Friday, February 25, 2011

Strategic Planning Analogy #378: Who’s to Blame?

Although there are many things that governments are not very good at, it seems that they excel at creating processes to assess whom to blame when things go wrong. Whenever there is a problem, governments are quick to set up a process to find out whom to blame. It can be special investigative committees or inquiry sessions in front of the legislature, or just your normal voicing of opinions while legislating “punishment” for the “evildoers.”

And if members of the government cannot find a non-governmental group to blame, then they will blame a political party other than their own for the problem.

You’d think that with all that finger-pointing and declarations of whom to blame, we’d be able to stop all of these problems from re-occurring. Unfortunately, all this finger-pointing has not stopped the problems. Instead, it seems like the problems requiring their “blaming” process are increasing.

Maybe if governments spent less time trying to assign blame and more time working together to fix things, we’d be further ahead.

Governments are not the only ones playing the blame game. Businesses do it as well. When a business venture fails, companies also tend to look for where to pin the blame.

I have seen situations where companies get into a heated debate about strategic failure. The debate centers around who is to blame for the failure. Was it the fault of the people who created the strategy or the fault of the people who implemented the strategy?

Unfortunately, just as governmental finger-pointing hasn’t reduced the problems they deal with, strategy finger-pointing (creators or implementers) hasn’t seemed to reduce the rate of strategic failure. Maybe if businesses spent less time trying to assign blame and more time working together to achieve strategic success, we’d be further ahead.

The principle here is that instead of segregating strategy creation from strategy implementation (so as to assess separate blame), we should be working towards greater integration of these two processes (making it almost impossible to separate blame). My reasoning is as follows.

Strategies Have 3 P’s
As I have stated many times in the past, successful strategies need to address three topics, each beginning with the letter P:

1. Positioning: The place where you win.
2. Pursuit: The ability to get to and keep that winning place.
3. Productivity: The ability to exploit that position for optimal cash flow.

For many people, the concept of strategy is limited to only the first P: Positioning. Pursuit is not seen as part of strategy, but part of implementation, which is considered completely different form strategy. To me, this is faulty logic. All three Ps are just different facets of the same gem. You cannot separate them without destroying the gem. It’s all one package. True Strategy includes all three.

Having a “great” position without pursuit is like having a plan to be the first to go to Mars, but not have a rocket. You won’t to get to the moon, no matter how great that would be. Having a “great” pursuit with no position is like running faster than anyone else, but running in random directions. All that running gets you nowhere. None of it works unless all of it works.

The P’s Are Interconnected
Since positions must be “pursuable” and pursuit must be in the direction of a position, it is hard to isolate the activities. They are, by nature, interconnected.

When devising a strategic position, capacity and capabilities must be a key element in the discussion. The idea is not to create a “great position”, but to create a “great position where your company can own.” You can only own a position if you have the capacity and capabilities to achieve it.

For example, I might want to own a low price position, but if my capacity and capabilities are such that I can never be the lowest cost operator, then I will never successfully own the low price position. Although it may be a great position, it is not the right position for me. I need a position where I can be successful in pursuit.

So, in this example, if the pursuit fails, whose fault is it? Well, if the position chosen works against the capacity and capability of the firm, then the positioning is just as much at fault as the pursuit (if not more so).

This also works in the other direction. As companies invest in their capacity and capabilities, they have to make choices about where to invest. Ideally, those investments should be made in a manner which reinforces what is needed to achieve the position. For example, if your position is to win with service, then you should overweight your investments into areas which will increase your capacity and capabilities in providing service. Otherwise, you cannot hold the service position.

So when one starts placing the blame at a lousy choice of position, consider whether the investments in capacity and capability over time worked for or against that position. Perhaps the position would have been highly successful if only the investments in pursuit had been more in line with the position.

In other words, neither positioning nor pursuit can be devised in isolation. Positioning needs to take into account the capacity and capabilities which can be realistically achieved by the firm. Conversely, investments need to consider the chosen position, so that investments become over-weighted in the areas most critical to achieving and holding the position.

Therefore, if things don’t work out, blame should not be isolated to the creators or the implementers, because creation and implementation should have been intertwined. Of course, if the creators ignored the implementers (or vice versa), then perhaps there is some isolated blame. But even here, perhaps the blame should be placed on the leadership who did not demand that the two sides cooperate.

The People Should Also Be Interconnected
The best way to ensure that the positioning decisions adequately understand capacity and capability, and that investment decisions adequately understand how to support the position, is by interconnecting the people working on these issues.

Implementers need to be a part of the positioning decision and strategists need to be a part of the implementation teams. This is not about two different isolated teams working on different issues (creation versus implementation). There is just one issue on the table (success) and both sides have something to offer to improve the work of the other.

Strategists are more likely to create a strategy appropriate for the firm when working side by side with the people who have to implement it. Conversely, implementers are more likely to take the right actions if they understand and have an emotional stake in the chosen position.

Pointing fingers at each other does not build the kind of teamwork and cooperation needed for success. It only creates isolation. After all, it is hard to blame “the other guy” when you both participated on each other’s work. Blame, by nature, creates uncooperation.

If One Fails, We All Fail
At the end of the day, if the company fails, everyone suffers a loss—creators, implementers, stakeholders and everyone else. We only win if everybody wins. There is no victory in a great idea poorly executed or a poor idea greatly executed. There is only victory when the right idea is correctly executed.

Encouraging blame in one direction discourages the cooperation needed for success. Worse yet, it encourages the wrong definition of success. If someone defines success as “I did my part right, but the other team screwed up”, then you get people who are content with failure, provided they can pin the failure on someone else.

However, if you hold everyone accountable when a project fails, then nobody is content with failure. We are more likely to help each other and keep all the parts of strategy properly intertwined if we view our success as depending on others also succeeding. Creators won’t be able to ignore issues of capacity and capability. Implementers won’t be able to ignore the key differentiators in the strategy.

When a project fails, the wrong question to ask is whether the blame belongs to strategy creation or strategy execution. This question discourages cooperation and creates an environment where failure is tolerated, provided the blame is not placed on me. If you want success, the question we should be asking is “How can we better integrate creation and execution, so that the probability of success increases.” This is done by:

1)Defining creation and execution as both being integral parts of Strategy.

2)Making sure the processes are intertwined:
a. Creators take capacity and capabilities into account when creating the position.
b. Implementers overweight their investments in time, money and labor in those areas most critical to the position.

3)Making sure the people are intertwined (creators and implementers are on each other’s teams).

4)Making sure failure is shared (so that there is no tolerance for failure and an incentive to help each other succeed).

The logic behind wanting to find someone to blame for failure is so that we can help prevent future failures. If you follow the suggestions in the summary, I think you still achieve the goal of helping prevent future failures without the negative consequences of the blaming process.

Monday, February 21, 2011

Strategic Planning Analogy #377: Equality Does Not Lead to Greatness

Watching the Olympics doesn’t seem as exciting as it used to be when I was younger. Yes, the athletes competing today are performing so much better than many decades ago, be it running or skating or whatever. The times are faster and the difficulty levels are higher.

However, it seems that all the Olympic athletes are getting better at equal levels. Rarely does an athlete pull meaningfully away from the rest of the Olympic crowd they compete with. Many are competing at nearly identical levels of greatness. Races are won with the narrowest of margins, like a one-hundredth of a second.

You get the feeling that the leaders are so closely matched that if you did the same event 100 times, the top five athletes would each win about 20 times. That makes it harder for me to get excited about who wins the actual Olympic contest. It’s almost random among the leaders. Rarely does a single athlete appear so dominant that they stand out as the clearly superior athlete.

Those great Olympic heroes of the past who stood clearly above the others are being replaced by hoards of indistinguishable equals. And even though these modern hoards of equals can outperform the heroes of the past, it all seems less heroic when they do it equally well.

As all the athletes get better conditioning and training, it seems that they start to hit the wall of maximum human performance. The science of athleticism has allowed athletes the world over to similarly reach that same maximum performance level. As a result, even though performance overall has improved, success has become more elusive. It is harder to get an edge over the competition when everyone is equally great.

This same type of phenomenon occurs in the business world. As industries mature, the leading firms all seem to reach a point where they are similarly achieving maximum performance on the industry’s business model. It becomes ever more difficult to stand out from the crowd, because all the leading competitors have figured out how execute at high levels on the rules of how the industry business model works.

It used to be that being great was all you needed to be a hero. Now, with greatness more evenly distributed, it takes something more, something different. If all you focus on is being great, then you will not achieve an edge, be it in Olympics or in the business world.

The principle here is that average performance never leads to exceptional results. Even if the execution level is extremely high, it will not lead to exceptional results if the competition’s performance is equally high. If you want to have better performance than the industry average, you need a business model which is different than the industry norm—a difference that can give you an edge which goes beyond mere execution.

The Problem of Trying to Outdo Others At the Same Rules
The temptation is to stick with the proven industry business model and just try to execute it better than everyone else. After all, shouldn’t superior execution lead to superior results?

The problem with this approach is that it is increasingly difficult to create meaningful superiority in execution within the standard business model in today’s economy. Consider the following:

1. With all the outsourcing going on, everyone has access to high quality alternatives for the whole business model (even in places where they are weak internally).

2. With the free flow of employees between firms, knowledge developed in one place eventually spreads to others.

3. Once vendors and consultants figure out how to help one firm in the industry, they will try to sell that expertise again to others in the industry.

4. The idea of proprietary IT systems has given way to using common industry platforms.

5. In the modern digital era, it is hard to keep much of anything secret from the competition. Everything is much more transparent.

As a result, it is extremely difficult to get much of any sustainable edge on the competition when using the same basic business model. About the only advantage to superior execution on the normal business model is that it helps you survive longer in an industry consolidation. The weak players get weeded out early (just like weak athletes don’t get to the Olympics).

Of course, given the intense competition in the typical consolidated industry, there is usually not a lot of profit to be found for the survivors. It’s all given away in competitive prices. And since all the survivors are already pretty good (or they wouldn’t have survived), it is very difficult to create any meaningful advantage within that group (while using the same business model) which translates into meaningfully superior profitability.

Think of the automotive industry. Benchmarking has made all the leaders similarly strong at execution. Everyone has pretty much caught up with Toyota in quality and reliability. And because all the players were outsourcing a large part of the production to China, they created an infrastructure in China that is allowing Chinese manufacturers to play by the same rules and quickly close the gap in performance with their own brands (putting pressure on prices). Capacity exceeds demand, so nobody can meaningfully raise prices. Superior performance is harder to come by.

Therefore, if you want to break away into superiority, you need to set aside the notion of doing the same thing better and shift to doing something different.

Tweaking the Business Model
Working differently does not necessarily require doing everything differently. But it does require doing enough things differently to create additional profit streams which cannot be captured in the traditional business model. Allow me to give some examples.

In its simplest form, the traditional business model for retailing is to:

a) Buy merchandise from a vendor.

b) Re-Sell the merchandise to a consumer.

c) Make money by changing the customer more than what it costs the retailer to purchase and sell the merchandise.

It is difficult to get superior performance as a retailer by just trying to do this a little bit better. No, the retailers with superior performance tweak the business model.

Consider Best Buy. They asked the simple question “Why should purchasers be the only ones who pay us?” Best Buy discovered that they could get vendors to pay them to get inside a bundled Best Buy purchase. Over the years, many vendors have paid to get into Best Buy transactions, such as the spamware on the Best Buy computers, deals on, Netflix, magazine subscriptions and many others.

Because the Best Buy business model did not depend as much on purchasers for its income, Best Buy could afford to lower its prices to consumers (because the money was coming from somewhere else). Other companies, like Circuit City, tried to match those retail prices, but because they were not at good at the alternative business model, they couldn’t afford to match prices. Eventually Circuit City went bankrupt.

Many years ago, I worked with a European retailer. They tweaked the traditional business model in a different way. At the time, it was extremely difficult to get approval for building large retail centers in Europe. They were a scarce commodity. So what this retailer did was to essentially run his large anchor stores at near break-even prices. This would create such a huge consumer draw that everyone would want to locate their small stores nearby. Since this retailer controlled all the nearby real estate approved for retail, he could charge a large premium in rent for the privilege of being near his anchor. As a result, more money was made off the real estate than off the traditional retail business model.

Consider what Apple did in the mobile phone industry. Rather than play by the normal industry business model for mobile devices, Apple tweaked it. By building a closed, integrated system which included device, software, apps and an apps store, it created many sources of income that were not available in the traditional business model. This allowed Apple to achieve superior results and place Nokia’s traditional business model at a big disadvantage. Rather than try to beat Nokia at its game, Apple created a different game.

Superior financial performance rarely comes from superior execution of the same thing everyone else is doing. Usually, superior execution cannot create a meaningful enough difference to deserve abnormally higher than average income. Therefore, if you want meaningfully superior performance, do something different. Tweak the business to create new avenues of cash not found in the old business model. Use your strategic planning efforts to seek better business models instead of merely seeking ways to do the old model better.

In this day and age, the Olympic athletes who get noticed are the one’s who invent a new athletic move in their sport. For example, Shaun White creates a lot of attention for himself by inventing new snowboading tricks for the Olympics, like the back-to-back double cork. Because these are tricks that nobody else is doing, they stand out. If you want your business to stand out, create new tricks that nobody else is doing.

Thursday, February 17, 2011

Ten Tools for Innovation

Over the years, I have written quite a few blogs on how to innovate. I decided to take ten of those blogs and put them into a book. Each chapter gives suggestions of a different way the rethink the status quo in order to create radical innovation.

You can download a free copy of the book here.

My hope is that this book will trigger something in your mind that leads to the next big thing.

Monday, February 14, 2011

Solutions Are Your Job

It seems that Clayton Christensen is in the process of writing a new book. You may recall that Christensen is a professor at the Harvard Business School and the author of popular business books like “The Innovator’s Dilemma.”

His new book will be on the topic of “jobs-to-be-done” marketing. You can read about it at the Harvard Business School site.

In summary, Christensen’s point is this.

1) Most marketers currently target their offerings based on either customer segmentation or product segmentation.

2) This methodology is flawed because it looks at people or products, rather than particular purchase decisions.

3) The reality is that people purchase something because they want it to do a job for them. When it comes to segmentation, the particular job desired from the product is more important than the person buying it or the product category purchased from.

4) Therefore, marketers should segment based on jobs to be done.

I wholeheartedly agree that basic premise. People spend money because they want something in return. And in most cases, what they want is not the stuff they buy, but what the stuff will do for them.

For example, people don’t buy Slimfast milkshakes because they are the best milkshake. That isn’t what they want. They don’t hoard them in their refrigerator because they like collecting cans of Slimfast. No. What they want is weight loss. That is the job they want the Slimfast milkshake to perform.

If the Slimfast milkshake is not getting the job done for them (that is, not causing them to lose weight), they don’t switch to a McDonald’s milkshake. No, it’s not about milkshakes. They switch to a different item which claims to do the job of weight loss better. It could be a diet pill, joining an exercise club, surgery, hypnosis, or any number of other things which have nothing to do with milkshakes.

It’s all about the job the person wants to get accomplished. Sometimes the job is rather esoteric, like wanting to improve the prestige of their image with their peer group. For this, they may consider luxury cars, fancy clothes, the latest in technology gadgets, going on an exotic vacation, or many other things.

The point is that if you don’t know what job someone wants to accomplish with their spending money, then it is very difficult to convince them to spend that money on you. Therefore, when building a strategic position, frame it around a job for which you can own superiority. Once you own that job, work to strengthen that ownership, even if it means abandoning old products for something entirely new.

For example, Bausch & Lomb wants to own the better eyesight solution. That’s the job they’ve chosen—to improve your vision. Originally, that meant manufacturing lenses. However, now there now many other ways to improve eyesight, so to fulfill the mission of their job, they have diversified their product mix to include eye surgery products, eyesight related medicines and vitamins and other such products. Although the product mix has diversified, the focus on the job to be done is still the same. They’re just finding better ways to do that job.

If you stick with an old product too long (like Kodak did with analog film), then you will be made obsolete when someone else finds a way to do the job of personal imaging better by using something which does the job better (digital imaging). Focus on winning the job rather than perfecting the obsolete.

Although this is a great concept, it is not a new concept. Marketers (and strategists) have been using it for decades. I’ve used the concept since back in the 1980s. The only difference is that instead of calling it “jobs-to-be-done”, I called it “solution selling.”

Back in the 1990s I wrote a book on strategy and devoted an entire chapter to the topic. You can read it here. Or, you can check out these prior blogs I have written on this topic (here, here, and here).

However, it seems that Christensen has found this to be a relatively novel new idea. Perhaps, that is because his specialty is Operations Management, not Marketing. It’s as if he just discovered that marketing can have value.

Well, regardless of whether this is new news or old news, it is valuable news. Frame your strategy around superior solutions to consumer problems. Find a place where you can perform that job better than anyone else. That, my friends, is the job-to-be-done for strategists.

Tuesday, February 8, 2011

Strategic Planning Analogy #376: Dry Wells

Imagine two people digging water wells. Bob takes a very sophisticated approach to the problem. First, Bob brings together a team of experts in the latest advances in drilling. They design an elaborate, but efficient drilling methodology with all sorts of high-tech tools. While the well is being dug, Bob calls in a team of experts in water pumping. They design an elaborate, but efficient system of pumps using the latest in pumping technology. Finally, Bob and his team design a complex, but efficient series of pipes in order to get the water to its intended destination. It took a lot of planning, but in the end, Bob was convinced that this was the best water delivery system in the country.

Sanjay took a different approach to the problem. Sanjay dug his well with nothing more than a little back-hoe and a simple shovel. He got the water out of the well using a bucket tied to a rope. Sanjay got the water to the customers by pouring the water out of the bucket into a small tank truck, which would drive the water to the final destination.

So who was more successful with their well?

It seems that Bob was so busy planning his water distribution system that he didn’t have time to properly locate his well. All those pipes, all those pumps, and all that fancy digging lead to a dry hole. There was no water anywhere near Bob’s well. It was a worthless enterprise.

Sanjay, on the other hand, made sure that he did his simple digging over a large body of fresh, clean water. That was where he focused his effort. Sanjay may not have had the most sophisticated system to get that water distributed, but at least he had water to offer his customers. Since he was the only one around who had discovered the water, Sanjay had a thriving business.

Bob was great at process. He had a great process for planning his water distribution system. He built a great process for delivering water. Unfortunately, Bob didn’t have any water to distribute. It was all for nothing.

Sanjay, on the other hand, was less concerned with having the right process. Instead, his focus was on being in the right place (on top of the only source of water). As a result, Sanjay was able to satisfy the needs of his thirsty customers, even if his process was less than ideal.

Every day, businesses need to make trade-offs on how they balance their time between a focus on process and a focus on place (also known as position). As we can see from the story, great process is worthless if the process is being built around a worthless place. Conversely, if your company is positioned in the right place (on top of what is desired), you can do well even if your process is less than ideal.

Therefore, as strategists, we need to make sure that sufficient focus is placed on being in the right place. Otherwise, we could be wasting a lot of time.

The principle here has to do with the primacy of position. In prior blogs, I have talked about the three main components of great strategy:

1. A Great Position – A Place Where You Can Win.

2. An Energetic Pursuit – Winning the Race to Own that Great Position and Defend it from Competition. (I speak more about pursuit in the second chapter of my new book “8 Questions,” as well as here.)

3. An Eye on Productivity – Optimizing the Wealth Available due to Owning a Great Position.

All three—positioning, pursuit and productivity—are vital elements to success. None can be ignored. However, of the three, positioning is the most important.

In the story, Bob had great pursuit. He quickly amassed great resources to create a great water distribution system. Unfortunately, he was pursuing a dry hole, so the pursuit was worthless. Bob also used experts to ensure that his system was highly efficient—a focus on productivity. However, even the most productive water system is worthless if there is no water for the system.

Sanjay started by making sure he got the position right (digging the well where the water was). That made all the difference.

Pursuit and Productivity are “Dependent” factors. Their success is highly dependent upon the desirability of the position being pursued and being made more productive. Therefore, the best way to optimize all three factors is to give the search for the right position primacy.

Statistical Support
This principle is supported by an article in the January 2011 edition of the McKinsey Quarterly. The article, entitled “Have You Tested Your Strategy Lately?,” brings up many ideas, but I want to focus on one particular point in the article. Referencing a book called “The Granularity of Growth,” by Baghai, Smit and Viguerie, the article states:

“80 percent of the variance in revenue growth is explained by choices about where to compete, according to research summarized in The Granularity of Growth, leaving only 20 percent explained by choices about how to compete. Unfortunately, this is the exact opposite of the allocation of time and effort in a typical strategy-development process. Companies should be shifting their attention greatly toward the “where” and should strive to outposition competitors by regularly reallocating resources as opportunities shift within and between segments.”

In other words, 80% of success (at least for revenue growth) comes from getting the position right. Only 20% is explained by pursuit and productivity. That is why Sanjay succeeded and Bob did not. Sanjay focused on the 80%; Bob did not.

If this is true, then our strategic planning should take this into account. Positioning needs to be more important than process. I mean this in two ways:

1) Strategic Planning Outcomes Are More Important Than Our Strategic Planning Processes.
It is easy to fall into the trap of trying to perfect an annual strategic planning process. Getting the calendar set up, designing great meetings and presentations, getting great forms to fill out, having great computer systems which link data to scorecards and budgets, and other such process issues can easily suck up all of our time and attention.

However, the ultimate goal is not to perfect the planning process. It is to optimize the business performance. Spend less time perfecting the process and more time making sure the company adequately grapples and comes to a conclusion on what determines 80% of success.

It’s okay if the planning process is a bit messy. In fact, that is probably a better way to find your position. I speak about that in more detail in an earlier blog, which can also be found as chapter 15 in the book “8 Questions.”

2) Strategy Implementation Processes are Less Important than Strategy Implementation Direction
Although there needs to be a methodology for implementing a strategy (implementation process), that process is fairly worthless if it is pointed in the wrong direction (towards a dry well). As we have seen, getting the right position is the critical first step. Unfortunately, the McKinsey article points out that most companies have their time priorities upside down. They spend 80% of their time on implementation (pursuit & productivity) and only 20% on positioning. Instead, we need to give the greatest priority to discovering the right position.

In the first chapter of “8 Questions,” (which can also be found here), I give a list of 8 questions which can help you get your position right. The McKinsey article referenced earlier also has some questions to consider. This is where the focus should be—on pressure-testing your position, so that you know you are in the right place. Otherwise, your efforts will be as misdirected as they were for Bob.

Although positioning, pursuit and productivity are all important elements of strategy, proper positioning is the most critical. That is because if you choose the wrong position, your pursuit and productivity efforts will be wasted. No amount of pursuit and productivity can get water out of a dry well. First, spend the time to position yourself where the water is.

Just because positioning is the most important factor does not mean that you need to reposition yourself on a continual basis. Great positions have lasting qualities. If you emphasize them long enough, the position almost becomes synonymous with the brand (think of the association between Wal-Mart and low price). Frequent change will just confuse the customer and dilute the power of the position. That being said, modifications may be needed to ensure that you still own the position and the position is still relevant.

Thursday, February 3, 2011

Third Book Now Available

Brand New!

Over on the right side of the blog you can find a link to the third volume of books of my favorite installments in this blog.

Or you can get to it from clicking here.

And its FREE!

Strategic Planning Analogy #375: Broken Bats?

I used to work for a retailer which had a very generous return policy. You could pretty much return anything you bought at any time and get a refund. All you had to do was fill out a form explaining why you were returning the item.

One time, a customer returned a baseball bat. The reason given for returning the bat? He said, “It didn’t work.”

Somehow, I think the problem had more to do with the person swinging the bat than the actual bat.

It is human nature to explain away our problems by blaming things rather than ourselves. An example is in the story. Someone was not effective at using a baseball bat. Rather than blame himself for the problem, he blamed the bat.

The bat is nothing more than a piece of wood. If the bat is not properly hitting the ball, it is not the fault of the bat. It is the fault of the one using the bat. If you improve the skills of the batter, then suddenly that same bat will be more effective.

I see a similar situation occurring today in academic business literature. The recent economic meltdown and current social ills have caused many academics to seek whom or what to blame. And many are blaming the capitalist system. These academics say that Capitalism has lead us astray and that we need to significantly change or modify the capitalist system in order to fix everything.

To me, saying that capitalism caused the mess we are in is like saying a batter cannot bat effectively because the bat is defective. No. Just as the cause of a bat not hitting is due to defects in the batter, the problem with capitalism is with many of the people practicing capitalism.

This is an important distinction, because we will concentrate our fixing efforts at the place where we think things are broken. If you think the bat is defective, you will try to redesign the bat. However, if you think that the problem is with the batter’s skills, you will focus on improving those skills.

Similarly, I don’t think the problems we are facing will be fixed through major changes to the way capitalism works. Instead, I think the effort needs to be placed on improving the skills of the people practicing capitalism. And, one of the people in the best position to do that training is the strategic planner.

The principle here is that the capitalist system is not broken. Instead, the primary focus of what needs to be fixed is the skill-sets of those using capitalism.

The goal of capitalism is to maximize return on investment. This is still an admirable goal.

If you look at a lot of the problems people are complaining about, most of these problems could be rephrased as poor returns on investment.

1. Financial institutions destroying billions of dollars with the money invested in them = poor return on investments managed by those institutions.

2. Collapse of the housing market = poor return on housing investment.

3. Exploitation of Society and the Environment = poor long-term return, since the size of the returns over time are hurt when society and the environment can no longer sustain the business model.

Poor returns on investment in capitalism are like poor statistics for a batter in baseball. If a batter has poor batting statistics, you don’t go out and try to redesign the bat. No, you try to improve the performance of the batter. And if that fails, you get rid of the batter and replace them with a better athlete.

Similarly, if areas of the economy are producing poor returns on investment, you shouldn’t abandon capitalism or redesign the goals of society. Instead, help train people to create better returns on investment (or replace them with people who can do a better job).

Academics to the Rescue?
My fear is that the current thrust from academia is trying to fix the bat rather than the batter. Consider Umair Haque. He is the Director of the London-based Havas Media Lab, but is probably best known for his blogs for the Harvard Business Review and his academic book “The New Capitalist Manifesto: Building a Disruptively Better Business.” Haque believes that the problems we are experiencing prove that our economic institutions are obsolete—a set of ideas inherited from the industrial age that no longer work for business, people, society, or the future. He recommends major changes to the whole system. In essence, he wants a major disruption to the system—a move away from the capitalist core of maximizing return on investment and a move towards businesses focusing on be being agents to improve society.

Even Harvard Professor Michael Porter, a giant in strategic planning, is starting to lean towards fixing the bat. He is the cover article for the January-February 2010 issue of the Harvard Business Review. The cover of the magazine claims we need to “Fix Capitalism.” Porter’s article, “Creating Shared Value,” creates the impression that maximizing shareholder investment is no longer the proper goal. Instead, it should be replaced with a goal of maximizing shared value.

What does that mean? Even Michael Porter admits he does not fully understand the implications and impact of maximizing shared value.

But even Michael Porter (whether he realizes it or not) admits in the article that much of the problems he is trying to fix relate to poor returns on investment. Consider the following quote from the article:

“A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?”

I would paraphrase that quote as follows:

The problem is not the capitalist system, but the people running the companies within the system. They have learned bad habits over the past few decades. They have started to sub-optimize return on investment by thinking short-term. As a result, they miss the additional longer-term returns which would come from having more prosperous customers to purchase their goods, having a business model which is not reliant on unsustainable resources, having a model which doesn’t self-destruct its value chain, or helping to build a stronger and more prosperous marketplace which would be better able to purchase its goods.

In other words, don’t change the goals. Just get people back on track towards achieving the original goals. The highest cumulative returns on investment come from business models which are sustainable over the long run. If your business model destroys the greater marketplace in which it operates, it is also destroying the life of the business model (and shrinking the potential return on investment).

Businesses thrive when money changes hands. If your business model chokes (and economically starves) everyone else in the value chain, then there is no one left to support your business model.

I am reminded of a book which came out around 1980, called Merchant Princes, by Leon Harris. The book talked about the history behind the establishment of all the great department store companies in the US back in the 19th Century. One of the common themes of the book was that once the department stores became fairly well established in their communities, the founders spent less and less of their time on running the stores and more and more of their time in boosting the fortunes of their community.

These department store leaders understood that to maximize the return on their department store investment, they needed a prosperous community. The larger and more affluent the community, the more money there would be to spend in the department store. These leaders knew that even a perfectly-run department store would fail if it were located in a destitute economy. Therefore, acting in their own capitalist interest of maximizing return on investment, they focused on making their communities the best they could be.

In other words, Capitalism (in its purest sense) works when people understand the bigger picture of how to fully maximize returns. We just need to inject some of that 19th century thinking into the 21st century.

No Thank You
My fear is that if we start getting academics, governments and others tinkering with the foundation of capitalism, we will end up with less (in spite of the good intentions). Didn’t communism teach us that social engineering of the economy has severe negative unintended consequences?

No, instead of trying to fix the bat, let’s retrain the batters. Show them that maximum returns come from a broader, longer-term perspective (where a happy side effect is a better society).

And the best trainers are the strategic planners. Strategic planners have traditionally been best at seeing the big picture and the longer time horizon. Let them work to help the leaders also understand the bigger picture and the longer time horizon and how that impacts return on investment.

And if you want to make minor modifications to capitalism, don’t focus on changing the goal from returns to values. Keep the old goal and just modify things so that short-term actions which destroy long-term cash flow are discouraged and long-term actions which build truly sustainable returns are encouraged.

The problems of today do not mean we need to radically change capitalism’s focus on return on investment. Instead, we just need to get a broader and longer-term perspective on what truly optimizes return over the long haul.

They say that the first step to curing an alcoholic is to get them to stop blaming others and admit they personally have a problem. Some business leaders may need to ignore the academics and do the same.