Wednesday, September 29, 2010

Strategic Planning Analogy #354: Strength in Diversity

Last week I was on vacation. One of the places I visited was the Niobrara Buffalo and Elk Wildlife Refuge near Valentine, Nebraska. The wildlife refuge was located at the intersection of four distinctly different ecosystems. From the west came the Rocky Mountain pine forest, from the south were the sparse sandhills of the Great Plains, from the north came the harsh environment of the Dakota Blackhills, and from the east were the lush deciduous forests. All four ecosystems comingled within the nature preserve. It was beautiful.

The wildlife refuge claimed that being on the edge of multiple ecosystems creates an ideal environment for animals. First of all, the variety of ecosystems brings a variety of eating options. There is more diversity both in terms of plants and other animals to eat. This makes it easier to find nourishment all year long, regardless of the changing climate conditions.

Second, this ecological diversity creates a variety of habitats for the animals. Depending on the time of day, time of year, and type of activity, different habitats are more desirable than others. By being in an area with multiple habitats, the animals can be in the optimal place at the right time.

Unfortunately, at the time of year I was at the refuge, the Elk and Buffalo were hiding in a portion of the property which was off-limits to humans. But I did get to enjoy the beauty of the ecosystems and see a waterfall up close. And although I did not get to see a buffalo, I did get to eat a buffalo burger (from commercially grown buffalos, not the nature refuge).

Strategic planning tries to find places where businesses can be strong and prosper. According to this nature refuge, animals get stronger and more prosperous when they live in an area of diversity. In many ways, I think this fact also applies to businesses.

Just as there is strength in diversity for wildlife, there is strength in diversity for businesses. Is your planning taking advantage of the richness to be found in diversity?

In many of my prior blogs, I have spoken of the power of focus. In fact, it is almost impossible to succeed in business if you are not focused. Strategies are critical in that they point to where a firm should focus its efforts.

However, being focused should not be confused with being narrow-minded. Almost a century ago, Henry Ford had great initial success by mass producing the simple Model-T automobile, which only came in the color black. By narrow-mindedly sticking to this single product for far too long, the Ford Motor Company almost went bankrupt, because the market had shifted to nicer cars in more colors. Ford had to diversify its offering in order to survive. Kodak narrowly focused far too long on analog photography and missed virtually all the growth in digital imaging. Its fortunes faded along with the fading of its narrow focus.

As we can see from nature, there is power in diversity. The challenge for strategic planning is to apply the benefits of diversity without losing the benefit of focus.

The wildlife refuge saw two benefits from diversity: habitats and nourishment. We will now apply those two areas to strategic planning to show how to blend diversity with focus.

1. Diversity of Habitat = Diversity of Backgrounds (Process)
Just as animals live in many different places, people live in many different places. There is a great diversity in people depending upon the backgrounds of where they come from. Each background provides a unique perspective on the world, a perspective which is colored by the experiences that background provides.

One of the goals of the strategic planning process is to provide an understanding of the marketplace in which a company competes. This understanding is richer when developed with a diverse group of people.

To paraphrase Colin Powell, former US Secretary of State and Chairman of the Joint Chiefs of Staff, if your team is made up of people who think just like you, then most of you are redundant. How much redundancy is there in the people involved in your strategic planning process? Do they all tend to be about the same age, same gender, same race, from the same country, having similar incomes, with the same educational background? Does your group include any people who live more on the edges of society?

If you want a rich understanding of the world, it helps to have a rich variety of backgrounds in the people who are building that understanding. Multiple perspectives and points of view will help you to avoid blind spots in your analysis. As the market shifts, you will be better able to both detect the shift and adapt to it, because you will already understand that perspective. If your team can only see the world “as it used to be”, you will fall into the obsolescence traps we saw earlier with Henry Ford and Kodak.

Consider carefully the mix of people you place into the planning process, to ensure diversity of perspective. It should not just be a few senior executives. In addition to broadening the diversity of employees in the process, one could also consider including suppliers and customers in the process.

During the process, don’t hide in the corporate office. Get out into the various habitats where your product is used. See what’s going on at the point of sale. See what’s going on in places where you are both successful and not successful. Enrich your perspective.

The diversity of animal habitats allow the animals to be in the right place at the right time. The diversity of thought and perspective allow your business to be in the right place at the right time.

Diversity of thought does not mean randomness of action. Focus is not thrown away. A company still needs to focus. But that focus will be more effective if you have a broader understanding of the environmental context surrounding that focus. It allows you to truly optimize your focused efforts, because you truly see the world as it really is—in all of its diversity.

2. Diversity of Nourishment = Diversity of Revenue Sources (Outcome)
Animals are nourished by food. Businesses are nourished by sales income, or revenue. Animals die without food. Businesses die without income.

Diversity of food sources benefit animals. A diversity of revenue sources benefit businesses. As the old saying goes, if all of your eggs are in one basket, you lose everything if you drop that basket. It is better to diversify that revenue source into multiple baskets.

There are two ways to diversify one’s revenues. First, you can diversify your customer base. For example, if you only sold to new construction businesses, you were in severe trouble when the recent great recession virtually wiped out new construction. Had you also sold to other customers who were less severely hit by the recession (like refurbishers of old construction), you would have had a stronger base of revenue.

Second, you can diversify your product offering. By focusing too much on analog imaging products, Kodak missed the benefits which they could have gotten by diversifying faster and more aggressively into digital imaging products.

This diversity does not mean you should try to sell anything to anybody. You still need focus.

Here are two examples of how to diversify your revenue sources while still maintaining a focus.

Bausch and Lomb is focused on helping people have superior eyesight. Yet, within that focus they have diversified their product offering to include corrective lenses, eye surgery devices, eye nutrition products, eye care products, and so on. No matter which way the market moves in terms of superior eyesight, Bausch and Lomb is ready. They won’t become obsolete when a particular approach to eye care becomes obsolete, because Bausch and Lomb has a diverse enough offering to be able to shift with the times. By focusing on the solution (superior eyesight) rather than a single product to get there, they have strengthened their ability to survive and be nourished with sales for a long time.

3M focuses on particular technologies. In particular, they tend to focus on technologies in a handful of areas, like adhesives, abrasives, and substrates. However, once they master a technology, they try to sell it to as many customer bases as possible. For example, 3M is the master of the technology behind adhesive tape. This technology is applied to as many markets as possible, such as the consumer market (Scotch Tape), the home improvement market (masking tape), the medical market (tape for bandages), the security market (reflective tape), and so on. There is still a focus (on technology), but a richness in revenue by applying that technology to as many diverse customer bases as makes sense.

Although focus is still essential for strategic success, that focus is made more powerful when properly blended with diversity. The first type of diversity is the diversity of thought used in the strategic planning process. The more perspectives you bring to examining your area of focus, the less likely you will miss opportunities within that focus. The second type of diversity is diversity of revenue sources. By sticking to your area of focus, you can still improve revenues by applying that focus to a broader base of products or customers.

In the Buffalo and Elk Wildlife Refuge, the Buffalo did not try to become elk and the elk did not try to become buffalo. They stuck to the essential focus of who they were as animals. Yet at the same time, they prospered by exploiting the diversity of the multiple ecosystems around them. You should do the same.

Monday, September 27, 2010

Strategic Planning Analogy #353: Warning!

Awhile back, I was awakened in the night by beeping smoke detectors. It wasn’t the high pitched squeal warning me of fire. It was just the beep to warn me that the batteries were low. But it woke me up anyway.

This was a newly built house which still had the original batteries in the smoke detectors. I didn’t even know how many smoke detectors were in the house. As I stumbled around half-asleep, I discovered six smoke detectors and took out their batteries (for one I needed a ladder). But I could still hear a beeping. As it turns out, there were seven smoke detectors, and it took me forever to find that seventh one.

Then I got dressed and went to a store open all night in order to purchase replacement batteries. When I got home, I had to remember where those seven smoke detectors were, so that I could put in the new batteries (which wasn’t easy). By the time I was done, I had trouble getting back to sleep.

Why can’t these things happen in the middle of the day?

The purpose of a smoke detector is to monitor the environment. If it detects the early signs of a fire, it gives a warning so that you can escape to safety before it is too late.

The strategic planner serves a similar function. One of the roles of a strategic planner is to monitor the environment, looking for early signs that the environment is changing. Ideally, the planner will then make key executives aware of the problem early enough so that the company can adapt to the change before it is too late.

Smoke detectors are such valuable warning tools that there are laws mandating that they be placed in houses in key locations (which is why my house has seven of them). Let me tell you, if it weren’t for those laws, I would have been tempted that night to yank out some of those pesky detectors that were keeping me awake.

Fortunately for me, those laws are there to keep me safe. Unfortunately for businesses, there are not similar laws mandating that businesses have enough strategic planners to adequately monitor the business environment to keep them safe.

If you cannot make a compelling case for having “strategic smoke detectors” at your business, you could miss the early warning signs and your business could be destroyed by the fires of change.

We live in a world where the idea of having full-time, on-site strategic planners is becoming ever rarer. To many, the idea sounds quaint and obsolete. Yet, just as smoke detectors are still relevant and critical to ensuring the long term security of the building occupants, full-time strategic planners are still relevant and critical to the long-term security of the business.

If we treated smoke detectors the same way many companies treat strategic planning, we would be seen as reckless fools (as we shall see in the three examples below). Let’s stop the foolishness! Mandate the full-time staffing of strategic monitors.

1. Wait Until There Is a Fire to Buy A Smoke Detector
What if someone said “Fire detectors are only useful when there is a fire, so I won’t buy one until I know there is a fire.”? You’d probably think that person was a bit crazy.

By the time your nose or eyes could detect a fire (without the aid of a smoke detector), the fire may already be quite large. It might be too late to escape. This is not the time to think about running out and buying a smoke detector. At this point, about all you can do is frantically try to keep from dying.

As silly as this sounds for smoke detectors, I have seen a similar approach to strategic planning. The comment goes something like this:

“I don’t need a full-time strategic planner. I’ll just wait until I get into a jam and then bring in a strategic planning consultant.”

The problem with this line of reasoning is that by the time a company is already in a jam, it may be too late to bring in strategic planning. You may not see the signs of problems in your income statement or balance sheet until competing forces and consumer change have already engulfed your business in the flames of your own obsolescence. The world has already passed you by with superior go-to-market strategies which are more relevant to the new environment.

The best time to adapt to a changing environment is early on, when you still are operating from a position of strength and relevancy—when you still have the time and the cash flow necessary to adjust. This type of situation requires having strategic planners on site all the time, monitoring and adjusting in the early stages—when things may still look good to the naked eye. If you don’t bring in the strategic planning until the time and cash flow are nearly gone, there is little the strategist can do to help you prosper. At this point, about all you can do is hope to escape without dying.

Have you ever noticed that whenever a company issues a press release saying that they have recently hired a strategic planner to help them “examine strategic alternatives” that the end result is usually either selling the company or declaring bankruptcy? That’s because if you wait until the fires of change have already made your company irrelevant before looking for alternatives, then bankruptcy or selling out (to someone who adapted sooner and better to the change) are about the only alternatives left.

2. Complain When the Smoke Detector Doesn’t Make a Sound
What if—on that night when I was changing batteries in my smoke detectors—I had said, “These smoke detectors are worthless. They have never once warned me about a fire. They cost me money as well as the time and expense of replacing the batteries. I think I’ll get rid of them.”

If I said that, you’d think I was pretty short-sited. Just because my house had never caught on fire does not mean that the smoke detectors were worthless. They were still faithfully monitoring the environment. They were still ready to act the moment they detected change. Had there been a fire, I would have been protected. Taking the smoke detectors out makes me vulnerable to any future fires.

Eliminating smoke detectors is silly and short-sighted, but a similar approach is often taken with strategic planning. Things may be going well at the business and there may be little need at the immediate moment for drastic strategic change. Therefore, a business might conclude that strategic planning isn’t doing much or isn’t needed much. As a result, they eliminate the department.

Just because the alarm has not yet sounded does not mean that you should eliminate the alarm. Change is inevitable. Some day you will need that alarm. Having strategic planning on site all the time is the only way to ensure that you will have the alarm when you need the alarm.

Do we get angry when we live another day and do not yet need our life insurance? No…we are happy in knowing we are still alive and in knowing we are prepared just in case. The same is true of strategic planning. It is insurance against change. Eliminate the planners and you no longer have that protection. Sometimes strategic advice to “stay the course” is the best advice a strategist can give. Be happy that the strategy is still working for another day. Don’t fire the strategist because he has no new strategic change agenda.

3. Complain When the Alarm Sounds
What if my house caught on fire and my smoke detectors started blaring away in the middle of the night. Wouldn’t you think I was a bit crazy if I started getting upset over all the noise from the alarms and hated them for waking me up? Instead, I should be grateful that they woke me up so that I could get to safety.

Yet, I have seen similar reactions to strategic planners. Part of the role of strategic planning is to help companies change to adapt to the changing environment. Their call for change is often essential if I want my business to be in a safe position for the future. However, instead of the leaders being grateful for the wake-up warning, they complain. The leaders grumble about being woken up from the daily grind and commanded to change. They don’t want to change. They label the planners as excessive worriers who have too much of a negative attitude. As a result, they stop listening to the warnings.

If we want to be successful as strategic planners, we need to manage our image so that our warnings are properly heeded. An alarm clock is worthless if the user just turns off the alarm and goes back to sleep. We need to sound our alarm in such a way as to keep management from just turning us off and going back to sleep.

There are many businesses today which do not fully appreciate the value of having a permanent strategic planning department on site. This attitude is like not wanting to have permanent smoke detectors on site. Just as eliminating smoke detectors leaves you vulnerable to fires, eliminating strategic planners leaves a company vulnerable to obsolescence. If you do not make a strong case for having such a permanent planning department, you can be putting your company at significant risk.

Not only will this current trend put businesses at risk, it also puts your career at risk if you are a strategic planner. That should give you added incentive to make the case for keeping permanent strategic planning departments.

Thursday, September 16, 2010

Strategic Planning Analogy #352: Tug o’ War

Tug o’ War is a simple game. All you need are two teams and a large rope. The two teams each grab onto the opposite ends of a rope and pull as hard as they can. The team which out-pulls the other, causing the other team to cross into their territory, wins.

Having played the game a few times, I know it can be a very difficult and strenuous game if both teams are of equal strength. When the teams have equal strength, the game seemingly goes on forever and you get extremely exhausted. It’s more fun if your team is a lot stronger than the opposition. Then, you don’t have to work as hard and you win more quickly and more often.

In Tug o’ War, winning comes from amassing more power at the point of struggle than your competition. The one with the relatively larger strength wins. The same is true in the business world. The one with the larger relative strength usually wins.

Think of the rope in Tug o’ War as being like your supply chain. The person on the other side of the rope is someone else in your supply chain, either upstream (supplier) or downstream (distributor, customer). Within a supply chain, there is a certain amount of revenue and a certain amount of costs. These revenues and costs need to be allocated amongst all the players within the supply chain. If you are a good negotiator, you can get a disproportionately higher percentage of the supply chain revenues while absorbing a disproportionately lower percentage of the costs. Your gains come from the losses of others within your supply chain.

Of course, while you are trying to get a disproportionate advantage against others in the supply chain, others in the supply chain are trying to do the same to you. Hence, the big struggle, like a game of Tug o’ War. And, like in the game, the one with the most power typically wins the struggle.

As mentioned earlier, Tug o’ War is more fun if you are stronger than the team on the other side of the rope. The same is true in business supply chains. I’ve worked with retailers who were very strong relative to their suppliers and I’ve worked with retailers who were weak relative to their suppliers. Let me tell you, those experiences are very different.

When with the weak retailer, we were forever going to the suppliers begging for access to sell their product. We were willing to promise almost anything to get them to cooperate and sell to us. Needless to say, even if we did successfully get access, we didn’t make much money on the deal because the negotiation favored the supplier, who was much stronger.

Conversely, when the retailer was relatively much stronger, the roles were reversed. The vendors came knocking at the doors of the retailer, begging us to sell their wares. To gain access to our stores, they would offer almost anything—even including some equity ownership in their company. In this case, retailer got the most favorable end of the negotiation.

The more power you bring to the supply chain, the better your negotiation of who gets the revenues and who pays the costs. Getting such power rarely comes by accident. It takes strategic effort.

Therefore, when strategizing about the battles ahead, don’t just build your strategy around the struggles against your competition. Remember, you also have this tug o’ war with your supply chain as well. In fact, your ultimate profitability may have more to do with how your supply chain tug o’ war turns out than how your competitive battle turns out. This is because a winning tug o’ war strategy in the supply chain not only makes your individual transactions more profitable, but it can also give you an edge in your fight against the competition (particularly if their tug o’ war within the supply chain was less successful).

How much of your strategic effort is focused on your supply chain tug o’ war?

The principle here has to do with accumulating the right amount of power within the supply chain. The key here is determining what the right amount of power is and what it takes to get it. This is not just about getting the most power you can. Remember, it is not absolute power which is important, but relative power. It does little good to focus on building your power if you still end up significantly less powerful than your supply chain partner on the other end of the rope. Also, as we will see later, there can be risks if you gain too much power. The goal is not to obtain all of the power, but only enough to gain advantage.

So what can we learn from the game of Tug o’ War to help us with this supply chain strategy?

1) Don’t Let the Other Side Get Too Strong
In Tug o’ War, you can still win if you are weak. All you need to do is ensure that the opposition is even weaker. There are steps you can take in your strategy to proactively try to keep other players in your supply chain weaker than you. Take, for example, the relationship between franchisors and franchisees. If you are a franchisor, you have a choice in whom you franchise to. Are you making those early front-end choices strategically for the long-term Tug o’ War between franchisor-franchisee?

At first, it may seem easier to franchise your concept to a small number of large franchisees. After all, this eliminates the hassles of dealing with a lot of small operations. Through only a few deals, you can quickly get huge geographic penetration for your concept. In addition, these large franchisees tend to be successful and well financed, reducing the risk of failure.

Unfortunately, when you take such a move, you have made the franchisee relatively stronger in the franchisor-franchisee tug o’ war. A large franchisee has more leverage in the negotiations and can gain more advantage. Your one-time decision has created decades of tougher Tug o’ War battles than there needed to be.

Take, for example, NPC International. They own about 1,200 Pizza Hut franchises. Just their volume alone would make NPC a top ten fast food retailer in the United States. Worse yet for Pizza Hut, NPC now controls about 20% of Pizza Hut’s volume in the United States. That gives NPC a lot of power in negotiating with Pizza Hut. For example, instead of accepting the typical supply distribution arrangement Pizza Hut offers its franchisees, NPC in August negotiated a separate deal to get their supplies from McLane Foodservice. I’m sure that this deal between NPC and McLane Foodservice puts disproportionately less of the total supply chain profits in the hands of Pizza Hut.

And it is Pizza Hut’s fault, because they allowed this franchisee to get too powerful. NPC International got large by buying up other franchisees. Strategically, it might have been in more beneficial if Pizza Hut had outbid NPC and then placed those units in the hands of others where the power of the franchisees would have been more dispersed. Then Pizza Hut would have had more power when distribution decisions by the franchisees were being made.

2) Build Your Own Strength With the Help of Others
Even if your team is small and weak you can still win Tug o’ War if you can partner with others who will pull along with you on the same side. In other words, if your negotiating clout is weak, then don’t negotiate alone. Form alliances with others.

The internet has shown that if individual consumers work together en mass, they gain a lot more clout and get better deals (think firms like Groupon). Cooperative buying organizations have been around a long time, where groups of people or companies negotiate together in order to get a better deal. Technology is making such buying even easier. Take advantage of these opportunities increase your relative strength at the point when Tug o’ War negotiating occurs.

3) Keep the Game Fun for Both Sides
If you build up too much power, nobody will want to play Tug O’ War with you because they won’t have any fun. The same is true in business. If you gain too much power, and exploit that power too strongly, nobody will want to play with you. And if nobody in the supply chain wants to play with you anymore, you cannot run your business anymore.

Think of the U.S. automobile industry. The manufacturers had used their power so aggressively to squeeze concessions out of their suppliers that the suppliers could no longer make a profit serving the automobile industry. Many suppliers started diversifying away from the automobile industry and started to no longer bid on projects in the automobile industry. Those suppliers which remained started going bankrupt, causing all sorts of problems for the automobile companies purchasing from them. The result was that the automobile companies now had fewer supply options and the remaining options were shakier. This is all because they had taken the power principle too far.

Remember, the goal is to win with your supply chain, not to obliterate it. Although they may be on the opposite side of the rope, they are still your partners. You cannot survive without them. Getting a disproportionately better deal does not mean taking it all and leaving them with nothing.

Besides, the cost to get that much power may be more than what you can get in concessions (diseconomies of scale). And if you exploit your power too much, you can have government agencies coming after you.

4) Be Careful When Pulling on Both Sides of the Rope.
Some people argue that the best way to avoid problems in the supply chain is to diversify into the rest of the supply chain. In other words, become your own supplier and/or distributor. Now there can be some benefits to this approach, because you cut out some middleman expenses. However, this approach can often be a disaster.

The problem is this—if you own both sides of the negotiating table, then you cannot get a disproportionate advantage. Although you get to absorb all of the revenue, you also have to absorb all of the costs and all of the risks.

It is like trying to play Tug o’ War while holding both ends of the rope at the same time. There is no way to win an advantage.

In addition, if you own a supplier or distributor, that often means that your competition will no longer want to use that same supplier/distributor for fear that it will put more profits in the hands of their competition. As a result, your ownership could weaken the power of that supplier/distributor in its own Tug o’ War battles.

A large part of a company’s success may be due to how well they play Tug o’ War with their supply chain partners. Therefore, supply chain power management should be a key part of any strategic planning exercise.

Negotiations with supply partners do not always have to be adversarial. Sometimes you can find some win-win alternatives where you can make your whole supply chain more competitive against competing supply chain alternatives. But don’t be na├»ve when negotiating and assume your partners always have your best interests at heart. I remember one wholesaler saying that his suppliers all told him that he was their favorite customer. At first he was happy because he thought that was a compliment. Then he realized that he was their favorite customer because they got their best differential advantage when negotiating with him. He stopped being happy and started negotiating harder.

Monday, September 13, 2010

Strategic Planning Analogy #351: Does Your Strategy Smell?

The human senses fall into two categories—dependent and independent. By dependent, I mean that the use of these senses are dependent on us directing them to sense in a particular way. The dependent senses are sight, taste and touch. For example, sight is a dependent sense, because we only see what we proactively choose to look at. If we do not want to look at anything, we can close our eyes. It all depends on us.

Conversely, the remaining two senses—hearing and smelling are independent. Independent senses are always on and taking it all in, without our control. We will hear every sound in our environment, whether we want to or not. We cannot turn it off or be very selective in what we choose to hear out of the environment. I experienced this the hard way a couple of weeks ago when the people next door decided to have a party in their backyard with extremely loud music (loud enough to shake the house I was in). I could not escape the sound unless I left that environment (which I did, along with most of the other families in the neighborhood until the party was over).

The same is true of smell. This was made painfully clear to me recently when a car ran over a skunk in my neighborhood, causing me to smell the awful skunk odor all day, whether I wanted to or not.

Having both dependent and independent senses ideally suit humans in their ability to live in a dangerous environment. The independent senses (hearing and smell) will alert us to dangers even when we are not actively seeking them out. For example, we could be asleep, and the sound of an intruder or the smell of a burning house will wake us up so that we can protect ourselves. They make for an excellent early warning system.

On the other hand, the dependent senses help us to focus our attention on particular specifics in order to better proactively assess potential dangers. For example, if a sound wakes us up, we can then focus our vision in the direction of that sound to better evaluate exactly what is going on there (is it friend or foe). Dependent senses are excellent analytical tools, because we can direct them to specifically analyze a particular area.

The power is in having a combination of both independent and dependent senses.

Our senses help us survive in the environment we are in by helping us become more aware of the nature of that environment (where the rewards and the dangers are). Similarly, strategic planning’s goal is to help companies succeed by better understanding and adapting to the environment the business is in. That is why traditional strategic planning spends a lot of time trying to understand the environment and predict what the future environment will look like. This activity helps the business understand where its rewards and dangers are.

Just as there are advantages to having both dependent and independent senses, there are advantages to having both dependent and independent planning systems. Independent planning systems are like hearing and smelling—always examining the environment without the need for us to actively intervene. They act as an early warning system, tipping us off to environmental changes even when we are not actively looking. Many dashboard planning systems act like independent senses, always monitoring the state of the environment in near real time—even while we sleep.

By contrast, dependent planning systems are more like seeing or touching. Examples would be actions such as specific in-depth environmental analysis projects, where a planning team focuses on specific issues, like competitive actions or the impact of recent government regulations. By focusing on key issues, one can better understand the cause and effect in the environment, making for better forecasts.

Having both in your planning arsenal will give you the best of both worlds.

The principle here has to do with balance. Are your planning systems sufficiently balanced between dependent and independent planning tools? Do your planning systems smell as well as see? You will not have a complete picture of your environment unless you achieve this balance. You will not be able to respond quickly unless you have both, either.

All Eyes, No Ears
The strategy process is weakened if all of the effort is imbalanced and placed on dependent processes (all eyes, no ears). Although there is great benefit from proactively studying specific issues in depth (using our eyes), it does not tell the whole story. In particular, there is the problem that you will only gain knowledge in the areas where you look. Other environmental issues will come as a complete surprise, because you were not monitoring them.

In talking with people in the food industry, I’ve been amazed at the level of detail they knew about how their products were used out in the environment. A gentleman from Pillsbury once was telling me about how much of their logs of uncooked cookie dough get eaten raw at slumber parties by girls with oversized spoons. And the things the Cheerios people know about how those little o’s are purchased and consumed would boggle your mind.

This is all well and good. But it is not enough. It provides great depth about what is on their agenda to study. It says nothing about the places where they are not looking. Eyes can only see what they are looking at. They need the ears to hear everything, even things not being looked at.

For example, what is the benefit of knowing how a cereal fits into breakfast at home if people decide to no longer eat breakfast, or decide to eat breakfast from a restaurant? Changes tend to start at the fringes, outside the periphery of where our sights are focused. By the time the change has impacted our field of vision, it may be too late to properly react. Precious time is lost.

Therefore, we need to balance out focused looking with unfocused hearing. We need data gathering and monitoring of the background noises throughout the environment, to pick up the sounds of change on the fringes. We need early warning systems to wake us up to changes while there is still time to react.

Does your planning system routinely monitor the bigger picture to hear the rumbling on the fringes? Do you have a daily dashboard to warn you when the status quo is shifting away from its norms?

Most strategies are only viable if assumptions stay within a narrow range of possibilities. If assumptions fall outside that range, the strategy is no longer valid. Do you know the environmental trigger points at which point your strategy is no longer valid? Do you have “always on” independent sensors monitoring the situation to determine and alert you when assumptions are moving towards the trigger points? If not, your focused efforts could be leading to great insights in areas that are no longer relevant.

All Ears, No Eyes
The opposite type of imbalance is also dangerous. As we have seen, listening for changes is a good thing. However, if that is all you do, you have only half the data you need. You are missing the depth of insight that comes from focused research.

It’s great to know that a trigger point has been reached, but without an in-depth knowledge of related issues, you will not know how to react to the change. It is like someone whose nose wakes them up to the smell of a burning house, but they still die because they never researched what to do when a house is burning.

The moment of crisis is not the time to become educated. It is the time to act. Education needs to be processed in advance. If you have no idea how to act at the point of change, then you have gained little advantage from having your advance warning system. Time is wasted.

This is where tools like scenario planning come in. It is a focused effort to try to understand how certain types of changes impact outcomes. It allows you the depth of understanding to properly react if these types of changes eventually occur. Without in depth knowledge, it is difficult to even know which trigger points are even worthy of monitoring. How much time to you spend learning about specific nuances of your environment which are critical to strategic success?

Directed focus provides the context, so that you know which noises are friends and which are foes (and which are relevant and which are not). Lose the context, and all you have is a lot of noise.

Successful strategic planning needs both direct and indirect knowledge gathering processes. The indirect processes provide an early warning of what is happening on the fringes of change. The direct processes provide the depth and context so that you know what to do when the early warning alarm goes off. One is not very useful without the other.

Of course, the worst thing to do is neither type of information gathering. Sticking your head in the sand and ignoring the environment is not the path to sustained success. “See no evil, hear no evil, speak no evil” does not make the evil go away. The only thing which goes away in that situation is your business’ future.

Wednesday, September 8, 2010

Strategic Planning Analogy #350: All the Way

Once upon a time, Bob decided he would try to jump over the Grand Canyon. People told Bob that the Canyon was too wide and too deep. If he tried to jump the canyon, he would not make it to the other side. Instead, he would fall to his death.

Bob was not worried. He said he had read a book about attempting difficult tasks. The book said that if you want to accomplish nearly impossible tasks, all you need to do is break down the large, difficult task into series of smaller, more manageable segments. Therefore, Bob broke down his jump across the Grand Canyon into a series of smaller jumps. Bob’s conclusion: “I am not able to make the entire jump in one leap, so I will plan to do it in five consecutive smaller jumps.”

Needless to say, after the first of his planned five jumps, Bob was no longer around to finish the other four jumps. He had fallen to his death on the first jump.

Not all tasks can be broken down into smaller segments. Either you make it all the way across the Grand Canyon in one leap or you do not make it across at all. In the case of the Grand Canyon, a partial, or half-way attempt does not get you partially or half-way to the other side. It only takes you on a path downward to your death.

The same is often true in business. Strategic initiatives which only go “half-way” in a particular direction do not usually give you half the benefit of going “all-the-way.” Instead, half-way can be worse than staying where you are.

By going half-way, you do not really stand for anything in the mind of the customer. Others, who have taken either extreme, own the viable positions. Because you do not fully own a position, you do not provide a reason for consumers to prefer you. Therefore, by being in the middle, you fail.

Solid footing on either side of the Grand Canyon is a good thing. Trying to provide “the best of both worlds” by being halfway between those two sides of the canyon provides no footing at all, so you fall. Similarly, when choosing your strategic position, make sure you jump far enough to reach solid footing. Make sure you move far enough to truly own the new space. Don’t settle for half-way.

The principle here has to do with critical mass. If you want to be considered a viable alternative for a particular strategic position, you need to surpass a minimum threshold of value in the direction of that position. For example, if you want people looking for low prices to consider you as a low price alternative, you need to prices to be below a certain threshold to be considered. That threshold becomes your critical mass. If you do not meet the critical mass, then you are not even considered. Going half-way to the critical mass is worthless. All the effort to go half-way will get you nothing, since you have not moved far enough to be considered a viable alternative. It is like jumping half-way across the Grand Canyon.

I was reminded of this principle over the weekend while driving to Chicago for a mini-vacation. While driving across the countryside, I stopped at a number of fast food restaurants. One restaurant I did not stop at was Burger King. The reason? Their strategy only went half-way. They did not have enough critical mass in any direction to give me a reason to prefer them. I will give two examples of this.

Traditionally, fast food restaurants have not been the best places to get a cup of coffee. Other options, like Starbucks, provided better coffee—both in terms of taste and variety. If you were a coffee aficionado, fast food restaurants were not on the list for consideration. Burger King was the first to try to change the coffee reputation in the fast food industry. They introduced BK Joe, which was a better cup of coffee than the other fast food coffees at that time.

Unfortunately, this was a half-way move. Although the coffee was better than other fast food offerings at the time, it was not good enough to be a viable alternative to the coffee shops. There was not enough of a critical mass—in flavor or variety—to become a viable alternative in that space. Similarly, the coffee was not superior enough to get large masses of other fast food customers to switch their entire meal to Burger King just to have BK Joe with their meal.

By contrast, look at how McDonald’s pursued coffee. Rather than go half-way, they went all the way. They not only introduced better coffee, but coffee good enough for many coffee lovers. They also introduced all the relevant varieties of coffee, including lattes, mochas, and iced coffee. They had enough of a critical mass to be able to sub-brand the area inside the McDonalds as McCafe. By going all the way, the McCafe was seen by many as a viable alternative to the coffee specialists, while also having the advantage of being lower priced (and often more convenient) than the coffee specialist.

The most recent addition to the McCafe has been fruit smoothies. This further solidifies McDonald’s as owning the convenient, value-priced quality beverage space. While driving on the trip, my wife and I wanted to make a quick beverage stop. We ended up at a McDonald’s, because we wanted their fruit smoothies. Even though there was a Burger King across the street, we did not even consider it. Not enough critical mass.

In another attempt to stand out from the fast food crowd, Burger King decided to offer bigger, better burgers, made with a higher quality of beef and better toppings. Unfortunately, Burger King continued with the half-way approach. The variety and quality did not reach enough of a critical mass to change the perception of Burger King. It was merely an add-on to the traditional menu, so they still had a traditional fast food image overall.

Those who love great burgers tend to go to the more upscale casual dining restaurants, where the quality and variety of burgers is greater. Burger King’s half-way change simply was not enough to be considered a viable alternative to these casual dining burger restaurants. Similarly, the upgrade was not so dramatic that other fast food restaurants could not imitate it. McDonald’s added their own version of a better burger to the menu, essentially negating any prior advantage Burger King had.

Now contrast Burger King’s half-way approach to the approach of the Hardee’s fast food restaurant chain. Hardee’s also wanted to go after the bigger, better burger segment. However, unlike Burger King, Hardee’s went all the way. They completely abandoned their old traditional menu, eliminating anything that worked against the bigger, better image. They branded their premiere burger the “Six Dollar Burger,” not because they charged six dollars for it (they actually charged much less), but because Hardee’s claimed it tasted as good as the six dollar burgers found in the casual dining chains. They rebranded their hamburgers as “thickburgers.” They came up with a large variety of different thickburgers, enough to create a critical mass worthy of competing against the casual dining chains.

Once the burger position was solidified, other quality moves were made. For example, the shakes at Hardee’s are now made using real scoops of hard ice cream, not a soft-serve machine like other fast food restaurants. And most recently, they stopped using frozen, pre-breaded chicken strips like the others. Now they bread them fresh right at the restaurant.

Because they went all the way, Hardee’s has now become for many a viable alternative to the casual dining restaurant, an alternative that is more convenient and costs less. Instead of being seen as an inferior McDonald’s (as they were before), they now own a viable position in the marketplace.

When it was time to stop on the road this weekend to grab a quick hearty meal, my wife and I stopped at a Hardee’s, even though there was a Burger King nearby. The choice was obvious.

The Results
So what are the results of half-way versus all the way in fast food? Well, the McCafe has been a huge success for McDonalds, no matter how you measure it: sales, traffic, profits or stock price. Burger King has given up the fight on owning coffee and has announced it is going to start selling “Seattle’s Best” coffee, a brand owned by Starbucks and available at lots of other restaurants (no longer a proprietary differentiator).

Overall, Burger King has been losing traffic and has had a declining stock price. It’s franchisees are furious because they think Burger King is mismanaged. As a result, this past week Burger King was sold to a private equity company called 3G. The hope is that by no longer being a public company, there is the time and patience to fix the company.

As for Hardee’s, if they had not shifted their position, there is a good chance they would no longer be in existence. Now, they own a niche which gives them a reason for existing. Oh, and by the way, the company that just bought Burger King used to own a sizable piece of the company that owns Hardee’s. Perhaps they will put the knowledge they learned there to good use at Burger King.

When it is time to position (or reposition) your company, do not go half-way. Half-way positions do not provide enough critical mass to give consumers any reason to prefer you. Even if it means abandoning a lot of what you used to stand for, be bold and go all the way. Then you will be standing on solid ground (“owning” a reason to be preferred). This is much better than going half-way and finding yourself halfway across the Grand Canyon with nowhere to go but down.

This week Burger King has announced a change to their breakfast menu. Management admitted that their old approach to breakfast (which, as one would expect, only went half-way when compared to McDonalds), was inadequate. To quote Burger King CMO Mike Kappitt’s assessment of their old approach, “We've almost abdicated [breakfast] to McDonald's.” The revised breakfast menu has added nine new items. I don’t know if that is enough to create a critical mass, but at least it looks like maybe Burger King is finally waking up to the error of going half-way.

Friday, September 3, 2010

Strategic Planning Analogy #349: Seasons of Life

Way back when I was in college, I took a class in communication. At the time, I believed that successful people need to be good communicators, so I wanted to learn how to communicate well.

One day, we had a guest lecturer who specialized in the advertising communication of pharmaceutical companies. He brought in numerous examples for the lecture. I will never forget one of the pharmaceutical ads. It was an ad for an anti-depressant. The ad was directed towards doctors and was placed in a medical journal.

The advertisement talked about a number of sad situations, such as a major tragedy or the loss of a loved one. The ad then told doctors that if a patient comes to them saddened by one of these occurrences, that the doctor had an obligation to prescribe their anti-depressant, since these were not appropriate times to be sad.

After reading the ad, the guest lecturer (who was incensed by the implication that people shouldn’t be sad and grieve over tragedies like the loss of a spouse) asked, “If these are not occasions when it is appropriate to be sad, then when is it appropriate? Since when is grieving something evil to be avoided at all cost?”

That question still haunts me all these decades later.

The implication of the pharmaceutical ad was that people have a right to be happy 100% of the time. Even in the midst of horrific circumstances, there is no need (or reason) to grieve. Just take a pill and be happy.

Yet deep down we all know that grieving is an important part of healing and moving on after a tragedy. To ignore this part of the process is to ultimately delay lasting health. Sometimes, it is good to be sad for time. It is a natural part of the seasons of life and a valid way to cope with tragedy.

Many times in the business world, I see companies inappropriately acting like the advertising copy for that anti-depressant. They act as if all news all the time about their company and its products should be happy. They do not consider any tragedy large enough to derail their “happy talk.”

In these companies, strategic plans always project a future wildly growing sales and profits—year after year after year—regardless of the seasons of life that company is going through. Forget about recessions. Forget about product malfunctions. Forget about market saturation and life cycle maturity. Forget about tragedies the customers may be going through. Let’s be happy, optimistic and push for ever higher sales in the current quarter.

Just as avoiding grieving in our personal lives can harm long-term emotional healing, avoiding dealing with the tragedies surrounding a business can harm a company’s long-term health.

The principle here is that strategic planning needs to consider the seasons of life the company is currently in.

This is not to say that a company is just a victim of its circumstances and has no control over its destiny. On the contrary, the primary reason for strategic planning is to better control one’s destiny. Strategic planning is the attempt to create a better future by proactively choosing the best path (and then making it a reality through execution). By proactively choosing a path, one increases their control over how the future evolves (hopefully in one’s favor). This should lead to superior results versus letting the circumstances of the world fully dictate the future (without proactive intervention).

This also is not to imply that companies should radically change their strategy with every little momentary change in the environment. A good strategy should pursue a strong position which transcends minor variations in the environment. If you are changing your strategy every quarter, then you really don’t have a proactive strategy. You are just in a reaction mode, never catching up, let alone getting ahead. If you want to win by owning a position in the mind of your customer, you need to stick with that position over a long period of time.

Yet, that being said, we cannot blindly ignore the seasons of life a company is going through. Minor adjustments may be needed to have actions appropriate to the times. Without some of these minor adjustments, your strategy can quickly become irrelevant to the moment and actually damage your long term prospects. Just as the death of a loved one requires momentary grieving, there are times when companies need momentary adjustments in order to be in tune with the times.

Here are three examples of how being out of tune can be damaging.

1. Ignoring Tragedies
In spite of good intentions, sometimes bad things happen to companies. Recent examples include performance problems with Toyotas, manufacturing problems at Johnson & Johnson, and the problem with drilling in the Gulf of Mexico by BP. How a company reacts to these tragedies can significantly influence long-term prosperity.

The wrong reaction is to ignore the tragedy and continue the “happy talk” as if nothing happened. Instead, an adjustment is needed. These are tragedies and tragic times need an appropriate response. BP and Toyota lost some serious credibility because they continued their happy talk and did not adjust rapidly to “grieve” about the tragedy.

When tragedy strikes, the strategy quickly needs to adjust. First, quickly (and publicly) acknowledge that a tragedy has indeed occurred. Don’t pretend nothing serious happened. Don’t ignore the problem in hopes it will go away.

Second, take responsibility for resolving the tragedy. Don’t waste time pointing fingers at who is to blame. Instead of trying to deflect the cause of the problem, focus on resolving the problem, regardless of who caused it. Make resolution your responsibility, regardless of who caused it.

Third, quickly create a viable plan to get the tragedy resolved and put the resources there to make it a reality. In fact, as part of normal strategic planning, it may be a good idea to have a tragedy back-up plan in place, so when tragedy strikes, all you have to do is pull out the back-up plan and adjust it, rather than start from scratch.

BP and Toyota did not embrace these three actions and lost a lot of equity in their image (and are paying a high price to get that image back). By contrast, Johnson & Johnson has historically embraced these actions, not only in the recent manufacturing issue, but back when Tylenol was tampered with. By acting quickly and decisively, Johnson & Johnson has done a better job of weathering these storms.

2. Fighting Against Lifecycles
Growth is fun. Growth is exciting. Being in the growth phase of the lifecycle can be a pleasure for both you and your shareholders.

Although there are some tricks to lengthen the growth phase of a business, one cannot stay there forever. Eventually growth phases end and are replaced by maturity, followed by decline.

If a company gets too focused on the happy talk of growth, it can end up mismanaging the company through these transitions. For example,

a. You can set growth targets that are no longer realistic. That can lead to overinvesting, creating the problem of excess capacity. It can lead to taking ever more drastic steps to get the overly aggressively sales targets, which can cause growth that is highly unprofitable. It can lead to building an infrastructure that can no longer be supported, because the projected growth to support it was a fantasy. When aggressive growth targets are no longer met, employees will stop getting bonuses and good, but frustrated people will leave. Each phase of the business lifecycle requires a different approach to organization, investment and compensation. If you ignore the changes in the cycle, you will end up with an inappropriate structure.

b. You can delay looking for “the next big thing.” One of the main reasons why an industry moves into maturity or decline is because a new innovation has taken its place. New industries make old industries obsolete. If you surround yourself only with happy talk, you will not be as concerned as you need to be with potential obsolescence. Instead, you can start to believe that your industry will keep growing forever. You will not invest enough into the innovations that will replace your current position. As a result, someone else with come up with the innovation that makes your industry obsolete, leaving you with nothing. It is better to plan your own demise (as tragic as that may be) and have a replacement innovation than to be left with nothing.

We’ve talked more about trying to stay in tune with your lifecycle in prior blogs, like here and here.

3. Failure to Empathize With Customers
Many times your customers may be going through their own tragedies and grievings. If you do not come along side your customers and grieve with them, you will be out of touch with your customers. Your happy talk will appear as crude and disrespectful. The customers will switch allegiance to companies whom they feel better understand them.

During the recent great recession, there were many companies which failed to empathize enough with those customers who were having great difficulties trying to cope. These companies acted as if everything was still wonderful in the lives of their customers. There was no sense of empathy to the tragedies their customers were facing. Some of these companies, like Abercrombie & Fitch or Proctor & Gamble, lost a lot of market share which may never fully come back.

Without customers, you have no business. Therefore the seasons of life for your customers are very relevant to your business. Your strategy needs to adjust when the seasons of life change for your customers, so that you are seen as relevant and understanding.

Although strategic planning helps you control your destiny, there can still come major changes in the seasons of life for your business which can trigger a need for adjustments. Whether it is a sudden tragedy within your company, a change in your business’ lifecycle, or a tragedy for your customer, they all need to be addressed—quickly and decisively. Otherwise, you will be out of sync with the world around you. And who wants to buy from a company who is out of sync with the buyer? Setting aside happy talk for awhile and implementing a strategy of “grieving” can sometimes be the best thing you can do.

The Bible says that Solomon was one of the wisest men who ever lived. In the book of Ecclesiastes, Solomon says that:

“There is a time for everything, and a season for every activity under heaven: a time to be born and a time to die, a time to plant and a time to uproot, a time to kill and a time to heal, a time to tear down and a time to build, a time to weep and a time to laugh, a time to mourn and a time to dance, a time to scatter stones and a time to gather them, a time to embrace and a time to refrain, a time to search and a time to give up, a time to keep and a time to throw away, a time to tear and a time to mend, a time to be silent and a time to speak, a time to love and a time to hate, a time for war and a time for peace.”

In other words, the appropriate actions depend on the season of life you find yourself in. Get in tune with your season of life, so that your strategy is appropriate.