Thursday, February 3, 2011

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.


  1. Gerald Nanninga,

    First, I congratulate you for publishing your third book, which I have only glanced. Surely, I am going to read it attentively

    Second, your current post reminds me of the famous questions whether to blame the song or the singer, the painter or the paint. Yes, we still refrain from admitting our mistakes, learn from them and then improve. However; as you correctly stated, the biggest mistake is having a narrowly-focused goal(s). I would even say a selfish-goal. Thinking of a company's interest, while ignoring the community interest is a fatal mistake. I believe in having fractal goals with the goal widening as the number of stakeholders increases (scales up). For example, an individual goal must grow to accommodate the family goal, which in turn to accommodate the neighborhood goal, the community goal and the country goal. A company’s goal is only a scale down of the society or country grand goal(s). Do you agree?

  2. Ali Anani;

    For a seed to grow, it needs to be placed in fertile soil. Similarly, for a business to grow, it needs to be placed in a strong and supportive marketplace.

    Businesses do not operate in a vacuum. Just as the farmer cannot ignore the soil around the seed, a business cannot ignore the marketplace around the business. Both must be nurtured. If a business does not also concern itself with the greater societal environment, it will be like a seed in bad soil. So yes, I agree with you.

    My point is that the best way to ensure the soil around the business is fertile is to convince the business people that fertile soil gives them the best return (and then let capitalism take care of the rest).

    I think this is much better than rejecting capitalism and allowing governments to re-engineer the economy.

    Wal-Mart has discovered that adopting more environmentally sound practices increases return on investment. As a result, this company has done more to change environmental practices around the world than the meddlings of governments and other non-business entities.