Wednesday, December 1, 2010

Strategic Planning Analogy #366: Stats vs. Wins

I was reading a story recently about a quarterback in the US National Football League. It seems he had gotten very concerned about his individual stats when playing the game of football. Quarterback stats include things like percentage of completed passes (which you want to be high) and number of intercepted passes (which you want to be low).

This quarterback discovered that his desire to have great stats was affecting the way he was playing the game of football. For example, if you want a high % of completions and a low % of interceptions, you stop taking risks on where you throw the ball. Instead, you only throw short passes to receivers who are not being well defended.

Unfortunately, there is a negative consequence to this approach. First, if you only throw short passes, you reduce your ability to advance enough yards to score touchdowns. Second, there are rarely opportunities to throw a ball to an undefended receiver, because the opposition usually has a good defense. Therefore, if a quarterback waits until he finds an undefended receiver before throwing the ball, he will end up waiting too long. Eventually a defender will get to the quarterback and tackle him for a loss.

After realizing that his quest for great stats was hurting the team’s performance, the quarterback changed his ways. He started to play to win rather than play to get great stats. The result? His stats got a little bit worse. His completion percentage went down a little and his interceptions went up a little (although in both cases, the stats were still pretty good). However, at the same time, the passes he did complete went a lot further and he wasn’t tackled for a loss as often. The net outcome was that his new approach resulted in scoring more points and winning more games. And at the end of the day, he was happier winning games rather than having great stats.

Like sports, businesses have a lot of performance stats to look at. Business stats often tend to be financial in nature, including things like earnings per share, return on investment, sales growth, and the like. Other stats include things like the percent of customer sales calls which result in a sale, or the number of defects.

Too much of a focus on these stats can cause the same problems for businesses that the focus on stats had for that quarterback. Often times, the best way to achieve these business stats is by taking fewer risks or delaying decisive action. The result may be great stats to put in your next quarterly report, but you could be placing your company in a position to lose your ability to compete and win over the longer term.

Strategic planning is about finding ways to win in the marketplace. Don’t let the quest for better stats get in the way of winning.

The principle here is that the goal of businesses should be to win long-term in the marketplace rather than to achieve the highest short-term stats. Yes, there is usually a correlation between performance on stats and winning. For example, if all of your financial stats are horrible, your company is probably on a path to failure. And successful companies usually have pretty good stats.

However, there is usually a point at which a quest for further improvement of stats can be counter-productive. The reason is similar to the situation with the quarterback. The only way to ensure that bad performance NEVER occurs is to stop performing. And, as we all know, without taking risks, you will never achieve great rewards. We can see that in the examples below.

1. The Quest for Great Stats Can Lead to Behaviors which Hurt the Business
Let’s say you want the highest possible return on investment. One way to do that is by eliminating most of your investments. In the short term, earnings will continue to come in. And since your investments have dropped to next to nothing, your return on investment stats will look great. However, if you stop investing in the future, eventually your source of earnings will dry up as your old business model becomes obsolete and non-competitive. In the long run, you will have nothing.

Eliminating investments to achieve high returns on investment is like a quarterback trying to avoid dropped passes by never throwing the ball. The stat may look good, but you won’t win any games that way.

Instead, it is better to make a number of investments into your future, even if it drops your return on investment a little, because it will increase the likelihood of keeping your company relevant and successful long-term.

Another stat that can be counter-productive if taken too far is sales growth. There are many ways in which a quest for the highest possible sales can hurt a business. First, not all sales are profitable sales. Taking on too much unprofitable business can ruin a company. Second, taking on too much sales can clog up your operations and result in disappointing your core customers, who then take their business elsewhere. Studies have shown that in most cases, the vast majority of a business’ profits come from a small minority of their customers. If going after more business hurts your ability to serve that more profitable core, you can be far worse off, even if sales are much higher.

Third, if your business success is based on owning a niche, you may ruin that position if you try to stretch that appeal too far. Just think of all the high-end luxury brands which chased after mainstream market sales, which ruined the cache of their high-end prestige and eventually destroyed the brand.

Fourth, the attempt to increase sales appeal beyond a certain level can cause a company to try to make a product meet too many needs. As a result, instead of solidly owning one position in the marketplace, the product now confuses the customer and does not really stand for anything anymore. In other words, by attempting to not alienate anyone, the product now also doesn’t excite anyone. Most business successes happen at the performance extremes, not in the murky middle. Yes, extreme positions place a limit on one’s appeal, but those niches can be great places to be if you want to win long-term.

The goal to completely eliminate defects can also be counter-productive. A lot of the methods used to eliminate defects work by institutionalizing processes. You find a way to do things well and never deviate. Of course, when such a process is institutionalized, innovation is also eliminated. How can you get better than the status quo if you are prevented doing things differently from the status quo? Adding new products (or product improvements) will, by nature, make it harder to be defect-free, since there is a learning curve in innovation. If your product mix becomes obsolete due to a lack of innovation, it no longer matters that those obsolete products have 0% defects.

We can go on an on, but I think you get the idea. An extreme focus on statistical perfection can be counter-productive to winning.

2. Be Careful When Choosing What You Measure and What You Reward.
So how do we prevent this type of bad behavior? Well, first look at which stats are currently most measured and most talked about at your company. Then ask yourself these questions:

a) Are these the stats most associated with winning?
b) At what point does additional focus on these stats become counter-productive?
c) Are we moving into that counter-productive level of emphasis?

Then do the same thing for the way in which you reward people. This includes more than just bonuses. In addition, look at what types of performance leads to promotions and recognition. Are you rewarding people for counter-productive behavior. Have you set the goals so high that they can only be achieved by hurting one’s ability to win long term? If so, change the measurements.

3. Make Winning the Top Priority
Finally, if you want to win, you have to make winning a greater priority than just having great stats. As the quarterback learned, he won more games when he made winning a priority over having the best individual stats.

Often times, we like to measure individuals on their individual performance. But in the end, we don’t want people so focused on themselves that they forget to help the entire team win. How much of an individual’s rewards at your firm are based on team effort or on total company success? If none of their reward depends on the whole company winning, then why should you expect them to help you win?

Strategic planning’s goal is to help a company win the long-term battle in the marketplace. Unfortunately, the ability to win long-term is often prevented due to placing too much emphasis on perfecting individual stats. Too much emphasis on stats can lead to actions which prevent doing something wrong, and unfortunately also prevent doing something exciting. Winning takes risks. Don’t let the stats eliminate your risks.

Brett Favre is one of the most successful quarterbacks to have played the game of American football. In his prime, he helped his teams become winners. He helped teams win by taking bold actions. As a result of these bold actions, Brett Favre also holds the record for having thrown the most interceptions. Although that is a terrible stat to own, it is a natural consequence of the type of bold actions he needed to win games. If Brett Favre had focused on eliminating those interceptions, he would not have taken those bold moves needed to win games. Don’t let a quest for statistical perfection eliminate the boldness you need to win.

1 comment:

  1. Gerald Nanninga, I think it was Finner who wrote "had I waited to write a book so that no body would find a mistake in it, then I would have never written this book". Your post gives multi-dimensional approach that fall in the same line. This is another illuminating post.