their vacations. Unfortunately, they did not have as much control over the details as they had hoped, so the vacations did not turn out as planned.
The Jones family, as good emergents, chose a good general direction (towards warmth) and made the right adjustments to get in the direction of a warm beach. But because they did not plan out the big picture very well, by the time they reached the destination, all of the key spots had already been staked out by others (no rooms were available).
The principle here is that either planning philosophy, when taken to an extreme, is not optimal. Strategic Planning should not be a battle between the extreme of Positionists versus the extreme of Emergents. Both extremes lead to disaster. The best path is somewhere in-between.
1. The Overall Flaw
The big problem with either extreme is that it assumes something will take care of itself. Positionist extremists assume the little things will take care of themselves (if you get the big picture right). Emergent extremists assume the big things will take care of themselves (if you are vigorous enough in executing the details of the moment). In reality, nothing takes care of itself. You have to worry about both the big picture and the small details. That is why the Smiths and the Joneses had lousy vacations.
2. The Emergent Extreme Flaws
In particular, the emergent extreme has two critical flaws. I call the first one “The Mosaic Flaw.” Imagine that you are building a giant mosaic—too big to see in its entirety while up-close working on it. As you are choosing each individual little tile to put into the mosaic, you choose the color and shape base on what looks right to you in that immediate area. Each little area looks beautiful to you. However, when you are done and are able to stand back far enough to see the entire design, you realize that the total picture is an entire mess. It doesn’t look like anything in particular. It has no intrinsic beauty as a whole. It must be thrown away.
This is what happens when emergent extremism takes place. The big picture does not magically come together. A pile of pretty tiles do not automatically make a pretty mosaic. The only way to create a beautiful large mosaic is to: a) first have a general master design and b) stand back every once in awhile to get an idea as to the major ramifications of your immediate efforts.
The second major flaw with the emergent mindset is what I call “The Leap Flaw.” All strategies and business models eventually fail. For example, analog strategies and business models have been replaced by digital strategies and models. Business models dependent on tight control of information (like traditional travel agents and newspapers) are having their business models replaced by more open, consumer driven internet models (like Expedia.com or Craigslist). If you stick with a particular strategy/business model long enough, you will eventually become obsolete.
Emergents tend to focus on making adjustments to the current model, to make it better, stronger, and more appropriate to the moment. This approach rarely leads to the great leaps necessary to jump from one model to an entirely different model. A better, but obsolete model is still obsolete. And that is where emergent extremism will lead you in the long run.
3. The Positionist Extreme Flaws
Positionists avoid the flaws of emergents. They keep track of the big mosaic picture and prepare for leaps to radically new models. However, their method in the extreme also has flaws. The first is what I call the “Ivory Tower Flaw.” This is the idea that strategy is mostly an academic exercise which can be played out in a tower far removed from where the daily decisions are being made. Emergents will be the first to tell you that if strategy is divorced from where the work gets done, then it won’t have any impact on how work gets done—so the strategy never happens.
The second flaw of position extremism is what I call “The Funding Flaw.” It takes a lot of time to get to the glorious long-term nirvana envisioned by the positionists. It usually takes a lot of early investment to get there as well. If you only focus on the glorious nirvana, you may not have in place enough near-term activities to fund the transition from here to there. You may go bankrupt before you have a chance to reach that huge pot of gold at the end of the rainbow.
4. Where Should I Be On the Continuum Between the Two Extremes
So, if both extremes are dangerous, where should I be on the continuum between the two? That depends upon your current situation. In particular, it depends on Industry Barriers and Life Cycle Stage.
Some industries have high barriers to entry and high barriers to exit. This tends to create relative stability to the big picture. Once you make it in, you are relatively protected. Therefore, you can worry less about the positioning and focus more in the direction of the emergents. GE has traditionally focused mostly on these types of industries, which helps explain why their planning approach appears to lean more towards emergence.
By contrast, industries with low barriers to entry and exit are more in flux. To survive the turmoil it is ever more important to stake out a strong position which stands out over the fray. Here, I believe the approach needs to drift closer to positionists. I think that one of the reasons Bob Nardelli failed when moving from GE to Home Depot was because he went from a more emergent environment at GE (just execute lots of cost cuts right now) to more of a positionist environment at Home Depot (invest in a position which wins with the customer). By being too emergent in the new environment, he was out of step in what was needed at Home Depot.
Life Cycle stage also impacts which approach to use. In the early incubation stage of an industry, nobody knows how the industry will evolve. Here, leaning more towards the emergent side of the continuum may be more valuable.
The rapid growth phase is probably most suitable for positionist leanings. This is when the race is being won to see who will be the leader when maturity comes. It is important at this point to stake out your leadership position and win the race to own it. No time to waste meandering and hoping for something to emerge.
Once maturity is met, the big picture becomes more stable. As we saw earlier, stability tends to favor a leaning towards emergence.
When an industry is entering decline, it is time to look for a leap to a new model. As we saw earlier, positionist leanings work best when it is time to make a leap.
Since successful strategic planning needs to manage both the big picture and the small details, one should avoid the extremism leanings of positionists or emergents. The best place to locate on the continuum between the two can vary depending on things like industry barriers and lifestage. In other words, although we know the extremes are always wrong, there is no other place that is always right. You have to plan your planning approach, too.
Don’t try to keep up with the Joneses…or the Smiths. Both of these extremists will lead you astray.
Wednesday, February 24, 2010
Back when I was a teenager, and had just gotten my driver’s license, I caused a three car accident. As a result, I was forced to appear at traffic court.
Wanting to make a good impression on the judge, I got to traffic court early. This allowed me to hear several other traffic court cases before my own. Although there were slight variations in each case, they all went something like this:
COURT: You have been accused of doing [such-and-such]. How do you plead?
DEFENDANT: Not guilty, your honor.
COURT: But isn’t it true that you actually did [such-and-such]?
DEFENDANT: Yes, sir, I did. BUT there were extenuating circumstances which make me not guilty.
I could see that the judge was getting rather angry. Case after case involved somebody who acknowledged breaking the law yet still claimed to be innocent. There was no sense of remorse or guilt. It was as if the defendants all felt they were “special” and that the law did not apply to them.
When it was finally my turn, it went something like this:
COURT: You have been accused of doing [such-and-such]. How do you plead?
ME: I’m guilty, your honor. I did it and I’m sorry.
The judge was so happy that I was honest and took responsibility for my actions that he let me off very lightly.
Everything we do is seen by others within a particular context. This context affects the way we react to what we see.
In the courtroom, the judge reacted not only to the facts of each case, but also to the context surrounding those facts. In every case before the traffic judge that day, the fact was that everyone had broken the law. Yet the context surrounding my case was different from the others, causing the judge to act differently.
For the others, the actions of the defendants made them appear to be selfish liars who took no personal responsibility for obeying the law. Within this context, the judge became angry and gave harsh sentences.
In my case, the judge saw someone who was honest and willing to take responsibility for his actions. Within this context, he gave a lighter sentence.
This same principle applies to strategy. You can create the most brilliant strategy on earth. However, if the context of the way you run your business is negative or not authentic, the strategy will fail. Your employees will not embrace it and/or your customers will not believe it.
Businesses are more than just machines making products for other machines. Businesses have personalities and the customers act like that judge, altering their behavior based on those perceived personalities. Ignore the context of your personality at your own peril.
The key principle here is that strategic planning needs to consider context. This is important at both ends of the strategic planning process.
At the early end of the process, when you are evaluating the environment, evaluate how your company personality is perceived. Your suppliers, employees and customers are all going to treat you in a particular way, based upon your personality. Therefore, strategic success depends on either;
a) Creating a Strategy Consistent With That Personality Context; or
b) Creating a Strategy Plan to Change People’s Perception of Your Firm.
Do you even know how people perceive your brand/firm? I’m not talking facts, here. I’m talking perception. Are you seen as Trustworthy and Authentic, or are you seen as Selfish and Deceitful?
If you want customers to trust you, be seen as worthy of that trust. If you want to be attractive to the best employees, have an attractive personality. If you want the best suppliers to want to prefer to work with you, portray yourself as being a good partner.
Great strategies leverage a strength. That strength usually depends on some sort of special skill or relationship. That special skill or relationship can get stronger or weaker depending on how you structure the context around it.
Take, for example, Dow Chemical. During the Vietnam War, Dow produced the napalm used during the war effort. Being associated with one of the biggest killing factors of an unpopular war changed the context of how Dow Chemical was perceived. Only gung-ho military types were attracted to working for the company. Other potential scientists and engineers had no desire to work there.
After the war, Dow had a very difficult strategic problem. First, the internal corporate culture was being adversely impacted by this context. The regimented military mindset was not very conducive to the open, experimental, consumer-oriented culture they felt important to inventing the products of the future. Second, Dow’s strategic success depended upon having great scientists and engineers. However, because of the contextual residue from the Vietnam War era, many of the best and brightest would not consider working for Dow.
As a result, before Dow could optimize its strategy, it had to first change its perception. A great deal of time, effort and money went into creating a new perception of Dow—one more in tune with their strategic imperatives. This involved not only public relations efforts, but actually changing the way things were done at Dow. They had to change not only the way they talked, but the way they walked. Otherwise, the overall strategy would fail.
Context is also important at the end of the strategic process. The way you deliver your individual tactics will color your perception and your effectiveness. Therefore strategic planning needs to not only look at what tactics are important, but also the manner in which those tactics are delivered.
Let’s look at two examples—Toyota and Domino’s Pizza. Toyota has had some product recall issues and Toyota has worked to remedy them. Those are the facts. However, what is the perceived context around those facts? The initial impression appears to be that Toyota was slow, selfish and uncaring; they appeared insincere and secretive—not forthright and open. All of this has colored the way people are accepting the Toyota remedy—mostly to the negative.
Toyota’s core strategy has been to leverage the idea of superiority in product dependability. The context around the way Toyota initially handled the crisis destroyed much of the way consumers are perceiving product dependability at Toyota. Toyota may never fully recover that core strategic strength, no matter what they do factually, because the relationship with the consumer has changed. The trust factor has been seriously damaged. The context is not what it used to be. Customers will judge them more harshly from now on (like the judge in the story).
On the other hand, look at what Domino’s Pizza here in the USA did. Based on consumer research, Domino’s found out that many people thought their pizzas had a horrible taste—the crust was like cardboard and the sauce was as bland as ketchup.
So what did Domino’s do? They showed the public video clips of the research and then let the president of the company get on the air in a very open and transparent way. He apologized for past behavior and vowed to make a better pizza worthy of the public. They added 40% more spices to the sauce, improved the cheese and coated the crust with a garlic flavoring.
The context surrounding the advertising campaign was very open and transparent. You felt like these were good people trying to make up for past sins. They didn’t wait until the government stepped in or there was a consumer revolt. It was all voluntary.
I was so impressed that I went out and bought some Domino’s Pizza, something I had not done for years. This was also the first time in years my behavior had changed based upon a TV commercial. Bravo to Domino’s!
Toyota and Domino’s both fixed a problem. However, because Domino’s did a better job of managing the context as part of the strategy, its approach was far more successful.
Strategy is more than just deciding what to do. It needs to also consider how those actions impact the way the brand/firm personality is perceived. If the perception does not match up with the strategy, the strategy will fail. Therefore, a firm needs to both a) understand their current perception before choosing a strategic direction, and b) choose their tactical approach in a way that reinforces the type of perception needed to enhance strategic success.
I only had to go to traffic court once. Your firm, however, is being judged every day. People are always watching, and in this web 2.0 world, people will talk about what they see. Your context needs to be a daily concern.
Sunday, February 21, 2010
I’m currently trying to decide whether I want to sell my car soon or keep it for awhile. If I’m going to keep the car for awhile, I need to do some repair work—new tires and new brakes.
However, if I’m going to sell the car soon, I’ll skip those repairs. Instead, I’ll spend a little bit of money on the car’s appearance--like touching up some areas where the paint has chipped.
Although the touch up work would be a lot less expensive, it means I would be selling it and buying a new car, which is a lot more expensive than fixing the tires and brakes.
One of the great advantages of strategic planning is that it helps you to make the right decisions. Strategic plans give you the goals and objectives for your business. It tells you what you want to be. As a result, it is faster and easier to make decisions—just do things consistent with those strategic goals.
This is very similar to the story of my car. If my goal is to quickly sell my car, then I know exactly what to do—quit spending money on long-term repairs and put a little money into making the car more attractive to a buyer. If my goal is to keep the car for a long time, then I know what to do—invest in long-term repairs. Once I decide which goal I want, I will know exactly what to do.
So, we have a simple, two step process: determine the goal and then do the things consistent with that goal. Decisions become so much easier when you have the context of an overall goal, because a lot of options quickly fall away as no longer consistent with the goal.
But here is the interesting wrinkle…normally we think of strategic goals as being very long term—four to five years (or even much longer). However, sometimes a strategic goal can be very short term. In the example of my car, if I chose the goal of selling the car, then the time span is only a few weeks—touch up the car and sell it right away.
The same thing can occur in businesses—sometimes the goal for a business is to get out quickly. Before the housing bubble burst, a lot of people were following this type of short-term goal. They would buy a fixer-upper house, fix it up, and then quickly sell it. The strategy even had its own TV show: Flip that House. If you can flip a car or flip a house, why not flip your business?
The principle here is that strategic goals do not have to be designed to perpetuate a business for a long period of time. Sometimes the best goal is to quickly shut down a business or sell it off quickly.
This is not a strategy of defeat. It is a very viable approach to business. For example, a lot of people are well skilled at starting a new business, but not skilled at running that business once it gets large. They are better off flipping those businesses to people better skilled at running larger businesses once the start-up phase is over. There are a lot of these “Serial Entrepreneurs” in the high tech world. They start a business, sell it, then start another.
The same thing can also occur at the end of a business lifecycle. It takes different skills to thrive when an industry is in decline. Selling out to someone better skilled at this is a viable strategy.
So what can we learn from this?
1) Don’t Forget that Selling/Flipping/Shutting Down is a Viable Strategic Goal
When determining your strategic direction, don’t automatically assume that your goal is to create long-term viability. Short-term ownership may be a better option.
At the end of the day, it is all about cash flow. There may be more cash flow in getting out than in staying in. If your business is worth more to someone else than it is to you, then perhaps they will share a portion of that added value with you at the time they purchase the business from you.
Even if you lose money on getting out, if you lose less than if you stay in, you are better off. Take pride in choosing an option that optimizes cash flow, even if that means shutting a business down.
2) Waiting Rarely Makes These Strategic Approaches Better
Business is about taking risks. Not all risky ventures pan out as we had hoped when the pro formas were created. Sometimes, the problems can be fixed. Sometimes we just have to take our lumps and shut it down.
Studies have shown that one of the biggest problems in this area is waiting too long before shutting a bad risk down. Like an old car, waiting won’t make it more valuable. The value has nowhere to go but down. Cash flow is needlessly destroyed as time goes by.
It is easy to see why this happens. People get emotionally attached to businesses. Egos don’t want to admit that certain problems cannot be fixed. Careers may be threatened if the business is shut down. These cause us to procrastinate and postpone pulling the plug.
There are two ways to get around this. First, take away the negative social and emotional stigma to shutting a business down. Celebrate the wise decision in shutting something down quickly when that is the best option. Don’t punish the careers of those who make such a wise decision.
Second, set up predetermined trigger points before starting the new risky venture. If a particular trigger point is met during operations, this automatically starts a serious discussion around rapid sell-off/shut down. Trigger points help take the emotion out of the decision. A rational, predetermined approach has a better chance against the emotional tendency to procrastinate.
3) Once the Goal is Determined, Get All The Actions In Line With It
In the story about my car, if I decide to sell soon, I’m going to take radically different actions than if my plan is to keep the car awhile. The same is true for businesses. If the goal is to quickly sell/flip/shut-down, then all the actions should support that goal.
First of all, your definition of who you customer is may need to change. The primary customer is no longer the one who buys your products/services. Instead, the primary customer becomes the one who will buy the entire business. Are you doing everything to appeal to that new customer?
For example, at the height of the dotcom boom, a lot of start-ups wanted to eventually be bought out by a big firm like Cisco. The plan from the beginning was to sell out soon, so firms like Cisco were as much their target audience as product customers.
Cisco made it known at the time that they only wanted to buy companies located in one of three areas—Silicon Valley, Austin Texas, or the Research Triangle in the Carolinas. Therefore, if your goal was to quickly sell out, the decision was simple—locate your business in one of those three areas.
Investments should change when this type of goal is chosen. With my car, the investment would change from brakes to paint. On the show Flip That House, they showed which types of investments have the best quick returns to a prospective buyer.
Do the same. Alter your investments to optimize the sale, not to optimize long-term viability.
Selling or shutting down a business is not a sign of failure. It is often the wisest strategic move available. Therefore, do not forget to consider this as the proper strategic goal. And if it is the proper goal, act quickly and act properly. Change your actions to support the goal, even if it looks like an abandonment of supporting long-term viability.
Strategic planning helps determine core competencies. If your core competency involves specializing in running firms at a particular stage in their lifecycle, then do not be afraid to get out of those businesses when they migrate to the next life stage. In fact, plan it in advance, before the change occurs.
Sunday, February 7, 2010
One upon a time, there was a seven day race across the desert. One of the runners believed that the best equipped runner would win the race. Therefore, he packed the following:
a) The ingredients for seven days worth of balanced, nutritious meals, specifically suited to his metabolism (and the equipment to prepare them and cook them).
b) A comfortable cot and bedding (and a tent to sleep in—after all, a good athlete performs best when well rested)
c) Seven different running outfits (optimized for various weather conditions)
d) Four different sets of running shoes (each specialized for different running terrains)
e) A complete medical kit
e) Enough water to keep well-hydrated for the entire seven day race.
Another runner packed just the essentials:
a) Some energy bars and energy drinks.
b) A day’s worth of water.
c) A simple bed roll with netting to keep the sand off.
d) A map showing where to get additional food and water along the race.
When they got to the starting line, the second runner was able to put everything he brought in a backpack. The first runner found himself pulling a large cart behind him, loaded with gear.
Which one do you think won the race?
Even though the first runner had the best equipment and was prepared for more conditions, he was not going to win the race. His gear was too heavy. All his energy had to go into pulling the cart, rather than running the race.
The second runner focused on just a few essentials. That lightened his load so that he could run faster with less effort. This allowed him to win the race.
Businesses are also in a race and trying to win. Like the first runner, many businesses try to be the best equipped for all situations. They want to do well at everything, for every customer, in every way. Unfortunately, trying to be superior at everything is a tremendous burden. It takes a lot of time, money and effort. It weighs a company down.
If you want to win, you need to just focus on the essentials for the race you are running. The lighter load will make you more nimble and better able to excel in getting to the finish line.
The principle here has to do with focus. Successful companies tend to focus their efforts on the essentials needed to execute their strategy. They become the best at those aspects most critical to their strategic position and often ignore, downplay or outsource other factors.
Look at Toyota. They built their strategic position around dependability. For years, the key focus of their efforts was around improving the dependability in the way they designed and manufactured cars.
This focus was very successful—Toyota consistently was ranked among the best in building dependable cars—year after year.
The result of this achievement? First, Toyota became a highly desired brand. Apparently, a large sector of the car buying community desire reliable cars. Owning the position of reliability made Toyota the brand of choice for this community.
Second, Toyota was able to charge a premium price for their cars. Apparently, these customers were willing to pay extra for reliability. High demand and higher prices leads to becoming a highly profitable company. The focus on dependability was a winning strategy.
Over time, however, Toyota became like that first runner. They lost their focus and wanted to do it all. They wanted to build cars as well as trucks. And they wand to do it for every consumer segment, even segments that may not be able to afford reliability (or make it a key priority). They wanted to be the leading brand in all parts of the world, so. growth was added as another passion. And they wanted to achieve it all very quickly—so speed became yet another passion.
Trying to be the most dependable and the fastest growing automotive company, while designing the broadest assortment of cars and trucks, is a big burden. It is like trying to run a race while pulling a heavy cart. Eventually something has to give.
And that “eventually” has recently come to pass. As it turns out, some of that old passion and focus on dependability was not as strong as it used to be. That focus was lost a bit in the rush to do everything else. Toyota cars are not as dependable as they used to be. Other firms, like Ford, now achieve as good (or better) quality. Massive recalls and quality embarrassments are tarnishing the Toyota image.
The result? I suspect that those who desire reliability will no longer automatically flock to Toyota. In addition, Toyota will probably no longer be able to get away with automatically charging a premium price for those cars. In other words, Toyota will have to work harder to sell fewer cars. That’s what happens when you lose your focus.
Therefore, the key to strategy is to first find a strategic focus—a place where you can be the best and win the race. Trying to be all and do all won’t work. First of all, it is an impossible goal. You cannot be highest quality, cheapest price and fastest to market at the same time. Second, the lack of clarity probably means that you will be mediocre across the board and not win at anything.
The other strategic key is the need to make trade-offs on what is essential to carry on that race. In the case of Toyota, manufacturing and design excellence is critical to a focus on dependability. This is something that cannot be allowed to slip. It must be included in Toyota’s backpack. And other things need to be left behind so they don’t hold you back.
Depending on your focus, you will make different trade offs. While manufacturing was essential to the Toyota focus, it is not as essential to the Nike focus. Therefore, Nike can outsource manufacturing, just like the second runner outsourced the preparation of his food. By not putting manufacturing in the backpack, Nike has more room to focus on design and marketing—the two most essential skills for its strategic focus.
A winning strategy points out your company’s point of focus (where it will win) and then makes trade-offs on where to place your energy so that you can win the race at that point of focus.
To win horse races, the owners put blinders on the eyes of the horses, so that they can only look forward. The visual distractions to their sides are blocked. This makes the horses run faster. Are you focused on the forward goal, or is a lack of focus allowing your company to be distracted by everything that is peripheral to your goal?