Wednesday, March 16, 2011
Strategic Planning Analogy #382: Stop the Suspense
When I think of the word “suspense” I usually think of old Alfred Hitchcock movies or Stephen King movies/novels. These are people who entertain us by captivating our minds with the fear of the unknown. It’s the type of scary feeling which we enjoy.
What “suspense” does not bring to mind is accounting. Yet there is an accounting concept called suspense accounts. Suspense accounts are used as a temporary placeholder when you do not know the proper place for a journal entry. For example, let’s say your company receive some money, but you haven’t yet figured out why. You would debit cash and temporarily credit a suspense account until you know where the real credit would go.
Another example is using a suspense account to temporarily balance your balance sheet if it is out of balance and you do not know why.
Come to think of it, suspense accounts are also about experiencing the unknown, just like scary suspense movies. Unfortunately, this is not the type of scary feeling we enjoy. I’d much rather have a scary movie than a scary set of accounting books any day.
Although we may enjoy surprises and plot twists in our entertainment, most of us try to avoid that in our business performance. Investors (for both Debt and Equity) love stability and predictability. Too many surprises scare them (too much suspense). That’s why stable and predictable companies can usually borrow at a lower rate and get find more people to buy their stock at a higher price.
In addition, most employees don’t like too many surprises about their job stability. Therefore, by creating a stable environment, you may also be better able to attract and keep great employees
Strategic Plans can be a useful tool in taking a lot of the fear and suspense out of how people view a company’s future. Just that alone makes strategic planning valuable to a business.
The principle here is that strategic planning and strategic plans are great tools for minimizing suspense in business. We should use them to that end in order to reap the benefits.
There are four main ways in which strategic plans and strategic planning can help take the suspense out of business.
1. Minimizing the Unknown
One of the great benefits of a strategic planning process is that it gets people to think about the future long before that future is a reality. The more time you spend pondering the future before it arrives, the more prepared you are for it when it arrives. It is no longer a surprise.
A good strategic planning process should use some of that time to gather “facts” about the future. Although we can never understand with 100% certainty what the future holds, we can study trends and other environmental factors to better understand what the future will likely be.
Strategies are played out in the context of the future. The better we understand that context, the better we can design the strategy.
There are lots of ways to gather these “future facts.” You can purchase insights from experts in the field of futurists and trend watchers. You can have an internal strategy team conduct a lot a research (primary and secondary). You can draw from the expertise of your network of employees, customers and suppliers. You can go out to the edge of society where trendsetting typically occurs and see what they are up to. Or you can do a combination of these or other approaches.
The important thing is to get smart about the future, so that it more known and less surprising.
2. Minimizing the Uncertainty
Even after gathering a lot of “future facts”, you will still not be able to predict the future with 100% accuracy. Even so, you can still eliminate a lot of the suspense around the remaining unknown by preparing for multiple outcomes.
Through strategy tools like scenario planning or real options, companies can build multiple potential outcomes into their view of the future. By anticipating these various outcomes in advance, one can prepare the proper strategic variations for each scenario.
If you have prepared an answer in advance for each of the likely scenarios, you can have high confidence in your future performance even if you have low confidence in any particular scenario occurring. In other words, even if the future is uncertain, your strategic path can be certain if it includes answers for addressing the uncertainty of multiple scenarios. The unknown is a lot less scary if you are ready for a variety of potential “surprises.”
3. Smoothing the Bumps
Every strategic initiative has a life-cycle. There is a growth phase, a maturity phase, and a decline. The problem with many companies is that they do not adequately prepare for these transitions from one phase to the next. As a result, they end up with a trench of unstable performance—a period of strength followed by a period of decline followed by a slow ramp up to something else followed hopefully by another phase of strength (see chart).
That’s a lot of suspense. How low will the decline go? How soon will they find a replacement strategy? Will the replacement strategy succeed? If so, how long will it take? This is one of the problems Kodak is facing. They waited until analog imaging was virtually dead before becoming aggressive in digital imaging. There is much suspense over whether they will survive the trench. The company may end up dying with the death of the old analog business.
A much better approach is to anticipate the decline of the current strategic initiative and start building the replacement strategy while the current strategy is still strong. That way, by the time the old strategy starts declining, you already have a strong replacement. There is no trench of suspense in this approach. Instead, performance is relatively stable (see chart).
Best Buy has a strong history of using this approach. They aggressively go after the next new technology before the old one is obsolete, so that they can seamlessly move from strength to strength.
Strategic planning plays a role here by anticipating the future so that the trenches can be avoided. It forces the discipline of building the replacement strategies in advance.
4. Communicating Confidence
Plans should not be a kept a secret. They should be shared widely with employees and other key stakeholders. The more your employees and investors see and understand your strategy, the more confidence they will have in your future. And the more confidence they have, the less scared they will be about your future prospects. And the less scared they are, the more you will be able to achieve those benefits mentioned at the beginning of the blog. By contrast, if you are silent about your plans for the future, people will tend to think the worst and become even more afraid.
Strategic plans are a great promotional tool to ease the fears of your stakeholders and create confidence. Don’t be afraid to take advantage of this.
Suspense and fear are enemies of a company. They can increase your cost of capital and make it harder to get and retain great employees. To ease the fears and make the future less scary, use strategic planning to a) learn more about the future, b) create contingencies for the unknown, c) smooth out the bumps in strategic transitions, and d) communicate confidence in the future by having a plan for it.
Keep your suspense at the movie theater, not in your business.