Sunday, October 31, 2010

Strategic Planning Analogy #361: Cash Out

A friend of mine always had trouble buying gifts for his father. His father didn’t seem to appreciate gifts unless they were practical. And his father liked to take care of his practical issues on his own, not leaving any room for gifts.

After years of frustrated gift giving, my friend finally gave up. As a result, for one Christmas he just gave his father a card with a check in it. As it turned out, the gift he got from his father that year also was a card with a check in it. And the size of the checks were close to the same amount.

Now my friend was doubly frustrated. It seemed so futile to just trade checks for basically the same amount of money. It was almost like not giving or getting a gift at all, since they both ended up in essentially the same place as they started. It was as if nothing had happened.

Gift giving should be an exciting time, for both the giver and the receiver. But if all you are doing is trading money, a lot of the fun and excitement goes away. Nothing special happened. No great emotional memories.

As obvious as this might be in gift-giving, it is apparently less obvious in the business world. After all, when it comes time to rewarding employees, it usually comes down to just writing a check.

Money is nice and all, but it doesn’t usually lead to long-term emotional satisfaction. I was told one time that the impact of a pay raise on the emotional commitment of an employee tends to last for only about two paychecks. After that, it is just money and the higher paycheck is merely the new normal…nothing special anymore. Like with my friend and his father, the transaction seems cold and lacking in any lasting meaning.

Successful strategic initiatives tend to require a strong, highly committed workforce. And if you want strong, highly motivated employees, you need to give them a reason to bond with the company at a deep, emotional level. And after a certain point, money may be one of your least powerful tools to build this bond. A more inspiring gift is needed.

The principle here is that the best long-term motivator is rarely just cold, emotionless cash. To get the deepest level of commitment, you need gifts that touch the employees in a more meaningful way.

What the Corporate Executive Board Found
I was reminded of this when reading a recent article from Fortune magazine. The article was talking about what it takes to keep your high potential employees motivated to stay at your company and work hard at making it a success. This is an important issue, because a recent survey indicated that about 27% of high potential employee plan to leave the company they are working for within the year. This desire to defect continues to rise every year.

It is hard enough to achieve strategic success when you have committed employees. But when over a quarter of your high potential employees are focused on getting out the company, the likelihood of long-term strategic success goes down considerably.

As a result, this article looked at what it takes to get deep engagement and commitment from those high potential employees. The article reported on a survey of 20,000 high potential employees by the Corporate Executive Board. This survey asked these high potential employees what drove their commitment. They found that money was a very poor motivator. It was way down the list.

Instead, the best motivators included “a mix of recognition and challenges that stretch them without completely stressing them out.” In fact, the top motivator was “feeling connected to corporate strategy.”

These are things that really aren’t based primarily on money. They are more personal. Just as a personal gift at Christmas is more inspiring than just a check in a card, a personally enriching job which connects the employee to the strategy is superior for motivation over just giving the employee a check. Sure, it’s harder to develop these personalized programs than to write a check (just as it is more difficult to come up with a personal Christmas gift), the results are worth it.

Win-Win Solution
The good news is that this survey provides a great win-win solution for both the company and its high potential employees. The win-win idea is to get more involvement by high potential employees in the strategic planning process. If you expand the strategic process to include more people in more ways, there are two benefits.

First, as the survey indicated, employees become more committed to the company and its strategy when they are involved in the strategy process. By getting greater involvement up front, the strategy moves from being just words on a paper to being ideas owned by the employee. By being involved in the process, the employee takes ownership in the plan.

To the high potential employee, it is no longer just A plan…it is now MY plan. It is easier to be committed to something you helped to build. The high potential employee already has a vested interest in making strategic execution a success, because of the emotional commitment already developed in being a part of the plan’s creation. It is harder for them to leave the company, because they have more at stake in the success. And why would you want to leave a place that values your opinions so much that they want you to have a key role in developing the strategy?

Second, the company ends up with a better strategic plan. High potential employees have more at stake in the long-term, because they have not yet made it to the top. They can only have a great long-term future if the company has a great long-term future. Therefore, they are the most motivated to creating a great long-term plan.

By contrast, the senior executives have already made it to the top. They tend to be older and closer to retirement. They may be less motivated to create a great long-term plan, because the investment in the future could detract from near-term profits. By the time the long-term plan comes to fruition, they may already be retired (and not get credit for their part in the plan). After all, the remaining tenure of the average senior executives tends to be shorter than the length of the average long-range plan.

Hence, there is the risk that preoccupation by senior executives with cashing in their careers soon will keep them from optimizing the long-term. Their motivation in the long-term may be less than with the high potential employees. Therefore, if only senior executives are making the strategic plans, you may be sub-optimizing your long-term plan.

Hence, by elevating strategic planning to a broader level and by getting more input and involvement by high potential employees, both the company and the high potential employees are better off.

Great long term strategies need strong commitment by the high potential employees. The best way to get this is by giving them a large role in the development of the long range plan. Not only will this make them more committed to the company, but the company will most likely end up with a better plan.

I remember one time watching two senior executives from different companies trying to impress each other as to who was the best. They started by comparing who made the most money. However, both of them made so much money that it became a meaningless measure. After a certain point, the money failed to make a difference. Therefore, they had to look for other measures. You should look for other measures in your business as well.

Thursday, October 28, 2010

Strategic Planning Analogy #360: Interesting Neighbors

On time, I was shopping with a friend in London. I was bored with what one of the shopkeepers was showing my friend, so I stepped out of the small shop to look around at what was happening on the street.

I looked up and made an astonishing discovery. It is common in England, when someone famous has lived somewhere, for there to be a sign on the side of the building telling who the famous person was who lived there. Well, there, across the street from this shop were two of these signs next door to each other.

At 23 Brook Street was a sign saying that the electric guitar legend Jimi Hendix had lived there back in 1968-69. Next door, at 25 Brook Street, was a sign saying that classical composer George Frideric Handel had lived there back in the mid 1700s.

Although separated by time, I found it fascinating that Hendrix and Handel had been together in location. It made me ponder what it might have been like if two had been there at the same time and had been neighbors.

Just think of the music that the two of them could have written together. Hendrix’s raw energy combined with Handel’s sense of angelic majesty—WOW—that would have really been something. The jam sessions with Hendrix on guitar and Handel on keyboards would have been superb. (At least that’s how it plays in my mind.)

After all, back in the 1970s, the band Curved Air combined the sounds of contemporary rock with a heavy influence from the classical music by Vivaldi. I thought that worked out quite well.

It is interesting to contemplate the combination of a leading musician/composer from the 1960s with a leading musician/composer of the 18th century. The times were very different and the approaches to music were very different. Yet both Hendrix and Handel created great music and I think a combination of the two would have been great as well (even better than Curved Air, who I highly recommend).

After Jimi Hendrix died, people found copies of recordings of Handel’s music in Hendrix’s home on 23 Brook Street, so maybe there was more of a connection than one would originally think.

The point here is that unconventional combinations have the potential to create wonderful things. This not only applies to music, but also to strategy.

Staking out a new position does not mean that ALL of strategic components have to be brand new and original. No, you can take a lot of old and established ideas and still stake out new territory provided you combine them in new ways.

In modern language, this concept is referred to as “mash-ups,” where you invent something new in digital entertainment by mashing together already-made entertainment from a diverse variety of sources. Just as a Hendrix-Handel mash-up could sound wildly original, even though all the influences are borrowed from the past, your strategy could be original even though it is based on older influences.

The principle here is that you don’t always have to look forward into the fuzzy, uncertain future to find innovation. Sometimes great innovation can come by borrowing from solid successes in the past. By recombining solid strategic components from the past in new ways, one can possibly get the best of both worlds—radical new strategies without the risk of going into totally uncharted territory.

Years ago, I recall that the Kool-Aid beverage powder brand asked a university marketing program to come up with a strategy to boost sales. It got me to thinking what I would have done if I had been in that marketing program.

Kool-Aid as Seasoning?
My thought was to come up with a radical new strategic positioning, but anchored in a solid past. Instead of the current Kool-Aid position as a children’s beverage, why not position Kool-Aid as the kitchen seasoning that will make food more appealing to children? For example, would children be more likely drink their healthy milk if it was flavored with Kool-Aid? How about as a flavor enhancer to get children to eat their oatmeal? And how excited would the children be if their birthday cake was seasoned with their favorite Kool-Aid flavor (and how proud would their parents be when the other children at the birthday party think they are the coolest parents in the neighborhood for making Kool-Aid Cake)?

We all know what seasonings are. People have been cooking with powders kept on their kitchen shelves for generations. They can easily relate to the idea. So the concept is rooted in the past.

However, at the same time, general spices and seasonings specifically geared to children’s taste preferences is fairly innovative. So with this approach, one could take advantage of the familiar yet still create an innovative new strategic position.

Combining Kool-Aid with cooking flavors would be like combining Hendrix and Handel. You end up with a new category without having to really reinvent anything. It’s still the same old Kool-Aid recipe—no new inventions here—just a new way of looking at the old.

And hopefully, this would cause parents to buy extra Kool-Aid—the usual amount for normal use, and extra KoolAid for use as a flavor seasoning. Oh, and they would buy even more, just to have on hand for unknown future seasoning needs. After all, you always keep extra flour and sugar around; now add KoolAid to that list.

Kool-Aid as Dye?
One of the key ingredients of Kool-Aid is food dye. What if you repositioned KoolAid as a funky way to get fun colors into your life. There are many rebellious young people who have used Kool-Aid to dye their hair into wild colors. Perhaps this could be expanded into other color enhancing projects?

One could make simple watercolors that parents could give their children to use, knowing that it would be safe. I’m sure that a lot of other innovative dye approaches could be thought of.

The principle would be the same: to create an innovation without having to create a new product. Just combine the old product (KoolAid) with old practices and end up with a new strategy.

Where to Put the Energy
So, when looking for innovative new strategies, it is not always necessary to put a lot of effort behind scientists in an R&D laboratory. New innovation does not necessarily need new products with new patents. Sometimes, all you need to do is put a new twist on an old product by pairing it up with a new way of using the product.

Subway boosted sales when it got people to think about its sandwiches as not just food, but as a diet aid to lose weight. They didn’t really change their product. They didn’t invent anything new. It was the same old sandwiches. However, because Jared Fogle lost so much weight eating Subway sandwiches, it got others to try to do the same. Combining two old concepts (eating sandwiches and losing weight) was a winner.

So instead of putting all the effort and reliance for success in the hands of the R&D lab, consider just taking what you have and recombining it with other things to create something new.

Think of Legos. Those little bricks stay the same, but put them in the hands of creative people and you can build all sorts of different things. You don’t need to reinvent the Lego bricks. You just have to think outside the box and be more creative with what you have.

Just because a strategy is new does not mean all the components need to be new. Sometimes you can create a great new position by taking what you already have and just combining it with other pieces in a new way. Rather than putting all your hope in an R&D lab, get a little creative with what is already in front of you.

The success rate of getting great innovation out of the lab can be quite low. Many pharmaceutical companies are shrinking their R&D budgets because the return on investment is so low. Why not try a different approach by re-applying the stuff that is already right in front of you?

Friday, October 22, 2010

strategic planning analogy #359: Does It Fit?

I’m a real sucker for a great bargain. Unfortunately, not all great prices are great deals.

Take clothing, for example. I’ve seen lots of really great clearance prices over the years on clothes. Unfortunately, the clearance assortment usually leaves a lot to be desired. They almost never seem to have my exact size left in stock. Therefore, I’ve been known to buy clothing that doesn’t quite fit me exactly, just because I couldn’t resist the low price. Sometimes, I can make the clothing work. Other times, it just sits in my closet, never worn.

I may have paid a terrifically low price for the item, but it was a lousy deal because it didn’t fit and I never wore it.

It really doesn’t matter how little I paid for the clothes. If they don’t fit, they are worthless to me. It was wasted money.

The same can be said of certain strategic initiatives. They may appear to be excellent opportunities, but if they don’t have a strategic fit with the organization, you will never reap the full benefits of that opportunity. If fact, that great so-called “opportunity” could end up destroying value for your firm because of all the time, money and energy wasted in trying to make it fit, when in fact it does not and can not. You will always be at a competitive disadvantage versus others in that space who have a greater fit with the strategic initiative.

Just as you do not want a closet full of clothes you cannot wear, you do not want a business full of initiatives where you had no strategic advantage/fit. No matter how great the opportunity looks, it has to fit to be a great opportunity for you.

The principle here is that great strategies produce great cash flows over their life.

Two Factors Impacting Cash Flows
Two factors impact how much net cash a strategy will produce over its lifetime:

1) The amount of money/time/effort needed create and execute the strategy. These are the efforts which produce the INPUT for your strategy. For example, if your strategy is to become a major player in the smartphone business, you need to expend money/time/effort to design/develop your technology (hardware and software) and find a way to get the smartphone manufactured. Once this infrastructure is developed, you need a process to ensure your technology remains up-to-date and that daily operations run smoothly and efficiently. Without these inputs (a phone, software, and operations to produce them), you cannot be in the smartphone business.

2) The amount of money/time/effort needed to get customers aware of your strategy and make it easy to purchase what you are offering. These are the efforts which produce the OUTPUT for your strategy. Using modern terms, this is the concept of “monetizing” your strategy. For example, to monetize your smartphone, you need things like arrangements with the supply chain (mobile phone carriers and retailers), marketing campaigns, distribution capabilities, and a sales force. And if your business is advertising based, not only do you need a sales/marketing arm to reach end users, but also a sales/marketing arm to reach advertisers. In the case of the iPhone, Apple also needed to develop an infrastructure for developing and selling apps in order to fully monetize the strategy.

To maximize cash flow, one typically needs to keep the costs of inputs low and the net revenues from outputs high. A key way to do this is via strategic fit. Strategic fit is critical in both the inputs and the outputs. Without strategic fit, you will both expend more effort AND get less in return on your inputs as well as your outputs. And in a competitive marketplace, it is difficult to have a winning strategy when others, using strategic fit, can spend less and get more out of the same initiative.

Strategic Fit And Inputs
On the input side, strategic fit occurs when the competencies, skill sets, and infrastructure needed to get a strategic initiative up and running are similar to the competencies, skill sets and infrastructure already possessed by the firm. For example, it is easier to develop the software and hardware needed for a smartphone if you already have the engineering and technical experience to develop things like this in-house. Having brought similar technology to market in the past will put you further down the learning curve. This will make the process more efficient, more timely and more likely to succeed.

Similarly, experience in manufacturing similar products will give you an advantage in delivering the new product you have developed. You will get down the learning curve faster for everyday operations, thereby increasing the efficiencies of your input. If you can build the product using manufacturing infrastructure you already own and experienced employees who are already in place, you not only avoid the added expense of new infrastructure and new training, but you also get to spread your current infrastructure cost over more products. This makes your entire portfolio more profitable.

There was a strong strategic fit for Apple to enter the smartphone business, because it built upon the learnings, expertise and infrastructure developed for the iPod. This allowed Apple to get a quality, innovative product to market quickly and successfully. Conversely, Microsoft has been slow and far less successful in its smartphone strategy due to a poorer fit. Microsoft’s expertise and experience is more suited to developing and producing business productivity software. It knows little about designing gadgetry and is not the most savvy in understanding the consumer market.

Strategic Fit and Outputs
Outputs have a strategic fit when the necessary requirements to distribute, sell, market and monetize the strategy are similar to (or can piggy-back on) the distribution, selling, marketing and monetizing expertise/infrastructure already in place in the firm.

For example, the Apple iPad can take advantage of all of the expertise and infrastructure already in place to distribute, sell and monetize the iPod and the iPhone. Apple already has the needed relationships with the retailers and the phone carriers. They already have the apps infrastructure in place. Apple can use the same sales force and distribution infrastructure. They already know how to successfully market cool new technology to the target audience. This cuts out a lot of time and costs, as well as improving efficiency and effectiveness.

Contrast this to the experience Dell had in adopting its strategy from selling computers to business to selling computers to consumers. At first, you would think this to be a reasonable fit. Further examination says otherwise, particularly as it relates to outputs. Selling to consumers is quite different than selling to business. You need a different type of sales force, with a different type of sales pitch. You need different channels of distribution. You need a different product mix (less desktops, more laptops). You need a different marketing appeal (based on different attributes) which uses different advertising media. There are different after sales service expectations, since consumers don’t have their own IT departments. You need to be “cool.”

By not having expertise in all of these outputs to the consumer market, Dell was at a competitive disadvantage to HP/Compaq. HP/Compaq had a greater strategic fit in the consumer space, so they won the strategy battle in computers. HP/Compaq could move faster and more efficiently in the consumer space, giving them the edge over Dell.

Remember, even if you have a superior product, your strategy can still fail if the competition has a superior way to get their product sold. Just ask anyone who has tried to win against Frito-Lay in salty snacks in the US. It is almost irrelevant how good your snack is. Frito-Lay has such a lock on the distribution channels that you cannot get adequate access to the customer at the point of sale. Even a giant like Anheuser Busch had to abandon their strategic initiative into salty snacks (Eagle Snacks) in failure because of its disadvantage to Frito-Lay in snack distribution. Anheuser Busch could not transfer its beer distribution expertise, so there ended up being little fit on outputs.

Overcoming A Lack of Strategic Fit
Given the importance of strategic fit, companies try to find ways to quickly overcome a lack of strategic fit. There are two ways to do so. First, one can seek fit via acquisitions. The logic is that if you do not have a strong strategic fit within your company, then buy a company that already has that strategic fit. That way, your firm will have the strategic fit once the acquired company is assimilated.

Although this approach can sometimes work, it has two big drawbacks. First, you typically have to pay a large premium to acquire a company with the desirable knowledge and infrastructure needed for entering a hot new opportunity. You end up paying so much for the business that nearly all of the financial benefit goes to the seller, rather than the buyer. Unless this expertise and infrastructure is very scarce, others will also have this fit. And if the others already had the fit in-house, they will have attained it at a far lower cost than your acquisition, putting you at a competitive disadvantage.

Second, the expertise and infrastructure in the acquired company is only useful if it can be integrated into the new strategy. Transfer of expertise is always difficult, but it is more difficult when done via acquisition.

The alternative to acquisition is outsourcing. The idea is that if you do not have the fit, then outsource that work to someone who already has the fit. The problem here is that you can lose any competitive advantage. If everyone can outsource to the same experts, then you cannot gain an edge on anyone else using the same source.

Sony used to be very strong in conventional tube televisions because of its proprietary expertise in manufacturing. However, with the new TV screen technology, all the manufacturers are basically outsourcing the key manufacturing to the same few third-party manufacturers. Sony is sourcing from the same place as everyone else. Now, Best Buy can go direct to the same third-party manufacturers and build a comparable TV, cutting out Sony and keeping more of the profits.

In global automobile manufacturing, a lot of the parts were outsourced to manufacturers in China. Now, the Chinese want to become world players with their own automobile brands. They can rely on the local outsourcers to provide them the same quality parts as the established brands. And because the manufacturer and outsourced firms are both Chinese, they have some added synergies unavailable to global firms.

Therefore, don’t think of acquisitions and outsourcing as magic bullets that automatically achieve strategic fit and strategic advantage. There are significant risks involved. It is better if your strategy can rely on expertise and infrastructure that you (and only you) already have in place.

To win in a competitive environment, it helps to have a strategic advantage. An excellent source of advantage is strategic fit. The closer the fit between a new strategic initiative and your core expertise and infrastructure, the more likely you will have an advantage. Strategic fit not only applies to what is needed to develop/create a product/service, but also what is needed to monetize that product/service. Therefore, when choosing a strategy, look for options with a strong strategic fit in both areas. If the fit is not there, do not assume that acquisitions and outsourcing can automatically fill the gap and make you a success.

There are a lot of exciting new growth opportunities out there. But if they don’t fit, they won’t be exciting growth opportunities for you. Don’t follow the crowd and chase the latest hot idea. Look for the unique opportunity which fits who you are and is hard for others to copy because it doesn’t fit them. Wear the clothes that fit and you will always look good.

Saturday, October 16, 2010

Strategic Planning Analogy #358: Another New Strategy

Here’s a headline you probably will never see: Company Hires New Head of Marketing Who Doesn’t Change Anything.

Instead, we’ve seen the opposite happen hundreds of times. A new marketing head is hired and suddenly there is a new advertising agency with a new advertising slogan to match a new marketing strategy. And given that heads of marketing seem to only last about two to three years before being replaced, that’s a lot of new advertising slogans and marketing strategies.

That is why I was impressed by an article in Mediaweek last September about Tim Mahoney, Chief Marketing Officer at Subaru. In the six years prior to his return to Subaru in 2006 (after having been away for 9 years), Subaru had gone through five different ad slogans and marketing strategies (with two different agencies). In just the one prior year to Mahoney’s return, Subaru had used five different print ad layouts.

When Mahoney got back to Subaru, one might have expected him to change everything yet again. Instead, he kept the most recent slogan (from his predecessor), picked a singular ad layout, and started working on perfecting its execution. He told the ad agency to not even try to change them.

They have now had the same slogan and marketing approach for four years. The consistency is strengthening the brand. And as a result, Subaru has been doing very well and is picking up market share.

Marketing is not the only place where this type of problem happens. Executive turnover is high all over the spectrum. And it is very common for the executives in all areas to reject what the former executive did and go in a new direction. As a result, not only do marketing strategies wobble all over the place—all strategies seem to be in flux.

Not only is the tenure for marketing executives short; CEOs don’t seem to last very long, either. This just accelerates the changing of the strategy. How do you build a long-term strategy with enduring impact on the marketplace when the strategy itself does not endure?

In the case of Subaru, sticking with an ad strategy for multiple years has had a positive payback. The same is true for corporate strategies.

The principle here is that you will never complete a long-term journey if you keep changing where you want to go. If you want long-term success, you need continuity on the objectives and the follow-through.

Sure, sometimes things change so much that it is time for a wholly new strategic approach. Most of the time, however, all we need are a few tweaks to a long-standing game plan. The temptation to keep changing the strategy needs to be resisted. We can see the consequences of falling victim to the temptation to change in the example below.

The Consequences of Ever-Revolving Strategies
I know of a retail brand that, for more than a decade, changed presidents about every two years. Each new president wanted to make a good impression—prove they were worthy of taking over the helm. As a result, each new president would reject major portions of the strategy of their predecessor and create a new strategy for the company.

The logic was a follows. If the former president had been doing a good job, he would not have been let go after only two years. Something apparently was wrong with what the former president did. Therefore, the new president feels compelled to do something different. And, as part of doing something different, each new President did something new to the strategy.

Unfortunately, all these changes to the strategy had consequences:

1) Employees at headquarters became confused as to what they should be doing, because the priorities and the expectations changed so often. This made it very difficult for them to excel at their jobs. Rather than getting better at what they were doing, they always seemed to be doing “transition” work—undoing the old and starting the new.

2) Many employees out in the field started ignoring headquarters and their various strategic changes and began to do whatever they felt best. After all, it’s hard to hold the people in the field accountable when the leaders and the expectations change so often. The employees in the field knew they would outlast the leader and whatever his “strategy of the day” was. Therefore, they tended to ignore it, figuring “this too shall pass.”

3) When leaders know that their time may be short, their strategic emphasis often shifts to changes with quick returns. Long-term investments with longer paybacks are not a strategic priority. When long-term investments are delayed for over a decade, the basic infrastructure needed to run the business becomes tired, outdated, broken, obsolete, or terribly inefficient. It is difficult to compete against newcomers with the latest and greatest stores and management tools when yours are old and tired.

4) Consumers became totally confused as to what the store stood for. Various swings between standing for quality or price, upscale or downscale, left consumers unsure about what the stores were trying to be. It’s hard enough to get customers to love you when you solidly stand for something. It is almost impossible to get customers to love you when they have no idea of what you stand for. As a result, store traffic dwindled, year after year after year, as customers defected to stores with a stronger position in the marketplace.

As a result of all of these consequences, this retail chain is no longer in existence.

What do I Change?
Here’s the dilemma. Often times a company can be underperforming, creating a perception that change is necessary. However, if you keep changing the strategy, you can make things worse rather than better, as we saw in this retail example. So then, what should one do?

In general, we need to do more like what Tim Mahoney did. Rather than change the direction, he changed the execution. In other words, often times a strategy fails not because it is a bad strategy, but because either it was executed poorly or abandoned too soon. Therefore, rather than change the strategy, keep the strategy and change the execution.

Assuming the strategy is essentially sound, think about what could be holding back strategic success. Perhaps the company is missing some key components such as expertise, capacity, infrastructure, connections, technology, or whatever. If so, then instead of abandoning the strategy, focus tactics on obtaining what is missing. You wouldn’t send a soldier out to battle with a gun, but no bullets. Similarly, don’t try to execute a strategy which is missing key components.

Then, once the tools are in place, the emphasis should shift to improving the execution. Just as athletes get better with practice, so do employees. Keep at it, so that execution gets better. Keep pounding at the key essence of the strategy so that EVERYONE gets it—employees, customers, potential customers, supply chain partners, etc. Keep pounding at the essence of the strategy so that everyone instinctively knows what the right thing is to do. It’s better to have people know instinctively what to do than to either:

a) Have to stop the world and begin long debates every time something comes up;

b) Have to write down hundreds of pages of rules to follow that will never keep up to date with what’s going on; or

c) Have employees go off and do things somewhat randomly and contradictory, because they have no sense about what the company is trying to accomplish.

If you think change is in order, I think these suggestions are often a better place to start rather than automatically throwing the current strategy away.

When times get tough, or when a new executive is put in place, there is a temptation to quickly reject the old strategy and start afresh. Although this may occasionally be a good thing to do, usually frequent strategic change causes more problems than benefits. If you feel a need to change, consider instead changing the tools or the execution.

For your legacy, would you rather be known as the person who changed the objectives or the person who changed the results?

Wednesday, October 13, 2010

Strategic Planning Analogy #357: Crawling Backwards

Back when my son was a baby, he learned to crawl in only one direction—backwards. This type of crawling allowed him to move a bit, but since his eyes were facing in the direction he was leaving rather than the direction he was going, he kept bumping into walls. By not being able to see where he was going, he never got to anywhere he wanted to be.

We hated to see him suffer so much, so my wife and I came up with a plan. We would hold out in front of him some of his favorite food when he was about to crawl. The appeal of the food was so great that he eventually learned how to crawl forward in order to get to the food.

It’s hard to get where you want to go when you are moving in the direction of your butt instead of the direction of your eyes. Like my son, when you are always looking backward, you tend to run into walls.

It seems like a lot of businesses have learned to move like my son did. Their eyes are focused on where they have been rather than where they are going. The majority of their time is oriented on the past rather than the future. As a result, instead of quickly rushing to a glorious future, they end up bumping into walls. Their prospects die along with the death of dying past.

All strategic initiatives eventually fail. Even the great ones.

Great strategic initiatives are ideally suited to their environment. However, the elements of the environment are in constant motion. Consumers change, technology changes, competition changes, government regulations change, and so on. Strategic initiatives that were once ideally suited for the environment will get of sync with the environment if they do not adapt to these changes. Eventually, the changes will be so large that even previously great strategic initiatives will fail.

Therefore, if you want to continue to be successful in the future, you need to anticipate the changes the future will bring. And you will not be able to anticipate the future if all you think about is the past.

You may not think you are spending too much time on the past, but consider the following:

1. Finance
The purpose of accounting is to accurately represent in numbers what has happened in the past. Although this is necessary to do for taxes and government regulations, it has almost nothing to do with preparing one for the future. Accountants use the word “closed” as in “We have closed the books on the prior quarter.” That door to the past is shut…finished…closed. Quit opening it all the time.

How much time do you fret over the preparing of those accounting financials? How focused are you on having discussions and giving presentations based on those numbers about the past? How much of your management time is devoted to criticizing or praising people based on what happened in those numbers from the past?

If you want to dwell on financials, try focusing on future cash flow opportunities rather than past accounting performance. After all, stock prices are based on what people think of your future cash flow prospects. Think like they do. Put your eyes on the future rather than the past.

2. Growth
Businesses progress through various lifecycle phases, from introduction to growth to maturity to decline. Each phase requires a different type of strategic initiative. If you do not properly transition your strategy for these changes, you may not successfully progress to the next phase (and die prematurely).

As I’ve said many times previously, managers seem to love the growth phase. There is a tendency to want to perpetuate that phase as long as possible. Rather than looking forward to maturity, they keep looking back at the glories of growth.

This can cause many problems. First, maturity tends to be the most profitable phase of the lifecycle. Why do you want to postpone the most profitable phase? Second, if you keep pushing a growth-based strategy on a business that is no longer in growth, you will cause numerous problems. You will over invest in infrastructure and capacity, wasting a lot of money. You will set goals that are unrealistic, causing perpetual disappointments.

If you want growth, the way to get it is not by overinvesting in a mature business (looking backwards). It is by looking forward to brand new opportunities to provide growth that the mature business can no longer produce. Use the profits of maturity to fund the next cycle.

3. Efficiency
A lot of what businesses focus on is based in a desire for greater efficiency. In the name of efficiency we get standardization, benchmarking, ISO certification, Six Sigma and so on. At first, all of this sounds pretty good. Unfortunately, almost all of the tools used to become more efficient have the unwanted side effect of locking your business more tightly to the past.

Benchmarking chases after imitating where others have been. You cannot move ahead of competition if you are always chasing them via benchmarking. You cannot set the new standards of the future if you are focused on benchmarking the processes and the procedures of the past.

The problem with setting standards and going after ISO certifications and Six Sigma answers is that they get very rigid. You are locking the business into one way of doing things. Tolerance for deviation and experimentation goes away in the name of efficiency. Although those standards may have been ideal at the time they were established, they will not be ideal forever. Locking into the process of the past lock you into a mental mindset of the way things need to get done. Radical new approaches and different business models are stifled, because they do not fit the mold of the rigidness put in place in the name of efficiency.

The ideal process for one type of strategic initiative may be a horrible process for a different type of strategic initiative. For example, Apple built a successful business model for digital music by ignoring virtually every standard in the entire music value chain. It could do this because it was not locked into the old standards which were caused the analog music firms to bump into walls. The analog companies had perfected the obsolete and could not psychologically abandon it the way Apple did. They were crawling backwards while Apple ran past them to the future.

If you want a glorious future, you need to embrace some experimentation and deviation. Cultures like a Google and 3M encourage lots of experimentation. This leads to new opportunities. Remember, the ultimate goal is not to perfect efficiency at what you are doing today (perfecting the obsolete), but to do the right things for tomorrow in a non-wasteful manner.

There are some benefits to accurate accounting, a desire for growth, and a pursuit of efficiency. If you are not careful, however, a single-minded pre-occupation with these concepts can lock you into the past and make it more difficult to see into the future. In finance, balance the backwards look at closing the books with a forward look into future cash flow management. In seeking growth, look forward to new growth opportunities rather than trying to get unrealistic growth out of a mature concept whose growth days are past. In the pursuit of efficiency, don’t lock yourself into rigid procedures that make it impossible to adapt to the new realities of the future. Leave room for experimentation.

In the story, we got my son to quit moving backwards by providing an incentive which made moving forward a lot more desirable (tasty food). If you are having trouble getting your firm to look forward, perhaps you need to do a better job of making a future orientation look more desirable as well. You have to make pioneering into the future seem more pleasurable than nostalgia about the past.

Tuesday, October 5, 2010

Strategic Planning Analogy #356: Followership

Imagine, if you will, a marketer explaining her new marketing plan. This is what she says:

“I have 100 consumers for my product, but I am going to spend my entire marketing budget on reaching only one of them. I will ignore the other 99.”

You might want to ask her, “Does this one customer spend a lot more than the other 99?”

Her answer, “No, that one customer is slightly below average in spending.”

Then you might ask, “Are the other 99 so loyal that they do not need to be marketed to?”

Her answer, “No, they defect to the competition all the time.”

At this point, you might conclude that this woman is in the wrong profession and should give up a career in marketing.

It seems silly for a marketer to focus all their effort on one person and ignore everyone else. How can you expect consumers to patronize you if you ignore them?

Yet businesses do something equally silly. It seems that all the business books and consultants are focused on “Leadership”. For example, there are tons of books out there on how to become a great CEO, but try to find a book on how to become a great low level employee. They don’t exist. Last time I checked, there are a lot more followers in a business than there are leaders. Why don’t we spend more attention on followership?

Although strategies may be created by leaders back at the corporate offices, strategies are implemented primarily in places far away from the corporate offices by the hundreds and thousands of rank and file employees. A well crafted strategy at headquarters can be utterly destroyed by a front level employee who mis-handles a contact with a customer. How can you expect employees to properly implement the strategy if you ignore them?

Focusing only on leadership is like a marketer who focuses only on one consumer. It misses all the potential from everyone else. I understand why the authors and consultants focus on leadership…that is where their money is made. However, your money is made primarily by the labors of the followers. A strategy which ignores the followers will most likely fail.

The principle here is that strategic success should not be determined by the cleverness of the plan, but by the effectiveness of the implementation. Therefore, careful consideration should be given to how the plan impacts the implementers.

For example, many strategic plans try to implement change. Although that change may be good and desirable, change is typically resisted by the rank and file employees. If your strategy does not include specific attention to overcoming that resistance, then it will fail to be properly executed by those who resist it. Hence, the plan becomes worthless…all because of ignoring the implementers.

Although this principle has always been important, recent trends are making it even more important.

1. De-layering and Empowerment
There has been a trend in business to eliminate many layers of leaders and give more decision power to front-line employees. This can be a very good thing. It improves flexibility and the ability to react quickly. However, it also increases the risk that a strategy is implemented improperly. If those front-line employees are (a) unaware of the plan or (b) do not buy into the plan or (c) do not see the connection between what they do and the plan, then that extra empowerment they have will empower them to ignore the plan.

2. The Nature of Knowledge Work
Back in the days when most labor was assembly line factory work, the typical difference between the most productive and least productive employee in terms of output was about 20%. That was because the assembly line itself served to help people conform to the norms of efficiency. If you deviated much from the norm, you upset the entire assembly line. This was highly noticeable and the inefficient would soon be eliminated.

However, in knowledge-based work, it is a lot harder to detect and control output. In knowledge-based work, it is not uncommon for the best employee to accomplish more in a couple of hours than what the worst employee does in an entire week. In knowledge-based work, there can be a lot of people like Wally in the Dilbert cartoons, who can go for months without doing any real output and go undetected.

Without the assembly line to help enforce conformity, it takes extra effort to get employees committed to executing in conformance with the plan. If you do not pay special attention to this issue in your planning, these knowledge-based workers may end up doing nothing to advance the plan, or worse yet, apply their knowledge in a way that acts counter to the plan.

3. Social Networking
In the world of social networking there are no secrets. If a front-line employee screws up in the interaction with customers, it will soon be broadcast to the world via emails, blogs, Facebook, Twitter and other such media. Rather than accept your strategic claims at face value, customers go to social networking sites to hear other voices speak about your company.

In the world of social networking, headquarters has less control over its image than ever before. Successfully getting consumers embrace your strategic position and trust you with their patronage is harder than ever. Therefore, it is more critical than ever to implement the strategy well—even at the smallest levels. This requires more diligence in working with your implementers on execution.

4. Lower Employee Loyalty
The loyalty contract between employer and employee is not what it used to be. In general, newer, younger employees are not as blindly committed to their employers. They are more likely to quit if things do not go their way. They are not accustomed to blindly following orders. They ask a lot more questions.

As a result, loyalty can no longer be accepted as a given. If you want loyal employees, you have to earn it by “going the extra mile.” Good strategic plan implementation works best when implemented by loyal employees, particularly if the plan involves a lot of change. Therefore, an investment in building more loyalty throughout the organization can be very important to strategic success.

So What Does This Mean?
Keeping this in mind, strategic planning can improve its success in implementation by doing the following:

a) Consider how the strategic plan impacts your expectations of how employees should act (what they should be working on and how they should interact with others).

b) Consider what barriers may exist to cause employees to resist acting in this manner.

c) Develop tactics to remove those barriers.

d) Incorporate into the plan a means to communicate the essence of the plan to all workers (on a regular basis) so that they understand it, buy into it, see its relevancy to what they do on a daily basis, and want to work to make it a reality.

e) Link rewards and compensation to strategy implementation.

f) Whenever key decisions are being made in the organization, make sure its strategic implications are a part of the discussion. Institutionalize it into your decision-making process.

g) Get strategic issues into the daily conversation at the lowest levels of the organization, so that it is not forgotten.

h) Proactively work to improve employee loyalty.

Clever plans can be fun to develop, but true success depends on getting favorable results. Therefore, a large portion of one’s strategic effort should be focused on barriers to implementation. Since implementation depends on the implementers, significant attention needs to be given to the lower level employees who do that work. They will only execute the plan well if they understand the plan, see its relevancy to their work, and are motivated to want to see the plan succeed. Getting this right can do more for your success than just being clever.

The definition of a leader is someone who has followers. If you only focus on creating a great leader, you may not get great followers (and have failed in your task). However, if you focus on creating great followers, you will have (by definition) a great leader.

Friday, October 1, 2010

Strategic Planning Analogy #355: Measuring Up

I used to work for a company that was big into metrics. They wanted to measure everything. As a result, the budgeting department sent a form to each department. On this form, they wanted each department to suggest a key metric to be measured by and a targeted goal with that metric for the following year.

Being in a Strategic Planning Department, I had a hard time thinking of what an appropriate metric for us should be. In talking it over, the department decided that our greatest contributions to the company were ideas. Therefore, we put on the form that our department should be measured by the number of ideas we come up with.

Then we had to come up with a goal for this metric. We picked an arbitrary number. I think it was 1,000. Therefore, we put on the form that our goal was to come up with “at least 1,000 ideas” in the following year.

We turned in the form. We never once heard back from the budget department on our suggestion. That was fine by me.

I don’t think Strategic Planning Departments are well suited to annual metrics. One of their primary functions is to improve the long-term prosperity of the business. This is hard to put into an annual metric, because:

1) You usually do not know how much the long-term prosperity of the business is improved until many years later (falling outside the annual metric).

2) Since there is no control group, it is hard to measure how much of the improvement in a business’ long-term performance was as a result of the strategic planning department (vs. how much would have happened anyway).

3) If a plan fails, it is often difficult to determine how much of the failure was due to the quality of the plan versus the quality of the implementation. Since strategic Planning Departments are more responsible for the quality of the plan (while line operators are more responsible for implementation), it becomes difficult to determine how much credit (or blame) to assign to the strategic planning department versus the implementers.

4) When things go bad, there is always the excuse that “It would have been even worse without the strategic planning department.” Again, this is very difficult to measure.

Since long-term prosperity is a difficult annual metric, companies often look to simpler measures for a Strategic Planning Department, like staying within their budget or successfully completing a planning cycle process. Although these are easier to measure on an annual basis, they still have problems. In particular, there is no correlation between doing well on these measures and in improving the long term prosperity of a business. Creating a planning document on time and within budget does not mean that it is a good plan.

That is why my department did not take the budget exercise in the story seriously.

That being said, one might also conclude that it is not worthwhile to assign metrics to the strategic plan itself. However, I think that would be a mistake. Strategic Plans are not the same as Strategic Planning Departments. Although I think that planning departments are hard to measure, I believe that strategic plans can and should be measured.

The principle here is that a good strategic plan outlines certain conditions which are necessary in order for the plan to succeed. One can and should measure whether or not these events occur, because if they do not occur, your future is in trouble.

As I’ve mentioned in the past, a good plan should encompass three areas:

1) Positioning
2) Pursuit
3) Productivity

Conditions should be assigned to these areas and they should be measured.

1) Positioning
A position provides the reason why your business exists (from the customer’s perspective). It gives potential customers a reason to prefer your business versus the alternatives. For example, Wal-Mart owns the low price position, which is a reason to prefer it over higher-priced retail alternatives. Mercedes-Benz owns the prestige position, giving a reason to prefer it over other, less prestigious automobile options.

The position is the place where you need to win if the strategy is ever going to succeed. If you do not give customers a legitimate reason to prefer you, they will prefer someone else.

Positions are won in the minds of your desired consumer segment. They either believe it (and give you credit for owning it) or they do not. Your position is only real if they perceive it to be so.

Therefore, if you want to measure the effectiveness of your positioning efforts, you need to measure what is going on in the minds of your desired customer segment. How many believe that you own your desired position? This includes not only the customers who have already purchased from you, but consumers in your desired segment who have not purchased from you. Even if they have not purchased from you, they probably have an opinion about what you stand for, and that opinion may be what is keeping them away.

2) Pursuit
Pursuit includes the plan to obtain all of the necessary pre-conditions in order to deliver on the promise of the position. This includes things like:

A. Competency—the expertise to know how to deliver on the promise of where you want to win;

B. Capacity—the infrastructure needed to deliver on the promise; and

C. Contacts—proper access to all the other players in the business ecosystem needed to deliver on the promise.

Depending upon your position, there will be different priorities in what you need to pursue.

For example, if Wal-Mart is going to excel at delivering a low price retail position, it needs expertise in low price retailing, an efficient infrastructure of stores and distribution centers with enough capacity to take advantage of economies of scale, and the proper relationships with key vendors and suppliers.

These are measurable conditions. Either you have them or you don’t. Strategic plans should provide a roadmap of where you are deficient and what needs to be done to fill the gap. And then you measure the extent to which the gap is been filled.

And since we live in a dynamic environment, what is necessary to win on your position changes over time. New expertise may be needed, improved infrastructure may be required, new contacts may be needed. A good plan anticipates this dynamic so that you can stay ahead of the curve on pursuing what you need to win in the future. You can measure your progress on these as well.

3. Productivity
Productivity is needed in order to ensure that your costs to pursue the position do not exceed the benefits of owning the position. Productivity includes activities such as:

A. Action Trade-offs—Cutting expenditures in less important areas so that you can afford to spend more in areas more critical to the position.

B. Efficiency Efforts—Eliminating Waste without Eliminating Effectiveness

C. Investing in projects which will increase long-term productivity (sometimes you have to spend money in order to save money).

D. Cash Management—Reducing receivables, increasing payables, reducing interest payments, etc.

Particular goals and actions can be addressed in the plan regarding these types of productivity issues. These can be measured.

What Not To Measure
Specific conditions related to positioning, pursuit and productivity can and should be measured. However, there are other metrics which should be avoided (or at least downplayed). The metrics to avoid or downplay are those which can be achieved while ignoring the strategy. For example, look at a metric like sales. There are lots of ways to boost sales in the short run. Many of these methods can damage or destroy a long term positioning.

Toyota, for example, recently got sidetracked into a pursuit of growing sales as fast as they could. To achieve this growth, they took their eyes off the key position of reliability. As a result, reliability slipped, and now Toyota is having to spend a fortune to recapture its position.

Just focusing on sales will not necessarily achieve the plan. But if you properly focus on positioning, pursuit and productivity, the right kind of sales will naturally come.

So, when choosing metrics, ask yourself this question: Is it possible to excel in this metric without advancing the plan? If so, eliminate or downplay that metric.

Although it may be difficult to apply metrics to a strategic planning department, that shouldn’t stop you from applying metrics to the strategic plan. But not all metrics are good metrics. The metrics you choose should be specifically related to actions which advance the plan. In particular, they should measure:

A. Whether consumers believe in your position;
B. Whether you have properly pursued in getting what is needed to deliver on the promise of the position;
C. Whether you have taken specific steps to increase productivity without compromising your ability to deliver on the promise of the position.

Of course, if the best metrics are those designed to measure positioning, pursuit and productivity, then you’d better first create a plan which addresses the issues of positioning, pursuit and productivity. It amazes me how many plans ignore this first step.