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.