Tuesday, April 27, 2010
The Wall Street bankers are having a hard time trying to describe to the government what they did leading up to the financial crisis. I think part of the problem is that even the bankers themselves didn’t fully understand what they were doing. The financial transactions were so complicated that I’m not sure anyone at the time understood all the activities.
Just imagine trying to explain all that stuff to your little children when they ask you what you do.
Maybe that’s why when children dream about growing up, they talk about what they want to “be” rather than what they want to “do.” Children do not understand what grown-ups do, so they talk more abstractly about what they are—what their identity is.
They may say, “When I grow up I want to BE a ballerina.” They don’t say, “When I grow up, I’m going to DO so much practicing every single day dancing on my toes, that my toes will become distorted and bleed.”
Maybe it’s a good thing that children don’t know what we do. Otherwise, they might never want to grow up.
In many ways, I think most business people think in a way that is the opposite of how children think. When children look to the future, they tend to focus on what they want to be rather than what they want to do. By contrast, businesses tend to look at the future and focus on what they want to do rather than what they want to be.
In business, it all seems to be about “getting the job done”—making the numbers, doing the tasks. If you’re a manufacturer, the focus tends to be on making the manufacturing process more efficient—making more for less. If you’re in the service industry, it is about how to more efficiently serve your customer.
It is as if how you are defined as a business is set in stone, so all you can focus on is what to do to be better at that type of business. For example, you may define yourself as a baker, so you focus on the general tasks of baking.
However, what if we were like children and did not assume that what we are is set in stone? What if we were like them and spent more time pondering from all the possibilities of what we wanted to be? What kind of baker do you want to be? How would you like to be known? What would bring pride to your identity as a baker? If you were a famous baker, what is it that causes your fame? Or maybe you don’t even want to be a baker after all. Maybe you’d rather be a chef.
One of the roles of strategic planning is to help companies create a better future. In that role, I think strategists need to help companies become more like children. We need to get companies to daydream about what they want to be in the future. It is not set in stone. We have choices, and how we choose can have a large impact on our success.
The principle here is that most businesses do not have a reason for existing. By this, I mean that most businesses have not created a position in the marketplace which makes them so essential that it would be extremely difficult for the market to continue as we know it without them. Perhaps what you are offering is essential, but is your particular company’s version of that offering essential? Is your particular business essential?
Consider this: What if your particular business/brand/service no longer existed? Would the world really miss not having you around? In most cases, customers will quickly find a reasonable substitute and move on with their lives. We talked about this in an earlier blog.
If you have no reason for existing, then there is no reason to assume that you have a right to be successful. After all, if there are many reasonable substitutes, then about the only way to draw business to yourself is through reducing your profitability by either offering more than others or selling it for less. These can lead to lower than needed returns on investment.
Instead, the best guarantee of success is in designing a strategy which makes your particular business essential to others. This is a focus on BEING—How do I become an essential business which has a reason for existing.
Just doing things well does not guarantee success. A focus on doing does not necessarily create a reason for existing. We can see this in a comparison of Apple vs. Sony. Apple tends to have more of a focus on what they wanted to be. For example, they wanted to be the essential cool solution for music. To become that, Apple realized they needed an integrated market approach:
a) A cool device
b) Cool, easy to use software
c) Cool apps to run on that software
d) Cooperation of the content providers
e) A cool, easy way to access and purchase content and apps
This integrated approach caused Apple iPod/iTunes to become an essential cool way to get music. The digital music ecosystem would not exist as it does today without them.
By contrast, during the same time, Sony saw themselves as a consumer electronics manufacturer. Therefore, they focused on what consumer electronics manufacturers do—make consumer electronics devices. They tried to excel at “doing”—engineering and building music devices. Much of that engineering and building was very good. It lead to good consumer electronic devices. But it did not make Sony essential (or successful). The products did not sell.
If you focus on what you need to be, you will discover the right things to do (as Apple did). But, if you only focus on doing things, you may not do the things that are right to create what you need to be (as Sony did).
Let’s apply this principle to the strategic planning process.
When setting strategic goals, do they focus on “things to do” or on “positions to be”? A “doing” goal could be like hitting a certain level of sales. This is an activity—selling. There are lots of ways to try to hit a selling goal that do not lead to becoming an essential business. You can end up selling at a loss. It doesn’t tell you how to create something essential for others to buy. “Sales at any cost” tends to result in activities that cost you dearly.
Instead of a sheet of paper with only financial “doing” goals, how about some non-financial “being” goals, like:
a) Designing a new business model in which your company becomes essential.
b) Achieving a particular essential position in the mind of the customer
c) Creating a particular “Blue Ocean” opportunity.
d) Becoming vendor of choice with your most profitable customers
These types of goals can only be achieved if you transform the business into becoming a more essential player in the marketplace. Although perhaps a bit more abstract, they can still be meaningful, measurable goals (with accountability) that can create far greater success than merely chasing some financial targets. It all starts by asking “What do I want this company to be when it grows up?”
2) KPI’s (Key Performance Indicators)
When tracking your process, do you measure what is being done or what you are becoming? One of the benefits of something like the Balanced Scorecard is that it helps us to see beyond mere financials to encompass a broader approach to the business. Your KPI’s need this type of broader approach, including measures on whether or not you are becoming what you want to be.
For example, let’s assume you want to lose weight and become more attractive. You can measure your progress through “doing” KPI’s like caloric intake or time spent exercising. However, calories and exercise are not the whole story. You might take in so few calories that you become skinny to the point of being sickly and unattractive. Or you might exercise a part of your body so much that the muscles bulge out in an unattractive manner. To make sure the effort leads to attractiveness, you need “being” KPI’s which also measure degree of becoming attractive.
Once you determine your “being” goal, make sure at least one of your KPI’s directly measures how well you are becoming what you want to be.
Successful companies tend to be firms which own an essential position in the marketplace. Essential positions are achieved by focusing effort on becoming essential, rather than on just doing well. Therefore, long-term goals and KPI’s should define and measure your success at “becoming” rather than just “doing.”
A focus on “becoming” does not eliminate the need to care about what you do. You won’t become anything at all if you sit around doing nothing (except maybe become a failure). But unless you give becoming the priority, you will never properly focus on the right things to do, nor ensure that the doing is effectively leading to the becoming you desire.
Wednesday, April 21, 2010
Once upon a time, there was a man named Joe. Joe was the CFO of a large retail company. Joe wanted to make his retail company the most cost efficient retailer that ever existed. He made it his life mission.
Joe discovered that two of his company’s biggest costs were buying/managing inventory (having stuff to sell) and servicing customers (helping people buy the stuff). Therefore Joe eliminated these costs. First, he stopped buying inventory. That saved a ton of money on inventory. No more costs to acquire it, distribute it, or stock it. He didn’t need to invest in shelves or displays, either. Eventually, the stores became completely empty.
Then Joe eliminated the door to the store. “I never saw a positive return on investment directly related to doors, so why have them,” said Joe. Without doors, customers could not enter the empty stores. Joe loved it, because now he did not have to spend any money serving those customers.
About the only cost left at the store was rent. Therefore, Joe negotiated with the landlord to have rent set as a percent of sales. Now that sales were $0, his rent would also be $0. At last, Joe had achieved his dream—the most efficient store.
A couple of big priorities in business these days are efficiency and innovation. Therefore, it is not surprising that there are many looking for efficiency in innovation.
Joe found a way to create efficiency in retailing. He got rid of all the management headaches and eliminated all the costs at the store. There was only one problem…he also eliminated every opportunity for that retailer to make a profit.
Efficiency is not the same thing as effectiveness. An efficient path to nowhere is not valuable. Getting to nothing faster and cheaper still leaves you with nothing. Joe had no costs, but also no profits.
The same is true when looking for efficiency in innovation. The ultimate goal is not efficiency…it is effectiveness. An efficient process for innovation that does not create great innovation is not very valuable.
The principle here is to not confuse process with outcome. Yes, a process is essential, but it is only useful to the extent it creates the proper outcome. If greater efficiency does not improve the output, it hasn’t helped much, if at all. Sometimes greater efficiency can even destroy output, as we saw in the story.
Profitable retailing requires two things: stuff to sell and a way to sell it. Eliminate those two (for the sake of efficiency) and retailing has no longer has reason for existing. Similarly, innovation requires two things: a great idea and a way to bring it to market. Destroying these, in the name of efficiency, makes the innovation process worthless.
On April 19, 2010, CFO.com published an article about CFOs and efficiency. The article was reporting on a study conducted by The Boston Consulting Group regarding innovation. Not surprisingly, the study found that 85% of finance executives say innovation is an important part of their company’s strategy.
One of the most interesting parts of the study is that while 22% of finance executives say they are the biggest driving force for innovation at their company, only 3% of non-CFO’s see them that way.
Why the disconnect between CFOs and the rest of the executives? I believe it is due to confusion between process and outcome. CFOs are rarely responsible for the two key outcomes of innovation: Innovative Ideas and Bringing the Idea to Market. I doubt that most executives see the CFO as the “go-to” guy for a great innovative product idea or as the key player to bring a new, innovative product to market. How can you be the “diving force” of innovation if you do not do at least one of those two things?
Driving an empty semi-trailer does not make one a driving force (even if empty trailers get better fuel efficiency). The trailer needs to be full of innovation in order to make the trip worthwhile.
The CFO in the story was very proud of his efficiency actions, even though they destroyed the retailer’s profitability. In real life, CFOs need to make sure they do not fall into the same trap with regards to innovation.
Typical CFO innovation activity, like measuring the innovation process (from beginning to end) or helping control how much money flows to an innovation project, have their place—but this is not innovation! This is like the scorekeeper at an athletic event. Just because the person is keeping score accurately does not make them an athlete who is the driving force behind winning games.
I’ve read about executives taking pride in cutting lots of cost out of their innovation system. Well, nobody likes wasting money, but don’t get too proud of that fact if it is choking off future innovation.
True innovation, almost by definition, is going to be disruptive to the status quo. This applies not only to the status quo in the marketplace, but to the status quo of how things get done at your company. Most companies have a bias towards rejecting threats to the status quo. So if you really want innovation, focus on ways to fight this bias. That will be far more beneficial than efficiently monitoring a system biased against innovation.
The monitoring itself can be a detriment to innovation. Studies have shown that if a new innovative idea gets high visibility too quickly, it can choke it before it has a chance to take root. Non-monitored incubation time at the beginning can be a good thing.
Therefore, if you really want a great (rather than efficient) innovation process, I recommend the following.
1) Have access to innovative people
Great ideas usually come from those who are good at coming up with great ideas. You could have 100 people watch an apple fall from a tree, but it took a great thinker like Newton to find the notion of gravity in that observation. Even if these other people had better measurement tools when observing the apple, they still did not see the concept of gravity. Get access to people like Sir Isaac Newton, who find the innovation in common observation.
2) Have access to people comfortable with breaking the status quo
Not everyone is comfortable being the rebel who breaks the rules. Bringing innovation to market is hard enough by itself. Don’t make it even harder by putting it in the hands of non-rebels. I worked with a company once on an innovative new concept. The idea part worked great, but then it was handed over to a status-quo guy who was not a rebel by nature. The forces of the status quo took over and the innovation never saw the light of day.
It may not feel comfortable handing over the project to a rebel who likes breaking YOUR rules. You may not want them as your next door neighbor. But you do want them fighting your wars to get the innovative idea around the obstacles which can prevent success.
3) Empower the people in #1 and #2
Getting the right people is half the battle. The second half is empowering them so that they can actually do what they are good at. They need power. That power can take the form of freedom to think, access to funds, access to other resources in the company (knowledge, people, systems, etc.), the ability to make decisions, the ability to experiment (and sometimes fail).
There was an article in the June 2008 edition of the Harvard Business Review which looked at about 125,000 instances of strategy execution from over 1,000 companies. What they found was that the most successful implementation came from companies that got two things right: decision rights and information flow. In other words, if you want successful implementation
a) Give clear powers for decision-making and let everyone know who has them for each type of decision. Take the second-guessing, passing-the-buck, and bureaucratic red-tape out of the equation. (This provides the power to act without always looking over your shoulder and re-justifying everything all the time)
b) Let information (and the people who have it) flow freely throughout the organization so that everyone is acting based on the proper knowledge. Don’t horde knowledge; be generous with access. (This provides the power of access to the tools that will improve the intelligence of your actions).
These two factors were found to be far more important than getting the organizational chart right or getting the motivational incentives right.
4) Only after this, do you worry about measurements and efficiencies
We need policemen to catch the criminals, but we do not want to live under a police-state, where everyone is assumed guilty until proven otherwise. Innovation measurement and efficiency tools are similar. Use them to catch the really bad behavior (innovation criminals, or really bad concepts), but don’t create a police-state.
Great outcomes are more important than efficient processes. In fact, you can make a process so efficient that it chokes the outcomes. If you want great innovation, it is more important to have innovative thinkers and operational rebels with access and power than it is to have efficient measuring processes.
I am not advocating that it is okay to use ANY means to achieve your ends. Engaging in illegal/immoral/unethical behavior is not the right path to innovation. The banking industry came up with a lot of innovative financial tricks recently which helped bring down a global economy. Some feel that the means to that innovation fell into the illegal/immoral/unethical realm. Bad means will eventually come out and you will pay the price.
Tuesday, April 20, 2010
I was saddened to hear that CK Prahalad passed away on April 16th. He was one of the all-time great contributors to the field of strategic planning. CK Prahalad wrote or co-wrote some of the greatest business books of the last 50 years, including Competing for the Future and The Fortune at the Bottom of the Pyramid. He co-wrote the most reprinted article in the history of the Harvard Business Review (“The Core Competence of the Corporation”) and was twice ranked the #1 Management Thinker in the World in global surveys by the Times of London.
I was fortunate to have had him as a professor when I got my MBA at the University of Michigan. It was only his second year as a professor, but even then you could sense his coming greatness. I remember there was a bit of a controversy during that time for CK, because the US government was considering revoking his work Visa to be in the United States. He needed to prove to the government that he had unique skills and giftedness and was not just taking a professor job away from an American. Looking back on CK’s long and fruitful career, it is almost laughable that anybody could have ever doubted his unique contributions.
I will never forget the advice he gave us students. He said that we were gifted with abilities and credentials. It bothered him when he saw people like that take the easy road and go work for some large and highly successful company. He said those companies don’t need you as much and they won’t challenge you as much. Instead, he implored us to go work for the smaller companies or the companies who were going through difficulties. Those are the places where you will stretch yourself and make greater contributions. He wanted us to prove our worth and make a difference.
CK took his own advice—he proved his worth and made a difference.
Monday, April 19, 2010
At the exercise club where I work out, there are a series of TV monitors by the equipment, so that you can watch TV while exercising. Each monitor is set to a different channel. Some of the channels include a few of those political news cable channels.
It is interesting watching simultaneously how the different political cable channels report on the same news items. One would think they must be reporting from different planets, because their conclusions have absolutely nothing in common. Often, even their so-called “facts” of the situation have almost nothing in common. The “liberal” channels and the “conservative” channels each seem to live in their own little world.
I guess I shouldn’t be surprised. Emory University in Atlanta released the results of a political study back in January of 2006. Test subjects were given statements by a prominent conservative politician (a Republican) and a prominent liberal politician (a Democrat). The statements contradicted each other.
When shown these statements, both Democrat and Republican test subjects ignored the contradictions for their own party but saw the contradictions made by the other side. Worse yet, while going through the test, the test subjects did not show any increased activation of the parts of the brain normally engaged during reasoning. In other words, political opinions and mental reasoning appear to have nothing in common.
That explains a lot.
One part of the strategic planning process is fact-gathering. Different people place different levels of importance on the fact-gathering phase. As we talked about in an earlier blog, some people become obsessed with “fact-based decision-making” as being a top priority.
However, as we saw in the story, one person’s facts may be another person’s fiction. And even if we could agree on the facts, the story shows that mental reasoning regarding those facts may not occur. As a result, opinions and behaviors may have very little to do with the facts.
Therefore, when you are trying to develop a strategy to get consumers to behave in a particular manner (to your benefit), facts may be irrelevant. It may be more important to align yourself with a particular opinion segment (something like a political party) than to align yourself with the facts.
The principle here is that actions are more important than facts. Profit occurs when the right actions occur. Since actions are not necessarily determined by facts, then facts should not necessarily be the focal point of your strategy.
We need to get the “F” out. In other words, instead of focusing on “facts,” we should be focusing on “acts” (facts without the F).
This is not to imply that we should lie to our customers or intentionally deceive them. Not only is this wrong behavior, it is ultimately stupid behavior over the long haul. The global banking industry is feeling a lot of negative pressure and new restrictive regulations because of the perception that they deceived the public.
Losing the trust of your customer base can be a death sentence. And in today’s internet-connected, socially-conscious climate, bad corporate deeds always seem to find a way out into the public eye to your detriment. (Even if the facts aren’t 100% accurate, the damage is done).
Therefore, the idea is not to throw away the facts (and deceive), but rather to give higher preference to the mindsets in particular activity groups.
For example, let’s assume you want to sell lawn care products/services. You could dig up all the facts around the most productive way to care for a lawn, but this may not result in the ideal lawn care strategy. When you look at actions, what you will probably find is that there are two distinct types of actions regarding lawn care. One group hates lawn care—sees it as a burdensome chore—and wants as little activity as possible. Another group sees lawn care as a passion—like a pleasurable hobby—and enjoys their time in the activity.
The first group wants to do less than what the facts would say are ideally productive. The second group wants to do more than what is necessary. Neither is looking for the factually most efficient. Instead, a good strategy would be to pick a segment (no matter how “irrational” their actions seem) and appeal to the way they want to act. Either position your strategy as “the brand that minimizes the chore” or “the brand that enhances the satisfaction of the hobby.”
Another example could be cat food. If one were to look at the facts, one might come to the conclusion that the most appropriate food for a cat would be one that is high in meat, fat and bone meal. However, many of the people who put a high priority on their pets (and are willing to pay a premium to feed them) behave as if their cats were miniature people. They want them to eat what they believe is a good people diet, full of lean protein, grains and vegetables.
If you want these folks to act in a way that gets them to purchase your brand of premium cat food, you probably need to cave in to some of these pre-conceived notions and behaviors and put in some vegetables. This is like the political candidate who can only get elected by his party if he agrees to some of the party’s long-held notions.
So how can we apply this to the fact-gathering stage of strategic planning?
1) Put more emphasis on what people do than on what people say.
One of my favorite cartoons has someone going door-to-door taking a survey about what people are watching. One man goes to his door and tells the survey-taker that he only watches educational documentaries. In the background, you can see a TV set showing a low-brow comedy program. The moral of the story: Don’t believe what people say, but what people do.
This is why a behavior-based system to determine what people watch, like Nielsen (who has a box connected to your TV set) will get a more accurate reading than asking people what they watch (like in the cartoon).
The old joke used to be that nobody knew who Playboy was selling all those magazines to, since nobody claimed to be buying them. And if you did find someone who admitted to buying the magazine, they would claim they bought it for the articles, not the photos. If that were the case, why does Playboy bother to put photos in the magazine? Don’t trust the “facts” of what people say; trust the facts of what they do.
Rather than getting bogged down in endless pre-product scenario testing with consumers, get a prototype out there in the real world to test. One of the beauties of the digital age is that it is so easy to get a beta test out into the field. This allows you to get feedback based on actual activity.
If you want to develop a product to help people in doing their work, watch how they work at their place of work. If you want to improve the meal-making process in the kitchen, watch how people act in the kitchen.
2) Understand that different segments operate under a different set of “facts”—Pick One
Just as Democrats and Republicans seem to operate under a different set of facts, so do other segments. We saw this also in the lawn hobbyists versus the lawn-work haters. These segments have a different way of looking at the world.
It is nearly impossible to build a political position that would be equally loved by both Democrats and Republicans. They love totally different things. Similarly, it is nearly impossible to win by trying to pick a business strategy which tries to make everyone in the market happy. Broad middle-of-the-road strategies are rarely as successful as those which target specific segments or niches.
If you target a like-minded, similar-behaving segment, you can focus on specializing in exactly what they are looking for. You can appeal to their set of “facts.” You can speak their language. You can be a clear “winner” in the eyes of that segment. By contrast, if you try to appeal to conflicting points of view, you end up being the best option for nobody. So pick a segment for your strategy.
3) Interpret facts via a chosen filter
Once you choose a segment, try to see the world through their eyes. Filter the facts through the same filter they use. Don’t try to force them into buying what you think they should want. Give them what would make the most sense within their view of the world. Even something as simple as different views on lawn care can create heated battles among neighbors—as heated as political discussions. So don’t assume your business is too mundane to be beyond having different filters. Take heed or they may rebel against you.
The world is not a homogeneous mass of people sharing a similar point of view. Not only do we have different opinions, we often cannot even agree on the facts. Instead of being homogeneous, the world tends to cluster into a number of segments based on how one acts. Therefore, when designing a strategy, pay more attention to how people act than fretting over the precision of various facts.
Even if your targeted segment seems irrational, it only appears irrational because you are looking at the behavior through the wrong lens. Through their lens, it seems perfectly logical. Find the lens that helps you see the “logic” that they see.
Wednesday, April 14, 2010
I’m not very handy when it comes to home improvements. Once, I was going to replace some windows on my house. I went to the home improvement store expecting to see some standard-sized windows that I could just slip in to replace the old ones. As it turns out, there really is no such thing as a standard-sized window, especially for an old home like mine.
I would have to measure the opening and get custom-made windows. I knew that my skills at properly measuring the hole the window would go into would be poor, so I didn’t even try. Instead, I decided to call in a professional. They sent two people to my home—one to look at the windows in the house and one to talk about options and prices. As it turns out, while the one person was telling my wife and me about options and prices, the other one was going around the house stealing things from us.
Another time, I decided to put new siding on the outside of my home. At the time, I was living in Minnesota, which gets very, very cold in the winter. Since winter is the slow time in Minnesota to get new siding, I got a really good deal on the price. Unfortunately, when the workers took off the old siding and insulation, the pipes in my house froze.
When the job was eventually finished, it looked really nice. However, something happened that following summer, when it got very warm. The siding on the walls expanded with the heat and no longer properly fit the dimensions of the house. It became extremely difficult in the summer to open the door to the house, because the expanded siding was pushing against the door frame, making it too small for the door.
In home improvements, making the proper measurement is very important. If you cut things too large or too small, they will not fit. You will have wasted your time and have a disaster to deal with. Nothing seems to come in standard sizes, so it is up to you to make sure the measured size is right. Even when you outsource the measurement to so-called experts, you can have problems.
The same is true when it comes to defining the scope of your business. There is no standardized scope which is the same for everyone. You have to define the unique size of the scope which is right for your business.
Back in the 1960s, Theodore Levitt wrote one of the most popular articles ever to appear in the Harvard Business Review, called “Marketing Myopia.” In this article, he claimed that many businesses measure their scope too small. Levitt talked about how the railroad industry got into serious difficulties because they narrowly defined their scope as being in the “railroad” business when they should have used the larger scope of defining themselves in the “transportation” business. Other transportation options (planes, trucks, etc.) were growing while the railroad industry was shrinking. Levitt claimed that if the railroad companies had defined a larger scope, they could have continued to grow by diversifying into these related growing transportation businesses.
Then there is management/strategic planning professor Henry Mintzberg. Mintzberg claims that many businesses get into trouble by defining their scope too broadly. A large scope can lead to a lack of focus and dissipation of effort. Mintzberg claims that if the railroads had redefined themselves as in the transportation business, they would have failed due to lack of focus and stretching their resources too thinly across too many areas.
Marketing expert Al Ries would agree that focus is one of the cornerstones of business success. Ries claims that most brand extensions fail because they destroy the power of what the formerly focused brand stood for in the minds of the customer.
So measuring the proper scope for your business is as tricky as measuring the windows or siding for your house. Measure it too small, and you can miss all the growth opportunities. Measure it too large, and you can never get focused enough to accomplish anything.
So how do you know what is the right size for your custom-fit business scope?
The principle here is that the size of holes should be defined based on the size of what you are trying to put in the hole. In other words, holes for windows should be defined based on the size of the window you are putting in the hole. So before you define the scope of your business, make sure you know what kind of “window” you are putting in that hole.
So what is the “window” equivalent when defining scope? Well, here are few to consider:
1) The size of the customer alternatives
Consumers have alternatives. They can choose your firm or choose something else. Some of those alternatives can be very different from what you are offering. For example, if the customer wants to lose weight, they can choose from a wide range of diverse alternatives, from diet supplements to exercise programs to cosmetic surgery. The size of the “window” is the breadth of alternatives which are relevant to your core customer.
Returning to the railroad example, it is probably too large a leap to go from railroads to transportation. I think you need to understand which type of transportation solution you are specializing. For example, one could specialize in low-cost transportation, bulk container transportation, rapid transportation, small batch transportation, etc. Determine your solution specialty and then size your scope to include any other transportation option which has to potential to either threaten your core in that specialty or provide a diversification option with that same solution.
For example, Wal-Mart’s scope is sized as low price retailing. Whenever Wal-Mart sees something that could provide a better low price retail solution, it considers going into that business. This is why Wal-Mart diversified from discount stores into hypermarkets, supercenters and warehouse clubs. It goes wherever low price retailing goes. Wal-Mart avoids high end retailing because it is not within its scope.
2) The size of your capabilities
If the size of your scope is significantly broader than the scope of your capabilities, you are opening yourself up to entering places where you will fail. This is not to say that you shouldn’t have a little stretch in your scope, but in general the size of your scope “hole” should be similar to the size of your capability “window.”
Over time, you can enlarge the size of your scope as your company gains competencies. However, it is probably unwise to do it all at once. Take a look at Amazon. They started out with a narrow scope—selling books on the internet. However, as they got superior competency in internet selling, the scope was widened to include internet selling of other goods (and helping other companies sell on the internet). As they got superior competency and clout in the book business, Amazon expanded their scope into other areas of the publishing business, the most recent of which was the introduction of the Kindle ebook reader.
As Amazon CEO Jeff Bezos put it, "If you want to continuously revitalize the service that you offer to your customers, you cannot stop at what you are good at. You have to ask what your customers need and want, and then, no matter how hard it is, you better get good at those things." Then, when you get good at them, you can expand your scope to offer them.
Another example would be Cardinal Health. Cardinal Health started out in the US in the 1970s as Cardinal Foods, with the scope of being a grocery wholesaler. Then, in the 1980s, once they got good at being a wholesale distributor, they expanded the scope to include being a wholesaler of pharmaceutical and related products for drug stores and other health companies. The name was changed to Cardinal Distribution.
After getting to know their health care customers well, the scope was expanded to include a larger role in the health care industry. In 1994, the company was renamed Cardinal Health. Recently, it was determined that perhaps that health care scope was a bit too broad to be handled properly under one company, so in 2009, the company was split into two separate companies. The clinical and medical products were spun off into a new firm, called CareFusion. The scope of CareFusion is: To deliver clinically proven products and services that measurably improve patient care, principally by improving safety through reducing medication errors and healthcare-acquired infections. The remaining Cardinal Health now has a more focused and manageable scope within health care: To make healthcare more cost-effective through improving efficiency across the system, so our customers can focus on their patients.
It’s okay to redefine your scope over time. In fact, it is probably dangerous to never redefine your scope, since marketplace changes and capability changes may eventually make that original scope less than ideal. The trick is to time it properly so that good opportunities aren’t missed and bad opportunities (at least bad at a particular time for your firm) are avoided.
3)The size of your rope (lifeline)
Business strategies have a lifecycle. Unless you adapt and update, your strategy can die. If you can see the end of your strategy in the near horizon, it may be time to expand your scope as a means to expand your company’s lifeline. In other words, if you are hanging near the end of your rope, you may want to find a way to expand the length of that rope.
For example, had Cardinal Health (as Cardinal Foods) kept its scope focused on just serving independent grocers, there is a good chance the company would no longer be in existence, since the demise of the independent grocer in the US over time has eliminated nearly all narrow-focused publically held grocery wholesalers.
One of the key strategic decisions is that of defining a business’ scope. Define it too small and a company can miss many great opportunities. Define it too large and a company can lose focus and enter areas where it does not belong. To help size the focus appropriately, look at the breadth of your customers’ alternatives, the level of your expertise, and the length of the life within the current scope.
Just because business scope needs adjustments every so often does not mean that it should change frequently. Once you put new windows and siding on a house, you expect them to last many years. Similarly, if you scope your business properly, the scope should last many years as well.
Wednesday, April 7, 2010
Curly Lambeau was part of the founding of the Green Bay Packers football team back in 1919. Lambeau started as a player but spent most of his 31 years with the team in the role of coach.
At the time, US football was considered to be a running game. Forward passes were virtually non-existent. Curly Lambeau, however, was fascinated with the concept of the forward pass, and by the late 1920s he was making it a key part of the Green Bay Packer offense.
Since virtually nobody else in the league was using the forward pass much, teams did not prepare much of any defense for it. As a result, the Packers had a competitive edge and won a lot of games. They were the national champions in 1929, 1930, 1931, 1936 and 1939.
Eventually, other teams caught on to the idea of the forward pass, and now it dominates the offense for virtually all teams in the National Football League.
A large part of strategic planning is about change—what to change into and how to change in order to make that a reality. The key question here is “what is the most effective way to achieve that change within the company?”
One school of thought is that big strategic change requires focusing on big organizational change. This means things like changing the corporate culture, changing the organization chart, changing the key players, and other such large alterations to the systemic way in which the company gets things done. I call this the “reconstruction” approach—tearing things down and constructing a new replacement organization.
The other school of thought is to basically leave the organizational structure in tact and just change the way people think about what they do within that structure. I call this the “reorientation” approach—thinking differently about how you apply the current structure.
Curly Lambeau used the reorientation approach. He did not change the rules or structure of football. He did not abandon the traditional football league and start a new league. He still had the same number of players as everyone else in the same positions as everyone else. All he basically did was change the way his players thought about football. Instead of thinking “run,” he taught his players to think “pass.”
Once Lambeau got the players to think differently about the game, the new actions naturally followed. The change evolved out of new thought rather than starting with new structure. As a result of the new thinking, the Green Bay Packers won a lot of national titles and the city of Green Bay was nicknamed “Titletown.”
Compare this to the people who have tried to reinvent the entire structure of American Football, from the indoor Arena League to the XFL. The XFL lasted only one season (2001) and the Arena League teeters on bankruptcy and had to cancel the 2009 season to reconsider how to keep the league alive.
I believe that when it comes to change, too many companies flock to the reconstruction approach when reorientation is all that is needed. We need to be more like Curly Lambeau and focus on getting the current organization to think differently rather than blow up the status quo and start all over.
The principle here is that it is usually more effective to change outcomes by focusing on changing thoughts rather than by focusing on changing structure. Yes, sometimes a company is so messed up that the only path to success is to blow up the status quo. In most cases, however, I believe that such a radical approach is counter-productive, especially when compared to the success one can gain by merely changing the way people think.
Here are four reasons why I believe this.
1. Changing Thinking Is Easier Than Changing Entire Belief Systems
Organizational culture is a complex belief system—beliefs in how the world and the organization should work. It is almost like a religion. Changing the organizational structure is like trying to get people to change religions—not a particularly easy task.
Changing thoughts is a lot easier. You’re not changing the belief system, but only reorienting how one thinks about the current system. It is like telling someone “Here is a new way to think about glorifying God within your Christian context” is easier than “Here is why you should abandon Christianity for Buddism.” The resistance is lower; transformation is more likely.
2. Much is Lost in Reconstruction
Structural reconstruction is a major disruption to the business. This disruption gets in the way of progress. During the reconstruction, productivity and time is lost. If changed behavior cannot happen until the new structure is in place, this transition period is a costly loss of time and fruitful activity.
In addition, big disruptions can lower morale and confuse people about how to get things done (or even what should be done). Productivity goes into reverse.
By contrast, if you start with new thinking, new activities can begin right away within the old structure (just think “pass” within the current game, rather than first building a new league). New thinking tends to create fast success stories (1929 world championship), which help invigorate, rather than demoralize and confuse.
3. Organizations are Complex
In all large organizations, there is both a formal structure and an informal structure. The formal structure is what you see on the org charts. The informal structure is the way things really get done. By focusing on structure you can get too focused on just the formal structure and end up failing to change how things really get done informally.
If you start changing the informal structure, you are started to change the belief system, as we talked about earlier. This all becomes very difficult and complex to get all the parts of the system to change properly at the same time.
4. If You Start With Changing Thinking, The Better Structure Will More Naturally Evolve. If You Start With Changing the Structure, All You May End Up With is Rebellion
People act based on what they think. If you think that passing is a better approach to football, you will act in a way that makes for more effective passing and catching. Over time, these new actions may naturally evolve into a better organization—in a healthy and less-resistant manner.
However, if you start with structure first, resistance and rebellion set in. Without a compelling need to change (through new thought), people will resist the change. The new actions may never materialize.
My experience at Best Buy is a good example of this principle in action. At the time, in the late 1990s/early 2000’s, Best Buy ran only one type of retail store, only in the US. I knew that for Best Buy to reach its full potential, it would have to go beyond this narrow definition of who they were. Thinking needed to be changed.
We told management that they had the potential to become a $100 billion company (at the time, sales were closer to $15 billion). However, to get there, they would need to rethink who they were. They could no longer see themselves as just a US retailer, selling products in one way. Instead, they would have to see themselves as a major player in the entire global digital ecosystem.
They would need to get active in the entire value chain—working differently upstream with vendors to help direct how technology involves and working differently downstream with customers in how they interact with technology. They would need to stop thinking about selling items and to think about selling solutions and services. They would need to go to different countries and use different formats. In essence, they had to think of themselves as a global industry market-maker rather than as a retailer.
Eventually the mindset changed. Executives thought differently about the role and the potential of Best Buy. Without changing the culture or structure, the company took actions based on this new way of thinking. They expanded internationally, got into new formats (like Best Buy Mobile), bought the Geek Squad and put the service in all the stores, and started working more closely with vendors to more actively help determine how technology would evolve. Revenues are now around $50 billion (on the way to $100 billion).
In the First Quarter 2010 issue of NYSE magazine, Best Buy CEO Brian Dunn said, “Retailing is a noble endeavor. But I don’t think Best Buy is a retailer anymore.” The rethinking process was a success. They no longer see themselves as a retailer. They caught the larger vision. Great success has followed. Any structural change was evolutionary and a result of the change, rather than the source of the change.
When strategy dictates a need for a large change in outcome, don’t automatically start by trying to make a big change in structure. Instead, consider if you can get all the change you need by merely changing the way people think about the business.
There is always more than one way to think about a business. Rather than copy someone else’s thought vision about a business, find the unique thinking orientation which works best for you. Curly Lambeau and the Packers won games precisely because they had a unique thought orientation to the game (rather than complying with the conventional wisdom of the day).
Thursday, April 1, 2010
Back in 1983, Howard Schultz traveled to Italy. While there, he took part in the local culture of the Italian coffee bar. While spending time just sitting at the coffee bars and soaking up the cultural experience, Howard had an inspiration. Howard believed that Americans would become just as captivated with this Italian coffee experience as he was.
The idea was to design a “third place” for Americans, somewhere between home and work. It would be a place for conversation and a sense of community. And, yes, a place to buy quality coffee at premium prices.
When Howard got back to the US, he started a coffeehouse, called Il Giornale. In 1987, he purchased Starbucks to further his vision.
Apparently, Howard’s gut instinct was pretty good. There are now more than 15,000 Starbucks in 50 countries. Annual sales are in the $10 billion range. That’s a lot of coffee.
If Howard Schultz had done a lot of research into coffee facts back in the early 1980s, I don’t think he would have gotten much support for his vision. Price was one of the main drivers of coffee purchases, with a constant price war going on in the supermarkets between the top brands. Premium-priced quality coffees in the US hardly existed, and there was not a strong clamoring for it, either.
Nobody was really clamoring for a “third space,” either. Convenience was the driving force, as people were looking for ways to do things faster and easier. The idea of going out of your way to get a slow coffee experience would have sounded insane to most people at the time.
Seeking community? The 1980s were a key time of people moving out into the suburbs to escape interaction and hide in the comfort of their suburban home.
Young adults, a key Starbucks segment, at that time were into drinking colas, not coffee. Coffee was seen as that boring drink that old people consumed. And the last thing the youth wanted was to behave like old people.
If you were to have added up all the facts, the Starbucks vision would have looked like a real loser. Yet it was just the opposite.
Howard Schultz’s intuition, however, could envision something beyond the facts. This intuition was more valuable than the facts.
In the business world, strategic decisions are being made all the time. Usually, these decisions are made based on a blend of facts and intuition. Most of the current business literature praises fact-based decision-making and downplays the role of intuition. However, as we can see in this story, transformational strategic decisions like Starbucks often need to rely more on intuition, because the facts of the day are all pre-transformation.
It is like trying to measure the wingspan of a butterfly while it is still a caterpillar. The caterpillar has a wingspan of 0, because it is still in the pre-transformation stage. The wings do not come until after the metamorphosis—when the caterpillar turns into a butterfly. Rejecting a caterpillar’s eventual flying ability based on pre-transformation factual measurements will lead to the wrong conclusion—that this animal will never fly.
Intuition is needed in the pre-transformation stage, in order to envision a post-transformational world (because you won’t see it in the pre-transformation facts). Like the pre-transformation caterpillar, “facts” would have lead people to believe that Starbucks wouldn’t fly, either. And they would have been wrong.
A recent article in the McKinsey Quarterly was titled “Strategic decisions: When can you trust your gut?” The article was in interview with Nobel laureate Daniel Kahneman and psychologist Gary Klein.
This article tended to downplay the importance of gut intuition. It was considered to be a tool fraught with many perils—one to be used very minimally, because it was not very reliable. In fact, it was downplayed so much that the interviewer had to ask if there were ever situations when intuition could be trusted in the business world.
Gary Klein responded that intuition is best suited for situations with high predictability. He continued to say that in very turbulent situations there is no basis for intuition.
At first, this sounded very logical to me. But then I started thinking about examples like Starbucks. Eventually, I came to the conclusion that often the principle should be the exact opposite of what Gary Klein said, especially when it comes to major strategic decisions.
During times of high stability and high predictability, facts are probably at their highest level of relevance. You know exactly how to interpret the facts, because the future environment is virtually identical to the environment in which the facts are collected. You can trust the “facts” of customer behavior and customer research more than at any other time, because behavior is relatively stable and there is no turbulence to befuddle the consumer opinions. And because the management has already successfully acted in this environment, they will know exactly what the facts imply for their business. Therefore, stability is the best time to rely on the facts.
It is during times of turbulence when facts are the least reliable. Conflicting reports may be coming in. The “facts” may predate the latest turbulence and be obsolete or irrelevant. Customer opinions may be worthless because they applied to an older context. Customers may have no idea how the turbulence will affect their long-term future behavior, so they cannot give you accurate insight. Today’s “facts” cannot tell you where the environment will end up when the turbulence finally reaches a new level of stability (like trying to measure butterfly wings on a caterpillar). Therefore, since facts are at their lowest level of reliability during turbulence, one needs to rely even more on intuition in order to make sense about what is going on.
This is especially true when you are trying to create a transformational strategy, like Starbucks. In essence, transformation strategies are trying to take a stable environment and intentionally inject turbulence into it. The idea is to intentionally upset the status quo in order to create a new environment more favorable to your company.
Great strategic moves often try to re-write the rules of the game. Starbucks re-wrote the rules of how we view the role of coffee in our life. Apple re-wrote the rules on how we interact with people, information and entertainment. Linked-in has re-written the rules of how people find jobs. Social networking sites have changed the rules on how people think about their privacy.
I enjoy watching old movies made before the digital revolution. It is funny to see people driving around town looking for a pay phone, because cell phones weren’t invented. Housewives slave for hours to make dinner, because there are no microwaves or fast food restaurants. People have to wait until they get tomorrow’s newspaper in order to know what is going on in the world. It is difficult today to even imagine living like that anymore. Similarly, it would be difficult for people of that time to imagine the lifestyles we have today. Mere facts are not very useful in transformational situations like this. Instead, you need the intuition of visionaries—people like Howard Schultz.
Peter Drucker used to say that the best way to predict the future is to create the future. In other words, the more you take control of your destiny and proactively work to write the rules of the future, the more likely you will know what the future will be. Howard Schultz did not wait for the coffee revolution to occur before jumping in. Instead, he proactively created the coffee revolution. He created demand that did not before exist through his strategic actions. He made the old facts obsolete by creating a new world.
Similarly Steve Jobs did not wait for the digital music revolution to reach stability before jumping in. Through the iPod and iTunes, he invented the new reality that people flocked to. Through intuition, he envisioned a future and made it happen. Steve Jobs didn’t look at the facts to see what the future was evolving into. Instead, he envisioned a better world and made it happen, regardless of the facts.
Contrary to popular opinion, turbulent times may be the best time to ignore the facts and rely on creative intuition. This is even more true when you are intentionally trying to upset the status quo and proactively re-write the rules of the future in your favor.
Here’s the real shocker. If it weren’t for intuitive visionaries like Schultz and Jobs, the world would have evolved differently. There might not have ever been a coffee revolution or an app store for smart phones without them. The facts at the time would have been identical. Yet the outcomes would have been different. The intuition of visionaries had more to do with how these markets developed than the facts of the moment. Think about that next time people are telling you to reject intuition and stick to fact-based decision-making.