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?