Tuesday, July 27, 2010

Strategic Planning Analogy #341: Trophy or Pet?

The Roy Rogers and Dale Evans Museum in Branson, Missouri closed back in 2009. The Museum honored the life of cowboy singer/actor Roy Rogers (and his wife Dale), who made movies and had a popular television show back in the middle of the 20th century.

With the museum closed, the contents of the museum were auctioned off on July 16th of this year. Two of the more interesting items auctioned off were Trigger and Bullet. Trigger was the palomino horse Roy used to ride on the show. The horse died back in 1965. Bullet was the German Sheppard that appeared on the show, and was also Roy’s family pet. When Trigger and Bullet died, Roy Rogers had them stuffed by a taxidermist, so that they could be remembered and put on display.

Rural cable television station RFD-TV purchased the stuffed horse Trigger and the stuffed dog Bullet at the auction. They paid $266,500 for Trigger and $35,000 for Bullet. Bullet and Trigger will now be proudly displayed at the new Omaha headquarters of RFD-TV.

I don’t know about you, but I find the idea of stuffing one’s pet after it dies to be a little bit disturbing. Putting one’s dead pet on display like a trophy seems a bit unnatural and creepy to me.

Although this may seem like an odd thing to do to pets, it is not that uncommon for companies to do something similar with their strategies. Instead of caring for the strategy as a living document, they put it on display, like a dead, stuffed animal. Fancy strategy books are placed on the shelf like a trophy. They may even be commemorated with coffee cups, plaques, or T-shirts, with the company logo and the strategy theme emblazoned on them. The coffee cups and plaques also get displayed on the shelf like a trophy.

And there they sit…on display. They may be looked at and admired every once in awhile, but for all intents and purposes, the strategy is treated as if it were dead…a representation of a frozen moment in time past. To me, this is just as disturbing as a stuffed pet.

The principle here is that strategies should be viewed as and cared for more like a living, breathing pet than as a lifeless trophy. In particular, there are three ways in which a pet approach is more appropriate than a trophy approach to strategy.

Principle #1: Trophies Come at the End; Getting a Pet is Just the Beginning
Trophies usually come at the end of an activity, to reward the conclusion of some endeavor. For example, after an athletic competition is over, the winner gets a trophy in honor of having won. It is a reminder of the success of prior event—a celebration of a job well done.

Getting a pet is just the opposite. The day you receive the pet is just the beginning of the activity. Now you have to start the work of feeding and caring for the animal. Rather than a celebration of a conclusion, getting a pet involves the promise of much work in the future. One time I got a pet from the humane shelter and they would not let me take home the pet until I promised I would spend appropriate time and money to properly care for it (I even had to sign a document attesting to that).

Getting a strategy should feel more like receiving a pet than receiving a trophy. True strategies are not end-points, but starting points. The primary purpose of a strategy is to help a company achieve a better future state. It is a roadmap to future actions, not a celebration of past activities.

Does your company treat strategy formulation more as an end (like a trophy) or as a beginning (like a pet)? Here are some clues. If people act as if creating a strategy is just a task be done—something to check off on a “to do” list—then they have a trophy attitude. If people say, “Boy, I’m really glad we finally got that done” when the strategy formulation is over, then they have a trophy attitude. If they see the strategy document as proof of task completion, then they have a trophy attitude.

By contrast, if people see the strategy as the first step on a long journey of future activity, then they have a pet attitude. If they see the strategy as a formal commitment and promise to take particular future actions, then they have a pet attitude.

Principle #2: Trophies Sit on a Shelf; Pets are a Part of Your Daily Life
There’s not a lot one can do with a trophy once you receive it. It just sits there like a dead, stuffed animal. You can put it on display and dust it off every so often, but that’s about it.

Living pets are totally different. They require daily care and attention. They need to be fed and exercised on a regular basis. If you have a dog, you soon find that feeding them, walking them, and letting them out to do their thing quickly becomes a regular part of your daily routine. But that’s not all. Pets also need to be checked to make sure they do not get sick. And if they do get sick, you have to provide medicine to cure them. And if you do not take care of your pets on a regular basis, the police can have you arrested for animal neglect and cruelty.

Strategies also need to become incorporated into your daily routine, just like a pet. If strategies do not impact how you act on a daily basis, then why do them? A strategy is like a roadmap. Just knowing where I want to go is not enough. I need to take actions on a daily basis which get me closer to my desired destination. Otherwise, I will never reach my destination.

If you do not regularly care for a pet, it will die. Similarly, if you neglect a strategy, it’s relevance will die. I’d love to see the police arrest executives for cruelty and neglect towards their strategy, just as they do for neglect and cruelty towards animals.

How often is the strategy considered when decisions are being made and actions are being taken at your company? Daily? Monthly? Quarterly? Never? Is consideration of the strategy integrated into the daily routine? Do people even see any relevance or connection between what they do and what the strategy implies? Is the strategy just left on the shelf to be admired like a trophy? Could your employees be arrested for strategy cruelty and neglect?

Principle #3: Trophies Don’t Change; Pets Do
Trophies are typically made out of strong, durable materials. You can put them on a shelf and they will stay there, unchanging, for a long, long time.

Pets, however, change over time. They grow up. They get sick. You need to detect these changes and then adapt to them in your actions. For example, as you see your pets getting older, you may need to change what you feed them. You may need to change the exercise routine.

Strategies are living documents which are to be acted out in a dynamic, changing environment. One needs to become aware of the changes that are taking place and adapt the strategy to the changes, just as you would adapt your actions with a living pet. Otherwise, your actions will be out of sync with your environment and the strategy will sub-optimize.

The original strategy document should not be viewed like a trophy, which always stays the same. It is a work in process. Rather than being like a hard, unchanging metal/wood/plastic trophy, think of your strategy as being more like soft clay. It has a definitive shape, but it can still be modified a bit as conditions change.

This is not to say that you should be changing your strategy as often as you change the sheets on your bed. We’re not talking about strategy abandonment, but strategy modification. Just as we keep the same pet for years and work with it through the changes, we keep the same strategy for years, and work with it through the changes.

Once a strategy formulation process is completed, how often does your company:

a) Scan the environment for changes; and
b) Adapt the strategies/actions to optimize in this changing environment.

Is your strategy etched in unalterable stone, or is it written with a pencil? Is it seen as a living document? Do you ever go back and modify it?

Strategies should be viewed as being more like living pets than like dead trophies. Trophies celebrate an end, whereas strategies should be seen as a beginning. Trophies sit on a shelf, whereas strategies need to be integrated into your daily routine. Trophies do not change, whereas strategies need to adapt to change.

My wife and I recently went back to visit the college she and her brothers attended many decades ago. We went to the athletic building to look at the trophy case. There were trophies from back in the years when my wife and her brothers attended. There were photos next to the trophies showing the players on those teams, including a couple of photos of one of her brothers. The problem was that the photos were so old and faded that you could barely recognize the players.

That’s the problem with trophies. Over time, the source of that trophy fades away from memory. Time marches on, and if you stop planning for the future, you’ll stop getting new trophies.

Thursday, July 22, 2010

Strategic Planning Analogy #340: The Box vs. The Contents

A short time ago, I bought a fancy new water dish for our cats. It came with an electric pump. The pump pushed the water up over the outside of an inverted bowl. The cats were then supposed to lick the water as it ran down the bowl.

The manufacturer claimed that cats would love this fancy device. After all, cats are supposed to prefer gurgling running water over still water. In addition, this fancy device increased the levels of oxygen in the water, which is supposed to make it tastier.

I assembled the fancy water dispenser and waited for the cats to show their loving approval by instantly licking the water off the inverted bowl. Instead, I found one of the cats crawling into the box the product came in and playing with the cardboard flaps on the top of the box.

Apparently, the box was more interesting to the cat than its contents.

This experience with my cats should be familiar to anyone who has given gifts to small children. Quite often, they find the gift box to have greater play value than the toy that came in the box.

I have seen many parents get upset when the expensive toy is tossed aside as preference is given to the cheap box. But I say so what if the box is getting more attention than the contents. The child is happy and having fun. Isn’t that they whole point of giving in the first place?

Many business people also find themselves like those gift givers. They struggle mightily to create a superior product that their customers are supposed to love and then are disappointed when the product is ignored because the consumers are more interested in something deemed by the manufacturers as “superficial.”

“What’s the matter with these stupid customers?” they may ask. “Don’t they realize that my product is superior? Why are they distracted by these superficial things?”

My response? If something other than the actual product is what is making the customer happy, then perhaps you should be paying attention to more than just the product. Consider the entire package when developing your strategy. The whole idea is to make the customer happy, and if happiness comes from something other than the product itself, then that’s okay…just figure out a way to win on these non-product attributes.

The principle here has to do with recognizing the difference between a focus on the product and a focus on the customer experience. A focus on the product tends to be internally oriented—a focus on what I do to make the product superior. A focus on customer experience is externally oriented—a focus on how the customer interacts with the product. If you focus on the customer experience, you may find that the customer is not looking for ultimate product superiority. What they want is a better total experience, and that can only be improved by looking attributes external to the product.

For example, consider bleach. The purpose of bleach is to cleanse and disinfect. Therefore, one might think that to make customers happy, one should focus on making superior bleach—one that is the absolute best at cleaning and disinfecting.

The problem is this…it is difficult to make any one formulation of bleach meaningfully superior at cleaning and disinfecting. They all perform pretty much the same.

So what did Clorox do? They focused on the packaging. They created a unique spout on the top of their bleach bottle which reduced splashing. This made it easier to pour the bleach and less likely that any of the bleach would accidentally spill onto the person doing the pouring. Like in the story, they focused on the box (the bottle) rather than the contents (the bleach).

From a consumer experience perspective, this was a huge benefit. If bleach accidentally spills on a user, it can ruin the clothes they are wearing. By reducing the risk of ruining clothes being worn, Clorox made a superior user experience. Even though Clorox did nothing to improve the performance of the product (the bleach), they made the customer happier. And isn’t that the point?

I was working on a project one time to try to do some business in Mexico. During my conversations with one of the Mexicans, he made the following comment. “I don’t understand you Americans. Here in Mexico, we consider Corona to be one of the lowest quality, poorest tasting beers available. Yet, Corona is the beer you Americans decided to import, and you treat it like it is a premiere, high quality product. And by the way, everyone knows that the US has higher quality water than Mexico. So why are you importing beer, which is mostly water, from a place known for having inferior water?”

The problem with my Mexican friend’s logic was that he was product focused. He assumed that superior sales should go to superior products. He saw Corona as an inferior beer product. First, it came from a nation with inferior water and second, among other beers using that same water, it was considered by locals to have an inferior taste.

Here in the US, however, the major concern was not the quality of the liquid in the beer bottle, but the experience the customer had when holding that Corona bottle. Shortly after the conversation with my Mexican friend, I was on a camping trip in the US. On the campsite next to mine, a group of status-conscious Yuppies set up for the night. It’s hard to say they were “camping” because they brought all the creature comforts of their city life with them, including large propane street lights.

They decided they were going to have a party all night (which made it hard for my family to be camping next door). Everything about their party broadcast to the world their attachment to anything regarding status consciousness, including the way they dressed, the way they talked and the way they acted. And, as part of this status conscious behavior, they only beer they had was Corona.

To these Yuppie “campers,” it was almost irrelevant how the Corona tasted. It was just one more prop to enhance they experience of status-conscious lifestyle (and a darn good prop at that). Crown Imports, the firm that imports Corona to the US, apparently understood the importance of the packaging over the contents. They spent their time positioning Corona as the perfect beer for the status-conscious beer drinker. At the time they introduced the US to the beer, it was uniquely positioned as the beer where you put a lime wedge in the mouth of the bottle (how’s that for unique status packaging?).

There are lots of ways to improve the consumer experience that have nothing to do with the quality of the product itself. You can make the product easier to use through packaging (like Clorox). You can package the product inside better customer service (see this blog on gravel). You can connect the use of the product to charitable or social causes (see this blog on Toms shoes). You can improve convenience through the choice of delivery schedules or distribution channels. You can imbue the product with a status appearance (like Corona). You can take the same contents and customize them through packaging for different end users (consider Tide to Go stick versus Swash Get it Out stick).

You can position the product to be more fun to use (like McDonald’s Happy Meal packaging around a regular hamburger). Having watched how some kids “consume” a Happy Meal, this is a true case where the contents (the food) are often thrown away and the packaging (box and toy) is what is really enjoyed. This is very much like the story of my cat and the box.

So What have we Learned?

1) Don’t Just Focus on the Product
I’ve seen many business people get overly focused on the product and ignore almost everything else. The strategic emphasis is only on those internal product issues—improving production, improving quality. This is the “est” strategy. If I can only make my product the big-est, fast-est, cheap-est, strong-est, or some other “est,” then I am all set.

Unfortunately, the winner is often someone whose product is merely “good enough” but is packaged in a superior way.

I’m not saying to ignore the product. Product functionality must surpass certain minimum thresholds. But obsessing on complete product superiority to the exclusion of all the other factors important to the consumer is a mistake.

If you must focus only on the product, then define the product broadly, to include the packaging, the positioning, the image, the service behind the product, and so on. This is where key strategic choices can really make or break your business.

2) Focus on the Customer
Products must be seen within a context. That context is the way in which the customer will interact with that product. Improving that experience is more important than just improving the product. The goal of customers is not to make your production manager happy. It is to make themselves happy. And that happiness comes from having happy experiences. The more you can package your contents to accommodate and reinforce happy experiences, the better off you are—even if the actual functionality of the contents in that package are merely “good enough.”

If you want to focus on functionality, look at the functionality of the customer rather than the product. Are the customers functioning at a higher level of satisfaction (which could be rational or emotional)? If not, what can I modify in the entire package to improve their functionality?

Winning strategies look beyond merely seeking superiority in product function. They look at the entire package surrounding the product to ensure that the company is superior at creating consumer experiences with the product. These superior solutions may have little to do with the actual contents of your product and more to do with how it is packaged.

Don’t be upset if your customers act like my cat and ignore the product in favor of its box, so long as they are satisfied. And maybe you should spend more time on making your “box” more enjoyable.

Monday, July 19, 2010

Strategic Planning Analogy #339: Simple Solutions

Back in the 1960s, the United States and the USSR were in a race for dominance in outer space. Each country wanted to prove its superiority by achieving more in space than the other, like being the first to land a man on the moon.

There were a number of difficult challenges in getting a man to the moon and back. For example, in outer space there is no gravity, which makes it impossible to use a standard ball point pen. Things need to be written down while in outer space, so what do you do to solve this problem?

Well, the United States took a number of years and spent millions upon millions of taxpayer dollars to invent a pen that does not require gravity. It was quite an achievement. By contrast, the Russians found a different way to solve the problem. They decided to use a pencil (which costs practically nothing).

Government waste is nothing new. That multi-million dollar pen is not the first time governments have taken the expensive route when a much cheaper answer is available…and I’m sure it won’t be the last.

This is not just a problem with governments, however. Businesses also face all kinds of difficult problems. Just as in the case of the multi-million dollar pen verses a cheap pencil, there can be a tendency for business people to believe that complicated problems require complicated solutions. Well, many times you can solve a complex problem with a simple and inexpensive solution.

Before embarking on a long and expensive strategic journey to design a complex solution (like a pen that works in zero gravity), take a moment to consider whether there is a quick and simple solution (like a pencil). After all, just like the space race, businesses are in the race to win the hearts and minds of their customers. And in the business race, being slower to market with a more expensive alternative can destroy a company’s chances for success.

The principle here is that just because a problem may appear complex, that does not mean that the solution needs to be equally complex. Many times, there is a simple answer. In addition to the story of the multi-million dollar pen versus the pencil, here are some other examples of that principle in action.

Empty Boxes
There was a cosmetics company in Japan which had a problem. Occasionally, the assembly line where their soap was inserted into boxes failed. Customers could purchase a box of their soap at the store and then be disappointed when they got home and found that their box was empty. The soap never got inserted into the box on the assembly line.

The Japanese cosmetic company put its best engineers on the case to solve this problem. Their solution? They devised an X-ray machine to check every box going down the assembly line. The X-ray machine would take a picture of each box so that two technicians could see into the inside of the boxes to detect whether or not the box had soap in it. This was a complex and expensive solution which slowed down the assembly line, created a need for expensive equipment and the hiring of more people, and could create potential radiation problems in the factory.

By contrast, one of the rank and file people on the assembly line found a simple solution. He bought a strong industrial electric fan and pointed it at the assembly line. The wind from the fan blew against each box as it passed by the fan. If a box was empty, the fan blew it off the assembly line, leaving only the boxes with soap in them. This solution was cheap and did not slow down the assembly line.

Big Trucks
And you’ve probably at some time heard the story of the large truck which got stuck under a bridge. Apparently, the truck was taller (or the bridge lower) than expected, so there was not enough clearance. Engineers were looking at all sorts of complex solutions for getting the truck unstuck—including taking apart parts of the bridge or cutting off parts of the truck.

A little boy walked by, looked at the situation, and suggested that all they need to do is let some of the air out of the truck’s tires. This would lower the truck enough so that it could be simply driven out from under the bridge.

Rough Road
This past weekend I was on a long road trip. I was starting to get tired and was worried about getting so tired that I would accidentally swerve off the road into a ditch. I started thinking of ways to prevent this problem. My first thought would be to put laser beams along the side of the road. If a car swerved off the road, it would break the laser beam. This would then send a signal to a sensor that would activate a series of lights and horns to alert the driver that they had crossed over the edge of the road.

Of course, then I remembered that this problem had already been solved. The road crews had cut out narrow little strips of concrete from the edge of the road. When a car crosses over the edge, the tires will go over these places where the narrow strips were missing. This would shake the car a little and make a loud rumbling noise that would get the driver’s attention. It was a cheap and simple way to solve the problem…much better than my idea.

So what can we learn from these stories to help up avoid making poor choices in solving problems?

1. Look at how You Define the Problem
Before you start to solve a problem, make sure you have properly defined the problem you are trying to solve. With the space story, the US had defined the improperly defined the problem as “How do I design a pen to work in zero gravity.” The USSR had more properly defined the problem as “How can I take notes in outer space.” By pre-supposing that the answer required a better pen, the US ignored the possibility of a simple, non-pen solution.

In the story of the truck, the engineers were trying to solve the expensive problem of “how to untangle a tall truck from a low bridge” rather than using the boy’s approach of “how to eliminate the tangle altogether by changing the relative height of the truck to the bridge.” The engineer’s question caused them to look up for a solution, while the boy’s question caused him to look down (at the tires) for the solution.

In other words, how you frame the question will determine where you focus to find the solution. Poorly worded questions tend to look at process improvement (better pen) or cleaning up a mess (truck stuck on bridge). These questions almost by default tend to create complex and expensive solutions.

By focusing on improving a process, you are eliminating the option of seeking out different options, like eliminating a process or substituting a radically different process. By focusing on fixing a mess, you are missing out on options which eliminate the mess in the first place.

Better worded questions look at outcomes (ability to take notes) and solutions (truck no longer under bridge) rather than the immediate problem at hand (bad pen, stuck truck). Take time to phase your question properly, so that you are working on discovering solutions rather than fixing problems and processes.

2. Look at what You are Trying to Accomplish
In the case of the Japanese soap box engineers and my approach to solving drowsy driving, we both made a fatal mistake. We assumed that prior to solving the problem, there needed to be intermediary steps. We both added steps around detection and segregation.

The Japanese engineers wanted an expensive process to first detect which boxes needed special treatment (X-rays). Then they would segregate those empty boxes and treat them differently. My road process wanted expensive lasers to detect which drivers were driving poorly before segregating them for special treatments of noise and lights.

The simple solutions avoided the prior steps of detection and segregation. For the soap boxes and the fan, nobody needed to pre-determine which boxes had no soap in them and the boxes did not have to be separated for different treatment. Instead, every box was treated the same all the time. With the fan, empty boxes disappeared all on their own, without prior detection.

With the cut grooves in the road, there was no need for an expensive laser detection system. And you didn’t need a process to turn off and on warning sounds based on that detection. All cars were treated the same, and if a car was veering off the road, the system took care of itself.

In other words, before tackling a problem, make sure to examine what you are trying to accomplish. Sometimes we try to accomplish a series of steps which require events like gathering knowledge, detecting differences, and treating things differently based on these differences. Perhaps you do not need to accomplish all of those intermediate steps in order to solve the original problem. Again, one needs to focus on the solution rather than the process. By focusing on all the steps in a process, you may fail to see the benefit from eliminating steps or using a different process with simpler steps.

3. Look at who you ask to Solve the Problem
As we pointed out in an earlier blog, “to a hammer every problem looks like a nail.” In other words, we tend to create solutions based on our backgrounds and our strengths. An engineer will tend to look for solutions which require expensive engineering, because that is what they do for a living. In the case of the pen, the X-ray and the dismantling of a bridge, engineers were looking for engineering solutions. The idea for the fan came not from an engineer, but a worker on the line. The idea to let air out of the tires came from a little boy.

When you are looking for solutions, who do you have on the solution team? Consider having a diverse group, including people on the front line, customers, new employees, and people from diverse backgrounds and disciplines. It’s hard to find out-of-the box solutions if you keep turning to people in the same box to solve them. Make sure your team includes people whose occupation is not tied to expertise in creating complex solutions.

Just because a problem is large does not mean that the solution automatically needs to be large, complex, expensive, and take a lot of time. Often, there can be a simple solution. To find the simple solution, a) frame questions around solutions rather than problems; b) don’t get hung up on solving a number of unnecessary intermediate steps; and c) have a diverse team working on the solution.

Sometimes problems do require complex solutions. To determine whether a more complex solution is required, ask your self these questions:

1. Am I just treating a symptom or the root cause of the problem? If you are just treating a symptom, then you need to broaden the solution.

2. Is this problem intertwined with lots of other issues in a system where actions in one area can ripple out into dozens of unintended consequences in other areas? If so, then you probably need a broader systemic approach.

Wednesday, July 14, 2010

Strategic Planning Analogy #338: Traffic Jams

It’s common for larger cities to have traffic web sites. You can go there to find out where the major traffic accidents and road construction slow downs are. It’s great to check out the site before getting in my car to drive home from work. That way, I can adjust and plan a route home which avoids the worst of the traffic problems.

Since most days tend to be uneventful on my route home, I tend not to look at the web site all the time. Of course, it seems that whenever I check the site, there are never any problems and that whenever there is a problem, that is the day I didn’t check the site. As a result, the traffic tie-ups tend to come as a surprise to me. I don’t know about them until it is too late to avoid them. Then I am hopelessly stuck in traffic, unable to move or adjust. Had I only been more proactive by checking the site, I could have avoided the mess.

Like cars, businesses can get can get hopelessly stuck. Just as actions outside your control (like accidents, flooding, and road construction) can make your normal commute route unusable, external actions like shifts in the economy, competitive actions, and shifts in consumer desires can bring your old business plans to a complete halt.

In driving, if you know about the potential traffic problems in advance, you can re-plan your route to avoid the worst. The same is true in business. If you know what difficulties lay ahead, you can adjust your plans to avoid problems and become more in tune with where the opportunities for smooth progress are.

Checking out those traffic web sites are a lot like an important piece of strategic planning. Strategic planning takes the time to see what’s going on in the environment before starting the journey. That way, you can prepare a route for your business which gets you to your desired location faster and with fewer difficulties.

Avoiding this step of strategic planning would be like ignoring those traffic web sites. If you are unaware of the changing dynamics, your business will be surprised when the traditional path you take to profits is suddenly and unexpectedly halted by the new conditions.

By not making any adjustments to your strategic path until the old path is already obsolete (you are already stuck in “money-losing traffic”), it is often too late to make a smooth transition to progress. The road to recovery is slower and more painful. In addition, you have less cash flow to make the transition and competition (who planned better) will get to the new position sooner and get a head start on gaining ownership of that position.

It is much easier to adjust while times are still good, cash is still flowing in, and you still have a strong reputation with your customer base. Unfortunately, it is also more tempting to avoid looking ahead for necessary adjustments when times are good, cash is flowing in, and your reputation is strong. Don’t become tempted as I was to stop looking at that web site just because it had been a long time since the path had seen problems. The day you stop looking could be the day when your really need to look.

The principle today has to do with preparing for strategic adjustments. A good, solid strategic position usually lasts quite awhile and should not be changed all that frequently. However, the way in which that strategy is applied on a daily basis may need occasional adjustments. It is better to be proactive by adjusting in anticipation of change rather than waiting until the old methods no longer apply and scramble for a way out of the traffic jam.

Take Wal-Mart, for example. Wal-Mart’s strategic position is rooted in low cost, low price. This is a great position which can last for many decades. However, the best path for pursuing that low cost, low price strategy may need an occasional re-routing. By looking ahead, Wal-Mart recently saw that attitudes about the environment, energy and sustainability were changing. Looking at these environmental changes through the lens of their low cost, low price strategy, Wal-Mart saw the opportunity for a win-win strategic adjustment.

Wal-Mart discovered that if you approach energy, environment and sustainability issues in a particular way, it can lead to substantial cost savings—savings in energy usage, savings in packaging waste, and so on. All these savings lowers costs, so that one can lower prices. By proactively getting into the movement early and by approaching it aggressively, Wal-Mart was able to reinforce its low cost, low price strategy while at the same time become more in tune with the desires of their customer (and improving its consumer image).

This is only one in a series of adjustments Wal-Mart has made over the years to remain a leader at achieving is low cost, low price position. Earlier adjustments have included moving from low technology to high technology, adding groceries to the merchandise mix, and moving from a pure adversarial role with vendors to a bit more of a cooperative partnership. If Wal-Mart had not made these adjustments and kept on the same exact path they were on in the 1970s, they would have lost their leadership position. They would have gotten stuck in traffic and not grown to the success they are today.

It the extreme, as we saw in the last blog, sometimes the environmental changes are so severe bold new directions need to be taken. For example, the movement from analog to digital was so severe that the entire Kodak strategy (based in analog film and paper) needed to be abandoned and an entirely new route needed. Because Kodak did not boldly seek a radical new route, it got stuck in traffic while digital companies passed it by.

There are three principles we should keep in mind to help one become proactive in avoiding business “traffic jams.”

1. Check Traffic Conditions Early and Often
We have already talked about the importance of checking the traffic conditions early—before you plan out your journey. However, as we all know, the marketplace is dynamic and in continual flux. Road conditions when we start the journey will not necessarily stay that way throughout the journey.

Therefore, scans of the operating environment should not be seen as isolated, infrequent events, but rather as an ongoing concern. The more we can update our data base on a “real-time” basis, the sooner we can detect the need for adjustments, and the better our adjustment decisions will be.

Do you have a daily/weekly/monthly/quarterly dashboard of key environmental indicators (like those traffic web sites) to help you adjust while your business is on the road?

2. Know Your Alternate Routes in Advance
When I was commuting in Minneapolis, I had preplanned dozens of alternative routes. That way, no matter where I was during the commute, I had an alternative path from that point to my home or work. As a result, when things started to look bad on my normal route, I could quickly (and calmly) adjust to a superior alternative route.

This same principle applies to business. The equivalent of developing alternative routes would be scenario planning. By doing scenario planning in advance (and tracking the key factors determining which scenario is most likely), one can quickly adjust properly at the point when the key factors point to a need to adjust.

Waiting until disaster sets in to find an alternative is too late (just ask BP regarding the oil spill in the Gulf of Mexico). Do the scenario planning in advance so that everyone in your company knows what to do when it is time to make the shift. This eliminates panic, confusion, and rash decisions which would be regretted later. It also helps you make the transition faster.

3. Grasp the Immediate Ramifications of Future Problems
One of the biggest frustrations strategic planners have to deal with is getting the rest of the organization to adequately focus on longer-term issues. As we have talked about so often in these blogs, the “tyranny of the immediate” often blinds most employees to the long-term. They become so focused on putting out the fire-of-the-day that there is no time to think beyond today.

When presenting long-term plans, the response is often “I see no relevance to what I have to deal with today, so I will ignore it.” Therefore, it is imperative for us to help the organization see the relevance of the long-term to the issues of today.

Going back to our commuting analogy, that car accident slowing down traffic may be a long way away from the office, but that doesn’t mean I should ignore it until I get there. It has immediate relevance. For example, depending upon which alternative route home is most desirable for me in my commute, I have to make a choice immediately upon leaving the company parking lot. One route requires me to turn left upon leaving the lot, while the other requires me to turn right. Even though the accident may be many miles away, the changes in what I need to do while driving occur immediately upon leaving the office.

We need to show our leaders that long term paths have immediate implications on whether we turn left or turn right today. Wal-Mart was not going to achieve the full cost-saving ramifications of environmental sustainability immediately, but the instant that decision was made, it had immediate ramifications on how to deal with vendors, how to design stores, how to operate its logistics, and so on. We need to “connect the dots” to show that relevance so that we turn the right way right now.

In addition, we can show that by only focusing on today, we are like those people who ignore the traffic web sites and are surprised when they land in a traffic jam. Those traffic jams are the fire-of-the-day that they are constantly dealing with. Had they taken time to look long term, they could have avoided a lot of those fires-of-the-day by planning alternative routes around them. Wouldn’t it be nice to get out from under the tyranny of the immediate?

The more time we spend looking long term at what’s happening in the marketplace, the better we will design a path for our business which avoids profit slow-downs (and gets us to a better future more rapidly). This includes environmental scans at the beginning of the process, environmental dashboards while in process, and continual reminders of how long-term changes impact what we should be doing today.

Sometimes, the best way to avoid the traffic on the road is to take a helicopter. Don’t be afraid to think out of the box to radical new approaches.

Monday, July 12, 2010

Strategic Planning Analogy #337: Magical Profits

When I was a child, I wanted to grow up to be a magician. I read quite a number of books about how to do magic tricks. I even bought some magic kits that came with an assortment of tricks in them. I would take these tricks and combine them with what I learned from the books and put on magic shows for other children in the neighborhood.

It didn’t take very long before I gave up this ambition. First, as it turns out, I wasn’t very good at doing magic. Second, once the other kids in the neighborhood had seen one of my tricks, they didn’t want to see it a second time. They wanted to see new tricks. I simply wasn’t good enough (or rich enough) to keep coming up with new tricks.

Lots of people enjoy magic. It seems like business people are particularly fond of it. After all, businesses tend to flock to whatever the latest “trick” is that is being written about to “magically” improve the performance of their company. This includes tricks like six sigma, balanced scorecards and all those tricks referred to by some three-letter acronym.

Unfortunately, most business people seem to be as bad at magic as I was as a child. Their results do not magically improve. The trick fails to deliver as promised, so the trick is abandoned.

And then, like the other kids in my story, you can get business people interested in magic again if you come up with some new tricks they haven’t seen before.

Magic looks powerful when performed on the stage by a trained magician (who are often called “management consultants” in the business world). However, if you try to apply what you saw on stage in real life, you soon find out that what you saw on stage was just an illusion. The power isn’t real.

The principle today has to do with risk. In particular, the principle is that staying the course is often riskier than taking bold new moves.

At first, this may sound counter-intuitive. After all, staying the course is to remain on the same path which created today’s success. And, as research has shown, most bold new moves fail. Whether you are talking about new product introductions, acquisitions or other such bold moves, the vast majority fail to provide a positive return on investment. Therefore, it appears at first as if bold moves are the much riskier choice.

The problem is not that bold moves are inherently more risky. The problem is that it is easy to confuse solid strategic moves with magic tricks. Magic tricks can appear bold, but that is only an illusion. Risk is increased, because illusions rarely have a lasting positive impact.

Instead, true success comes from making real, substantial improvements either to the prevailing value proposition in the industry or to the business model which supports the value proposition. If you focus on improving value or the business model which supports it, then you may be substantially reducing your risk of failure, even if the path to do so is bold departure from the past.

So the riskiness of an acquisition is not based on the size of the deal, but on how one approaches an acquisition. An acquisition is just a process. If you justify an acquisition based on a belief that all sorts of “magic” will happen when you combine companies, then the acquisition is just a bad magic trick. On the other hand, if strong, strategic due diligence is done to ensure that either customer value or business model performance will significantly improve through a combination of companies, then the acquisition is no longer just magic. It is a means to make a solid strategy a reality.

In the early 1990’s IBM’s old strategy focused on computer hardware was becoming obsolete. They knew they needed a bold move to stay relevant in the computing industry. The bold move was to shift from hardware to software and consulting. It was only after the bold move was strategically chosen that they started on the path of acquisition—acquiring 200 software businesses chosen because of they fit with the master plan. It was strategy first, supporting tactic second. As a result, the bold move by IBM was a success.

The same can be said for innovation. If money is just blindly poured into innovation in the belief that any innovative endeavor will magically increase profitability, then you have turned innovation into a magic trick. By contrast, if one starts with a focused innovation plan, you will point your innovation efforts into areas more likely to benefit your company.

Acquisitions and innovation programs are not magic wands. They are merely tools. The tools are only as good as the person who is using them. Random sawing and nailing does not magically result in a sturdy house. To get a sturdy house, you need to follow the blueprint. Solid strategic planning is like that blueprint, telling you how to use these tools properly.

There is not a large risk in building a house if you start with a good blueprint and manage the process well, even if the house is huge. But if you try to build a house without adequate plans, the risk of failure is huge, even on a small, simple structure.

With this in mind, we will return to the original proposition that bold moves can be less risky than staying the course.

1. Staying the Course Will Eventually Fail Because All Strategies Eventually Fail
As mentioned above, successful strategies are based on providing superior value via a superior business model. What constitutes superior value and superior business models today will eventually cease to be so due to changes in the environment. Competition may catch up or pass you by. Consumer needs and desires may change. Technology may make your approach obsolete.

The world is dynamic and changing. If you do not adapt to the change, you will cease to be relevant. Kodak film and paper was a superior way to solve imaging problems at one time. But when the world shifted to digital, and cameras became just a feature on a mobile phone, and images were posted on Facebook rather than put on paper, Kodak’s analog strategy was no longer relevant. In that case, staying the course increased the risk that Kodak would fail. A bold, early move to find relevancy in a digital world could have actually been less risky.

2. Small, Incremental Change is Rarely Enough to Overcome Environmental Change
No amount of incremental improvement to photographic film and paper would have been enough for Kodak to overcome the dynamic redefinition of superior value and superior business model wrought by the shift from analog to digital. Only a bold move could maintain any resemblance to Kodak’s former leadership in imaging.

Similarly, consider the problem facing Blockbuster. The Blockbuster video rental business model was based primarily on superior convenience. This superiority was a result of a strategy focused on having the best network of conveniently located stores. Then along came Redbox with a new business model based on eliminating the video store and replacing it with video vending machines.

The Redbox video vending machine business model redefined convenience. These Redbox vending machines became more plentiful than Blockbuster stores (superior proximity convenience), were located inside of stores that were already being patronized, like grocery stores (superior one-stop shopping convenience), were located in places where one could access them 24 hours a day (superior time-access convenience), and did not require waiting in a long checkout line in a store to make the rental (superior transaction-time convenience). And by eliminating the high cost of leasing and operating a store, Redbox could rent DVDs at a lower cost than Blockbuster (meaning that the added convenience of Redbox came at a discount rather than a premium).

There is virtually no way to incrementally modify all of those Blockbuster stores in order to regain superiority in convenience. A bold move is needed to either find a new value to be superior in or a bold move away from the old store-based model. Oh, and by the way, a business model based on delivering videos directly to the home via the internet is also growing, making stores even less relevant. Staying the course with the old strategy is the riskiest thing Blockbuster could do.

3. Bold Moves Need to Be Based on Solid Strategy Rather than a Reliance on Magic
Bold moves should not start with a focus on a particular tactic (like acquisition or innovation or web 2.0 or sustainability). Again, these are just tools, not magic wands. Instead, the focus should be on finding a bold new business model which ensures superiority at delivering a particular type of value which is relevant for the evolving environment. Last month, many of my blogs looked at ways to do this radical rethinking of business models.

Once you determine the proper value and business model, then you can start looking to see which tool (or tools) is the best means to get there (acquisition, innovation, strategic alliance, web 2.0, etc.). This helps one avoid the high failure rate associated with these tools.

Also, it pays to be a bit skeptical when presented with bold new strategies. Don’t automatically assume that all of the synergies and benefits will magically appear as promised in the business models. The more the model is based on a solid strategy (rather than the latest trends in the fashion of business tricks), the less risk there is.

Sticking to the old ways of doing things in a dynamic world almost guarantees eventual failure. Even incremental change may not be enough to remain relevant and superior. Instead, only bold moves may be enough to remain relevant and superior. Yet bold moves also have their own type of risk. That risk is heightened when the bold moves are based on a belief in the magic of a particular tactic rather than properly doing one’s strategic homework. If a proper strategic approach is used, even radical bold moves can become less risky than staying the course.

When I gave up magic, I took an interest in juggling. I wasn’t good at that, either. Juggling in business can be an exercise in failure as well. It’s difficult to juggle both a continuation of the status quo and a bold move in a new direction. They need to be managed separately, by different individuals who can focus on just one of the tasks.

Tuesday, July 6, 2010

Strategic Planning Analogy #336: Gold Rush

Over the centuries, there have been numerous occurrences of people discovering deposits of gold or some other precious metal. Once the word gets out, almost immediately thousands upon thousands of people rush to the site to make their fortune.

The ones that come to mind for me are the San Francisco Gold Rush of 1849 and the Klondike (or Yukon) Gold Rush of 1897. San Francisco (then called Yerba Buena) went from being a small town of 79 buildings and a few hundred people the year before the gold rush to a population of 100,000 in the following year. In Klondike, the population went from practically nothing to around 40,000 after gold was discovered there. That’s a lot of people looking for gold.

Unfortunately, whenever a gold rush occurs, only a small handful actually become rich off the gold. Most soon leave the area and return home as poor as when they started (or worse). Many mining towns quickly disappear once the gold disappears, leaving just abandoned buildings. The gold may be precious, but the places where it is found (and the people finding it) are treated as disposable.

The business world is a lot like those gold miners. When word gets out that there is a hot, new growth industry, lots of businesses flood into the marketplace. Soon there is a glut of businesses all fighting to make their fortune in an over-crowded space. Recent examples would be the rush of business into the dot-com boom of the 1990s, the Web 2.0 boom of the 2000s and now the rush into sustainable energy businesses.

And, like with the miners, only a few of these businesses actually survive and make a fortune. Most of the businesses soon go under. I remember being in Seattle and San Francisco soon after the dot-com bubble burst. There were abandoned office spaces all over the place, almost like the mining ghost towns that were abandoned.

The key principle here is that just because an industry becomes hot does not mean that everyone who tries to make a fortune in that industry will become hot. Most of the companies who flock into such an industry will, in fact, fail. Just as most gold miners do not make a fortune in mining, even when they are in a “hot” location, most businesses do not make a fortune in hot industries.

As Michael Porter likes to point out, it is very difficult to earn high profits in an industry which is historically not very profitable (think airlines in the US). But this does not mean that it is very easy to make profits in an industry with higher profits. The reason? Profits do not flow equally to all players.
A few will do very well while the rest struggle. For every Amazon and Ebay that successfully came out of the dot-com boom, there are thousands who died a horrible death.

So what can we learn from the gold miners to help us be one of the few that makes a fortune in a hot market?

1) Choose a Prosperous Position
Just because gold was found near San Francisco in 1848 and near Klondike in 1897 does not mean that every patch of land near San Francisco or Klondike was full of gold. A few spots were full of gold, but most were not. If you wanted to make a fortune in gold, you needed to stake a claim to a spot rich in gold. The rest of the stakes were fairly worthless. It doesn’t matter how industrious you are at panning for gold when the creek has no gold.

The same is true in the business world. Just because some people were having success in some spots during the dot-com boom does not mean that every dot-com business plan was destined for fame and fortune. During that period, I saw a number of dot-com business plans that were absolutely horrible. The business models were not well thought out. Many projected costs higher than revenues into perpetuity. For some reason, these people felt that if you took a bad business model and put it on the internet, something magical would happen, causing it to suddenly be a great business plan.

Just as successful miners positioned themselves near where the larger deposits of gold were, successful businesses need to be concerned with their business positioning. You need to position your business at a place where you can provide high value to a chosen customer—high enough value so that they will pay you more for your offering than what it costs you to deliver it.

Rushing into a hot market without a sense about how you are positioned to win is like rushing to Klondike without a sense of where the gold is.

Over the years, I’ve heard a number of businesses who enter a hot market without a plan positioning them to win say something like this: “We’re not strong enough to take the leading position, but the market is so big and so prosperous that we will get our fair share and still do alright.” Who said that market share is “fair” and handed out proportionately to everyone who shows up? Markets always eventually go through a consolidation, with the strong getting stronger and the weak going away. If you do not have a position where you can win, you will not get that “fair share” of markets or of profits. You will end up with nothing.

It is not enough to just find a hot market. You need to find a place within that market where you can win.

2) Protect Your Stake
When a gold miner found a prosperous stake, their next worry would be to protect that stake from those who would want to take it away from them. These people might try to steal the location away from them, go upstream to get closer to the gold source before it reached them, or build as close to the successful miner as they could to siphon gold away from their operation.

The same situation exists today. If you find success, others will try to take that success away from you. They may try to “steal” your market share by copying you or take you to court to slow you down or shut you down.

The point is that just because you are in a hot business does not mean that you are safer. In some ways, you are less safe because there are more people trying to “steal” your business.

Therefore, you must become like the successful miners and not sit back and relax in your success. You need to protect your stake by aggressively working to protect your winning position. This may require reinvestments to extend your lead in providing value. It may require getting closer to your customers so they have less reason to leave you.

Amazon survived the dot-com bust because it worked hard to create the greatest value in its field. Rather than take profits out of the business early, it reinvested to create leading edge benefits.

3) Consider Support Services
Back during the San Francisco gold rush, there was a man who heard all the miners complaining about their pants. They said that mining was rough work and their pants were not strong enough to hold up under the work. They were tired of always having to replace their pants.

Well, when this man heard these complaints, he looked for solution. He found a supply of heavy denim cloth and rivets, originally brought to San Francisco to make tents for the miners. He took these materials and made pants out of them. The pants were a huge success.

And that was how denim blue jeans were invented. The man who invented them, Levi Strauss, made a fortune with his Levi’s jeans.

The point here is that often the most prosperous part of a hot market is not in the center—where competition is intense—but on the edge, supplying support to the core business. In these mining towns, often the most prosperous place to be was not as a miner, but as someone catering to the needs of the miner. This included supplying them with denim jeans, supplying them with food, and providing places for them to gamble away all that they earned.

Just as Levi Strauss made more money selling jeans to the miners than what most of the miners made, Cisco made more money selling servers to the dot-com businesses than the dot-com businesses made during the boom. A lot of the profitability in the internet boom has also gone into the pockets of support delivery services like FedEx or DHL. In the current rush to build electric cars, I would not be surprised if the battery suppliers make more money than the car companies.

Therefore, when looking for a prosperous strategy in a hot market, consider opportunities on the edge to support core. It may be a better option.

Don’t be lulled into thinking that just because you are operating in a hot industry, all your problems are over. Success in a hot industry is not a given. In fact, most of the players in a hot industry fail. To succeed, you still need to work on the basics—creating a winning position in the marketplace, building barriers so that others cannot steal away your success, and looking at support businesses as a source of profits.

I once visited an abandoned gold mine where most of the gold had long since been extracted. It had been turned into a tourist attraction. They let us pan for gold. Eventually, after many tries, I got this one tiny little flake of gold. I can see why miners would eventually give up if their stake was not in a superior location. Better to spend your time up-front choosing a superior location than to rush to work at an inferior position.