Wednesday, March 31, 2010
Recent articles from the McKinsey Quarterly have been looking at poor strategic decision-making. They are articles worth reading. Some of the articles look at how our biases can distort our thinking process. Others look at the problems which occur when we rely on our intuition rather than facts when making decisions. They claim these two issues can keep us from making the right strategic decisions.
After reading the articles, I thought I’d make my own comments on the subject.
WHY DO WE MAKE SO MANY BAD STRATEGIC DECISIONS?
The key question here is “Why do so many companies make so many poor strategic decisions?” We’ve all seen lots of poor decisions in the business world. To simplify the discussion, I’ve boiled poor strategic decision-making down to three causes:
1) The Main Goal Has Not Been To Make Good Strategic Decisions
If you want good strategic decisions, it helps to have good strategic decision-making as your primary goal. That may sound obvious, but unfortunately, many of the decision-makers on strategic issues do not have “making a good corporate strategic decision” as their main goal.
Instead, many of the leaders have different primary objectives. They tend to fall into the following two categories:
A. Avoiding Pain- Pain of Going Through Change
- Pain of Arguments/Discord in the Organization
- Pain of Taking a Risk
- Pain of Admitting Failure/Mistake
- Pain of Drawing Negative Attention to One’s Self as a Naysayer (hammers hit the nail that is sticking up)
- Pain of Going Against Wishes of Powerful Stakeholders (Shareholders, Key Customers, Bosses, etc.)
B. Increasing Personal Gain
- Career Advancement
- Benefits to One’s Silo in the Business
- Maximizing Bonus/Rewards
Often times, the right strategic decision involves pain and/or reductions in personal gain. If people are more concerned about pain and personal gain then they are about making the right decision, then they will, by nature, make the wrong strategic decision. Don’t assume that people automatically give good strategic decisions a priority when making a choice.
2) Wrong Amount of Facts
Facts provide the information which leads to knowledge. This knowledge helps us make better strategic decisions. If you eliminate fact gathering and analysis from your decision-making process, you increase the risk of making a wrong decision.
Relying just on experience and personal intuition can be dangerous. Your “golden gut” may not be as golden as you think. It needs to be tempered with facts. Therefore, too little attention to facts can cause poor decisions.
At the same time, too much attention to facts can also lead to poor decisions. When blazing new strategic trails, there may not be many facts at all to gather. If you wait until all the facts are in, it can be too late to act. First-mover advantage is over and the game is already won by someone else. Trying to gather consumer insights in an area where consumers have no prior experience can lead to bad and misleading data—sure the customers will tell you something, but it will usually be wrong, since they do not know how they will react under unknown circumstances.
Paralysis of Analysis (from too much data) is just as damaging as only relying on your golden gut (no data). A balance is needed.
3) Wrong Interpretation of the Facts
Just because you have the facts does not mean that you will interpret them properly. Three factors tend to cause improper interpretation:
A. Backward Lens
We often interpret facts based upon our knowledge and experience in the past. However, times can change. The “truths” of the past may no longer apply. Our worldview may no longer be in sync with the new truths of today. Sometimes we need to update our rules-of-thumb or risk having an obsolete point of view.
B. Preference Lens
Sometimes we see the world through the lens of our own personal desires and feelings. Our personal desires and feelings may be quite a bit different from those of our customers. Often times, our customers can be less knowledgeable and less wealthy than us. Their hopes and fears may be quite different from our own due to these differences.
C. Static Isolationism
The world is ever-changing, ever moving. Wayne Gretzky credits his hockey success to skating to where the puck will be rather than to where it has been. Similarly, if we only focus on interpreting facts as to what they say about “now,” we will never catch up to them. By the time we get to where that factual puck was, the puck will be somewhere else. Static analysis (assuming the facts we gather are not moving) will always put us in the wrong strategic place.
Not only are things moving, but their movement is altered based upon how others act. If I plan to take market share away from someone, I should expect them to retaliate. If I am a retailer, my success may have more to do with the decisions made by Wal-Mart in that category than my own decisions (because they are so powerful). Just because I choose not to cannibalize my business does not mean that others won’t choose to cannibalize my business. As a result, we cannot think in isolation (as if we are the only players in the game). We must consider the moves of others and how that will change the nature of our “facts.”
HOW DO WE MINIMIZE THESE THREATS TO GOOD DECISIONS?
1) Get Decision-Makers to Have a Goal of Making Good Decisions
If “Avoiding Pain” and “Increasing Personal Gain” are contrary to good strategic decisions, then we have to fix this. Take away some of the pain in making right decisions by fostering a culture where risk-taking, dissention, and failure are acceptable—even praiseworthy. Use tools to make differences of opinion constructive rather than destructive.
Create a reward system where people are penalized for being too selfish. Bonuses should have a corporate component, so that you maximize your selfish financial interests only by looking out for the long-term good of the entire corporation
2) If People Cannot Decide In the Strategic Interests of the Corporation, Don’t Let them Make Strategic Decisions.
It is often important to get input from across the organization. Hearing diverse opinions from all the key sectors is good. But that doesn’t mean that all the contributors of information should get a final vote in the decision. If the people are too biased or cannot see the big picture, then thank them for their input and make the decision without their vote.
3) Get the Right Amount of Facts
As we saw earlier, too much or too little data can cause problems. One of the questions I ask myself is this: What is the likelihood that additional data would cause me to come to a different conclusion? If the likelihood is high, get more data. If the likelihood is low, stop gathering data.
4) Get Biases Out in the Open
You cannot deal with biases unless they are out in the open. When someone states an opinion, keep asking them why they hold that opinion until you get to the root of the issue.
5) Think Dynamically
Assume that the world is dynamic and that your actions (and the actions of others) will change the way the world evolves. Look at various scenarios. Anticipate responses rather than reacting to them. Do role playing, where you have people take on the role of your competition—to see how they will react.
Bad strategic decisions come from wrong goals, wrong amounts of data, and wrong interpretation of data. Unless we fix these issues, we will be prone to making bad decisions.
Strategic decision-making is not a “once, forever” proposition. If the passage of time lets you see that a prior decision was a mistake (or that a prior correct decision is no longer relevant), it is okay to change your mind. Changing your mind shows that you are strong, not weak. Not that you should change your strategy every week (or even every year). But never changing is a path to disaster, since a changing world will eventually make all strategic decisions obsolete.
Thursday, March 25, 2010
Electricity can be a powerful force. When I was a young Cub Scout, I did an experiment with wrapping a wire around the metal part of a screwdriver. The ends of the wire were then connected to a small battery. The result? A powerful electromagnet that could pull towards it any iron substance nearby.
Of course, I was told not to directly touch the wires but to hold onto the plastic handle of the screwdriver. Otherwise the power of the electricity would affect me as well.
I found that out the hard way. When I was in high school, I picked up an electrical item. I thought it had a protective cover on the bottom. It did not. There were exposed wires on the bottom with which my hand came into direct contact. The electrical current caused the muscles in my hand to contract around the device so that I could not release my grip. I could feel the sensation of electricity through my hand. I thought I was going to be electrocuted. The electricity certainly had 100% of my attention at that point.
Fortunately, I was able to grab the device with my free hand (in an area where there were no exposed wires) and yank it out of the grip of my other hand. Needless to say, it was a very shocking experience.
I learned two things from these experiences. First, the closer something is to an electromagnet, the more it is influenced by it. If an iron piece was close to the electromagnet, it would jump up and attach itself to the screwdriver. If it was far away, there was no natural attraction.
Second, if you are directly on top of the electrical current, it will grab you in a way that makes it almost impossible to escape. All your energy is focused on coping with the situation at hand. It consumes you.
A business can be a lot like that electromagnet. The closer you get to the core of the business in the organization chart, the more you are naturally drawn in. Your time, your attention, and your enthusiasm become attracted to the business like iron to a magnet. It is powerful and exciting. Your identity and self worth are more closely tied to the business and you are naturally motivated to put in the extra effort to help the company excel.
For the CEO, it can be even more powerful—like putting your hand directly on the current. The powerful current of the business takes control of the muscles. It is nearly impossible for the CEO to let go. The CEO becomes a workaholic, who can never separate him/herself from thinking about or acting on behalf of the business. The attachment consumes them.
Of course, the opposite is also true. If you are at a distance from the core of the business, the pull is weaker. Entry-level workers out on the front lines are not as emotionally grabbed by the power of the business. To them, it is often just a job, nothing more. There is no natural pull.
One of the challenges of strategy is that successful implementation often relies on getting extra effort and close cooperation from all those folks distant from the core who are not naturally drawn in.
The principle here has to do with proximity. The ones with close proximity to the top of the organizational pyramid are living in a different world than the employees who are at a distance. When you are near the top, there tends to be a natural force causing you to focus extraordinary time and effort for the good of the business. It all seems so natural and normal when you are within the magnetic power of the core.
Those distant from the core are not under that magnetic pull. Non-work aspects of their life have greater influence. Putting forth extraordinary time and effort for the good of the business does not seem natural and normal. Instead of being pulled in, there is resistance that must be overcome.
One problem I have seen over the years is that those inside the magnetic pull can often forget what it is like to live outside that pull. The pull becomes so natural to them that it is hard to imagine life without it. Therefore, these people on the inside of the pull start thinking everyone is being naturally pulled in. This leads to two strategic problems:
1. They overestimate the natural commitment of the troops to achieving the strategy.
2. They fail to create sufficient incentives into the strategy to overcome the lack of natural commitment (since they were not anticipating such a need).
As a result, strategic implementation fails to live up to expectation and the plan suffers.
I was reminded of this fact while watching episodes of Undercover Boss on TV. In this reality show, CEOs of large companies change their identities and pretend to be entry-level employees in their business. Although it is a different CEO from a different company each week, the story lines in each episode are very similar. The CEOs go out there expecting to learn a lot about their business on the front lines. Instead, they learn a lot about their people on the front lines.
These CEOs discover that the people on the front lines are struggling with a lot of issues that have little to do with the business. Because they do not earn a lot of money, it is harder for entry level employees to cope with all of these issues. This can act as a barrier to getting 100% commitment from them.
At the end of the TV show, the CEO reveals his identity and rewards some of the people he worked with on the front lines with recognition and financial support. The front line people are so tickled with being recognized that suddenly they are more committed to the company.
So what can we learn from this?
1. Don’t Assume that the Magnetic Pull is as Powerful out in the Field as it is at the Core.
Instead, assume that the motivation out in the field is less than what you see in your world. Assume more distractions from a strategic focus, either from life issues or the pressures of just getting the day-to-day work quotas accomplished in an 8 hour period.
2. Find Ways to Get Magnets out into the Field.
If you cannot get the front lines closer to the magnet at the core, build more magnets out in the field. This could include things like:
a. Greater Recognition of the Work of Individuals out in the Field.
b. Assistance with Coping with Life Issues (like having on-site daycare).
c. Linking Additional Pay/Rewards to the Additional Work Involved in New Strategic Initiatives (like Contests or Rewards for Meeting Milestones).
d. Showing a Better Long-Term Career Path to Entry Level Employees.
e. Enriching the Jobs.
f. Listening to the employees and Paying Attention to Their Suggestions.
Many of these things cost little to the company, but can have large rewards. When designing an implementation strategy, design magnets into the plan. Put aside money in the budget for this purpose.
The people out in the field live in a different world than those close to the top. Therefore, do not expect them to have the same natural level of devotion to the company. If you want high levels of strategic execution out in the field, you may need to incorporate more incentives as a way to increase the devotion to the task.
As I’ve mentioned before, Henry Ford used to complain: “Why is it every time I ask for a pair of hands, they come with a brain attached?” Ford’s point was that when you hire people out on the front lines, you don’t just get robotic hands doing the task without question. Instead, you get the whole person, mind and all (whether you want it or not). If you don’t work on properly engaging the mind, you will not get all you desire out of the hands. Put some magnets out there to draw in the whole body.
Monday, March 22, 2010
Early in my career, I was working on a project with another guy in the department. He seemed more motivated than normal get this project done. He also wanted me to be more highly motivated.
Trying to get me excited, he said, “I was talking to the boss, and he said that if we do a really good job on this project, I will get a big promotion.”
So I started thinking…this guy had less seniority than me and a lesser position. If he were to get a big promotion, it would mean that he would become my boss, putting an additional layer between me and the top of the organization. In essence, his reward would have the indirect effect of acting as if I we getting demoted, or at best having my career path made worse.
So, if WE work hard, HE benefits at MY expense. What’s in this for me? Would not I be better off if the project has a little less than a stellar performance? The status quo looked a lot better to me than the so-called “rewards” that would come from working harder.
I could see the look on the face of the guy I was working with. He was starting to realize what was going through my mind. Now he regretted having told me about his potential promotion.
Business is ultimately about getting things done. One of Strategic Planning’s key roles is to help determine what should get done. However, just deciding what should get done does not necessarily ensure that it will, in fact, get done.
In the story, there was a disconnect between what the company wanted to get done and what I wanted to get done. Project success and my personal success were at odds with each other. As a result, I was not fully motivated to make the company goal a reality.
These types of situations happen in the business world all the time, often on a far larger scale than the project in my story. Businesses will make grand pronouncements of wonderful new strategic initiatives. They will explain how these new strategic plans will make everything for the company so much better.
Then, over time, you stop hearing much about that grand strategic initiative. Worse yet, there is no real evidence that the key elements of the strategy ever got accomplished. Status Quo prevails.
A year or two later, the business will make grand pronouncements about an entirely new and different set of strategic initiatives. Forget those old initiatives. Let’s embrace the new ones. Of course, the success in implementing the new initiatives turns out to be no better than the failure of the old ones.
Why? Usually in these situations, there is a disconnect between the ones declaring the initiative and the ones who are supposed to accomplish the initiative (just like what happened to me). Unless you fix the disconnect, the strategic initiative will not succeed.
The principle here is that strategic planning needs to be more than just a source of great ideas or mandates. It also needs to get involved in the messy work of implementation. Otherwise, the forces of the status quo will usurp control and render the strategy powerless.
I was reminded of this principle today while reading an interview with one of the authors of a book called “One Strategy.” The book, which was published late in 2009, tells the story of the project to design and release Windows 7.
The premise of the book is as follows. Most companies have two strategies: The “explicit” or “directed” strategy (the declared strategic desire from the top) and the “implicit” or “emergent” strategy (what emerges from the everyday activities of the organization). If those two strategies are not aligned, you will fail.
The book’s prescribed solution is to seek “strategic integrity”—where both strategies are one and the same. This is done by working on all those forces which cause the “emergent” strategy to vary from the intended “directed” strategy. This includes things like policies, procedures, organization, rewards, incentives, management style, and so on. In addition, there needs to be constant communication between the keepers of the directed strategy and the keepers of the emergent strategy so that they can stay on the same page. The book uses blogs by the Windows 7 project manager to illustrate how Microsoft created strategic integrity through this process.
In my story above, my rewards and incentives were not aligned with the project, so I was less than fully motivated to make the project a success. There was the potential for me to lose strategic integrity.
What is amazing to me is that this is considered a radical enough new idea to warrant a book. Isn’t this just common sense? Let’s assume for a moment that I owned an auto repair shop and decided to turn it into a gourmet restaurant. I tell the head mechanic to make the change and then go away for a few months. When I come back, I find out that nothing had changed. When I ask the mechanic why the new strategy was not implemented, he says:
“You didn’t give me any money to make the conversion from auto repair to gourmet restaurant. I had no policies or procedures for running a restaurant. All the employees here are compensated as a % of the labor costs in automotive repairs. If they stop doing auto repairs, they stop getting paid. In addition, all the mechanics figured that they would soon be out of a job (replaced by chefs) if they cooperated. Finally, I’m more comfortable managing a repair shop than a restaurant. So we decided to keep things as they were.”
Common sense should tell us that this would be an expected response. If you truly wanted to make the conversion from auto repair shop to gourmet restaurant, you would need to get rid of all those barriers to conversion and stick around to make sure that the forces of status quo do not win.
But I guess it is not common sense, since strategic failure (lack of strategic integrity) is so common.
Part of this is the fault of the professional strategy community. We often don’t like getting our hands dirty with the messy task of implementation. We voluntarily cut ourselves out of the daily conversation where the “emergent” strategy takes place. This is a mistake. No wonder so many companies see strategy professionals as irrelevant.
Part of this is the fault of the operators who try to block strategists from “meddling” in their affairs. Strategists cannot help remove the barriers if they are forbidden from entry into the world of everyday business activity.
So how can we help fix this situation?
1) Create Incentives for Cooperation
If the natural tendency is for the two sides to not want to work together, create incentives to overcome these natural tendencies. Tell the strategists and the operators that neither is rewarded unless both do their part to build the One Strategy. Suddenly, their success is dependent upon each other, so there is more incentive to work together.
2) Blend the Teams
The operators are more likely to trust the “meddling” of the strategists if some of the members of the strategy team are current or former operators. In addition, the strategists are more inclined to get their hands dirty if members of their team are used to getting their hands dirty. So if you want one strategy, build one blended team.
Professional strategists and professional operators both have something to offer. Blend them together, so that they offer assistance to each other rather than offering two distinctively different strategies.
Strategic plans are doomed if they are mere words handed off to people who are incented to keep the status quo. Strategy & Implementation need to be blended into a single, ongoing process.
I witnessed a company where about 90% of the organization believed that the “directed” strategy would have a negative impact on their career path. This was like my little story above, only multiplied by the thousands. As you may have guessed, the 90% revolted against the 10% and won. Never underestimate the potential resistance of people who feel that change threatens their personal agenda.
Thursday, March 18, 2010
I recently purchased a brand new car. This car is loaded with all sorts of features, more than on any other car I have ever owned.
One of the features on this car is a driver’s seat with seemingly infinite adjustments. I have nearly infinite adjustments:
a) Forward and Backward
b) Up and Down
c) Clockwise or Counterclockwise on the seat bottom
d) Clockwise or Counterclockwise tilting of the seat back
If that weren’t enough, there is a separate adjustment for the pedals, so that I can move them either closer to or further from the seat.
You’d think that with all those adjustments, I’d be overjoyed. Surely with that many choices I should be able to find my perfect setting for the seat.
Unfortunately, just the opposite has occurred. There were so many options that I had no idea which is the best. I sat in that car quite a long time trying a wide variety of seat settings until I became completely confused. Eventually, I just picked a setting I knew wasn’t awful, but didn’t feel perfect.
I will never be completely satisfied, because I have not tried every conceivable combination. There will always be a nagging feeling that if I only spent a few more hours, I could find a slightly better configuration. It will always feel like I am sub-optimizing my seat-comfort potential.
One important strategic decision which typically needs to be made concerns the breadth of assortment you offer. How many choices should I offer? What should those choices be?
In this web 2.0/3.0 world, this is getting even more complex. Consumers can have more say in what you offer and may even help in the design of your offerings. In addition, small batch/flexible manufacturing and digital tweaking of software makes it ever more economical to increase the range of what you can economically offer. The potential offerings can become nearly infinite, just like the adjustments on my car seat.
At first, an infinite number of options sounds great. That way everyone can get exactly what they want—and isn’t that what we’re in business to do?
Unfortunately, the situation often ends up more like my car seat. The more options you give, the more you confuse the customer. The customer actually ends up less satisfied, because there is this nagging feeling that perhaps there are other options in that infinity of choice which might be just a bit better. Perhaps purchases are delayed because it is too difficult to make a choice. Or maybe decisions are put off because potential customers expect current options to become obsolete due to ever more new options. Or maybe the customer goes to a competitor, where the process is less bewildering.
The principle here is that there is a big difference between selection and satisfaction. Often times, they can even work in opposite directions—increased selection can lead to decreased satisfaction.
Too much selection can raise expectations. The reasoning behind this thinking is that with added choice, I should expect to find something more to my particular liking. The odds of “perfection” should go up with near-infinite choice.
With higher expectations, what has happened is that I’ve increased the likelihood that the customer will be disappointed. Why? The higher the customer sets the expectation bar (closer to perfection), the more likely I will fail to exceed the bar, causing disappointment. Instead of under-promising and over-delivering (a method to increase satisfaction), infinite selection over-promises the benefit of choice and frequently does not live up to the hype.
Purchasing is about more than just the product. It is also about the process surrounding the product—the process of making a choice, buying the product, and using it after purchase. If the process is too burdensome, then the customer will be turned off—even for a good product.
Too much selection and flexibility can make the product or service harder to choose, more difficult to purchase, and more confusing to use. The process can destroy the overall value associated with the product.
Solution #1: Impose Limits
About 100 years ago, Sears discovered that the optimal selection for many of the items they sold was 3—one “good” (the low price option), one “better” (the best of both worlds option), and one “best” (the high quality option). Any more than three just added confusion (without adding sales).
Things in this regard haven’t changed all that much over the last century. In the US, Meineke Car Care Centers today give customers a choice of service levels, but limit it to three: Basic, Preferred or Supreme (sounds a lot like the old good, better, best).
Just because you can increase selection does not mean you should. Perhaps you should impose limits to choice.
Solution #2: Don’t Focus on the Product, Focus on the Consumer
When you focus on the product, you can start obsessing on all the things a product can do. The quest for product perfection takes control. Features, choices and flexibility can expand and get out of hand. Multi-function, do-it-all products rarely fare as well as simpler specialty products.
Rather than focusing on the product, you can focus on the consumer. Find out what the customer is trying to do and build a customer solution. This customer focus may lead to even abandoning the old product and going in a new direction.
The Corporate Strategy Board has a white paper about a B-to-B company called Alpha (a pseudonym to protect the customer’s identity). When developing their assortment, Alpha goes out and talks to the potential users of the product. They do not ask product-centered or feature-centered questions. Instead they ask them about their job. What is it they are trying to accomplish? What outcomes would make their job more successful?
Then, instead of offering infinite choice, they engineer a product specifically designed to improve the job of the one who will use the product. The customer is the hero (better at doing job) rather than the product.
Solution #3: Focus on the Process
Another alternative to product focus is process focus. What if you could offer near infinite choice, but eliminate the time, confusion and frustration of the process normally associated with infinite choice?
To illustrate, I will use another seat example—this time a bicycle seat. Once, I was in the market for a new bicycle, so I went to a bicycle shop. They had a wide selection that was a bit intimidating.
The salesman quickly pulled me aside and had me stand on a computerized platform. This computerized platform (with the salesman’s help) measured a number of parts on my body. Then the computer determined the optimal bicycle configuration for my body. The salesman adjusted the (near-infinite potential) seat to this optimal level and had me sit on it and try it out.
This made the process so easy. The computer did all the work. I didn’t have to worry about the infinite bicycle seat options—the computer found “perfection” for me (and the salesman set it up at the perfect position). The process substituted confusion with confidence (after all, the computer had no reason to lie and the salesman implemented what the computer said). It would have been great if they would have done something similar at the car dealership.
Selection is not the same as satisfaction. Increased selection can actually reduce satisfaction. Rather than rushing to pursue more choice in your offering, consider limiting your offering and putting more focus on the consumer or the purchase process.
In the end, the customer doesn’t care how many thousands of products you have to sell. They are only buying one of them. Focus on making them happy with the one they eventually buy.
Friday, March 12, 2010
Back in 2002, there was a movie released, called “About Schmidt.” In the movie, Jack Nicholson plays the part of Warren Schmidt, a man beginning the retirement phase of his life.
At the beginning of the movie, Warren is introducing us to the people in his life. At one point in the introductions, the movie is showing Warren uncomfortably trying to sleep with his wife Helen. The voiceover from Warren during this scene is as follows:
“Helen and I have been married 42 years. Lately—every night—I find myself asking the same question: Who is this old woman who lives in my house?”
The point of that scene in the movie was that for years, Warren had a mental picture of his wife more similar to that of the woman he had fallen in love with and married so long ago. His mental mindset had not kept pace with time.
Over the last four decades, Helen had changed quite a bit. However, because the changes had come so gradually, they were hard to perceive on a daily basis. Therefore, Warren’s perceptions had not picked up on how much cumulative change there had been to Helen.
Now that he was entering retirement, Warren was taking a fresh look at the fact he would be spending a lot more time at home with Helen. He looked over, and instead of seeing that young women he had married, he saw an old women in bed with him. It was a shock to him because reality had matured a lot faster than his perception. The mental picture of his wife had been replaced with this old person who seemed strangely different.
I believe this phenomenon happens a lot in the business world as well. Companies and industries age and go through life stages just like people. A young, vibrant, growing business over time can become an old, ugly mature and declining business. It may happen so gradually that you do not perceive the change on a daily basis.
Someone may have entered the business back in the young glory days and spent years working their way up to senior management. The busyness of the daily activities blinds them to the gradual aging of the business. Then, one day the person finds that results are getting harder to deliver. The old business tricks they learned in the glory years aren’t working any more. Suddenly, they take a fresh look at the business and are shocked to realize that the business is now old and dying. “Who is this old business who lives in my headquarters?”
The principle here is that the proper strategic approach is different, depending on the life stage of the business. Young start-ups in the garage need a different type of strategy from that of a mature business, and so on. We’ve talked about that in prior blogs (too many to link--try this, this, and this for starters).
In theory, that all sounds so logical. In reality, however, it is a little more difficult, because the transitions from one phase to the next are gradual. It’s not like on Tuesday you have dynamic growth and on the following Wednesday you are in the middle of maturity. You don’t get a tweet on your Blackberry which says: NOTICE – TODAY WE OFFICIALLY ENTERED MATURITY.
If we are not diligent in our observations, the transition can sneak up on us and surprise us. We don’t realize that the woman in bed with us is now an old lady with behaviors that are strange to us. By the time we wake up to the new reality, it may be too late to adapt in a way that optimizes our potential.
I think this phenomenon is particularly prevalent in mature economies, like the USA. Many formerly high growth industries in the US are maturing, and I think a lot of the leaders at these firms are in denial. Their mental picture has not kept up. As a result, their actions are out of sync with reality—they are sub-optimizing.
This phenomenon can also occur in younger economies, like India, where seemingly wide-open industries suddenly are filled by large multi-national firms who seem to sneak in from outside the country.
How can we keep from sub-optimizing due to having the wrong mental picture of our firm’s lifestage?
1) Challenge Your Assumptions on a Regular Basis
How often do you ask yourself if your business is near (or within) the transition to a new lifestage? If you never ask the right question, you will always be surprised by the outcome when the transition occurs. You don’t have to do this every day, but maybe once a year is a good idea. Put it on your calendar.
2) Read the Dials With an Open Mind
When a business is going through a transition, the transition tends to alter the performance of many metrics. Sales growth may slow, profit margins may shrink, customers may leave, and so on. If you mental mindset thinks that the overall lifestage has not changed, you may pass off these changes to your metric performance as “minor aberrations” or “due to the bad economy.”
Then, instead of adapting to the new lifestage reality, you continue with the tactics more appropriate for the former lifestage. Perhaps you even work harder at the old tricks in an attempt to bring back the old metric results.
I’ve seen this happen with the “sales” metric. As a business moves into maturity or decline, the natural growth in the industry goes away. Leaders who are used to all that natural sales growth get concerned when the growth dips. Therefore, they work harder to get back the old sales growth rates. However, the only way to do that is to aggressively try to take share from others. Getting large swings of market share during maturity often requires cutting costs so much (or adding so many extras to the offer) that all the profit is wiped out. You would have been more profitable accepting the lower sales growth and moving to mature industry strategies like cost control.
Therefore when the dials on the metrics you follow start to change, consider whether this might be an early warning sign that your business is moving on to the next phase of its life. Keep an open mind, not automatically assuming that this is just a temporary aberration. It may just be an aberration or an issue with the macro economy—but then again, it may not.
Like cancer, it is always better to detect these things early. Then you can deal with it when the problem is still small. By the time the dials have swung greatly on your metrics, it may be too late to effectively adjust to the new realities.
3) Have a Diverse Network
Don’t surround yourself with people who are just like yourself. Then all you have is a bunch of people with the same out-of-date mental mindset who reinforce that mindset though their agreement.
Instead, have regular contact with people of different ages and backgrounds. Young people aren’t as burdened by past perceptions and out-of-date mental models. They may see the transition sooner and more clearly. The fact that it may be difficult to even hire young people at your firm (because they perceive your industry to be old and in decline) can give you great insight.
Conversely, older people may have already gone through business transitions before. That experience can be invaluable in helping with this new transition. It may also give you more confidence to transition your strategy, since you have someone who knows the way.
Although it may be obvious that different lifestages of a business require different strategic approaches, this knowledge is worthless if you are blind to which life stage you are currently in. Transitions may be occurring right under your nose and they are not detected, because it happens so gradually. To remedy the situation, question your assumptions on a regular basis.
In the movie About Schmidt, Warren was so out-of-touch with how old his wife Helen was that he was completely unprepared when his wife suddenly died. His lifestyle deteriorated rapidly and he never fully recovered. Your business may be closer to “death” than you realize. If you are unprepared, your business may not fully recover either.
Tuesday, March 9, 2010
Years ago, I had to make a pitch to some senior executives in order to get funding approval for a new retail concept. I thought I was well prepared for any questions the executive team might ask. One of them, however, asked me a question I was unprepared for.
He said, “I refuse to fund this new retail concept until you can tell me what concept will come next that will eventually make this new format obsolete.”
Since I had assumed that this new retail concept probably had at least a couple of decades to go before obsolescence, it never occurred to me to worry about its end when I was making a pitch for its beginning.
No business environment remains stable forever. Things change. New concepts come; old concepts go away. Business models which once were perfectly suited to the market eventually fall out of favor. Change is inevitable.
Although I think the executive in the story was a little extreme, he did have a point. He wanted to make sure we were preparing a retail format that was designed to withstand the inevitable future change. If we only design to optimize today, we may be hastening our demise.
In particular, this old executive had a theory about retail based on years of observation. In most cases, he saw new retail concepts as appealing more to a niche when they start out. Eventually they gain greater acceptance and a broader appeal. This allows them to expand their offering.
Unfortunately, he also observed that these new niche concepts tend to start out building small stores—only big enough for the small niche of customers and products. Later, when the appeal broadens, those initial stores are too small to handle the added traffic and added merchandise categories. The stores need to be torn down and replaced with larger ones. This is a very costly adjustment.
His theory was that if you assume that eventually the appeal will grow and you can eventually sell more, build the bigger store today. That is a much more cost effective approach than to start with the ideal store for right now and then be too small in the future. Therefore, when this executive was asking me that question, what he really wanted to know was whether I was designing a large enough store to handle the long-term potential.
This approach applies to more than just new retail formats. With almost any business model, there is the risk that if you try to make it perfect for today, you are sub-optimizing the full life of the business. It is better to build a business model which optimizes the profit potential over the life of the project than to make it a little bit more profitable today and forgo much of the long-term potential.
Trying to squeeze out that last extra drop of profits today may close the door to many buckets of future profits when the market changes.
The principle here is that strategic plans need to prepare not only for the world as it is today, but also for the world as it will become. This may require strategies and near-term tactics that walk away from some current profits in order to reap even more potential later.
Having the ability to turn down some near-term profit in order to preserve that long-term potential can be difficult. Many stakeholders (lenders, shareholders, employees trying to maximize this year’s bonus) are pressuring to make as much today as they possible can. Resistance is difficult.
To help build your case, here are two approaches.
1) Lay Out The “Natural” Forces of Change
Just because the future will change does not mean that the future is totally unknown or random. Much of that change is reasonably predictable. There are “natural” forces in the lifestyle of an industry. These natural forces tend to create predictable change.
Because this change is reasonably predictable, it can be modeled. These models can then be used to help show why a sub-optimal approach today can be the best long-term option.
For example, when a new industry first emerges, there is usually very little direct competition. The old industry is usually unprepared and quickly loses market share to the new industry. Because of the lack of intense direct competition, early profit margins are high. Just quickly filling the pipeline with product is good enough.
Over time, however, natural forces tend change that environment. The old industry starts fighting back and adjusts in a way to lessen the advantage of the new industry. The new industry attracts additional players, making direct competition more intense. Profit margins drop. Just having a rather generic offering is no longer good enough as differentiation and excellence are needed to stand above the competition.
Eventually the next new big thing comes about to make your formerly new industry become the old, obsolete industry. Now you have to manage a declining business.
Since these types of natural events are highly likely to occur, you can build a strategy around ways to optimize performance throughout this change.
For example, if you are one of the early players in a new industry, you may want to create a strategy which legally helps increase barriers to entry for those who want to come in later. One approach might be to spend money up front tying up suppliers with exclusive or preferential contracts. It may put a small dent in near-term profits, but if it has a dramatic impact on slowing the ability of others to enter the industry, you can forestall many of those negative natural forces. Hence, you are more profitable in the long run.
Also, if you know that inevitable competition is going to create a need for more competitive excellence at some point, it may be more cost effective to build that into your strategy early. Although there were many factors behind the bankruptcy of Circuit City, one of the factors had to do with early real estate strategy decisions. In the beginning, the Circuit City business model was unique and powerful enough that they could locate their stores just about anywhere and customers would flock to them. As a result, Circuit City saved some expenses in the early days by locating stores in secondary (cheaper) sites.
However, eventually the industry became much more competitive. Firms like Best Buy came into Circuit City markets and built in the superior locations. (Best Buy also had larger stores, which would have made that executive in my story happy.) Consumers could see little reason to drive past those nice new Best Buys in the superior locations to get to the inferior location of the Circuit City. As a result, Circuit City eventually found itself at a significant competitive disadvantage. The cost to relocate all those stores to better sites was too much to bear at the end.
Yes, Circuit City was a little bit more profitable in those early days because they cut costs on real estate. However, that early decision locked them into a long-term competitive disadvantage which ruined a lot more future profits than the amount saved on that cheaper rent. If Circuit City had taken into account those natural forces when making those early real estate decisions (and other, similar decisions), they might still be around today.
2) Build in Flexibility for the Factors You Cannot Control
If may cost a little bit more up-front to build greater flexibility into your strategy, but that added flexibility may allow you to more profitably adapt to the uncertainty of the future. For example, Wal-Mart has a habit of leasing all of their stores. I am almost certain that if you did a detailed cash flow model, you would find that Wal-Mart would be slightly better off if it owned its stores rather than leased them. If that is the case, then why lease?
The reason is added flexibility. When Wal-Mart decided to move away from the discount department store strategy to the supercenter strategy, the leasing gave them greater flexibility to make the change. In many cases, they walked away from the discount store property when the lease was over and leased a brand new supercenter practically across the street. The old landlords are stuck trying to figure out what to do with an empty discount store that has little value when Wal-Mart builds across the street. If Wal-Mart had owned those buildings, then Wal-Mart would have been stuck with those old, obsolete-sized buildings. This would have made the transformation to the supercenter strategy far more difficult and far more costly. Foregoing a little cash by leasing was more than compensated for by the huge value it provided in flexibility.
The big thing in building automotive factories these days is flexibility. Sure, it costs more up-front to build a factory which can easily convert to building a wide variety of vehicles. However, it costs a lot more if you have specialized factories which specialize in the wrong thing when the market changes.
If your strategy is designed to make as much money today as you possibly can, then you will probably make less money tomorrow, because market factors change. Optimizing profits over the life of the business usually requires some near-term sacrifices. To help make the right choices: 1) Anticipate the natural forces of change and work them into your plans; and 2) Add flexibility to adopt to the changes you cannot anticipate.
One of the most spectacular business failures of the 20th century was Iridium. The entire business model was dependent on the assumption that mobile phone fees would stay high forever. This was needed to justify the expense of launching and operating over 60 communications satellites in outer space. Natural forces prevailed, however, and mobile phone fees plummeted (as did the prospects for Iridium). If the folks proposing the initial investment in Iridium had been confronted by a question like the one I received in the story, perhaps this disaster could have been avoided.
Tuesday, March 2, 2010
Once there was a preacher who was upset that the people in the congregation were not living up to the standards of the Bible. Therefore, he decided to give a sermon on the subject.
At one point in the sermon, he got so frustrated that he just blurted out, “That list in the Bible is called ‘The Ten Commandments,’ but you treat it as if it were called ‘The Ten Suggestions.’”
People tend to act based on what they believe. If you truly believe something is a commandment, you will act differently than if you believe it is merely a suggestion.
“Commandments” are unchanging absolutes. You are expected to follow the instructions to the letter. Your job is to obey.
“Suggestions” are optional. You can choose to follow them or go a different way. Your job is to decide whether you have a better approach than the one suggested.
One of the secrets to good strategy is accurately assessing when something is a commandment and when something is a suggestion. If you make the wrong assessment—have the wrong belief—then you will likely take the wrong action.
The principle here is that many aspects of operating a business are not absolutes. There is not just a single way to succeed. That’s a good thing, because if there was only one right way to do things, then we would only need one business per industry.
My experience is that too many people view the business world as full of “commandments” when, in reality, most are merely “suggestions.” This is particularly true when it comes to business models.
Most industries tend to have a particular way in which business is expected to be conducted. Most of the companies follow the rules of that business model as if it were a commandment. They do not deviate much from these so-called orders.
However, consider this: nearly every wildly successful new upstart company began by breaking the old rules of the old business model. (And when an industry consolidates, most of the companies that go away are following standard industry practices.)
Take, for example, the DSW shoe stores, a very successful seller of fashionable shoes in the US. Before DSW, fashionable shoes were sold mostly by department stores who all used the same basic business model. Inventory was hidden in the back out of the sight of the customer. The customer would sit in a chair while a salesman would go in the back and find a pair of shoes he thought were appropriate for you. He would then put the shoes on your feet and try to pressure you into purchasing them. The price of the shoes would be very expensive, unless you were lucky enough to be there when a large sale was going on.
DSW ignored this business model and did something entirely different. They put all the shoe inventory on the sales floor. Customers were free to try on any shoes they wanted at whatever pace they wanted. There were everyday low prices instead of constant big fluctuations between regular and sale prices.
A lot of people prefer this new business model over the old business model, which is why DSW is so successful. If DSW had just imitated the business rules used by the department stores, they would not have brought anything new to the marketplace. They probably would have failed.
Amazon created a new way to buy books by adopting internet selling early. Today, most of the conventional book stores are either out of business or struggling to stay alive.
Apple’s success has also come by consistently re-writing the rules of an industry. In a world where computers were expected to be utilitarian boxes, Apple introduced elegant products with gorgeous type fonts and lots of artistic versatility. The ipod, combined with itunes, rewrote the rules of how music was consumed. The iphone and the apps store redefined the business model for mobile communication.
In an earlier blog, I talked about how there are lots of distinctively different ways to sell pizza. If you can find a dozen distinctively different successful business models for pizza, there are probably many viable business models in your industry as well.
So what can we learn from this?
1) Don’t automatically treat the standard rules in your industry as commandments. Treat them as suggestions. Feel free to question why things are done that way and look for alternatives.
2) “Me Too” strategies rarely create outstanding businesses. When you follow the leader, you are by definition a follower, not a leader. If you want to lead, then you need to strike out in a new direction or do things in a new way.
3) Strategic planning is about finding a spot in the marketplace where you can win. It is much easier to become the winner in a new position than in one where there is already a heavily entrenched leader. Why would a customer prefer your brand if the brand is perceived as doing things just like everyone else? At that point, one tends to get into a death spiral of lowering prices (since price is all that is left to create a preference). Instead, win by making changes to the business model so that you can create a sustainable competitive advantage in some area.
4) Benchmarking is of only a limited benefit. Knowing how someone else is winning rarely tells you how you should win.
5) Encourage discussions around the underlying assumptions to your business model. I’ve been in many businesses where the business model is never specifically talked about or debated. It is assumed to be written in stone like the Ten Commandments and unalterable. It is just “the way things are done”—never to be questioned. Don’t fall into the trap of “But Nobody’s Ever Done It That Way Before.” We’ve talked about this in greater detail in another blog.
Of course, this is not to imply that everything in business is a suggestion. There are still some commandments to live by. Here is just one of those commandments to remember:
1. It can be good to break away from convention when building your unique business model. However, once you choose a particular model, your choice of actions should no longer be optional. Your strategy should mandate the proper tradeoffs so that everyone is moving in the direction of your chosen model.
For example, if your model is based on low prices, your strategy should create obedience around activities which make lower prices possible. Actions which go significantly counter to your chosen direction (even if others in the industry are doing them) are not to be tolerated. One of the main reasons why Wal-Mart has gotten so active in the sustainability movement is because it helps lower costs, which reinforces their low price position.
Strategic success often has more to do with how you act differently from the competition than in how you act the same. Therefore, when designing your individual business model, be willing to break the conventional rules. Treat them as suggestions. Then, once your particular business model is in place, command that company actions reinforce your business model. Build superiority at your point of differentiation through compliance.
Eventually, if your newfangled approach to business is successful, you will become the new leader. People will start following you. Before you know it, your newfangledness becomes the new conventional approach to the industry. At that point, it may be necessary to reinvent your model again.