Thursday, December 29, 2011

Strategic Planning Analogy #429: Musical Chairs

When I went to parties as a child, we played a game called Musical Chairs. The game used a circle of chairs. There would be one less chair than the number of children playing.

As music played in the background, the children would walk around the circle of chairs. When the music stopped, everyone would try to sit in a chair. Since there was one less chair than children, one child would not get a chair. That person was called “out” and was no longer allowed to play the game.

Then, one of the chairs would be removed and the music would start again. The process would be repeated until only one child was left sitting in the one chair that was left. That child was declared the winner.

Sometimes the game would get very active when two children would fight over a single chair. Although both would try to claim rights to that chair, one of them would lose out. After all, the rules stated that only one person could sit in a given chair. Since there were fewer chairs than children, by definition someone would lose out in each round.

The chairs in Musical Chairs can be thought of as being like business opportunities. And the children can be thought of as being like companies who want to take advantage of those business opportunities.

Like in the game, there are more companies trying to take advantage of the opportunity than there are opportunities. As a result, companies lose out and can no longer play the game in that arena.

You can see this happening all the time in business. Whenever there is a “hot” business space, there will be tons of businesses trying to exploit it. Unfortunately, there are too many companies chasing these “hot” spaces. As a result, most companies do not successfully exploit the opportunity. “When the music stops,” and the companies rush for a seat at the business, not all will find one.

Look at the recent “hot” spaces like Solar Panels, Social Media Couponing, iPad imitations, etc. Companies are quickly exiting the businesses or going bankrupt. Yes, the business space may be “hot” but most of the businesses trying to exploit the opportunity fail. There are not enough chairs to satisfy all who want to play.

The principle here is that merely finding a good place for your company to play is not sufficient. So-called “good places” attract too much interest relative to the opportunity. As a result, these “good places” quickly become “bad places” for those who cannot quickly secure a solid ownership of share in that space. Like in the game of Musical Chairs, most players are asked to leave the game because they could not find a chair for their business to occupy.

Therefore, strategies require two elements—a viable space, and a way to aggressively fight to win a place within that space.

Best Buy Example
I was reminded of this principle while reading the book “Becoming the Best” by Dick Schulze, the founder of Best Buy. The book talks about the history of the development of the massive Best Buy retail chain. There were several times in the early years when Best Buy was on the verge of bankruptcy. Best Buy could have very easily become one of those companies who could not secure a chair and been told by the marketplace to leave the game.

Yet, Best Buy endured to become the last national consumer electronics retail chain left in America. It won the game of musical chairs in the consumer electronics space. Why? Part of the answer can be seen in the sub-title of the book: “A Journey of Passion, Purpose, and Perseverance.”

Dick Schulze did not just “show up” at the game. He was quick, aggressive, and persevering. He understood that business is a race and that you have to run aggressively, with purpose and endurance, in order to win that race.

A great example was back in the late 1980s when a large competitor, called Highland Appliance, decided to enter Best Buy’s territory in order to drive the smaller Best Buy into bankruptcy. Realizing what was going on, Best Buy reacted quickly and aggressively. First, Best Buy acted quickly to grab market share in markets where Highland was committed to grow, but moving slower.

Second, Best Buy was the first to realize that the old commissioned sales model (which Highland, Best Buy and everyone else was using) was becoming obsolete. Therefore, Best Buy quickly changed its approach and became the first in the industry to own the superior business model which was an approach more like a supermarket (no commissioned salespeople). They called the new business model “Concept II.” Because of these quick and aggressive tactics, Best Buy survived and it was Highland Appliance who soon went bankrupt.

In other words, with Concept II Best Buy developed a superior position where they could win (a great space) and then quickly and aggressively did whatever it took to own that space before anyone else could get there (a great race). By doing both tasks, Best Buy won the game of musical chairs in its industry and reaped the rewards of being the leader of consumer electronics when all the money was being spent to convert from the analog to the digital era.

Sure, everyone knew that there were great rewards to be had if you were in the digital space when that conversion from analog to digital took place. But not everyone who wanted to take advantage of this opportunity succeeded. Best Buy succeeded when others failed because it worked faster, harder and smarter at securing the right position in the space (Concept II) and then did whatever it took to make sure nobody took it away from them. They found a chair to sit in and never let anyone push them out of the chair.

General Motors Example
An example in the opposite direction would be General Motors. In recent years, it was becoming apparent that the old automotive business model of owning a huge portfolio with lots of different brands was no longer the best place to be. The wise business move would be to sell off some the weaker brands and concentrate more effort on the stronger brands.

General Motors understood this, but they were slow in the race to execute the strategy. Compare their speed and aggressiveness in execution versus Ford. Ford acted quickly to sell off its Land Rover brand, which was going out of favor due to its focus on large, gas guzzling vehicles. As a result of acting quickly, Ford was able to exit the business while also getting some cash from the sale of the division.

By contrast, General Motors was slower in reacting with its large gas guzzling Hummer brand. By waiting longer, that gas guzzling segment became even less desirable. And Ford had already sold its Land Rover division to the best potential buyer for such a brand. As a result, General Motors could not find a buyer for Hummer and had to shut it down at a huge loss.

A similar situation happened with their northern European brands. Ford acted quickly and found a buyer for Volvo. General Motors was much slower and more timid in reacting and could not secure a buyer for its Saab division. GM had to shut it down for a loss.

Both Ford and General Motors saw the same good strategy of shrinking their portfolio. Both tried to execute that same “good” strategy. But because Ford was quicker and more aggressive, it was able to execute the strategy far more successfully than General Motors. Same strategy, but different results due to differences in speed and aggressiveness. Just as it takes speed and aggressiveness to secure a chair in Musical Chairs, it takes those same qualities to win in business.

Strategic planning needs to be more than just identifying places where money can be made. It needs to also develop a path whereby its company can out-hustle the competition and survive the race to become one of the survivors. Great opportunities cause a large rush of firms who try to exploit it. Most of these firms will not benefit from the opportunity because they lose the race to become one of the few firms which can secure a “chair” in the industry. Slow imitators rarely achieve benefits as large as the quick and aggressive innovators. So it you want to win, not only find the right space, but find a way to win the race.

Musical Chairs requires many rounds before a winner can be declared. Just because you survive any early round does not mean that you will survive later rounds. The same is true in business. Don’t get complacent because of early success. This is an endurance race. You have to keep running.

Saturday, December 24, 2011

Strategic Planning Analogy #428: Changing Tires

Let’s assume there are two people driving along in a car. One is the manager and the other is his subordinate.

As they are driving along, the car suddenly gets a flat tire. After pulling off to the side of the road, the two of them just sit in the car doing nothing.

Finally, the manager says, “Well don’t look at me to change that tire. I like the current tire. It successfully got me everywhere I wanted for the last five years. I see no reason to give up on that tire and change it just because it had one little setback.”

The subordinate says, “Well don’t expect ME to change that tire. It’s not in my job description. It’s not a part of my bonus calculation. I’ll file a complaint if you force me to change it.”

So the two of them sat there by the side of the road for hours with that flat tire, even though there was a spare tire and jack in the trunk.

When a tire goes flat, you need to change it. Similarly, when a company’s current business model goes flat (stops working), you need to change it. Therefore, one might think that all one needs to do when business models go bad is to discover a new business model and a migration path and you’re done. Right?

Wrong. In the story, they had the equivalent of the new business model (the spare tire) and the migration path (the jack). Yet those parts just sat in the trunk not being used.

Why? Because nobody was adequately motivated to use the jack to put on the spare. The manager did not see the need for change and the subordinate did not feel personally responsible for making the change. If nobody wants to do the work, then having the parts is worthless. You’re stuck on the side of the road while the other companies pass you by.

Are companies really as silly about change as those people were with the flat tire? Well, consider research by McKinsey and Co. Scott Keller and Colin Price of McKinsey recently wrote a book entitled Beyond Performance. The book is based on research into thousands of executives at hundreds of companies. Here is what they found.

First, about 70% of change programs fail. In other words, most of those flat tires don’t get adequately fixed. That’s not good news.

Second, the primary reason why those change programs failed is not due to a lack of resources or plans. In other words, it wasn’t for a lack of spare tires and jacks that these change programs failed.

Instead, 72% of the failure could be traced to the people in the organization—nearly half of this amount to management failure to support the change and the rest due to employees resisting the change. In other words, most companies are very much like those people in the story. They sit by the side of the road in failure because management won’t support the change and employees resist the change activity.

The principle here is that “change” is an activity, not a concept. You can have the concepts of a new vision or a new strategy or a new business model. You can also have the concept of a plan to make that change a reality. But if equal effort is not also placed behind motivating people to act, you will almost surely fail.

Therefore, a strategist’s job is not done when the business model and migration path are devised. It is only done after equal effort is spent creating an internal environment capable of vigorously acting to bring about that change—quickly and fully. Otherwise, all you have done is put a spare tire and jack into the trunk and left the company sitting by the side of the road unwilling to use the tools you provided.

Getting Management Support
So how do you get management to embrace the need for change? There are several approaches.

First, you can try to get them to see that the status quo is truly broken and cannot be brought back to its former glory. In the story, the manager thought the flat was just a temporary setback for the formerly successful tire and that it would eventually bounce back up on its own like before. Therefore, he was not motivated to change that tire. Similarly, you need to show people that the flat is a major change in the condition of that tire. It will not return to its former glory on its own. It must be replaced.

Second, you can try to convince them that even if they liked that old tire, they’ll like a new tire even more. In other words, if you cannot convince them the old model has gone bad, then convince them that the new business model is so much better that it is worthy to change to get the improvement.

Third, you can appeal to their personal motivators. Most managers have something which drives them to reach the top. For some it is greed for money, for others it is greed for power, for others it is leaving a legacy, and for some it is leaving a mark which makes the world a better place. Whatever the motivator, tie it to the change. Tell them that if they make the change, they will get more money, more power or more whatever, than they had before. It’s sorta like telling a guy with a flat tire ,“If a guy puts slick new tires on his car, all the cute girls will want to ride with him.”

I’ve talked about ideas like this in more detail here and here.

Getting Employees to Make the Extra Effort
In addition to getting the managers motivated, you need to properly motivate the employees. It’s one thing for employees to do the minimum required for their position. But if you want to succeed in the transition for change, employees typically need to put in a much stronger than normal effort.

Keeler and Price refer to this as going beyond merely motivating through normal incentives to tap into “employees’ sense of meaning and identity to harness extraordinary effort.” This is effort which comes from deep in the heart.

This means transforming the change agenda from being “additional work” on top of the day-to-day to becoming “the greater work” which gives meaning to all of one’s efforts.

I’ve spoken about this topic in more detail in several other blogs, including this one.

A large part of strategic planning has to do with enacting change within the organization. The key roles typically given to strategists are to:

a) Help determine what to change into; and
b) Help determine the best path to get there.

However, research has shown that if that is all that is done, there is a high likelihood of failure. To ensure success, one must do more. One must also make sure that:

a) Management believes in promoting the change; and that
b) Employees are deeply motivated to give an extra effort to make it a reality.

Strategists need to help with these issues as well.

Changing a tire is not a glamorous job. You have to get your hands dirty. But the car won’t get moving again unless you change the tire. In business change, not all tasks are glamorous, either. But if you keep the big picture in mind, you can see that the messy jobs are essential if you want the big prize. So don’t shy away from getting your hands dirty by working on getting the implementation done.

Tuesday, December 13, 2011

Strategic Planning Analogy #427: Reporting Documents Vs. Managing Documents

Back when I was in college, I was a DJ on the college radio station. Near the end of one year, there was a student who suddenly realized she was about to graduate without any marketable skills. She decided to put in some time on the radio station to get some free experience.

The only position she could get on short notice was to announce sports news. Unfortunately, she knew absolutely NOTHING about sports (her passion was classical music). Before going on the air, she would ask me questions, like which sport did a particular team play, or what was the name of a sports team in a particular city. She literally knew NOTHING about sports.

As a result, her sports reports were the worst I ever heard. All she would do is state the name of a city and its score. One after another after another after another after another, with no commentary, no insights, no additional statistics, no excitement. It was painful to listen to.

Sports scores are important. They tell you who won and who lost. But that’s about it.

They really don’t give you a feel for how the game was played. You don’t know what happened to create the score. You don’t know how many near-scores were prevented by great defense. You have no idea what any of the players did. You don’t know the team strategy. If all you have are the scores, you are missing a lot. And as a result, that woman’s sport’s report was missing a lot—which made it a terrible report.

The same is true in the business world. There are financial metrics which can tell you the results of how well a company did, like Net Earnings or Earnings per Share (EPS). These types of metrics are like the final scores in a sporting event. They are important to know, but they really don’t tell you a lot.

For example, did EPS go up because earnings went up or because outstanding shares went down? Did earnings go up because of increased volume, decreased expenses, or a one-time accounting adjustment? Are the results repeatable, or based on unusual one-time circumstances? None of this can be discerned from just looking at earnings.

What if you had a sport team coach who never watched the game he was coaching and only looked at the score? He wouldn’t be able to coach well, because he would not have any knowledge of what was happening on the field of play. He wouldn’t know how well individual players were playing or how effective particular plays were.

Similarly, how can you expect business managers to execute well if all they do is look at final results? They have no idea of what’s happening out in the marketplace. They don’t know who is performing well. They don’t know which tactics are working. Worse yet, they may be satisfied with final results, not realizing that they were obtained illegally, unethically, or by means of tactics which will destroy long-term performance.

You wouldn’t expect a coach or a sports announcer to only look at final results. Yet, so often we tolerate this in the business world.

The principle here is that, by definition, “results” are the result of something which occurred in advance. Results are merely outcomes produced by prior actions. Earnings don’t magically appear by themselves. They are the result of a lot of prior activities. Therefore, if you want to impact results, you have to manage those prior activities.

As we saw in a prior blog, if all a coach does is yell at his players to “Make a higher score,” he has not provided any insight into how to get a higher score. His yelling is fairly worthless. If you want better results (a higher score), you need to dig deeper into how the game is played.

Similarly, if all we tell an employee is to “Get higher sales,” we have not provided any helpful insights. If you want higher sales, you need to dig deeper into how sales are made.

Reporting Tools are Not the Best Management Tools
Part of the problem is that businesses often use the same metrics to manage reported results (outcomes) as they do to manage operations (inputs).

“Results Reports” are the scoreboards of business. They are typically income statements, balance sheets, cash flow statements, or some variation of these. They tell the external stakeholders how well you did. They let the shareholders, debt holders, and government agencies “know the score.”

These are great reports. However, their focus is primarily on the outcome, not what caused the outcome. They let you know the score, but not what created the score.

Sports scores may be great for telling the external world how the team did, but they are not the best tools for helping the team improve that performance. To do that, they look at different data, like who is making errors, how successful are particular plays being executed, are people playing with the proper form, do they know what to do, are they cooperating as a team, and so on. You won’t find those answers in the final score. That’s why sports teams use tools other than the scoreboard to improve results.

Similarly, the reported results in an income statement or balance sheet won’t give an adequate enough picture to know how to improve those results for a business. They tell you the “what” but don’t tell you the “why.”

Therefore, businesses should be more like sports—use one tool to report results and another report to manage the process to get those results.

We can see this in the example of a retailer. One of the key results a retailer wants is sales. Yet, as we saw earlier, just wishing for sales or yelling at employees to get sales will not create sales. Sales are the result of prior activity.

What are the prior activities which create retail sales? The formula looks something like this:

SALES = (# of customers) X (# of trips to the store) X (# of items bought per trip) X (the average price per item purchased)

In other words, if you want to increase sales, you need to do a combination of the following:

a) Get more customers;
b) Get the customers to come more often;
c) Get the customers to buy more items; and
d) Get the customers to buy more expensive items.

You can measure these items by looking at:

a) Customer Counts
b) Customer Frequency (which is easier to measure now that customers have loyalty cards).
c) Size and Composition of the Average Transaction (in units and currency)

Then you can design tactics to improve these activities. And then you can measure your success with these types of metrics.

However, none of these metrics can be found on an income statement. The first line on the income statement is “sales.” The sales are already assumed to exist and are reported as a done deal. It gives the “sales” score, but no insight on how to improve it. The income statement is a miserable way to manage sales. Instead of using that results report mechanism, one needs a management report with these other measures.

How Did We Get Here?
Although it may now seem obvious that different tools are needed to manage a business than to report results, many businesses tend to use results documents for both. Budgets are usually based on result metrics. Bonuses are based on result metrics. Management meetings focus on result metrics. It’s as if everyone is yelling about the size of the sales without ever bringing up the measures which truly impact sales.

How did we get to this situation? I think a lot of it has to do with the tight connection between the accounting function and the strategic analysis function in many companies. They are often the same people or exist in the same department.

The accounting orientation has a predisposition towards result reporting (it is what they were trained to do). In addition, it is a lot easier to report everything if everything uses the same report. Therefore, there is a temptation to force all reporting into a result-oriented template.

Yet this is not the ideal format to understand what is happening in those activities which really create those results. It is not the right tool to manage what causes those results. A different monitoring system is needed…a strategic one.

Although results reports, like income statements, are useful (particularly for external stakeholders), they are insufficient. If you truly want to manage the important internal activities which cause these results, you need a different tool. You need a tool which monitors how well people are performing on the key inputs to that performance. Otherwise, all you are doing is shouting the score without any clue as to how to improve the score.

Sports media like ESPN, Sports Illustrated, and EuroSport spend only a small percentage of their time reporting scores. Instead, they focus their time on trying to understand the performance behind the scores. Is your reporting approach more like these companies, or more like the woman I knew back at the college radio station (who didn’t have a clue as to what was behind those scores)?

Thursday, December 8, 2011

Strategic Planning Analogy #426: The Gotcha Guys (Part 2)

There’s an old saying that “absence makes the heart grow fonder.” That may be true, but absence certainly does not make the relationship easier.

My son works the day shift. His fiancée works the night shift. As a result, they do not see as much of each other as they would like and that adds difficulty to the relationship.

I can empathize with that. When I first moved to Columbus, my wife stayed back in Minneapolis for awhile (about 750 miles away). That was tough.

For a relationship to thrive, there needs to be interaction. This is not only true with marriage. It is also true with the various aspects of one’s business. In particular, I am thinking about the people in charge of long range strategic goals and the people in charge of monitoring near-term financial targets (like annual budget and bonus targets).

If these two groups are not interacting together on a regular basis, they can get out of sync with each other. It can get as dysfunctional as when married couples drift apart and no longer interact on a regular basis.

If the near-term monitors and the long-term strategists are not in regular communication, their agendas may no longer be compatible. Achieving the near-term targets may no longer move the company towards the long-term goals. They might even do the opposite and move the company further away from the long term intent.

As we saw in the previous blog, many problems can occur when the near-term monitoring of the “Gotcha Guys” loses the context of the long-term goals. The Gotcha Guys can end up rewarding bad behavior and punishing good behavior. They can also stifle the creativity needed to achieve ambitious long term goals.

In this blog, we will look at some suggestions to help avoid these problems (and keep that context in place).

The principle here is that long-term goals are only achieved if they are part of the daily discussion when near-term targets are being decided and monitored. Therefore, it is essential to have frequent interaction between the near-term Gotcha Guys and the long-term strategists. Here are some ideas to help make this a reality.

Suggestion #1: Set More Strategic Targets
Most of the near-term targets used by companies are simple financial metrics, like “sales” or “expenses.” As we saw in the last blog, it can be easy for people to “game the system” and use tricks to achieve these types of simple metrics in ways that have nothing to do with achieving strategic goals.

Some try to avoid this problem by trying to make the metrics more complex by using ratios. Then you might have metrics like “Sales per Labor Hour” or “Expenses as a Percent of Sales.” But, as we saw in an earlier blog, even ratios can be abused and lose their link to the bigger strategic picture.

Therefore, I suggest that some of the near-term targets avoid numbers altogether. Instead create some monitoring questions which are more subjective—requiring more of a yes or no type of answer.

In its roughest form, the question would be “Did this area take the desired steps to move the company closer to its strategic objectives?” Now this is probably too vague to use in this form. But if you have a well thought out strategy, you should be able to figure out what types of key activities need to take place to make it a reality. Then you can determine which areas of the business need to participate in each activity and how they can impact it. Some examples of key activities might be:

a) Adding some specific capacity where it is lacking.
b) Adding some specific capability where expertise is lacking.
c) Convincing consumers to believe in the claims of your positioning.
d) Creating superiority in a particular attribute essential to winning in the marketplace.
e) Properly resolving a key strategic issue.

By holding people accountable in the near-term for specific activities directly linked to the long-term strategy, one is more likely to get the long term strategy achieved. These types of questions are more difficult to “game” because you are more directly measuring actual long-term activities.

Now some people will take this one step further and try to create fine-tuned metrics around these activities. This is usually referred to as a balanced scorecard. Although having a balanced scorecard is better than just the simple metrics mentioned earlier, it may still be less ideal than the more vague and abstract version of the question “Did you move us closer to our goal?”

I have two reasons for saying this. First, if you keep the question more vague, it requires more interaction between the long-term folks and the Gotcha Guys in order to interpret the target and the performance. And as we said at the beginning of the blog, more interaction is a good thing.

Second, the more we try to push this into a metric rather than a question, the easier it is to sever the linkage between near- and long-term. The temptation is there to focus on just “hitting the number” rather than “doing what’s right.” Why provide that type of temptation?

Now I’m not saying that all the targets should be in this format. Just do enough so that the near-term and long-term people are forced to work together to ensure that people are rewarded on their activities in a long-term context.

Suggestion #2: Use Scenario Planning
As we said in the last blog, near-term targets can get out of sync with long-term goals when the environment changes (or we learn of a need to adjust our assumptions). One way to get around this problem is to analyze various scenarios in the beginning and think through their ramifications to the desired metrics.

Then, if the situation changes, the long-term people can tell the short-term people to shift the program to the alternative scenario and its alternative metrics. By using this process, it gives more opportunities for the two groups to work together (when setting up the scenarios and when changing scenarios). In addition, it is a quick way to keep everyone in sync when times change.

Suggestion #3: Force Interaction
Finally, if these other suggestions do not create enough interaction, then mandate it through policy.
Mandate periodic cross-functional meetings. Rotate people between the two departments. Put them on project teams together. Make increased interaction one of their goals. Have them sign-off on some of each other’s work. Do whatever it takes to ensure that the short-term Gotcha Guys are confronted with the long-term context.

It is easy for near-term targets to get out of sync with long-term goals. To help prevent this from happening, it is a good idea for the groups responsible for near-term and long-term to interact on a regular basis. Three suggestions to do this are:

1) Add some abstract action-oriented questions to the near term criteria (“Did you do what was required to get us closer to our goal?”);

2) Use Scenario Planning;

3) Force interaction through policy decisions.

If couples stop communicating altogether, they can end up getting a divorce. Let’s keep our communications frequent between the near-termers and the long-termers to prevent an ugly divorce in our business.

Tuesday, December 6, 2011

Strategic Planning Analogy #425: The Gotcha Guys (Part 1)

Many years ago, the US Postal Service ran an advertising campaign to increase the use of its priority mail service. The advertising was a tremendous success—far higher than anticipated. Usage of priority mail skyrocketed. The return on that advertising investment was phenomenal. It paid for itself many times over.

The US Postal Service employee in charge of the advertising was pleased with how well the advertising was working. He could see that each dollar spent on the ads returned high levels of profits. Therefore, he increased the spending on the ads. And the ads continued to perform well.

You’d think that the US Postal Service would be happy with these outstanding results. Instead, they fired the employee in charge of the advertising. Why? The man had overspent his allocated advertising budget. And that was considered an offense worthy of being fired.

In this story, we see two points of view. The employee felt he should be rewarded, because he had dramatically increased the profitability of the Postal Service—far more than what was expected. He saw that as a great success.

By contrast, the US Postal Service saw it as a great failure, because the expense budget allocated for advertising had been violated. Such a gross overspending needed to be severely punished.

The employee understood the “Big Picture”: He knew that the postal service needed to create demand for the more profitable Priority Mail if it was to have any long-term viability. He was fulfilling that big picture purpose. His superiors, however, were focused on the “Little Picture”: The postal service was losing money, so it needed to control each line item of costs on the income statement. By losing sight of the big picture, these superiors made a poor long-term decision regarding the advertising.

A similar situation can occur in strategic planning. Somewhere within the planning process, one usually sets some near-term targets—usually financial in nature (the Little Picture). Then there are people assigned to monitor progress against those targets. If the targets are not achieved, then this violation is brought to everyone’s attention.

I call these monitors of the Little Picture the “Gotcha Guys” because they appear to take great pleasure in catching people in the wrong. When they see a violation, they seem to want to shout “Gotcha!” because they like catching people in the act of violating the rules and want everyone to know that they caught someone. These are the types of people who would take pleasure in firing the US Postal Service employee who broke the rule on advertising spending.

Although one needs people to monitor this near-term performance, one must never forget the larger context of the Big Picture. Remember, the ultimate goal of strategic planning is to improve the long-term prospects of the business, NOT to hit every interim target exactly.

In practice, sometimes you can end up discovering a better path to long term performance which doesn’t exactly mesh with the pre-set interim targets. As long as this better path is consistent with the foundational principles of the strategy, it should not be severely punished.

The principle here is that near-term performance always needs to be evaluated within the longer-term context. Otherwise, near-term performance may never lead to the desired long-term results. This blog will briefly look at three problems which can occur when this context is ignored. In the next blog will look at ideas to help keep the context in place.

Problem #1: The Linkage Is Not Ironclad
When the near-term targets are set, there is an assumption that there is a linkage between the near-term target and the long-term goal. In other words, there is an assumption that if the targets are generally achieved, then the goal will be generally achieved.

In a rough sense, that is commonly true—there usually is some sort of linkage. The targets of where to cut and where to invest tend to be made with the idea that they will lead to the right outcomes.

The problem is that this linkage is not ironclad. One cannot assume that there is an unbreakable connection between the two.

For example, sometimes one can find ways to achieve the near term targets in a manner contrary to the long-term goals. Haven’t you ever seen managers find tricks to achieve their numbers (and get big bonuses) which are contrary to long-term intent? They cut needed investments and repairs to hit the near-term expense targets while jeopardizing long-term capabilities. Or they hit a near-term sales target by using tricks which either destroy profits or hurt future sales opportunities. These are the people who are destroying the future, but are wrongly ignored by the Gotcha Guys because they hit their targets.

Conversely, there can be ways to improve strategic outcomes which violate the near-term targets (as we saw with the postal service advertisements). These are the people who are improving the future, but get wrongly punished by the Gotcha Guys, because they missed their targets. In both cases, because the Gotcha Guys are not evaluating near-term performance within the long-term context, they are coming to the wrong conclusion.

Don’t assume an ironclad link. Evaluate each case to make sure the right long-term move was made.

Problem #2: We Learn As We Implement
When the implementation plan and near-term targets are set, we make the best choices based upon what we know at the time. However, as we start the implementation, we learn even more. Sometimes we learn that some of our assumptions weren’t as good as we thought. For example, competition may react differently than anticipated. Or, as we saw in the story, advertising may work a lot better than anticipated.

As we learn, we need to adapt. Sometimes that adapting means that the original targets need to be adjusted. I’m pretty sure that if the Postal Service had known in advance how well the advertising would work, they would have set a higher target for advertising expenses.

In other words, our good intents on target-setting may have lead to the wrong targets. As we learn this, we should adjust the targets. I’m not saying here that we should continually change our Big Picture strategy based on the latest whim. That should be relatively stable. But sometimes tactics need to be adjusted (in light of new learnings) in order to better achieve that same strategy.

The Gotcha Guys tend to ignore learnings and just zero-in their focus on monitoring performance on the original targets. This can lead to not taking advantage of the new learnings and sub-optimizing long-term performance.

Problem #3: Gotcha Guys Stifle Creativity/Innovation
One of the key buzz words these days in “Innovation.” Most of the recent literature seems to promote the idea that great strategic leaps forward require an innovative approach. We need to think “outside the box” in order to find our strategic edge.

The problem with a rigid adherence to the near-term targets is that the targets were probably set with “inside the box” thinking. A truly innovative approach may require severing the linkage between the target and the strategic goal.

If the Gotcha Guys are given too much power to force compliance with the near-term targets, they may inadvertently be stifling any creativity and innovation. Creative approaches which could lead to superior achievement of long-term goals might be abandoned, for fear of upsetting the Gotcha Guys.

Although there is a need to break down long-term strategic goals into near-term tactics, problems can arise if those near-term tactics take on a life of their own outside the context of the bigger picture. For example, tactics can be achieved using tricks that do not support the strategy. Or, tactics may become obsolete as we learn more through implementation. Or, innovative ways to improve on the big picture may be ignored because they do not fit with the original tactics. That is why compliance with near-term targets needs to be done within the context of the longer-term strategy. That way, we can assure that the right things get done—not only for now, but for the future.

The recent news from the US Postal Service is that they are near bankruptcy and that drastic changes are needed in order to survive. Perhaps if they had spent more time years ago incorporating the big picture into their decisions (rather than punishing creative initiative) they would not be in a mess as large as they are today. Learn from the mistakes of the US Postal Service.

Tuesday, November 29, 2011

Strategic Planning Analogy #424: Matching Up

Recently, I was talking to someone who was divorced. After the divorce, she had been using a number of internet dating sites to find a new partner. Her ex-husband was also using a number of internet dating sites at this time to find a new partner.

What was interesting was that these internet dating sites kept making suggestions that these two formerly married people should start dating each other. Given the nature of the negative emotions surrounding their divorce, I can assure you that the idea of getting them back to dating each other is a very, very bad idea.

One of the secrets to a good marriage is a good match between the people getting married. And although computer dating services may help reduce the risk of a bad match, they are not foolproof. As seen in the story, some of their suggestions can be disastrous. That is why extra effort needs to applied to ensure the match is truly good.

The same idea applies to strategies. Like marriages, strategies require good matches between the people involved. After all, strategies are only good if they are effectively implemented. Implementation requires the actions of a number of stakeholders. If these stakeholders are not well matched up with the essence of the strategy, they will stray from the strategic intent. Implementation will suffer.

Yes, there are computer programs and internet sites to help us find the right strategic stakeholders, be that strategic partners, acquisition targets, employees, customers, lenders, equity holders, etc. However, these tools are not foolproof. Extra effort is needed to ensure that all the parties match up well with the thrust of the strategic intent. If we are not diligent and vigilant in making sure we have good strategic matches, we will end up with the equivalent of a strategic divorce…and that is rarely the desirable way to implement a strategy.

The principle here has to do with strategic fit. Strategic fit based on how well stakeholders match up with the strategy. Typically, the better the fit, the better the strategic execution.

The logic behind this idea seems pretty obvious. For example, if your employees are strongly opposed to what the strategy is trying to accomplish, then they will rebel and resist. Implementation will suffer (I have witnessed this firsthand). However, if the employees are in strong agreement with the strategy, then they will more heartily implement it properly.

Anyone who has had an activist investor who wanted to move the company in a different direction than the management has also seen how such a mis-match can stall strategic implementation. The worst case scenario is that the two sides (management and equity investor) will get into a nasty fight and neither strategic option will be strongly embraced. The company suffers greatly.

Or ask Netflix about how well their strategy to split the company went after they announced it and found out that it was a major mis-match for their consumers. Customers rebelled, subscriptions dropped dramatically, and the stock price dropped equally dramatically. Netflix had to abandon the original strategy to split the company.

So it would seem to be a no-brainer that companies need to cultivate a strong strategic fit with all their stakeholders—be it employees, investors, customers, or whomever is important to the success of strategy implementation. Yet, like with Netflix, there are so many examples where companies have not been diligent and vigilant in maintaining strategic fit with these stakeholders (and have suffered the consequences).

So what causes companies to stray from this basic principal? To put it bluntly, it usually boils down to either greed or laziness.

Greed and Overreach
Greed can ruin strategic fit in two ways. First, greed can lead to strategic overreach. A great strategy is typically based upon owning a strong position. For example, a position may be based on superiority in delivery an attribute, like quality, speed or service. By definition, these positions tend to be limiting. To strongly own one of these attributes, one typically has to make trade-offs against other attributes. For example, for Apple to truly own coolness, elegance and ease of use, it has had to trade away from low cost/low price.

Limiting can initially sound bad, but it can actually be very good. It is easier to find strategic fit with customers if you stick to your point of uniqueness. Your customers became your customers because they also wanted that point of uniqueness. There was a fit.

But greed can set in. Management may want to expand beyond their point of uniqueness. They want to become much more. As a result, they overreach and destroy strategic fit with their customers.

For example, every time Wal-Mart has tried to expand beyond their low cost/low price position and try to become known for fashion, it has failed. It is a mis-match with how Wal-Mart is perceived by those who want low cost/low price and those who want fashion.

When exclusive high fashion brands let greed cause them to overreach and try to be more relevant to the masses, it leads to long-term disaster. The old customer who loved the exclusivity will walk away quickly. The new masses will eventually walk away as well, because a lot of the appeal to them was in emulating the exclusive customer (who is no longer associated with the brand). Not only is there now a mis-fit with the customer, but also their supply chain. Once the fashion brand appeals to the masses, the exclusive retail outlets will drop the brand because it no longer fits with their strategy.

Or how about Toyota? Toyota had a strong position in producing dependable cars. However, Toyota got greedy and wanted to make all kinds of cars at all kinds of prices. The trade-offs which used to lead to superior dependability started to fade away. Quality and dependability dropped to levels which hurt the credibility of the old position. People were no longer willing to pay a high premium to get the “dependability” of a Toyota, because it no longer seemed worth it.

Greed and Cheapening
Another outcome of greed may be in underinvesting in the core position in order to cut costs and make more money. To own a position, you have to invest in it. Choke off investment in the strategy (in the name of greed), and your actions no longer fit the strategy. For example, another part of Toyota’s problem was that they underinvested in the quality levels needed to create dependability (in order to increase the profits needed to invest in overreach). This lead to less dependability in the cars and a mis-fit with the customers.

In this economy, companies are finding they can get away with paying their employees less. In the long run, however, this is creating a mis-fit between employees and the company. The good employees leave as soon as they can. They ones who can’t leave get angry and become less committed to putting in any extra effort behind the strategy.

If you cheapen your approach enough (in labor, parts or whatever), execution will eventually suffer to the point where you lose the right to own that position. Then your strategy is lost. Greed for short-term bottom-line gains eventually leads to far lower long-term profits.

Sometimes it isn’t overt acts like overreach or cheapening which ruin strategic fit. Sometimes it is just a lack of effort to keep fit from eroding away. We can get lazy in our vigilance to maintain fit. For example, we may let mis-fitting employees creep into the business because we do not police that characteristic close enough in the hiring process. We hire them because they have superstar status and forget to do the due diligence into whether they are the right fit for the culture and strategy. When the fit is wrong, they can poison the culture of a company and ruin the strategy.

Many of the Silicon Valley firms like Google, Apple and Facebook realize how important engineering excellence is to their core strategy. As a result, they are not lazy in their approach to getting the best engineers. They do whatever it takes in terms of pay, perks and image to gather this important resource for their company the best they can.

Another place laziness in fit-seeking can occur is when looking for investment capital. We may take equity investment money from someone just because they want to invest in us and not take the effort to ensure that there is a strategic fit between their objectives and ours (and regret it later when they challenge our strategy due to a mis-match). Or we can acquire a company because the financial models look good, but not do additional due diligence into strategic fit. That lack of strategic fit can make the acquisition a disaster. In fact, poor fit is one of the leading causes of acquisition failure.

As we have seen, strategic fit cannot be assumed to be a given. Fit can fade away due to greed or laziness. Therefore, we need to become proactive in aggressively cultivating strategic fit with all our key stakeholders—investors, employees, customers, partners, supply chain, etc. We need to make fit a high enough priority to overcome the impulses of greed and laziness.

Whenever a decision is being made which impacts a stakeholder, we need to ask this question: Will this move strengthen or weaken strategic fit?

Cultivating fit needs to become integral to the strategy itself. We need to seek out investors who agree with our approach. We need to seek out employees who believe in the strategy. We need to find distributors where supporting our strategy is in their best interests. We need to aggressively seek out those customers who are looking for what we are offering. We need to only aggressively go after acquisitions with a strong fit. It cannot be taken for granted. It must be sought out.

Strategic implementation is strongest when all the stakeholders to the strategy are well-matched to the strategy. Without a strong fit across the board, the strategy suffers. There are many forces (like greed and laziness) which can naturally work against strategic fit. Therefore, we need to be proactive at seeking out and protecting strategic fit.

Sure, not everyone is a good fit for our company. But that doesn’t mean we should give up looking for them. They are out there. We just need to take the effort to seek them out.

Monday, November 21, 2011

Strategic Planning Analogy #423: The Whole Canvas at Once

Back when I was in college, I spent one year as an art major. I had a professor who tried to teach me how to paint. This professor said that beginning novice painters tend to make the mistake of working on a painting one section at a time.

These new artists try to get one small section of the painting fully completed before moving to another section of the canvass. Then they try to fully complete the painting in the second section before moving to a third section, and so on.

The professor said this was a mistake because all of these little sections rarely fit together properly when the painting is completed. The colors don’t blend together right, the textures don’t blend together, and the overall effect feels disjointed rather than as one flowing statement.

Instead, the professor said that one should paint over the entire canvass all at the same time. First, you rough out the entire painting at the same time. Then you put on the finishing touches across the entire canvas at the same time. That way, everything flows together well and the painting makes a grand, unified statement.

Although this advice was excellent, my painting skills were not. It was soon thereafter that I switched my college major to something besides art.

Painting and Strategic Planning are both creative processes. And, in my opinion, a great strategic plan (when completed) can be just as beautiful as a great painting. But both can appear rather ugly if one does not follow the advice of my art professor.

The strategic process is often broken down into its component parts, like mission statements, five forces analyses, vision statements, scenario planning, goal-setting, tactics, etc. Then, like those misguided painting novices, we can try to perfect each of these parts in isolation before moving onto the next component. It can be like following a check list. You do a strategic task to completion, check it off the list as “done”, and then move onto the next item on the list.

The problem comes when all the items on the list are finally checked off as done. Because each step was done in isolation and fully completed before moving onto the next step, the end result looks ugly. The parts don’t blend together. Everything is disjointed. There is no overall flow to the plan.

Because the pieces are not well integrated, faulty logic can creep into the strategic process, or even no logic at all to tie the parts together. The net result is a failed plan, because not only is the logic weak, but nobody could understand the flow and become committed to making the flow a reality.

Just like in painting, a truly beautiful strategic plan occurs only when you work the entire canvass simultaneously. That way, you can make sure that the logic flows properly and that people can clearly see the vision you have tried to communicate.

The principle here is that strategic planning is not a series of isolated events, but an iterative process. You cannot effectively finish one part until you have finished all parts.

Each Part Influences Other Parts
All of the various parts of a strategic plan influence all the other parts of the plan. Therefore, one needs to work through all the parts together in order to take advantage of all the richness to be found in the interaction between the parts. The whole canvass needs to be worked as a whole—in an ongoing basis—allowing the knowledge gotten from feedback in one area to influence all the other areas.

For example, one can do a SWOT analysis (Strengths Weaknesses Opportunities Threats) and come away thinking you really know where your strengths are relative to competition. However, a later scenario exercise (or market test) may cause you to realize that if the environment unfolds in a particular manner, your “strengths” may not be as strong as you originally thought. You may need to go back and modify your earlier SWOT conclusions. And if your original mission was based on a strength you now feel is less secure, you may need to change the mission statement. Either that, or you may need a radical reprioritization of strategic initiatives in order to spend time restoring a strength you realize you no longer have.

Or let’s say you set a goal. Then later on in the planning process, you realize that the only way to possibly achieve that goal is by taking on more risk than you feel comfortable with. Based on this new information, you may need to go back and either change your goal or change your tolerance for risk. The worst thing you can do is not go back and change the goal (because that task is already “done”) and then disappoint everyone when the goal is not achieved, because the goal was never realistic in the first place.

Sometimes, you cannot tell if a vision is a good one until you work through all of its implications in the rest of the planning exercises. You may find out that it isn’t as good as you thought, or perhaps you stumble upon an even better vision. So you should be open to change as you go through the process.

Don’t Be Premature In Wordsmithing
I’ve seen planning processes grind to halt as executives struggle over each individual word in a mission statement or vision statement. Many weeks or months can go by as the simple sentence is edited, then re-edited, then re-re-edited, then re-re-re-edited, and so on. Major discussions envelop the choice of each word.

This is like the painter who labors forever over the perfection of the painting of a single tree in a forest landscape before moving on. So many layers of paint and scrapings of paint may occur on that single tree that it no longer looks like it fits into the rest of the forest. Similarly, so much effort is put into the individual words or a mission or vision statement that the big picture of the whole plan is missed.

Earlier, we saw that as we learn from the planning process, we may need to go back and modify prior efforts. A good idea for a vision or mission statement may not look so good anymore. It may need to be altered. Unfortunately, if you have just gone through this major, time-consuming struggle to perfect each word of the statement, it may not be possible to alter it any more. It’s taken on a life of its own and it would be a political nightmare to open it up for review.

Now, you are stuck with:

a) A statement no longer appropriate for the strategy; or

b) A strategy that matches the statement, but not the reality of the marketplace; or

c) A statement which eventually gets ignored because people know it is not relevant to what is happening (meaning that all that work was a waste of time); or

d) A strategy which eventually gets ignored because people cling too tightly to the improper vision/mission statement; or

e) A poor planning process, because the earlier-written statement blinds the executives from keeping an open mind about the realities in subsequent analyses.

None of these are good options. That’s why vision and mission statements should not be fully locked down into the final words until the full planning process has had a chance to “pressure-test” the statement, to make sure it is still completely relevant. Postpone the “wordsmithing” until you are sure you have a full understanding of the big picture. Don’t do it as a complete, unalterable, isolated event at the very beginning of the process.

Because all the parts of the strategic planning process influence your knowledge base for all the other parts of the process, you cannot do effective strategic planning in a strictly linear manner. Instead of perfecting each part individually and sequentially (like a check list), one needs to incorporate a little back and forth into the process. New learnings need to be applied to prior strategy tasks to ensure that they are still relevant. Be willing to adjust and modify along the way. Work the entire strategy canvas together.

Just because the strategy process should be iterative does not mean that a plan is never completed. Painters work the entire canvas together in an iterative fashion, yet manage to eventually complete the painting. Everything on the painting gradually gets better together until everything looks great. The same is true of strategic planning. Yes, go back and forth to keep making everything better, but eventually stop when the whole picture comes together. Then start the implementation.

Monday, November 14, 2011

Strategic Planning Analogy #422: Hatching Chickens

Back when I was a child, the family living next-door hatched chickens in their garage. They had a number of incubators full of eggs. As long as the incubators were kept at the proper temperature, those eggs would hatch. Then the neighbor’s garage was full of cute yellow baby chicks.

Eventually, those chicks would be gone, and they’d have a bunch of new eggs to hatch. I never asked what happened to all those baby chicks…or asked why someone living in an inner ring suburb of Detroit was hatching eggs in their garage…or why they also had a machine to make ceramics in their garage. I guess as a young boy, you just thought it was cool to see a bunch of baby chicks get born and didn’t think about the rest.

Chickens are not the only things which are hatched. Companies try to get strategies hatched which will grow the firm. But just as all eggs do not lead to hatching chickens, not all strategies result in growing a firm. Instead, some just die in the shell.

To reduce the risk of failure, my neighbor put the eggs in an incubator. The incubator had a temperature level which was tightly controlled. There was a thermometer in each one, so that one could make sure the temperature was ideal for hatching eggs. At the right temperature, hatching was more likely to occur.

The same is true for strategies. Strategic success has a lot to do with the characteristics of the company where the strategy lies. If the environment is wrong, then the strategic idea will die (just like those eggs if held at the wrong temperature).

The principle here is that even great strategic ideas will die if they are placed in the wrong environment. Therefore, having great ideas is not enough. One also needs to manage environment, so that the ideas have a chance for survival.

1) Don’t Try to Hatch a Strategy Which Requires a Distinctively Different Environment
For example, one time I worked with a company and came up with what I thought was an excellent strategic idea. It leveraged a lot of the company’s core competencies in a way which could reinvent an entire industry, creating huge growth opportunities. Unfortunately, I could never get the idea to hatch within this company, no matter how hard I tried.

The problem was that the corporate culture at this company was centered on helping people have more fun. This new strategy had nothing to do with “fun.” It was more focused on alleviating pain. This incompatibility with the prevailing culture doomed the strategy. It didn’t have a chance of hatching. The corporate temperature was wrong.

As in this case, the temperature was wrong because the energy of the company was focused in a different direction. However, sometimes there just isn’t any energy at all to support change. The incubator is turned off and it is too cold to grow anything.

These are the companies who resist any kind of change. New ideas are shot down quickly. Energy is spent on protecting the power bases of the status quo rather than moving the company forward. Anything out of the ordinary gets vetoed.

We talked about the need for getting power behind a strategy in the prior blog. But if there is no power to harness, then you have what I referred to in an earlier blog as “hard clay.” Once clay has been baked hard in a kiln, you can no longer reform the clay into something new. The hardened shape stays forever. Just as you cannot remold the hard clay into a new form, you cannot remold a cold company into a new strategic reality. The efforts are a waste of time.

If you find yourself in a cold environment with hard clay, don’t waste your efforts on radical strategic change. You won’t get anywhere. Your strategic options are more limited to things like:

a) Milking the old strategy as well as one can on its way down (a harvest strategy); or
b) Divesting the operation (all or in part) (a liquidation strategy).

Although these may not be the most dynamic options, at least they are compatible with the temperature of the company, so that they have a chance of succeeding. I’d rather have a successful harvest strategy than a failed repositioning strategy—no matter how appealing the repositioning at first appeared.

2) Build Strategic Incubators
Sometimes, if the core business is not the right temperature, you can still have success if the company allows you to build separate incubators. For example, when IBM was trying to invent the PC, it was soon apparent that the core business environment at IBM was the wrong place to hatch such a strategy. The structure, the bureaucracy, the culture…they were not designed for such a radical start-up. The PC would have died before hatching. Wrong temperature.

IBM was clever enough to realize this, so they moved the PC development off-site. It was freed from the old corporate structure and allowed to incubate on its own—far away from headquarters in an environment ideally suited for such a start-up. As a result of the isolation, the diversification into PCs was a success. It hatched well because it was allowed to be put in the right kind of incubator—even if it required being separated and held at a different temperature than the core business.

Incubators work on eggs because they properly control the entire environment around the egg. They protect the egg from the wrong environment. The same is true with strategies. If you separate them from the pressures of the core business and nurture them in the right culture, they can hatch into a successful business. Therefore, pre-plan the incubator needs when proposing a strategic move which would die if started within the core. Include the incubator as part of the proposal.

Beyond that, the trick here is how one handles the strategy once it is successfully hatched in the incubator. Eventually, the project needs to leave the incubator and get reunited with the core. Otherwise, the core will never benefit from the strategy. However, the newly hatched business is still young and weak. It can still get stomped on and killed by the core if one is not careful.

Therefore, your great idea may not only need an incubator strategy, but also a post-incubator strategy.

3) Sometimes You Need to Change the Core Culture
If keeping a culture which has either gone cold or is no longer suitable to the future is not acceptable, or if incubation of a small offshoot is not enough, then one is left to change the core culture. This is extremely difficult and highly risky. The likelihood of success is low.

If this is your choice, understand the risks and enter the project well prepared. Start early and expect a long battle. Anticipate resistance and head it off early.

One of the biggest errors I have seen is leaders trying to push a new strategic agenda and think that all they are doing is pushing a strategic agenda. If the agenda is radical, one is not only pushing a new strategic agenda, but one is also pushing through a new culture, a new bureaucracy, a new corporate climate. If all your forces are lined up to push the strategic agenda, then the forces of the status quo culture will resist your effort at the cultural level.

This is a two-front war—a war of strategy and a war of culture. You have to win at both to win at all. That is why trying to change the whole corporation is so difficult and risky.

Even great strategic ideas will fail if launched in the wrong environment. To prevent this failure, one must either:

a) Limit one’s strategic options to only those options compatible with the current corporate environment;
b) Launch the new ventures in a separate incubator, protected from the core and run with a more appropriate culture; or
c) Launch a risky two-front war to change both the strategy and the culture of the core business at the same time.

When someone outlines a strategy to me and asks me if I think it is a good one, my first response is to ask them who the strategy is for. After all, strategic success depends not only on the idea, but on who is going to implement it. A strategy which is great for one company could doom another, depending on the situation and the culture. Therefore, don’t just try to seek a “good strategy.” Instead, seek out the “strategy most appropriate for me (and my culture).” Find the strategy which will hatch in your incubator.

Monday, November 7, 2011

Strategic Planning Analogy #421: Tapping the Power

One year for Christmas I decided to put up a larger than normal Christmas light display in my front yard. I bought all sorts of new items to place in my yard, including a metal deer covered in lights with a motor that made its head go up and down.

Everything worked fine for a few days. Then it stopped working. The lights went out and the motor stopped working. I spent many hours over many days going over everything in the front yard trying to get it to work again. I assumed that something in the display was broken, so all I need do is fix the display and everything will be fine.

So I spent hours looking for the brokenness in the display. I wiggled all the wires in the display. Nothing helped. For the rest of the season, the display at my house was dark and lifeless.

After Christmas, I started to take all of the lights and displays down. It was then that I saw a switch in my garage that I had never noticed before. It was a circuit breaker switch. I pushed the button, and all of a sudden the remaining parts of the display began to work.

If I had only spent a second at the beginning of the season pushing that button in the garage, I could have saved all of those many hours wasted in the front yard trying to get that display to work.

My goal was to have a great Christmas light display. Therefore, that is where I focused my efforts. When my goal was not being achieved, I spent my time looking for a solution somewhere in the display.

Unfortunately, the problem was not hidden within the display. It was back behind the scenes in the garage. Had I only taken my eyes off the goal, I would have seen that the display was fine and that the problem was that there was no electrical power getting to the display. Had I spent more time thinking about the power behind the display, I would have had a working display that year.

A similar situation can occur in strategic planning. We can get so focused on our strategic goal that we forget about looking at how well the goal is connected to the corporate energy source. Since the goal is what we want, we look at fixing the elements of the goal when results fall short. This can all be a waste of effort, since the problem often is a result of insufficiently tapping into corporate energy. Turn on the power of the organization, and the results will come on their own.

The principle here is about discerning the difference between power and performance. Performance is the output—it is what we want to happen. It is our goal. Power, by contrast, is the input—it is the energy needed to accomplish the goal.

Strategic planning is usually pretty good about managing the performance. It helps us decide what we want to happen (goals) and how we are going to measure the results (metrics). Many times, however, the process comes up short on managing the power. It doesn’t go behind the scenes to ensure that sufficient energy is focused on the plan.

Power is often just assumed to be there. Just set the goal and the work will get done. Therefore, all the effort is spent on getting the right goal and measuring the progress towards the goal. Nobody bothers to go back into the garage to make sure the power switch is set in the “on” position.

The real problem occurs when performance falls short of plan. If you focus only on the performance, you may not be able to fix the problem, because the cause may be insufficient power.

For example, let’s say that you have a goal to achieve dramatic sales growth for a particular product and performance is falling short. To fix the sales problem, you may look for a sales solution. You may look to change the advertising, or change the pricing, or start a new sales promotion, or some such similar tactic. This would be similar to when I tried to fix my Christmas display by tinkering with pieces of the display. And, like with my Christmas display, all those efforts may not work.

However, if you stepped back to consider the power in your organization, you may have found that there was nothing wrong with the original plan (as far as it went). Instead, the problem was insufficient motivation amongst those required to do the selling (not enough power). Perhaps they do not believe in the product. Perhaps they have put their power behind a different product in the portfolio. Perhaps they just aren’t motivated to work hard because they feel no loyalty to the company. If you fix the power, the performance will come all on its own, because highly motive employees can accomplish much.

Problem #1: No Power
There are two ways in which a company can mismanage power. First, they may not create sufficient power. I have personally witnessed how much performance is impacted by the level of power running through the employees.

For example, I worked with a company that used to have a lot of power flowing through the employees. They were highly motivated to “do whatever it takes to win.” They loved the founder and would go the extra effort in response to that love. The place felt like a family and everyone worked hard for the good of the family. The power was huge and performance was outstanding.

Then something happened—the founder retired and the new leadership destroyed the feeling of family. As a result, work became nothing more than just a job. People went from voluntarily working 70 hours a week (because they loved doing it) to working only 50 hours a week. The energy levels during those 50 hours went down as well (because they didn’t love doing it as much and they didn’t care as much). The power of family love was replaced with unproductive in-fighting. Personal goals replaced doing whatever it takes for the greater good. And, not surprisingly, performance started to suffer.

The company is scrambling to find ways to get performance back up. But the focus in on adjusting the tactics rather than the power behind the tactics. As a result, they are fighting a losing battle.

In essence, the company had unknowingly turned off the switch in the garage, not realizing how much impact that would have on the display out front. And now they are trying to fix the problem by tweaking the display rather than turning the switch back on.

By contrast, I had the privilege to work in the past with the employees of Save-A-Lot, a hard discount, low price food retailer similar to Aldi. When you walked into the Save-A-Lot headquarters, you could feel all the energy and buzz around you. The power switch was on full power.

When you talked to the people, the conversation wasn’t around doing a job of pushing groceries at a profit. Instead, people talked in terms more similar to a religious revival. They talked about the pride they had in providing a higher standard of living to those who society tended to overlook. They talked about bringing “greater dignity” to the poor by packaging the food products to look like the brands the rich people ate. They not only wanted to feed these people, but improve their sense of self-worth. It was as if they weren’t grocers, but missionaries on a mission to save the poor from malnutrition and humiliation. They were united in purpose and focused on this larger, more personal motivation. And guess what? This power lead to great performance.

To achieve high levels of power, you need to supply high levels of purpose. This purpose needs to transcend just working for a paycheck. It requires tapping into the inner desires of your people. This concept seems to be taking on greater significance, as the Millennials who are now entering the workforce seem more focused on this greater purpose than the Baby Boomers they are replacing. If you do not provide a greater purpose, you will lose a lot of the power potential in the Millennial segment.

Strategic Planning can help by infusing a higher purpose into the Vision and Mission Statements. Planners can help ensure that strategic processes not only looks at managing performance, but also proactively manages power. They can make sure that power issues get sufficient attention.

Problem #2: Power Unlinked
Even if the company is full of power, performance may still suffer if there is insufficient connection between the power and the performance. My Christmas display only worked when plugged into the power source in the garage. Similarly, strategists need to connect the strategy to the power in the people.

Strategists need to show how the strategy is connected to the higher purpose. They need to show how achievement of the strategy not only improves performance, but improves achievement of the higher purpose. They need to show that putting effort behind the plan gets them closer to the higher purpose that doing something else.

Often, the best way to ensure that strategic goals are met is to take your focus off the goals and focus instead on ensuring that the organization is powerfully motivated to achieve the goals. This typically requires bonding with employees at a deeper level (than merely meeting the goals) by instilling a higher purpose into what people do. The higher their motivational power, the more likely the effort will be there to get the task accomplished. If you can connect that power to the task at hand, then the results will pretty much take care of themselves.

This deeper bonding can also work with customers. If consumers identify with your higher purpose, then they will want to support your efforts by purchasing from your company. This can lead to higher unit sales volumes at higher prices.

Friday, November 4, 2011

Strategic Planning Analogy #420: Creating the Future

Back in 1989, a move came out titled “Field of Dreams.” The story is about a farmer who heard voices. One of the voices kept saying, “Build it and he will come.” Eventually the farmer figured out that he was supposed to build a baseball field on his farm. So he did.

After building the baseball field, the players from the old 1919 Chicago White Sox team miraculously come out of the corn and onto the playing field. Many exciting things happen in the movie as a result of building that baseball field.

The movie would have been pretty dull if that farmer had ignored the voice which said “Build it and he will come.” Then all you would have seen is a movie about a farmer harvesting corn.

Exciting things happened in the movie because the farmer was pro-active in building that baseball field. He did not wait to react to the world around him. He built a new world on his farm and his life was forever changed.

This same dilemma occurs in strategic planning. We have the choice of either looking at the world as it is (and finding a way to exploit it), or of envisioning a new world and building it.

Building a new world can be difficult. Scoffers may laugh at you (like they did to the farmer in the movie). But often, the rewards of building that new world can be great.

The principle here is based on an old quote by the late business guru Peter Drucker. He said, “The best way to predict the future is to create it.” In other words, the future is full of unknowns. The best way to minimize the unknowns in your future (and maximize your ability to succeed) is to proactively work to create the future of your choice. Rather than react to an uncertain world you did not create, proactively shape the world to your benefit. Be like the farmer and “build it” and the profits “will come.”

Weakness in Reaction Approach
This idea is contrary to a lot of the writing on how to do strategy. These writings will tell you to do an environmental analysis and then look for holes in the current environment to exploit.

Yes, this process of reacting to what the world offers up can often improve performance a bit. After all, exploiting what is in front of you is better than just drifting along and not trying to find a way to exploit the current environment. This process, however, rarely leads to great leaps in success.
The problem is that the current environment is designed to optimize the status quo. The rules of how the game is played are designed to perpetuate the status quo. The current leaders of the status quo tend to hold a disproportionate amount of power and influence. The supply chain is designed to their advantage. Unless you are one of those current leaders, it is hard to make an impact under their rules. Barriers to entry and exit keep the status quo in and you out. You are left to look for the small niches that the leaders ignored.

Another problem with the reactive approach is that you are always in a “following” or “chasing” mode. The world is constantly moving, and if you are merely trying to exploit what is in front of you, then by the time you get your strategy up and running, the world may have already passed you by. This is why Steve Jobs ignored the voice of the consumer. He said that by the time you got around to satisfying that voice, the consumer would have already moved on to something else. You’d never catch up by reacting.

There is a lot of truth to the idea of “first mover advantage,” where those who lead in creating a new world have inherent advantages over the companies which follow them. For example, look at all the companies trying to follow the success of Apple’s iPad. They can hardly make a dent into the industry built and lead by first-mover Apple. First movers are proactive, rather than reactive.

Strength of Proactive Approach
Look at the companies which tend to be at the top of most admired lists: Apple, Google, Southwest Airlines, Amazon, and Fed-Ex. These are companies which ignored the status quo and built an entirely new world, with new rules which gave them an advantage. They built it, and it (profits) came.

Apple totally reinvented industries such as computing, music, telecommunications, and entertainment. Google changed the way the world thinks about and uses information. Southwest Airlines threw away the rulebook on how airlines are supposed to operate and created a totally different one—one where they had the advantage. Fed-Ex created a category which did not before exist—guaranteed overnight delivery—and used the advantage of the new rules to create a great company. Amazon created shopping tools and a shopping process unheard of before. They rewrote the rules on customer service (via recommendations, customer reviews, and one-click) and created an empire.

These were not followers. They did not look for holes in the status quo. They built new worlds with new rules. By creating their own future, they had greater control over their worlds and how they evolved. They were able to predict how their industries evolved because they invented that future. They invented the rules by which the new world plays—rules which are most beneficial to themselves.

You Have To Build The Whole System
So does this mean that I just need to design the next cool thing and I’m all set? Not really. The forces of the status quo are quite strong. They will fight anyone trying to upset their situation. The best way to overcome this marketplace resistance is to build an entirely new marketplace. In other words, this is not about building new things, but entirely new systems which encompass the entire supply chain.

Consider the iPod. It was not the first attempt at reinventing digital music. Many MP3 players preceded it. They failed because they could not beat the forces of the music status quo. A music player without the cooperation of the music industry is not very useful.

The genius of the iPod was that it was a total reinvention of the entire music ecosystem. There was the cool player which the consumers loved. There was also an easy way to access music through iTunes. And Apple found a way to get cooperation from the holders of the music which nobody else had been able to do before. So this was not just a device play, but a rewriting of the whole system, including where and how music was sold and new rules on how musicians and labels were compensated.

Google wanted to reinvent the way businesses advertised. However, to do that, Google needed to also reinvent the platforms where that advertising took place. Google created the best search engine in order to be the preferred place for the new advertising to take place. They built Google Maps, Blogger, and other such sites so that they could control the way key future advertising venues evolved (and make sure Google got a huge chunk of that advertising).

In order to play in the advertising space in mobile, Google invented Android and gave it away for free. As a result, Google is controlling the leadership in smartphone platforms, giving it more control over how mobile advertising evolves (to its advantage). Google understands that if you want the new rules to benefit you, then you need to have a say in how the entire ecosystem evolves.

Amazon wants to ensure that the rules of digital commerce for ebooks and other such products work in their favor. As a result, they developed the Kindle as vehicle for these types of transactions. Some may complain that Amazon is selling the Kindle too cheaply, but consider the value it creates in helping Amazon reinvent the rules in their favor. Just as Google proved with giving away Android for free, the market penetration which comes from low prices helps one control how the future is built. And that is where the real benefit comes in.

And this is not just a digital phenomenon. In the early days of Wal-Mart, Sam Walton wanted to reinvent the rules about how rural customers purchased goods. Unfortunately, just building stores in rural areas was not enough to get the cooperation of the status quo. To win, Wal-Mart had to reinvent the entire ecosystem via building his own sophisticated distribution and data processing networks. Without that, Wal-Mart would not have been able to gain enough control to rewrite the rules of the future in their favor.

Great strategic success rarely comes from reacting to the market as it is. Instead, it comes from creating an entirely new market, where the new rules are written to your advantage. The secret is about gaining as much control as possible over your destiny in a volatile world. To ensure that the new rules are written to your advantage, you need to reinvent the entire ecosystem, not just throw a new product into the old system. Build the system, and they will come.

Controlling the system does not usually require owning the whole system. Apple did not purchase the music labels. Google does not own telecommunication companies. Wal-Mart did not purchase the companies which supply its products. However, these companies created enough influence so that these other players were forced into playing by the new rules. And that is the key.

Tuesday, October 25, 2011

Strategic Planning Analogy #419: Get Into the Flow

I used to work with a company that would go into a panic the week before the quarterly board meeting. They acted as if they were totally surprised that a board meeting was coming up. They never seemed prepared. As a result, there was always a last minute rush to get ready (with lots of overtime).

I was always flabbergasted by this lack of preparedness. After all, the board meetings were put on the calendar almost a year in advance. They were mandated by law to be held quarterly and they had been holding these quarterly meetings for decades. I wondered why everyone seemed to act as though the meetings were a surprise.

I used to joke that these people are so out of touch with the rhythms of the business that they are probably shocked every morning when the sun rises in the east. They probably say to themselves, “Wow! The sun rose in the east AGAIN. What a surprise! I wasn’t ready for that. Didn’t it just do that yesterday? I wonder when it will do it next time.”

There is usually a rhythm or flow to a business. It is the way things get done on a recurring basis. Some activities seem to effortlessly mesh with the flow of the business. Others seem like a major disruption to the flow.

At the company mentioned above, board of directors meetings were treated as a disruption to the business flow. The normal flow had to stop while panicked people altered their routine and rushed to get the director’s meeting job done. After the board meeting, the normal flow returned and people acted as if the board had never met.

When it comes to strategic planning activities, we have a choice. We can either build a structure where strategic planning meshes into the regular flow or we can have it appear as a disruption—like those board meetings. As we will see below, strategic planning is better off when part of the normal flow.

The principle here is that strategic planning is more effective when incorporated into the daily flow of business. This will not occur on its own, since the “tyranny of the immediate” tends to naturally push longer-term strategic issues out of the daily flow. Therefore, if you want strategic planning to be part of the daily flow, you have to actively work to make it so. Otherwise, you will end up with a dysfunctional mess like I saw with those board meetings.

Why Strategic Planning is Less Effective When Seen as a Disruption
There are several reasons why strategic planning is less effective when seen as a disruption. First of all, the reality is that a company moves in the direction of the daily flow. It is the sum of all those little decisions and daily actions which causes a company to become what it is. You can put a business mission or vision statement in a fancy frame and place it on the wall, but if it is not a part of the daily flow, it will have no impact on the business. You may as well frame a picture of a dancing bear and put it on the wall for all the good it would do.

For example, if your strategy calls for radical change and the daily flow doesn’t change, then the change strategy will never take root and become reality. The simple truth is that you are what you do. If the implications of the strategy are not integrated into the daily flow of what gets done, then the strategy will never succeed. So if you want an effective strategy it must move beyond disruption status and get integrated into the flow, where the real decisions are made.

The second problem with strategy-as-disruption is that it is often not taken seriously. After the disruption of an annual strategy session, people go back to their routines. It’s sort of like taking a vacation or going on holiday. It can be a fun diversion—a pleasant disruption of the routine—but afterward, the old routine returns. Or it can be seen as an unpleasant disruption, like getting the flu. Once the illness is over, the goal is to get back to the normal routine as soon as possible. Either way, the connection between the disruption and the routine isn’t made because the disruption is not taken seriously enough to cause any real lasting change.

It reminds me of what the civil servant government employees in Washington DC are known for. Tradition has it that they frequently say, “Government administrations come and go. Sometimes they are Democrats; sometimes they are Republicans. They make all kinds of pronouncements about grand new programs and new ways of doing things, but in a couple of years they are gone. Then another administration shows up with their own pronouncements. Well, we were here before these administrations, and we will be here long after they are gone. So we will keep doing whatever we want, just like we have always done before.”

In other words, the government doesn’t change much, because the everyday workers of the bureaucracy reject the disruptive calls which come from the outside politicians. The daily flow stays the same because the pronouncements aren’t taken seriously, and the grand strategies go unimplemented.

Steps to Get Strategy Into the Flow
Since it is critical to get strategic planning into the daily flow, it is prudent for the strategist to take steps to ensure that happens. The first step would be to create visibility at the point where daily decisions are made. If the key decision-makers only see the strategists once a year at an annual planning meeting, then the strategists will only be a small, maningless distraction. If you want to impact the daily decisions, you have to be visible all the time—to be there when the regular decisions are being made.

Get on the calendar of as many of the decision making bodies as you can. Go to the meetings. Steer the discussions to consider the strategic implications of what they are considering. If they won’t let you into the meetings, get to the meeting members prior to the meeting. Make sure the strategic context is top of mind and part of the normal decisions within the flow.
The second step is to provide a link between the conceptual and the practical. Business Missions and Vision Statements can provide a great conceptual framework for where you want to take the company or brand. But that doesn’t mean that everyone can intuitively understand how it impacts their own day-to-day actions.

For example, let’s say that your strategy is to become a leader at providing some functional attribute, like service, or quality, or speed. That sounds nice, but how should a salesman do his or her daily task differently in order to expedite this strategy? How should someone on the shop floor act differently as a result of that mission statement? Where should R&D efforts be directed to make the strategy a reality? How should a secretary answer the phone as a result of this strategy?

Unless you can provide a link between the words on a paper and what the average person does on an average day, they may never make the link. Don’t assume people will figure this out on their own. Help them to make the connection. Help them to see that the everyday actions of everyday employees impact strategic success. Help them to find ways to act in support of the strategy rather than (unknowingly) against it.

Ask people to visualize how the daily flow should look when the strategy is fully operational. Then help them figure out how to change their processes in order to get in line with that visualization.

Finally, pay attention to metrics. Metrics are the way we measure the daily flow. If you want the daily flow to move in concert with the strategy, then use tools which measure how well the flow is moving with the strategy. Don’t expect the daily flow to support the strategy if the measurement tools and benefit packages reward a different type of performance. For example, if you want to win on quality, don’t focus on cost control metrics and rewards

Some people use a version of the Balanced Scorecard to accomplish this. However, it might just be as simple as making sure that once everybody sees the link between what they do and the strategy, to measure how well that link is getting done.

Strategic execution is most likely to be successful if the strategic planning process is integrated into the daily flow of how things get done in the business. Otherwise, you end up with strategic planning as being a minor disruption which gets ignored when the real work is resumed. To ensure that the strategy is integrated into the daily flow, consider the following actions:

a) Increasing the visibility of strategists and strategic thinking throughout the year at the places where routine decisions are being made.

b) Helping employees at all levels of the organization see the link between their everyday activities and the overall strategy.

c) Using metrics to measure and reward how well the daily flow is reinforcing the strategy.

There’s been a lot of talk over the years about how ineffective many Boards of Directors are. I think a lot of that has to do with the fact that they are often seen as a disruption rather than as part of the daily flow (as we saw in the story above). Unless you want your strategic planning