Monday, November 22, 2010

Strategic Planning Analogy #365: Strategy by Appearance

In the world of fast-food restaurants, Wendy’s wants to be known as the place for fresh, healthy, natural food. They refer to that as “real food.” To quote Ken Calwell, Chief Marketing Officer of Wendy’s, "We want every ingredient to be a simple ingredient, to be one you can pronounce and one your grandmother would recognize in her pantry.”

To build upon this image, Wendy’s recently reformulated its french fries, the first reformulation in 41 years. The new fries are called “”Natural Cut French Fries with Sea Salt.” The two key elements of the reformation were as follows:

1) Replace regular Rock Salt with Sea Salt.

2) Leave the Potato Skin on the french fry.

The idea was that sea salt is associated with healthiness more than regular rock salt. In addition, leaving the skin on shows that these are real pieces of potato, not a processed potato slurry. In combination, this gives the impression that the new fries are a healthier, fresher, more natural food.

But here is what Wendy’s is not advertising. Salt has sodium, whether it is sea salt or regular salt. And the new fries have more sodium than the old fries. One report I saw said the sodium for a regular serving went up from 350 to 370 milligrams of sodium. Another report I saw said the new fries have 500 milligrams of sodium. Either way, it is more sodium, and that is not good for you.

In addition, the new fries from Wendy’s have more calories per serving than the ones they are replacing.

No wonder tests showed that people liked the taste more—there was more sodium and more calories. Yet the new formula gives the impression that the new fries are healthier. That’s a pretty neat trick.

Great strategies own a great position in the marketplace. But what does it mean to “own” a position? Positions aren’t owned just because the facts are on your side. Look at Wendy’s. Their new french fries really aren’t all that fresh and healthy. The facts say they are increasing the sodium and the calories. Yet Wendy’s is building a stronger reputation for its fresh and healthy position with these new fries.

No, positions aren’t owned based on published facts. They are owned based on consumer impression. Or, to quote Jack Trout and Al Ries, positions are won in the mind of the consumer. And the consumer makes up his or her mind based on a variety of inputs—and not all of the inputs agree with the facts (is sea salt sodium really better than rock salt sodium?).

So, just as Wendy’s marketing success is based a lot on impression (rather than fact), so is strategic success. Just because you have all the facts on your side does not mean that your strategy will succeed.

Instead, strategies win when they cause behavior to change in your favor. And you will not create a change in a person’s behavior until you first change how a person thinks about that situation. After all, if my impression towards your brand hasn’t changed, then why should you expect me to change my actions towards your brand? Therefore, strategies need act like Wendy’s and incorporate strong impression triggers (like sea salt and skin-on-potatoes) to help increase the desired change in impression.

The principle here is two-fold. First, strategic management is really the management of mental impressions of all the key stakeholders. For example, if you want competitors to back away, then give them the mental impression that attacking you would be a fool’s errand. If you want consumers to prefer you, then give them the mental impression that you are the best at meeting their needs. If you want to get adequate financing for your strategy, give the lenders the impression that you are a great credit risk. And so on…

The second principle is that effective management of mental impressions requires more than just facts. Minds are influenced in a variety of ways. For example, there is a reason why lawyers and bankers tend to have elaborate offices. It is because banking and legal competency is difficult to see at first glance. Therefore, elaborate offices act as a visual substitute—a quick way to create a mental impression of competency and expertise (They must be competent, because how else could they afford these elaborate offices?). The elaborate office is their version of the sea salt.

Therefore, when creating your strategy, you need to consider two things. First, what are the impressions I want in the minds of all the stakeholders? Second, what can I use as visual triggers to make that impression stronger?

One of the best examples of visual triggers was Oxydol detergent. Back in the middle of the 20th century, Oxydol’s strategic position was to claim superior cleaning due to putting bleach right in the detergent. This was a hard position to sell, because the detergent looked just like all the competitors. Why should a customer change their mental image and view Oxydol as superior?

That was when Oxydol started coloring 5% of the detergent with a harmless green dye. Suddenly, Oxydol looked different from everyone else. Now that consumers could see an obvious difference, they were more willing to change their mental impression of the brand. It must be better, they thought, because it has green crystals not found in any other brand of detergent. So even though the green crystals did not change the cleaning ability of the detergent, they got people to believe more strongly in the superiority of Oxydol’s bleach-in-the-detergent strategic position. This lead to Oxydol becoming the leading detergent in the US for many years.

In the early years, when Wal-Mart was trying to establish its low price strategic position, it would get into massive price wars with everyone. One of the more famous price wars had to do with the price of blue jeans. Wal-Mart and another retailer kept taking turns trying to get a lower price than the other on blue jeans. Eventually, Wal-Mart lowered the price to 9 cents—virtually free.

How did these dramatic and highly visible price wars impact mental impressions? Well, first, consumers became more firmly convinced that Wal-Mart would do anything to have the lowest price. They became so confident that Wal-Mart was always lowest priced that they did a little less price checking. They just assumed they would be better off shopping Wal-Mart. Second, other retailers learned that it was futile to try to beat Wal-Mart on price. As a result, other retailers voluntarily let Wal-Mart get a small price advantage in order to avoid future price wars. In the end, the strategic price position was stronger and competition was weaker—because of a superior management of mental impressions.

As a side note, I think one of the reasons why Wal-Mart has struggled a bit internationally is because they did not do as much of the radical visual examples of price dropping in these countries as they did early on in the US.

Progressive Insurance
In a more recent example, think about Progressive Insurance. Progressive wanted to own the low price position in US auto insurance. The problem is that nearly all auto insurance companies claim to have competitive prices. And insurance can be so complicated that it is hard to make direct comparisons to validate those claims. Therefore, a visual substitute was needed—their version of sea salt or elaborate offices.

The answer was in providing comparisons. Whenever you ask Progressive to give a price quote, they will simultaneously provide the price quote for a few of their competitors. This leads to the following mental impression: Progressive must be really confident that they have lower prices, because they are willing to give you quotes for the competition as well. If Progressive is that confident in their low prices, then I should be, too.

Total Cereal
Back in the mid 20th century, Total cereal owned the position of most nutritious cereal in the US. They did this buy guaranteeing that each serving of the cereal had 100% of the essential vitamins. Then, in the 1970s, a new type of cereal started to take away that position from Total. The new cereal was a granola-based cereal, in particular a version produced by Quaker. Quaker created the mental impression that granola cereals provided superior nutrition, because it was similar to those muesli cereals sold in the health food stores, which are popular as the healthy breakfast in much of the rest of the world.

Total was losing the mental impression, even though the facts would show that Total had more vitamins and minerals than the granola cereal. General Mills seriously considered ceasing production of Total cereal—shutting down in defeat. In the end, they decided to try one last time to regain the mental impression. They did it though commercials showing how many bowls of granola one would have to eat to equal the nutrition of one bowl of Total. It was a strong visual statement—a tableful of granola bowls versus one bowl of Total.

In the end, Total regained its position and is still going strong even today. The Quaker granola cereal—in its original form—is no more.

For strategies to succeed, they much change behavior in the marketplace to one’s benefit. Behavior only changes after mental impressions are first changed. Therefore, effective strategies are designed to change mental impressions. However, just having the facts in your favor may not be enough to change mental impressions. Therefore, great strategies not only find great positions, but also great visual cues to easily drive home that position in a strong way—even if the visual cues have little to do with the facts.

Don’t think that this principle only applies to consumer strategies. It also applies to the world of B to B. Mental impressions impact industrial and business buyers as much or more than consumer buyers. An industrial buyer can lose his or her job if their decisions appear unwise. Therefore, they also look for those visual cues that will bring more approval from their bosses (who may not understand the “facts” behind the decisions).

Sunday, November 14, 2010

Strategic Planning Analogy #364: Product-Focus vs. Solution-Focus

Beginning in the mid 1980s, Kodak and Fujifilm became embroiled in a fierce and bitter battle for global leadership in photographic film. Year after year after year, the companies focused on each other while trying to gain a competitive edge. Tons of money were poured into research to continually make their respective photographic film better and better. For awhile Fuji would have the technological lead. Then Kodak’s advances would retake the technological lead. Then it would go back to Fuji, and so on.

Since neither could get a sustainable edge on quality, they also focused on manufacturing costs and pricing. Again, the goal was to try to get a pricing edge on the other firm. However, pricing was kept so competitive, that there wasn’t much of a sustainable advantage here, either.

Fuji was able to make inroads through innovation by being the first to widely distribute the disposable camera. Of course, Kodak eventually retaliated…and they had a few innovations of their own as well.

This battle continued for decades.

After all of this focus and effort on getting an edge in photographic film, where is Kodak’s photographic business today? Well, by the late 2000s, demand for photographic film had dropped so low that Kodak only did one manufacturing run of its famous Kodachrome film per year—just a mile long sheet that would be cut into a mere 20,000 rolls. By 2009, there was only company left in the world developing Kodachrome film—Dwayne’s Photo—and they were only processing a few hundred rolls a day.

On June 22, 2009, Kodak announced that it would no longer make the Kodachrome film. The film business today is virtually non-existent. Over the last few years, Kodak’s share price has tumbled. $100 worth of Kodak shares in December 2004 was worth only $14.47 by December 2009. And Kodak hasn’t made a profit in quite awhile.

Of course, the irony is that while Kodak was busy internally focusing on beating Fuji in film, outsiders took leadership and ownership of the digital imaging business. And, by comparison, those folks are doing quite fine financially.

In the past, we’ve talked about many things that are like strategic planning. Today, we are talking about something many think is like strategic planning, but really is not.

Strategic planning is about improving a company’s long-term prospects. This is not the same as improving a company’s products. Kodak spent decades focusing on improving its photographic film business. It continually worked on improving the film quality and value. Unfortunately, by focusing on the product, Kodak nearly destroyed the company. The long-term prospects for Kodak do not look very solid anymore.

The sad news is that there are lots of companies out there like Kodak. They mistakenly confuse product planning with corporate planning. They mistakenly assume that if they keep making the product better, the company will automatically be better.

Products, however, have lifecycles…they arrive, grow, mature, decline and then disappear (like photographic film). Over time, lifecycles have been getting ever shorter. If you only focus on the product, your company will die when your products die. And that could be rather soon.

To create an enduring, long-term prosperity for your company, you have to think beyond the current portfolio and focus on how to extend life beyond the current cash sources. Otherwise, the cash will dry up and you will have nothing in the pipeline to replace it.

The principle here is that solutions make a better anchor for strategy than products. Why? Solutions are eternal…products are fleeting. I’d rather bet on eternal solutions than fleeting products.

For example, think about losing weight. This is an eternal problem. There will always be a strong demand for solutions to this problem. But the products people have introduced to solve this problem come and go rather quickly. Individual weight loss fads are fleeting—here today and gone tomorrow.

I remember when low carb products were dominant weight loss fad. I lot of companies created long term strategies around a focus on low carb products. One firm was developing a strategy to build a chain of low-carb only supermarkets.

Of course, the low carb fad went away…and a lot of those firms who had a product-based focus on low carb went away as well. They would have been better off positioning themselves to be a weight loss solution leader, who can shift products while staying true to the solution.

This is what Kodak missed. It focused on the product (film) rather than the solution (visual memories). Consumers don’t want products—they want solutions. If someone comes up with a superior solution, the consumers will abandon the old product and flock to the new one.

Digital imaging is a superior solution over film for visual memories. Therefore consumers abandoned the film and went digital. It really didn’t matter how much better Kodak made the film. The best film was still an inferior solution for visual memories.

I was excited this past week when I saw an example of a company that “gets it” and did not follow the path of Kodak. The company was Northrop Grumman Corp. Northrop Grumman had to make a choice—would they anchor their strategy to products or solutions. They chose solutions.

The solution they chose was to help governments win wars. This is an eternal problem. However, the way wars are won varies over time. Back in the 20th century, wars were won by efficiently moving troops across land and sea. Having a strong Navy would be a crucial part of a war solution.

The wars of the future, however, will be different. Rather than being fought on the ground, they will often be fought on the internet. Instead of moving troops, one uses unmanned drones. Instead of a confrontation between troops, you have terrorists using letter bombs and individual attacks on civilians. Winning the war on data will be more important than winning the war of real estate.

As a result, Northrop Grumman is willing to abandon products which no longer provide the best military solution and shift its portfolio to superior solutions to military problems. According to a recent article in the Wall Street Journal, Northrop Grumman is seriously considering abandoning the shipbuilding business, even though they are one of the largest military shipbuilders in the world. And in their aircraft division, they are shifting the emphasis to unmanned vehicles.

For the future, the big thrust for Northrop Grumman is into the high tech tools designed to win in a digital era: robotic systems, information technology and high-end surveillance equipment. This is where superior solutions to the eternal problem will be found.

Northrop Grumman could have continued its focus on building better warships. It would take advantage of the company’s strengths. And navy ships are still being requested by governments. Isn’t that what strategy is all about? Not when your strengths are focused on perfecting on obsolete solution. That would be like Kodak continuing to squeeze the last sales out of film when digital imaging is known to be the superior solution of the future.

Big navy warships will eventually be as desirable as photographic film. Better to get out when you can still find a buyer for the division than wait until the bitter end, like Kodak, and end up with nothing.

Therefore, it is better to build a strategy around superior solutions and design a plan to become the winner with that superior solution—even if it doesn’t play to your current product strengths. You should even do this if it means hastening the demise of your current product. After all, if you don’t move to the superior solution, someone else will, so your old product will become obsolete either way.

Focusing on building the best product is worthless if your product is an inferior solution for your potential customers. Given product lifecycles, all products will eventually become obsolete. If you want your company to outlast the lifecycle of your product, focus on superior solutions, rather than superior products.

Kodak saw their enemy as Fuji, a company focused on the same product. In the end, the companies which took away all of Kodak’s business weren’t even in the film business—firms like Sony, HP and Flikr. Often times, the superior solution comes from somewhere far afield—totally unlike your product. Therefore, since replacement solutions often come from outside the industry, keep your strategic eyes looking beyond your industry.

Thursday, November 11, 2010

Hey, Check it Out!

I've been published in two editions of the emag publication called "Shift Perspectives" right there next to other authors like Seth Godin. You can check out both emags (#1 and #2) here.

Wednesday, November 10, 2010

Strategic Planning Analogy #363: Star Players

Once upon a time, there was a basketball team which was doing very poorly. The owner of the team started yelling at the coach about how disgusted he was with the team losing all the time.

The coach responded, “The problem is the poor talent on this basketball team. We don’t have any athletic stars on this team. If you can go out and get us some star athletic talent, I can make this basketball team a winner.”

So the owner went out to hire some star athletes. A week or two later, the owner announced that he had just hired some great athletic superstars for the basketball team. These superstar athletes were among the best in their field. It took a whole lot of money to sign them to the team—more than anyone else on the team was making—but the owner was hoping that their superior skills would bring him a winner.

Yet the basketball team continued to lose. In fact, the team was worse than it was before adding the star athletic talent. Why? These star athletes were among the best jockeys the horse racing world had ever seen. Unfortunately, a jockey’s key attributes include being short and light weight—not exactly what you want on a basketball team.

Although the story is made up, it contains a lot of truth. When times are bad, there is a tendency to want to get some superstars on your team. It happens in sports all the time. The idea is that if we can just get one or two star players on the team, we can move from being a loser to being a winner. It’s seen as the quickest way to make a big improvement.

That’s why the top players in a sport make so much money. They are seen as the difference between being a loser and being a winner. And that is worth a lot.

This phenomenon is not just limited to sports. Businesses do this all the time as well. When a business is continuously producing poor results, there is pressure on the board of directors to do something quickly. To common perception is that the quickest path to moving a company from being a loser to being a winner is the same as for a sports team—just hire some star talent.

As a result, businesses pay a fortune to hire one or two superstar leaders from outside the company. They put a business superstar (who’s been on the covers of all the business magazines) into the CEO chair. Unfortunately, the track record for bringing in outside superstars in business is not very successful. James Heskett, a professor at the Harvard Business School, was recently musing on the internet about the research showing how the superstar philosophy often does not usually work in the business world. The results are underwhelming.

Why is that so often the case? I think it is like what happened in the story. You can bring in superstars, but if they are not fit for the task at hand, all that super-ability is wasted. Those may have been the best jockeys in the world—absolute superstars in their field. But their talent is useless for playing basketball. There was not a good fit between the jockey star’s ability and the basketball team’s need.

It also works the other way. A basketball superstar would be a lousy jockey. The outstanding abilities of a leading basketball player are ill-suited to riding a racehorse.

Ignore the fit and you can end up paying too much to get something worthless at getting what you need done.

The principle here is simple. Don’t hire jockeys to play basketball (or vice versa). Even the best jockeys will do poorly at basketball, because it goes against their strengths. It is the wrong fit.

I believe the hiring of outside business superstars rarely works because almost by definition it will be a poor fit. Let me explain why.

The Needs of the Business Looking For a Star
Usually, the businesses with the greatest motivation to hire a superstar are like the basketball team in the story—chronic losers. After all, there is little motivation to go outside and spend a fortune on a business superstar if your business is already highly successful. No, it is the companies with lots of problems who have the greatest temptation to go after a superstar.

Although there can be lots of reasons why a company is consistently posting poor results, it usually boils down to two key issues:

1) A Poor Position in the Marketplace. This blog has talked about the importance of positioning probably more than any other topic over the years (for the best one, look here). It is virtually impossible to win in the marketplace unless you have a winning position. You need a reason why a significant number of customers would naturally prefer you over the competition to solve a particular problem. Without a strong position, the only way to get business is by “bribing” customers with below-cost price cuts and outlandish deals. And that is not a path to being a winner.

2) Poor Resources. If you lack in resources, it is hard to win. Those resources could be a lack of knowledge, competency, infrastructure, IT capabilities, money, modern automation, manufacturing capacity, supply chain connections, or a host of other such tools. Just as you cannot build a great house without great construction tools, you cannot build a great business without the needed business tools.

Therefore, it is probably the case that the biggest need of the business looking for a superstar is a new position and/or better resources.

The Abilities of the Typical Superstar
So if that is what the company needs, what does the typical superstar offer? Well, first, we need to understand that business superstars tend to come from highly successful companies. After all, the logic goes like this: how could this person be a business superstar if his or her business is doing poorly? Almost by definition, a superstar must come from a place with consistent success.

This means that the company where the superstar is from probably already has a good position and good resources. So what sets the superstar above the rest? Usually, they are the people who excel in getting the most out of that position and those resources. In other words, they tend to be super-operators. They can leverage those core elements better than others. They can make production more efficient, selling more powerful, and make the most out of the knowledge, data and capabilities inherent in the business.

The Lack of Fit
So here is the problem. The company needs a new position and a complete overhaul of its resources. The business superstar typically knows how to leverage positions and resources, but is clueless into how to create them in a place that doesn’t have them.

This is like hiring jockeys to play basketball. The fit is all wrong. The business superstar’s brilliance is worthless to the weak company, because there is nothing for him to leverage with his leveraging skills.

Jockeys know what to do if there is already a fast horse in existence. But if there is no fast horse, the jockey doesn’t know how to win. Similarly, a business executive skilled at improving a strong business doesn’t know what to do if there is not already strength to the current business.

I had a boss who put it something like this: “We keep hiring all these great people to turn around the business, but instead of their strengths transferring to the business, the weak business transfers to the people.”

Or to quote Warren Buffett, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

In other words, when the skill-set of the star does not meet the needs of the business, the star will no longer look like a star. It’s not that they suddenly lost all their skills. They just have skills that are useless for the task at hand. Therefore, if you feel a burning need to turn around a weak company, make sure there is a good fit. Look for the rare star who is great at transformation (moving from weak to strong) rather than the more common star who is great at operation (getting more out of something already good).

A company which is producing consistently poor results requires a different type of leader than the company that has been consistently strong. Therefore, it is very risky to take someone who has done well in a successful company and put them in a poor company. It is likely that the skill-set of the superstar at the strong company is a poor fit for the different needs at the weak company. Instead, if you are a weak company, look for people who are good at transformation, not good at operating in a place already transformed.

Operating a strategy well is a far different skill than creating a great strategy. Make sure you know which is the priority need before you fill the leadership position.

Monday, November 8, 2010

Strategic Planning Analogy #362: Driving Force

Awhile back, a friend of mine took a job running a division of a large retail company. Not very long later, I heard he had decided to quit that job and retire early. I asked him why he quit running that business so quickly. He said he quit because the company he went to work with was very corrupt. It seemed to him like almost all the executives were taking bribes under the table.

Not only was he personally against corruption (and was uncomfortable in that environment), he felt it was ruining the company. Decisions were made based on where the bribes were coming from, rather than what was best for the business. In addition, the corrupt culture was so pervasive that my friend knew it would take a significant amount of time and energy to eliminate it from the company. And he didn’t think he would get the support necessary to do such a difficult task. Therefore, he decided to retire.

Not very long after that conversation, I came across a new book which tried to explain why the company my friend just left was having severe financial troubles. The book listed a small handful of mistakes the company had made and made suggestions as to how your company could avoid making those same mistakes.

I decided to call the author of that book. I told her that I thought a lot of the financial problems at that company were due to the corruption and bad decisions made based on the bribery of the executives. I wanted to know why that wasn’t a focus of her book.

The author sort of stammered and stuttered after hearing my question. She got rather vague and evasive in her answer. Reading between the lines, I got the impression that what she wanted to say, but was ashamed to admit, was:

1) She knew about the corruption.

2) She knew that, as an author, she would have been putting herself into harm’s way if she accused management of rampant corruption in a book. Without an airtight case, and lots of concrete evidence, she could be sued and have her life ruined.

3) She knew that publishers could sell more copies of a book announcing “a handful of tricks for avoiding failure” than a book that merely says “don’t be corrupt.”

So she took the safe route and side-stepped the topic of corruption.

I started thinking that her approach wasn’t all that different than that retail company. She wrote content which would put the most money in her pocket rather than writing the truth. The company executives did what would put the most bribe money in their pocket than do what was truly the best for the company and its customers. As a result, both the customers of that retailer and the purchasers of that book got less than they deserved.

Just like that book was supposed to be a guide as to how to avoid failure, strategies are supposed to be a guide—pointing the way to avoid failure and create long-term success. Unfortunately, that book was a poor guide, because it focused on saying what the author thought people wanted to hear, rather than the truth which they needed to hear.

In the same way, if your strategy remains in the lofty world of platitudes and fancy phrases, and avoids the messy reality in front of it, it will be a worthless strategy. Strategies only work well if they match the context of the company which has to implement it. If the company is corrupt (like the one my friend left) or incompetent (like the company portrayed in Dilbert), then you have a bad context for almost any strategy. Unless you address these messy issues, the written strategy is fairly worthless. It will fail under the weight of corruption or incompetence.

The principle here is that one’s real strategy is the sum of what one does rather than the sum of what one says. If you have a toxic culture due to tolerance of bad activity (such as corruption, incompetence, excessively selfish greed, or abuse), then that becomes your strategy.

In these cases, all those pretty little words in the planning document are a waste of time, because they are not what is driving the behavior. Instead, the behavior is being driven by the toxic culture. Whatever you tolerate, that is what you will get. If you tolerate bad behavior (in any form), then your company will become infested with bad behavior.

Toxic cultures tend to promote selfish behaviors which ignore the best interests of the company’s key stakeholders. Rather than doing what is best for the customers, or the shareholders, or for the business, employees in toxic cultures merely look out for themselves (at the expense of everyone else). This creates sub-optimal behavior for the business—a strategy for failure.

Even if the company in the story had not made the mistakes in that book, I am sure they still would have been a failure, because of that corruption. You cannot win in the marketplace if you ignore the marketplace in your decision making. Bribe-driven decisions rarely lead to the best choice for customers.

Most businesses tend to operate in highly competitive spaces. If you are not providing excellence at a value, then you will lose business to others who are.

Toxic culture makes it hard to create excellence, because all of that ignorance, corruption or abusive behavior gets in the way of creating greatness. Toxic culture also makes it difficult to create value, because all of that personal greed sucks excessive money into the pockets of employees, robbing the company of the ability to pass on savings to the customer.

A lot has been written about the success of Wal-Mart. As in any success, there are a lot of factors at play. However, one factor which I think often gets under-emphasized is Wal-Mart’s intolerance of toxic behavior. Wal-Mart tends to take an extreme approach to ensure that its buying staff is not corrupted by bribes. Buyers (and vendors) know that their job (or relationship) with Wal-Mart is in jeopardy if the buyer is caught taking as little as a free cup of coffee from a vendor. Both the buyer and the vendor will be punished. This zero-tolerance approach makes it extremely difficult for toxic behavior to creep in and over-ride the core strategy.

Back around 2006, Wal-Mart fired Julie Roehm, its new Chief Marketing Officer, because there was an appearance of toxic behavior between Roehm and the advertising agency. There was the appearance of Roehm accepting financial benefits (like fancy dinners) from the ad agency. There was also the appearance of potential sexual misconduct between Roehm and one of her subordinates.

At some point, I suspect Wal-Mart almost didn’t care what the extent of the toxic behavior was. Wal-Mart wanted to send a message that even the appearance of potentially toxic behavior was not to be tolerated. Wal-Mart was very loud and very public about why they let Roehm go. Based on this, and many other examples, the word gets out that toxic behavior is not tolerated. Instead, one is to focus on getting the Wal-Mart strategic agenda accomplished.

So, if toxic culture can ruin a company like the one in my story and zero tolerance of toxic behavior can help create one of the largest and most successful companies on the planet, then it appears that this is an important area for strategic concern. So how can you help keep toxic behavior from becoming a ruinous strategy?

1) Watch the Tone From the Top
Everybody below in an organization is watching the people at the top. If they see the people at the top getting away with toxic behavior, then they will see toxic behavior as tolerable and acceptable for everyone else. “Do as I say, not as I do” won’t cut it. The people at the top need to set the example. In fact, they need to set a higher standard for themselves so as not to even give the appearance of tolerating toxic behavior.

Actions speak louder than words. Strategy words lose out to bad behavior every time. Make sure your leaders are modeling the right behavior.

2) Watch out for How Your React When Your Star Players Behave Badly
What do you do when your highest performers behave badly? Do you tolerate their toxic behavior as a tradeoff for getting their high performance? In the long run, it is usually better to get rid of even star performers with toxic behavior, because the negative impact on the whole organization of that tolerance is worse than the added benefit of their slightly higher output.

3) Watch out for How You Set Rewards
People need to be rewarded for doing the things which are in the best long term interests of the company and its strategy. Otherwise, there is the temptation to use toxic behavior in order to maximize near-term bonus. There are lots of ways to hit a short-term sales or earnings target. Many of those ways can involve toxic behavior. If your bonus only focuses on the achieving the “what” rather than the “how” it was achieved, you may be rewarding toxic behavior without even knowing it.

Your strategy is the sum of what you do, rather than the sum of what you say. If your company tolerates toxic behavior like corruption, abuse, incompetency and excessive selfishness, then that becomes your real strategy. And when employees are only trying to optimize their own selfish gain at the expense of everyone else, you have a losing strategy. Fight to keep toxic behavior from getting a toehold in your organization. Fight to keep the focus on living the strategy instead.

The irony is that if you try to make the money the easy way, via bribes, your gains may be cut short. Either you lose your job or the company you work for goes away because the bribery culture leads to destruction. However, if the toxic behavior is avoided, the company prospers, and you can share in that prosperity for a long time. I suspect that more employees got wealthy on Wal-Mart bonuses and stock options than employees who got wealthy taking bribes at the failing retailer mentioned in my story.