Thursday, August 26, 2010

Strategic Planning Analogy #348: Bigger Vision

Back in the 1980s, David Graham was trying to figure out a way to revive the economy of southwestern Indiana. His conclusion: the economy was poor because there was no interstate highway running through the region.

Mr. Graham tried to get the government to extend interstate 69 from central Indiana to southwestern Indiana. Unfortunately, a 1990 study said that the project didn’t make financial sense. Nobody in government would back the project.

Normally, that would be the end of things, but then Mr. Graham ran into David Reed. Mr. Reed had a broader vision. Interstate 69 already ran from the Canadian border southwesterly towards central Indiana. What if this road was extended all the way to Mexico? It would become the centerpiece symbolically connecting the three countries of the newly being formed North American Free Trade Agreement (NAFTA).

All of the sudden, interstate 69 was getting fans from all over the country. All the politicians from areas located along the pathway to Mexico were rushing to back the plan. Large, national lobbyists were backing the plan. It was getting attention at the nation’s capital.

And, of course, if a road is to be built all the way to Mexico, it will have to go through southwest Indiana.

This story is based on a review of the book “Interstate 69,” which appeared in the Wall Street Journal. The concept here is fascinating. Mssrs. Graham and Reed took a local project which nobody was interested in and made it a national passion all because they found a way to attach their local agenda onto something larger which others could get excited about. Had they stuck to just their own local agenda, nothing would have happened.

Every business has its personal agenda—things which they want their business to accomplish. They may want to increase sales, or increase production or increase profits—something which will benefit the company. However, if a business only promotes its own personal agenda, it may not get much support. Why should others help promote the profitability of any one business if there is nothing beneficial in it for anyone else?

If a business wants assistance in getting its personal goals accomplished, it helps if you can align those goals with a greater purpose which has an established base of supporters. That way, as all the support behind the greater purpose moves forward, you can ride the coattails and get your agenda accomplished as well.

The principle here is that strategic planning often needs to reach beyond just what is in the interest of the company to include a broader base of constituents. Unfortunately, it is easy to get caught in the trap of localism when devising strategic plans. By this, I mean strategic planning which only selfishly looks at what is best for the company. After all, isn’t the primary goal of strategic planning to create a better future for the company? What could be more selfish than to create plans to improve a business’ prospects for success?

However, the irony is that often one can be even more successful if effort is diverted from a purely personal agenda to a larger agenda. Rather than starting a strategic planning process by asking “What will make me better?,” perhaps a better question is “What great, larger cause can I get behind that will open doors of opportunity for my business?” Because Mr. Graham got behind a larger cause of building a route between Mexico and Canada, he significantly increased the likelihood of getting the opportunity to have a major interstate expressway run through southwest Indiana. If he had stayed focused on just what is best for southwest Indiana, the potential of getting that expressway would have been 0%.

Department Store Example
There are many examples of this principle in action. I am reminded of a book called “Merchant Princes,” which came out in the 1980s. This book told the stories of the families which built all of the great local department stores in the U.S. back in the late 1800’s. In almost every case, these leaders spent a great deal of time on projects beyond the scope of their department stores. In particular, they spent a lot of time on projects designed to boost the economies of their local community.

These leaders knew that economic growth is not spread evenly. Some communities grow faster than others. They also knew that there was a greater chance that a community would grow better than average if there were groups designed to proactively promote the community. And if this larger agenda of building a strong, growing community was achieved, there would naturally be greater opportunities for their local department store to take advantage of that growth.

If these department store families went around begging community leaders to make them more profitable, they would not have gotten much support, if any. But by asking people to help them create a better local community, they got a lot of support. That support indirectly benefited the department store.

By contrast, what if these department store leaders had only concentrated on their own local business? They could have built one of the greatest department stores on the planet. However, if they ignored the larger issue, that store could end up located in a small, shrinking, dying economic area. All their effort would be for naught. Without growing populations of prosperous people, there is little chance for those department stores to be successful. It is only by embracing the larger agenda that they could maximize their local agenda.

Automotive Example
A more recent example would be in the automotive industry. The great recession was making it difficult for automotive companies to survive. The industry players needed help. They discovered that they were more likely to get government assistance if they embraced a larger agenda. That larger agenda included things like trying to protect local jobs and trying to move to greener electric automobiles.

A lot of people would be against bailing out wealthy business leaders just so that they can become wealthier. However, if you tell them they are helping to save jobs and save the planet, then you are more likely to get support. And indirectly, that effort to save jobs and save the planet also saved some automotive businesses.

Applying the Principle to Strategic Planning Process
So how do we apply this principle to the strategic planning process? Well, instead of focusing the planning process on one question, we should consider three questions. The one question we usually focus on is “How can I build my business?” This is the selfish, narrow question. To this, I would like to add two more questions:

a) How Can I Build My Base of Alliances? And
b) How Can I Build My Base of Opportunities?

Again, the irony is that if we spend less time focusing on “How to build my business” and divert some of that effort to building alliances and opportunities, we will end up building a more successful business.

Building Alliances
Mr. Graham improved the likelihood of getting his highway when he started moving his focus to building alliances. He started the Mid-Continent Highway Coalition. This became a tool for gathering a broad base of allies. The more allies he had, the more voices there were putting pressure on the government to get the highway built. To get those allies, he had to change his strategic vision to include more than just concern over southwest Indiana.

When you are creating your strategic vision, are you making it broad enough to entice allies to rally around your cause? Are you then building tactics around that vision to proactively seek a broad base of allies? Are you then building tactics to leverage your allies to your mutual benefit?

Building Opportunities
As part of Cisco’s strategy, they spend a great deal of effort sending people to developing nations to teach them about the benefits of investment in telecommunications infrastructure. They are not selling the benefits of Cisco. They are selling the benefits of infrastructure. Cisco points out how telecommunication infrastructure investments can be the best and fastest path to get a developing nation to the next level of prosperity. It will make the leader of that nation a hero.

The goal of these efforts is to build more infrastructure creation opportunities. Cisco does not always win the bid to build that infrastructure when it goes to bid. However, by devoting effort in the strategy to education, Cisco creates more occurrences when a developing country decides to build such an infrastructure. So even if Cisco doesn’t win all the bids, it ends up with more business than it would otherwise have gotten, because it has created more business to bid on.

This is like the department store leaders who worked on building prosperous cities. There was no guarantee that all that prosperity would be spent at their department store, but it certainly increased the potential pool of money that they had the opportunity to go after.

How much of your strategy is spent on building the opportunity pool to extract your business from? Being the best soccer player in the world while working in a country which hates soccer is not nearly as lucrative as being merely a very good soccer player in a country which worships the sport. Just as building the sport builds the player’s potential, spending time building your industry can improve your company’s potential.

The irony is that if you want to selfishly optimize your success, it usually pays to spend less of your strategy time on your selfish ambitions and add to your strategy broader concerns. These broader concerns tend to provide you with more allies and more opportunities, which in the end provide greater potential for those selfish ambitions. This is not about merely doing good for the sake of doing good, but about building a stronger path to a larger pool of profits.

Most of the extension of interstate 69 still isn’t built. Even if you have lots of allies, when money is tight, progress is difficult. However, the state of Indiana has recently started work on extending interstate 69 into southwest Indiana. And that is success that would not otherwise have occurred.

Sunday, August 22, 2010

Strategic Planning Analogy #347: GPS

I love those GPS devices you can put in cars. I’m a typical guy who doesn’t like to ask for directions, and with GPS, you don’t have to ask for directions.

I remember when those devices first came out, and about the only cars that had them were rental cars. I was on a business trip to go visit some stores. I put the addresses of the stores I wanted to visit into the GPS device on the rental car and the device would tell me how to get to the stores.

That worked fine until I put in the address of one particular store. The GPS device took me to a location, but the store wasn’t there. I got really angry with the GPS device for taking me to the wrong location. I was blaming it for having a defect, because it did not get me to the store I wanted to see.

Eventually, I figured out that the store I was looking for was no longer in existence. The GPS accurately took me to the empty lot where the store used to be. Apparently, my list of store addresses was out-of-date. The device was fine.

I guess this goes to show that even the latest and most sophisticated technology is worthless if you fill the device with out-of-date information.

The purpose of the GPS device is to help a driver more easily get from his starting point to his desired destination. Strategic planning has a similar function. Its goal is to help a company more easily get from where it is now to its desired destination.

Therefore, instead of having GPS stand for Global Positioning System, we should rename it the Global Planning System.

The principle here is that we can make strategic planning a lot more popular and useful if we borrow some of the functionality which has made the GPS device so popular.

1. It is next to the driver during the journey.
The beauty of the GPS device is that it is right there in the car next to the driver during the entire trip. It isn’t anchored to your desktop computer back in your office. The GPS is highly useful specifically because it is immediately available when you need it most—while you are driving.

Unfortunately, not all strategic planning systems work this way. In many cases, the strategist is there at the beginning helping to set up the destination and the path for the company, but once the journey to the future begins, the strategist is not in the “car.” It is as if the strategist is waving to the company car as it pulls away, yelling to the driver “Good luck on the journey.” No wonder a lot of companies find strategic planning as irrelevant. They don’t take it along on the journey.

You wouldn’t set up a plan on the GPS and then leave the GPS device in the office. That would be silly. No, you would take the GPS with you to use in the car while you are driving. The same principle should apply to planners. To not bring them along on the journey is equally silly.

Usually, when strategists are left behind, it is because management sees them as being a part of corporate staff, and there is apparently no place for staff once the “operators” of the business to take over. This is a shame, because just as the GPS is most useful after the journey has begun, strategists can be most useful once the journey to the future has begun.

Strategists can be there to help companies interpret the environment they are driving into and make suggestions on how to adjust to that environment. With the ever more rapid changes in the environment, this type of in-car advice is more critical than ever. But strategists can only do that if they are in the car next to the driver.

If the strategists are left out of the car, the operators will make corrections and adjustments on their own once the journey begins. Due to short-term reward systems and the “tyranny of the immediate,” long-term considerations may not get properly reflected in those adjustments (no one in the car has their eye focused on the long term). Eventually, the car may get so far off the original course that nobody can figure out how to make those old maps given them by the strategists before the journey make any sense any more. This just reinforces their original perception that these staff planners aren’t useful for the journey anyway.

As a planner, as much as it is in your power of influence, make sure you get a seat in the car once the journey begins. This will make your services more relevant and more valuable.

2. There is live-time interaction and adjustment.
There is great power in the immediacy of the information of the GPS. When it is time to turn left, the GPS will tell you to turn left. When it is time to turn right, the GPS will tell you to turn right. And if you accidentally turn right when you should have turned left, the GPS will immediately help you get back on track.

The information is given to the driver at precisely the moment it is needed, in real-time interaction. The relevancy and usefulness is increased precisely because of the frequent interaction. If the GPS only dispensed its suggestions for turning once every hour, it would not be very useful. You would miss a lot of turns, because the information would come too late, after the intersection is long passed.

This is why it is a mistake to only use strategy as part of a long, drawn out annual process. If the only time major dialog between the operators and the strategists occurs is at some annual off-site planning retreat, the strategist becomes just as irrelevant as a GPS device that only tells a driver about turns once per hour.

The annual off-site retreat is an artificial environment. The car has been temporarily parked. The daily “turns” of business have been set aside. A GPS is not as important when the car is parked, and neither is the strategist.

A lot of decisions need to be made in the period between annual business cycles. If the strategist is not there, the decisions can lose a lot of the long-term strategic perspective. Strategic turns will be missed because the strategist is not there to point them out.

Therefore, as much as it is in your power of influence as a planner, make sure you get frequent interaction time with the operational leaders of the company. Insist on having a voice at the regular meetings where the decisions on which way to “turn” are being made. As you increase the frequency of your interactions, you will also be increasing your relevancy to the business.

3. It is easy to use.
People like the GPS device because it is relatively easy to use. You don’t need to spend weeks in advance filling out complicated paperwork each time you want to use it. Just a few simple clicks and away you go.

How easy is it for your company to use the resources of strategic planning? Does your process force operators to get lost in a sea of paperwork? Do they dread having to do anything related to planning because of all the seemingly tedious and time-wasting work your process puts them through? Are you as easy to use as a GPS device?

Fortunately, if you get points 1 and 2 correct (lots of frequent interaction at the times when decisions are being made), then a lot of that complicated process stuff is less critical. Your frequent interactions help you to know what’s going on, so that you don’t need others to write it all down for you on complicated forms. More frequent access to strategists usually leads to ease in interaction, since there is greater familiarity.

4. It relies on periodic updates of its database.
GPS systems make their advice based on their database. Since roads and road conditions change over time, it is important for the GPS database to get updated. Otherwise, the GPS can make improper suggestions.

Similarly, strategists need to periodically update their data and perspective on what is happening in the environment. Otherwise, the decisions based on the data will be out-of-date and irrelevant. Are you taking the time to stay relevant with what is happening in the environment? Or are you like the situation in the story, where you are directing people to empty lots, because your information is out-of-date?

If you want your strategic planning to be as desirable and as useful as a GPS device, then follow its examples:

a) Be in the car for the whole journey. Don’t just set up the trip and wave good-bye.

b) Have frequent and timely interaction with the key operators when decisions are being made—all year long. Don’t rely on an annual meeting to be your primary time of interaction.

c) Have an easy-to-use process, so people will want to interact with you.

d) Update your data periodically, so that your perspective remains relevant to the changing environment.

The Cooper Mini automobile from BMW is based off a design originally made for small race cars. That is why many of the key dials on the dashboard are in the center of the dash rather than right in front of the driver. When the small cars race, they have two occupants—one is mostly concerned about what’s happening outside and one is mostly concerned about what the dials are saying. This power of two makes for better racing. The same is true for businesses. By having the strategist alongside the driver, the strategist can better help the driver win the race.

Tuesday, August 10, 2010

Strategic Planning Analogy #346: Right to Play

Poker chips have value…but what kind of value? Some peg their value at their exchange rate—you can cash in poker chips for money at a pre-determined rate of exchange. However, that value can only be realized if you turn in your chips. In other words, this value in the chips can only be realized if you stop possessing them.

Since very few business places allow you to spend poker chips like money, that value can only be realized when you have real money. So the real value, in that case, is in the money, not the chips. If people stop exchanging your chips into money, the value in those chips vaporizes.

To me, the more powerful value in the chips is what they allow you to do while you still possess them. The unique value of poker chips is that they allow you the opportunity (i.e., give you the right) to play poker. Before you can play poker, you need to have first made an investment in poker chips. Without the chips, you cannot play. That is the true power and value inherent in poker chips.

Poker chips are a lot like market share. There is value in having a lot of market share…but what kind of value? One type of value would be to use your power of market share to create excessive profits. In many ways, this would be like cashing in your poker chips for money. And, like poker, if you cash in your market share “chips” you can no longer use them to play the game.

The logic works like this. To create excessive profits, you need to extract excessive value out of your marketplace transactions. The more value you take out of the transaction, the less value there is for the customer on the other side of the transaction. In a competitive marketplace, there will be alternatives to your excessive greediness—alternatives which provide greater value to the customer. Customers will start switching to these alternatives. As a result, your market share will go down. In other words, when you seek excessive profits, you are typically cashing in (or losing) your market share chips.

To me, the greater value in market share is like the second value for poker chips mentioned above—the value in being allowed to continue to play the game. In this case, the “game” is the game of business. If you want a business which endures and produces a return year after year after year, you have to leave a large percentage of your chips on the table. In other words, you need to continue to invest in providing the type of value needed to hold market share if you want to continue to play the game. Otherwise, your market share will drop until you are no longer able to play.

The principle here has to do with transformation. When a company is very successful and creating high levels of market share, there is a tendency to not want to transform the business model. After all, the current model is working quite well. Why kill the goose that is laying the golden eggs? Why risk current profits for the uncertainty of what would happen if you transform the business?

The Innovator’s Dilemma
Clayton Christensen wrote about this problem in the book “The Innovator’s Dilemma.” Briefly, the premise of the book is that innovation leads to marketplace disruption which creates great success for the innovator. This success makes the innovator want to cling to the status quo that his innovation produced. Unfortunately for this innovator, marketplace innovation cannot be stopped. If this innovator will not continue to innovate, others will, creating disruptions that make the original innovation obsolete. The irony is that the only way the innovator can continue to succeed is by destroying the current model of success and replacing it with successive disruptions of new innovation.

This is very similar to the poker chip analogy. Refusing to reinvest in additional disruptive innovations is like refusing to put chips on the poker table. When you have a lot of chips, the temptation to cash in (take excessive profits) is huge. But if you do, you lose the right to continue playing.

Trying to keep the high profits of the old innovation is taking excessive profits out of the game. You are no longer investing in the new innovations that will increase value to the customer. Others, who are still investing in innovation, will create greater value and take away your market share (your chips), leaving you with nothing.

Yes, it takes money away from today’s profits when you spend it on innovation. And yes, your immediate profitability may go down during the disruptive phase. BUT, if you do not ante up with these investments, you can no longer play the game. Your long-term profit stream potential goes away because you are no longer competitive once the next disruption occurs. In search of a small pot of success today, you sacrifice your ability to earn any future pots of success.

I was reminded of this dilemma when reading of a paper published on August 4th by Kristina McElheran of the Harvard Business School. This study looked at how market leadership impacted the way a business innovates. The conclusion of the study was that market share leaders may invest more in incremental innovation, but spending on truly disruptive innovation is more likely to come from non-leaders. In other words, leaders have more at stake in the status quo, so they are less willing to invest in innovations which disrupt it. The disruptions come from those who have less at stake in the status quo.

This is just the Innovator’s Dilemma all over again. The problem has not gone away. Leaders are still cashing in their chips, rather than making the investments needed to continue to play the game.

Therefore, if you are currently in a position of market share power, you need to ask yourself this question:

Am I going to use this power in a way which allows me to continue to play the game or am I going to cash out early?

Cashing Out
Even if you still choose to cash out early, by asking the question it is at least a conscious choice that you have made based on weighing the alternatives. If you do not ask the question, you may end up cashing out by accident, and have a lot fewer chips to cash in than you had anticipated.

Selling out near the peak (before the next disruption has its impact) is a viable strategy. If you do this, you can often walk away from the game very wealthy. This is a proactive strategy with careful analysis of the environment and understanding the timing of trends and inflection points. You are putting yourself up for sale while you still have leadership benefits (i.e., still have lots of chips to cash in).

This is very different from trying to cling to the status quo as long as you can and then selling as a last resort. While clinging to the status quo, your market share is being disrupted by the next innovation. You are losing your market share chips to the next innovator. By the time you get around to selling, you have very few chips left to cash in.

Staying to Play
If you choose to stay to play, then that requires a different set of actions. You need to take some of your profits and reinvest them into the game, in order to maintain value leadership. The trick is trying to optimize the balance between the current inward cash flow from the status quo with the outward cash flow needed to create the next disruption in your favor.

At least as a leader, you have the potential to orchestrate how that transformation occurs better than others (provided you do not get too greedy in the short-term). Take advantage of the opportunity. Be proactive in guiding the transformation (rather than resisting it).

Markets continue to innovate. If you resist innovation and do not transform your business, you will lose to the next round of innovators. Therefore, either cash out while still at the top or reinvest in disruptive innovation at levels necessary in order to continue to play the game for a long time.

In poker, you can sometimes get away with bluffing. In business, you may be able to fool the customers for a short while, but eventually they will figure it out and shift their business to the place where they receive the best value. Innovation leads to better value. Therefore, if you want to maintain leadership, follow the innovation to the greater value.

Sunday, August 8, 2010

Strategic Planning Analogy #345: Up in the Clouds

The other day, I was pondering the question “How much do clouds weigh?” I looked it up on the internet.

A typical common cumulus cloud is about 1 cubic kilometer in volume and weighs a little over a billion kilograms (close to 2.2 billion pounds). This is approximately the weight of 6,300 blue whales.

What is interesting is the fact that even though a cloud is much larger and over 6,000 times heavier than a blue whale, it can float in the air. The smaller, lighter blue whale cannot float in the air.

Businesses would like to soar above the competition. In many circles, the conventional wisdom is that it is easier to soar if you are small. The reasoning is that large companies are not nimble, flexible, or fast enough to do what it takes to soar.

Yet clouds are very big and extremely heavy and they can soar above the earth. Similarly, there are many large companies that appear to be doing rather well. For many decades, huge General Electric was considered by many to be among the best managed companies on the planet.

On the other hand, there are a lot of large companies (like the old General Motors) which needed to go through bankruptcy because they were overly bureaucratic and sluggish. In fact, I can find great successes and great failures among both large companies and small ones. Size does not appear to be the key determinant of success.

So if size is not the determinant of success, what is? Well, clouds soar because they have less density than the air around them. Usually, the air around a cumulus cloud has a density of about 1.007 kilograms per cubic meter. The clouds are only 1.003 kilograms per cubic meter, making them lighter than air. By contrast, the smaller, lighter blue whale cannot float because it is much denser than the air.

Hence, if you want to soar, you need to reduce your density.

The principle here is that strategic plans need to focus more on density than on size. I have seen many instances where strategic plans have focused primarily on size. They want the company to get very big very quickly and state their long-term goal in terms of size. Or maybe the strategy is to split up the company to keep it from getting too big.

There are lots of ways to make a company get very big, very quickly. And many of those ways can be very destructive. For example, one can overpay for a poor acquisition. Remember the disastrous joining of AOL and Time Warner? Sure, the company got very big very quickly from the merger. Unfortunately, the net result had a market cap much lower than the sum of the companies when they were separate. It destroyed value.

One can also get very big by selling below cost. The airline industry is full of very big companies that have horrible negative returns on investment because their fees do not cover their costs. These big airlines try to fix the problem by merging (so they can become even bigger). Unfortunately, if you are losing money on most of your sales, getting more sales just increases the losses.

On the other extreme, there are companies that put the main focus on shrinking. Particularly during the recent great recession, many companies focused the strategy almost exclusively on cutting—be that cutting employees, cutting investment or cutting corners on product quality. However, study after study has shown that the companies most focused on cutting during recessions (particularly during the latter portions of a recession) tend to do the worst when coming out of the recession. They have ruined morale, disappointed their customers, and fallen behind on technological advances and sales capacity issues. As a result, the benefits of the next boom go to someone else.

Size alone is a horrible goal (in either direction). There are just too many ways to reach your size goal while destroying the company. That is why I think it is better to focus a strategy on density.

What is business density? I think of it as those factors which enhance or impede one’s ability to get where one wants to go. Consider two situations: walking in your office versus walking inside a swimming pool. It takes a lot more effort (and you move a lot slower) walking in a swimming pool than in an office. Why? The water environment of the pool is much denser than the air in your office. The extra density of the water gets in the way of forward progress.

The same is true in business. There are lots of factors that can impede forward progress. They can include things like excessive bureaucracy, confusing/conflicting goals, micromanagement, insufficient investment in infrastructure, weak systems, corruption, and so on. These types of things increase your density. If you want to move quickly and soar like the clouds, you need to reduce the density of your business environment. This is true whether your company is small or large.

There are two ways in which strategic planning can help reduce a business’ density.

1. Narrow the Focus of the Company Goal
One of the most important ways that strategic planning can reduce business density is by providing focus. A clear, focused business mission, well-communicated to employees, can make it easier to move forward. It eliminates the density problems of confusion, hesitation and conflicting priorities which come from a lack of strategic focus. When you have a solid understanding of what is truly important, you can more boldly go down that path (with less resistance).

Perhaps even more importantly, a focused strategy helps people to understand what is not important. A lot of effort can be wasted chasing agendas that add little to moving a company forward. A good, focused mission helps keep people from chasing down these rabbit trails of unproductive side-issues, because they can then see them as clearly “off-strategy.”

If everyone knows where the focus is, and is motivated to move in the direction of the focus, then less effort is needed to micro-manage the company. Excessive, dense bureaucracy can be trimmed away, because there is a more natural effort to get the right job done when the same focus is uniformly embraced by the whole organization. This allows innovation around the focus to bloom, increasing the speed to success.

Strategic planning is ideally suited for helping a company to choose and then rally around such a proper narrow focus.

2. Broaden the Focus of the Strategy Plan
But knowing the focus of the direction is not enough. Eventually, you have to reach your destination. Efforts at direction and implementation need to work together in order to reduce density.

In many companies, strategists are a key part of helping determine the planning focus, but then are excluded when it comes time to implement the plan. I think this is a mistake. If you do not proactively bake the key components of implementation into the original plan, you will create inefficiencies.

This is why I believe that great strategic plans need to address three components together:

a) Positioning: What is my focus? Where am I going to win?

b) Pursuit: Do I have all the proper pieces in place to reach my goal as quickly as possible? Do I have the proper types and amounts of expertise to reach my goal? Have I built enough capacity in order deliver in sufficient quantity to win? Have I built up enough of the right kinds of contacts up and down the supply chain in order to accomplish what needs to get done? Am I properly investing in the areas necessary to pursue the focus in front of me?

c) Productivity: Have I shrunken waste and increased efficiencies, so that I have enough time and cash flow to win the game? Have I gotten rid of wasteful activities, so that more time can be spent on activities related to the focus? Have I invested in technologies and processes needed to improve efficiency? Am I building and leveraging my power in the marketplace so that my actions have a stronger impact?

There is a reason why the keyword labels for positioning, pursuit and productivity are so common in this blog. They are the cornerstones for a successful strategy. I believe that strategists need to be an active part in coordinating all three areas together. Otherwise, excessive density can creep into the process and your cloud will sink.

Clouds soar because they are less dense than the air around them. If you want your business to soar, eliminate the density in your internal environment which impedes your ability to move forward. Strategic Planning can help you do that by 1) narrowing the focus of who you want to be (and what you want to do) and b) broadening the strategy plan to proactively manage pursuit and productivity. If you do this, you can be nimble and effective, even if you are a large company.

Density is a relative term. You soar if you are less dense than the environment around you. Although blue whales are more dense than the air, they are less dense than the water they swim in. As a result, the whales succeed in the water. Therefore when attacking your internal density, keep in mind how your goals stack up against others in the same space. Will you be the least dense? Have you chosen to focus in an area where you company’s density gives you an advantage?

Friday, August 6, 2010

Strategic Planning Analogy #344: Who to Court

The following are some quotes from billionaire entrepreneur Sam Wyly’s autobiography regarding the timing of his IPO of Sterling Software:

“Not only did we break new ground with our software company roll-up; we also broke new ground with the instant exchange listing. The market loved all this and, within one week, took our share price up from the initial $9 to $15. From there it headed to $30. Along the way, we raised more cash at $17 in what’s called a secondary offering. But in June, only thirty days after we’d gone public, the markets ran out of gas and lost their enthusiasm for technology. Prices dropped dramatically and the IPO market was as dry as a pumped-out oil field.”

“If we hadn’t hit the market when we did, we would have suffered during the following seven-year IPO equity drought along with a lot of other wanna-be technology start-ups that never got off the ground. Our timing was perfect.”

And this is what he said about the timing of when he sold the company:

“My initial investment was less than $2 million. We sold out in March 2000, at the peak of the tech and telecom market boom, for a price per share that was 30% over market. The total sale package was $8 Billion…Amazingly, we hit the very last month of the long bull market. The tech-heavy NASDAQ Index would drop 80% over the next two years.”

The stock market tends to act like the fashion industry. Sometimes a certain sector will be in fashion and have people clamoring to get in. Other times, a sector will fall out of fashion and have people clamoring to get out.

Sam Wyly made his billions in part because he understood the fashion cycles of the market. He quickly did his IPO of Sterling because he had a sense the tech stock IPOs would soon be going out of fashion. He was right and got the IPO done just in time. Later, he had put together an accelerated push to sell out quickly, because he sensed that the latest tech boom was about to end. He was right again.

In between the IPO and the sale, Wyly could see that anything remotely related to the internet was getting unrealistically high evaluations. Therefore, he split Sterling into two companies, with one piece positioned to be as much like those dotcom companies as he could. When he did a separate IPO for that piece (called Sterling Commerce), he took advantage of the high fashionability of the dot com boom and got very rich again.

Wealth from stocks did not always correlate to profitability. To quote Wyly, “In 1995, the first web browser, Netscape went public, its shares priced at $28. It jumped to $75, valued at more than the country’s biggest defense contractor, General Dynamics…Netscape launched an ‘irrational exuberance’ in the market…I saw no rationality to these dot-com companies going public and instantly reaching such astronomical heights when they consisted of little more than a Web site and a few computer kids pecking away at their keyboards. To me, it was nothing more than the old Wall Street broker rationale: ‘When the ducks are quacking, you feed the ducks.’”

So Wyly did well by making Sterling Commerce look like a duck (and then getting out before the ducks stopped quacking).

If a lot of the valuation is based on getting in tune with the Wall Street fashion, then perhaps one’s strategy not only needs to look internally at maximizing performance, but also externally at optimizing the fashionality of the stock market.

In the last two blogs, we’ve been looking at the importance of properly defining your category. First we looked at how to define your category for your customers. Then, we looked at how to define your category for your management. Today we will look at defining your category for your shareholders.

How the market categorizes a particular stock often has a large impact upon how investors treat that stock. If you are perceived as being in a hot sector (e.g., category), investors may flock to your stock and bid it up, even if you are not a leader in the sector. Conversely, if you are seen as being in a weak sector, they may abandon you and drive your price down, even if you are a leader in the sector.

Therefore, it is not enough to just manage your individual performance. It is also important to manage how your stock gets categorized, since that may have as much to do with your valuation as your individual performance.

There are two key principles to this process:

1) Look for solid investment category ownership
There are many different goals an investor could have when choosing where to invest. They may be looking for high growth, or maybe low risk, or maybe cash income, or high liquidity, or long-term gains, or support for a particular social cause, or some other factor.

If you want people to prefer to invest in your business (and pay a premium for the privilege), it helps to own leadership in one of these types of investment categories. Being “sort of okay” at many factors is not as good as solidly owning a single factor. For example, being categorized as a strong growth stock will get you preferential treatment by those who want to invest in growth stocks. Or being known as a great dotcom company when dotcom companies are in fashion will get you preferential treatment by those swept up in the irrational exuberance of investing in dotcom companies.

Therefore, a key step in maximizing one’s share price is to:

a) Pro-actively choose an investment category to own; and

b) Have a strategy which re-enforces that position.

We saw this when Sam Wyly proactively tried to position Sterling Commerce as being in the exuberant dotcom category, even if it required a strategy of splitting the company into two parts. This positioning to the investor is very similar to the idea of positioning to the consumer. You

a) Define who you are (the investment problem you are solving),

b) Deliver on the promise of that definition (own the solution in the mind of the investor), and

c) Sell to those who are looking for that type of solution (the investor who wants that type of investment)

2) Consider the fashion cycles of the investment community when timing your equity moves
Timing is an import part of strategy. Strategy for the investor is no exception. Sam Wyly became very wealthy in part because of his timing with investors. Customers come and go. It is better to sell to them when they are coming than when they are going. This also applies to customers of your stock.

Closely observe the fashion cycle for your investors. Design a strategy in advance so that if you start seeing a shift in the fashion, you are ready to move quickly.

3) Manage your audience based on the best category for you
Now I have heard many strategic planners complain that catering to the whims of the investment community is death to strategic planning. Their complaint is that most investors are only looking near-term. They say the investors are only interested in the current quarter and are not interested in the long-term. They say that if you cater to the investors, they will ruin long-term prosperity in the name of short-term gain.

Yes, this is true of many investors. But it is not true of all investors. There are people out there like Warren Buffet, who tend to ignore current fashions in stock and invest for the long-term rather than the short-term. Many of these investors place value on good long-range planning.

To those complainers, I say don’t become a victim of the investment community and don’t let them dictate the rules of your business. Become pro-active in controlling the relationship. Choose a great investment position for your company that puts you in a category which rewards long-range planning. Then pro-actively seek out the types of investors who prefer those types of investments.

If you court the right types of investors, they will support what you are trying to do. If you find enough of them, they will bid up the stock, broadening your appeal even further.

As part of your strategic planning, don’t just position your company to the consumer. Many of those same consumer positioning principles also apply to your investors. As part of your strategic planning, choose an investment category to own and then seek out and court the investors who are looking for that kind of investment. This will increase the value of your business beyond just how your income statement and balance sheet looks.

Although the long-term approach is typically the way to go, it doesn’t hurt to bend a little sometimes to the current fashion of your investors. After all, they are the customer of your stock. Don’t you bend a little to satisfy the current fashion of the customers of your product?

Wednesday, August 4, 2010

Strategic Planning Analogy #343: Where to Look

As the old story goes, one evening there was a man named Bob crawling on his hands and knees outdoors under a bright streetlight. Another man came along, named Jim, who was curious as to what was going on.

Jim asked Bob, “What are you doing?”

Bob replied, “I’m looking for my lost car keys.”

“Where did you last see your car keys?” inquired Jim.

Bob replied, “A couple of blocks down the road, next to my car.”

Puzzled, Jim asked, “Well, if you last saw the car keys down there, why are you looking for them here?”

Bob answered, “Because the light is better here.”

Looking for something is not the same as finding something. If you look in the wrong place, you will never find what you are looking for, no matter how intense your effort is. Bob will never find his car keys because he is looking in the wrong place.

Businesses are looking for great opportunities for growth and prosperity. These opportunities will only be found if the business looks in the places where the opportunity exists (not the places where they want to look).

It may feel more comfortable looking where the most light is, but that doesn’t mean that what you are looking for is there. In the business world, the greatest amount of light (the data which illuminates our mind and helps us to see the world around us) is usually focused on the status quo. However, new opportunities usually require us to reinvent the status quo a bit, making current wisdom somewhat obsolete.

The great opportunities of the future tend to be on the darker fringes of today’s status quo. If you want to find them, you may have to leave the bright lights and spend time out in the fringes.

You will only find the things located within the areas where you look. If an item is located outside the area of your search, you will not find it. How you define your search parameters determines where you will look. Therefore, if you want to find growth opportunities, be sure to define your search zone to include areas where there are the best growth opportunities are located. This usually requires defining a search zone including areas which is not located under the bright lights of the status quo.

In the last blog, we looked at the importance in defining for your customers the category you compete in. Customers, however, are not the only stakeholders in the success of your business. Another key category is your employees.

Just as it is important to get customers to properly categorize your product, it is important to get employees to properly categorize your company. Some of my greatest successes in the business world came from getting executives to re-define how they thought about their company—the business category it was in. By redefining the category, I was able to open their eyes to wonderful new potential opportunities which fell outside the old, narrow category definition.

The way you define your company limits where you look. If you define yourself in terms of the status quo, you will only see ways to incrementally improve the status quo. You will never find the “next big thing” which will make the status quo obsolete, because your narrow definition has kept you from looking where the next big thing is coming from. Sure, there is less data to examine out on the fringes, but that is where the new opportunities are. Include it in your search.

Back in the 1980s when I worked at Shopko, Shopko was facing a problem. It was a discount department store competing against Wal-Mart, Target and K Mart. Wal-Mart had a lock on the best position for Discount Department Stores—lowest prices. Target had the second best position in the category—cheap chic. Although K Mart’s position was weak, it was large, so it wouldn’t be going away soon. So what do you do if you are Shopko: the #4 discount department store in a market where you don’t need four alternatives and the best two positions are already taken?

The first thing I did was convince management to redefine their category. Instead of defining themselves as a “Discount Department Store Company,” I convinced them to redefine themselves as a “Value-Based, Category-Owning Merchant.”

Changing the definition of the category sounds like a small thing, but the implications were huge. I had redefined the search area for new ideas, so we found more great new opportunities.

In the past, because they defined themselves as a Discount Department Store, Shopko thought they had to act like all the other Discount Department Stores. They had to carry the same products, in the same way, in the same depth. It meant trying to figure out how to beat Wal-Mart in a head-on competition with a similar offering. This was a path to disaster. Shopko would never stand out from the crowd if it acted like everyone else in the crowd.

“Value-Based, Category-Owning Merchants,” however, have the flexibility to do things that “Discount Department Stores” do not. We could carry different products in different quantities and sell them in different ways. The idea was simple. Rather than carry a medium assortment of every category sold in a discount department store (like everyone else), we would choose the extremes. In departments where we thought we could win, we would carry far more depth than the typical discount store. In areas where we did not think we could win, we would either eliminate the department or only carry a convenience assortment. The idea was no longer to compete head-on against Wal-Mart, but to peacefully co-exist through careful choices regarding where we wanted to play to win.

Over time, this redefinition of the Shopko business helped Shopko experiment in all sorts of “fringe” areas it probably never would have considered under the old definition.

Back in the 1980s, there were close to 100 other regional discount department store chains in existence in the US. Today, virtually all of them have disappeared. Shopko, however, is still in existence today, a testimony to the power of redefining your category.

Best Buy
A similar situation existed at Best Buy when I got there in the late 1990s. Best Buy at the time basically defined itself as a “US-based, Big-Box Consumer Electronics Retailer.” Its key competitive differentiation was the elimination of commissioned sales people. This was a narrow definition which limited future opportunities.

My team helped Best Buy management to see the company in a new light. We redefined Best Buy as a “Key Player in the Entertainment and Technology Business Ecosystems.” This opened up the potential to numerous new business opportunities, including things like technology services (through the Geek Squad), working upstream to help determine the evolution of new technology, working more directly with key players in the entertainment industry, selling products in a different way (Magnolia high-end, higher service entertainment retailing and Best Buy Mobile Kiosks), and going international.

By changing the definition of the business category, Best Buy started looking in more places for more opportunities. This brought in new streams of cash flow, allowing them to lower the prices on the consumer electronics they sold. Circuit City, which still pretty much operated under the older, narrower definition, tried to match the Best Buy prices, but because they had not expanded into all of those other businesses, they could not afford to match Best Buy prices. Eventually Circuit City had to file for bankruptcy. Best Buy is still going strong.

If you want to find great new opportunities, you need to look where the great new opportunities lie. Usually they lie outside the status quo. Therefore, if you want to find them, you’d better define your business broadly enough that you are not trapped by only looking within the status quo for your future.

Broadening one’s business definition does not mean saying “I’ll do anything to make a profit.” There still needs to be limits. The idea is to not just find new opportunities, but to find opportunities in areas where you can win. Your core competencies, size and other such factors limit the number of opportunities where you can win. Keep these factors in mind when re-drawing your search parameters. Even in the broadened definitions of Shopko and Best Buy, there were still limits.

Monday, August 2, 2010

Strategic Planning Analogy #342: Categorical Success

Prior to 1995, modern art from India sold for practically nothing. However, beginning in 1995, modern art from India started fetching about $6,000 per piece at auction. About six years later, this art was selling at auction for an average price of $44,000, with a few paintings going as high as one million dollars.

What caused the rapid increase in prices? It was mostly due to inventing a name. Prior to 1995, there was not a suitable name to categorize modern art from India. As a result, it tended to be perceived as falling into the equivalent of the “other” category of art, called “Decorative Art.” Decorative Art was perceived in the marketplace as not having any real intrinsic artistic value of its own, but was rather “derivative” of other more authentic art forms. Therefore, its value was based on suitability as a home décor accessory, rather than as being a work of art to be admired on its own merit. As one would expect, being categorized as “Decorative Art” is a sure path to ruining perceived value.

However, beginning in 1995, there was a strong, coordinated effort to shift these works into a brand new category. The new name given to the new category was “Modern Indian Art.” The claim was made that this new category was a “unique aesthetic tradition” within branch of the “modernist” movement, worthy of being considered “fine art.”

To make the claim believable, multiple parties started writing papers about this new category. These parties included art academics, art action houses, art critics and the artists themselves. The papers explained what the characteristics were of true “Modern Indian Art” and what made it so special.

Now that there was a name for this category, museums started holding “Modern Indian Art” exhibits. The more mainstream art media began talking about it. Suddenly, this “decorative art” was re-envisioned as “fine art” in the minds of the art consumer. As a result, the prices for these works began to skyrocket…all because of a change in name.

Maybe I should change my name.

Businesses spend a lot of time worrying about their product. Can I improve the quality of the product? Can I make the product more efficiently? Can I add more features to the product? Can I make the product more functional?…and so on. The idea is that if I make the product better, I can increase its value, allowing me to charge more when I sell it (and increase profits).

This line of reasoning leads to strategic plans focused on product improvement.

However, as we saw in the story above (based on a Harvard Working Knowledge article), the perceived value (and the selling price) for art from India skyrocketed even though the actual product did not change. The art from India being sold prior to 1995 was no different than the art being sold after 1995. In fact, it was often the same exact pieces of art. Nothing was done to the actual artwork to improve it. Yet the perceived value (and prices charged) increased tremendously.

Why did perception change even though the product was the same? It was because the people in the art industry changed the focus from a product orientation to a category orientation. Rather than improve the value of items, they worked on two issues: a) Creating a new category to classify the items; and b) Improving the perception of the new category. By developing a strong, new category, they were able to instantly improve the perceived value of everything placed within that category (even though the individual items had not been changed).

Perhaps the value of your products could also rise faster if you changed your strategic focus from a product orientation to a category orientation.

The principle here is that value is determined within a context. If you do not manage the context, then you will achieve sub-optimal value.

A product’s value is usually determined in a comparative sense. In other words, a product is compared to others to see if its value is “better” or “worse” than those it is being compared to. The goal is to achieve a perception of “better value.” But better than what? What is the relevant context for comparison?

The Context for Art
The context is largely determined by how the category is defined. In the case of Indian art, when the category was defined as Decorative Art, the context worked as follows:

1) Since Decorative Art, by definition, is an inferior category to Fine Art, the value of all recent art from India is inferior to any Fine Art (and should have décor-level prices rather than fine art prices).

2) The only way to add any value to art from India (beyond average décor prices) would be to convince someone that it had superior home décor uses than other art in the Decorative Art category.

In other words, the definition of the category limited the context of comparison. Indian art could never get a high perception, because the context was that—at best—it could only be seen as slightly better than low value décor.

However, when the category was redefined as “Modern Indian Art,” a sub-category of the Modernist Fine Art Movement, the context changed.

1) The core value began with average values within fine art, particularly the value of modernist art.

2) Comparisons of superiority were now made with other modernist works of art (not home décor objects). Ultimate value now came from variations to the higher base value of the average modernist piece.

By changing the category, the context of comparison was changed, which automatically raised the perceived value and price for modern Indian art.

The Context for Soup
The same thing benefits of category focus can be seen with Campbell’s Soup. Back in the 1980s, Campbell’s produced the vast majority of all canned soup sold in the US. The good news was that this meant that Campbell’s had won the race for superiority within the context of the category of “soup.” The bad news was that soup was a small and low growth category.

Worse yet, when the soup category was compared with other food categories, it did not fare well. Soup was seen as a weak substitute to more substantial meals like steak and potatoes. Soup was viewed as something poor people would eat that could not afford the more substantial (and supposedly better for you) meals which required a knife and fork.

Campbell’s could have focused on improving their soup product. However, within the context of soup, they already had the leadership position, so their market share would not have moved much, if at all. In addition, better soup was still just soup—an inferior category when compared to knife and fork food categories. The best soup was still seen as inferior to mediocre knife and fork foods.

Just like the Indian art, as long as it was classified in an inferior category (decorative art or soup), Campbell’s soup would get an inferior value.

Therefore, Campbell’s changed its strategy to focus on improving the image of the category they were in. In the late 1980’s, they started the advertising campaign with the slogan “Soup is Good Food.” The idea was that if they could improve the image of the soup category, they could grow the sales of the category, since soup would now compare more favorably against other (non-soup) meal alternatives (broader context of favorable comparison). In other words, they tried to move “soup” form being a sub-set of the weaker food choice category to a sub-set of the better choice food category. Since Campbell’s sold most of the soup, an improvement in soup meant gains for Campbell’s. The strategy worked for quite a while.

So what can we learn form these examples?

1) Actively manage which category you are placed in.
Consumers will slot you into a category. If you do not actively manage which category you are placed into, you lose control over one of the key determinants of your value. The customer may put you into a low value category, a context which makes it difficult to create value, no matter what you do to improve your product. Therefore, to make sure that your product gets the highest possible value perception, actively work to get people to slot you into a high-value category.

If necessary, do not be afraid to create a whole new category, one which you strategically manage for maximum category value (like Modern Indian Art).

2) Work on strategies to improve the relative value of your category.
The stronger your category, the more favorably your product will compare to other substitute categories. Therefore, rather than only working to make your product better, work to make your category better (soup is good food).

3) Consider product improvements in light of their impact upon your category context
Winning products tend to produce a point of superiority relative to viable alternatives. Therefore, when choosing where to place your product improvement efforts, choose areas where you gain the maximum advantage in factors important to the category. Find places where you can shine when compared to others in the category (the viable alternatives).

Rather than focusing all of your strategic efforts internally on product improvement, spend time focusing on managing the category your product competes in. Often the value of the category impacts your profitability more than what you can do to improve your product. Therefore, work to get your product slotted into the most desirable category and then work to improve the value of your category relative to substitute categories.

Trying to be all things to all people usually results in being nothing important to anyone in particular. Therefore, when defining and managing your category, make your scope narrow enough so that you can create a winning position within that category.